The Colombian government's announcement of a jumbo infrastructure package in January was quickly dubbed a response to the economic crisis. The more mundane reality is that many projects were conceived years ago and have been rolled into this programme. Meanwhile the government is already re-thinking the structure and timing of some projects to secure private sector participation.

The $24 billion program will need funding from both the state and