Rebuilding Colombia

May 10, 2017

Regular readers of LatAm INVESTOR will know that Colombia’s attempt to rebuild its creaking transport infrastructure is one of the region’s most exciting investment stories. However, in case you missed our previous articles, the basic plot goes something like this. Colombia is a vast country, roughly the size of France and Spain combined, which is split between striking landscapes of dense jungle, fertile valleys, immense mountain ranges and thousands of miles of Pacific and Atlantic coast. All of which makes it marvellous for holiday photos but a very difficult country to link with transport infrastructure. That technical challenge was exacerbated by a volatile political environment. With Colombia roiled in conflict for the second-half of the 20th century it was unable to plan and finance the new roads, railways, ports and airports that it so desperately needed.

Improving economic and political conditions since the turn of the century paved the way for Colombia to finally tackle its infrastructure problem. Hence in 2012, in the first term of President Juan Manuel Santos, the National Infrastructure Agency (ANI by its Spanish acronym) was launched. ANI was fresh from the corruption problems that had tainted its predecessor and entrusted with delivering an unprecedented infrastructure package that could eventually involve $50bllion of investment from 2013 to 2021. The key tenet of the ambitious new programme was that private-sector investment would fund two-thirds of all the country’s infrastructure projects, up from a traditional level of around 50%.

Improving economic and political conditions since the turn of the century paved the way for Colombia to finally tackle its infrastructure problem…

Unsurprisingly creating a new agency and re-branding the programme didn’t magically make Colombia’s historical challenges disappear. Remote communities that have a long history of conflict with the central government began to protest against infrastructure projects. Meanwhile, Colombia’s traditional bugbear of bureaucracy and disjointed government manifested itself through onerous environmental procedures. Needless to say these issues delayed the progress of the programme. However, for the most part they have been overcome. A new community consultation mechanism seems to be resolving the most serious social disputes, while the environmental agency is now processing permits more quickly.

Indeed the figures show that Colombia’s programme is picking up speed, says Luis Fernando Andrade, President of ANI. “We have awarded 30 projects, with two more in the process of being awarded. Twenty-five of those projects already have financial closure and have presented us with their letters of commitment from the banks. Meanwhile 19 have actually begun construction – so the programme is progressing well.” That is backed up by the macro statistics. Last year Colombia received $2.2billion of private-sector investment in transport infrastructure – a 20% increase on the previous year. “We are optimistic that this rate of growth will continue in 2017 with another 20% increase”, says Andrade.

No place for corruption

However, in late last year another traditional bugbear raised its head – corruption. The Odebrecht scandal, which has affected countries throughout the region, came to Colombia because of two infrastructure concessions that the Brazilian engineering giant was involved in. Some analysts worry that the fallout from Colombia’s connection to the scandal could limit international investors’ interest in the country’s infrastructure programme. However, Andrade doesn’t agree.

“Firstly let me make it clear that there is currently an investigation into Odebrecht’s deals in Colombia – so I can not comment on that investigation while it is ongoing”, clarifies Andrade. “However, speaking more generally, I think Colombia has handled the unfortunate situation well. Out of the 50 infrastructure PPPs that we currently have open, only two have Odebrecht involvement. That is far less than other impacted countries in the region. Moreover, we have been quick to resolve the situation according to the rule of law and terms of the contract. So the Ruta del Sol project has been terminated and liquidated. All participants that acted in good faith, such as employees or financiers, have been fully compensated, while spare money has been held in reserve for any future lawsuits. And the now the project has been reissued for a completely new tender. We are in the process of doing the same with the Magdalena River project, which was the other concession with Odebrecht involvement.”

I think Colombia has handled the unfortunate situation well…

So far there are no signs that the incidents of corruption have hit investors’ appetite for the infrastructure programme, says Andrade. “I am pleased to say that early signs are that the market is impressed by our handling of the situation. Since the scandal broke in December we had the bidding process for the Cúcuta – Pamplona highway. There were fears that investors would stay away but actually we had three strong bidders. Indeed, since January we have received $1billion of financial commitment letters, so it is clear that our infrastructure programme is seen to be clean. Ultimately stress situations like the Odebrecht scandal are important for showing how the system will react. In our case the system reacted quickly and justly, so it has come out of it quite well.”

Of course you might expect the man in charge of Colombia’s infrastructure programme to say that, but the view is shared by the private sector. InfraRed Capital Partners is a UK-headquartered infrastructure-focused institutional investor that recently took a 50% stake in the $610million Perimetral de Oriente de Cundinamarca project – a 154km toll road in east Bogotá. Managing Partner, Bryn Jones, has been impressed by the transparency of Colombia’s infrastructure programme. “The Colombian government and the ANI have reacted quickly to address these concerns and are working with the relevant parties to find a solution. More broadly, the Colombian government has a smart, long-term infrastructure plan which is being implemented in a systematic manner; they take governance seriously and the procurement processes that we have seen have been structured to ensure transparency.”

Marching on

The fact is, Colombia’s infrastructure programme is starting to prove itself to investors. Lots of countries in the region have launched ambitious infrastructure programmes but many have been waylaid by the types of social, environmental and corruption problems listed above. The resilience and flexibility that Colombia’s government has shown in finding solutions to these problems has been crucial to ensuring that the programme remains on track. With momentum firmly behind it, the only remaining challenge is how to finance the next wave of projects.

On one hand the scale of Colombia’s infrastructure programme is a great advantage. A common gripe of Latin America-focused institutional investors is the limited range of large investment opportunities in medium-sized Andean economies, such as Colombia. But that scale is also an immense challenge for a country that has limited local project finance expertise and capabilities. Andrea Ramirez Velandia, partner at Profit Banca de Inversión, an infrastructure-focused financial advisory boutique, believes local financial institutions may be reaching their limit. “There are regulatory restrictions about leverage ratio of Colombian banks, to finance these kinds of projects. The limit to finance 4G projects corresponds to 25% of the technical equity of local banks so, taking into account these restrictions, banks can finance up to the amount of COP$11.04billion ($3.6billion) but the outstanding amount pending for funding these projects is around COP$32billion ($10.6billion). Other financing entities like FDN [a national development bank] can finance up to the amount of COP$0.68 billion ($226million).”

It is a legitimate concern to highlight, says Andrade. However, he is optimistic that international investors will fill the funding gap. “I have been speaking with major infrastructure investors, such as insurance companies and pension funds, and many seem on the point of entering a bid. Likewise there are large global banks with project finance expertise, such as Santander and JP Morgan, that have not yet taken part in our infrastructure programme and that will change.”

That optimism is shared by  Jones who believes the sector has a lot to tempt international investors. “There are several aspects which make Colombia’s 4G road programme particularly interesting including a significant pipeline of projects with a well-defined common contractual framework and requiring sizable equity tickets. The programme provides an opportunity to acquire a diversified portfolio of projects with varying construction risk profiles and different payment structures including quasi-availability road projects and traffic-based projects with relevant toll history.”

Financing projects of that size is never going to be simple…

Moreover Andrade feels the fact that Colombia’s infrastructure programme has managed to overcome so many obstacles will make it easier to attract fresh investors. “There are lots of international players that have had a good experience so far and are now looking to increase their exposure. Really it is to be expected. When we launched this programme, lots of investors had valid concerns about issues such as environmental licenses and deal structures etc. Now those concerns have been resolved and there is a track record of successful investments. That makes it easier to attract the next wave of investors.”

Again, Jones agrees, noting that InfraRed’s experience in Colombia has whetted its appetite for more projects. “Following our first investment in Perimetral Oriental de Cundinamarca, we are actively looking to make further investments in new private and public road initiatives, teaming up with local and international players.”

One good example of this is Constructora Meco, a Costa Rican engineering and construction firm with a series of major concessions in Colombia’s infrastructure programme. It is part of the concession for the $778million Conexión Pacifico 3 highway, a road that will connect Buenaventura port with the country’s three most important production centres: Valle del Cauca, Eje Cafetero y Antioquia. It is also involved in the $800million Cartagena – Barranquilla road and the Prosperidad bypass, the $500million Honda-Puerto Salgar-Girardot highway, and five expansion and construction projects in several airports, worth more than $100million.

Constructora Meco’s Vice President, José Alfredo Sánchez Zumbado, also agrees with Andrade that a successful track record helps. Reflecting on Meco’s experiences raising capital for its Colombian projects, he says: “Financing projects of that size is never going to be simple, but the fact that the first bond issue was a success made it a lot easier thereafter. It meant that we had a track record and a successful case study that we could show investors. I visited Geneva, Zurich and London to speak to investors and generally, they were keen to get exposure to the Colombian infrastructure story.”

Financial innovation

What is interesting about Constructora Meco’s experience is that it shows the importance of combining regional construction expertise with international capital and financial know-how. “One of the first things we did was name Goldman Sachs as an advisor”, says Sánchez. “They helped us to structure the deal and underwrite our debt issuance. They made us realise early on that we would need to have excellent institutional practises from the beginning if we were going to attract international investors. With that in mind, we achieved a credit rating from Fitch, which helps reassure investors that Constructora Meco is a prudently-run company. We also hired a firm of top New York lawyers to help with the bond issue. In the end, it was a complex deal with six different legal firms representing the issuers, lenders and different banks.”

With that experience under the belt, Meco will now feel more confident about tapping the markets in the future, says Sánchez. “As a company we learned many lessons from this process and we will use in the future. It has taught us that if you can get the balance between yield and risk right then there is a lot of international interest in these types of projects. We will probably issue more bonds in the future as we take on new infrastructure projects in Latin America.”

Given the constraints that Ramirez highlights above it is clear the success of Colombia’s infrastructure project will need investors to find innovative ways to fund projects. Fortunately there are already signs that is happening. “There is a draft decree that increases the limits of pensions funds’ investment in these infrastructure projects”, says Ramirez. “In the past, these limits have been increased for banks and other financial entities, such as the FDN. Also there are two infrastructure debt funds in fundraising stage. There is the COP$1.5billion ($500 million) Caf – Ashmore fund, and the COP$2billion ($667million) FCP 4G Credicorp – Sura Asset Management fund.”

Looking ahead

With most of its teething problems behind it, industry insiders expect Colombia’s infrastructure programme to pick up pace. Moreover, there will be a slew of new opportunities in varied types of infrastructure from parks to prisons. British investors can be forgiven for missing out on the first phase of Colombia’s infrastructure programme. But now that it has momentum behind it, and plenty of projects ahead, they might not forgive themselves if they missed out on the next stage.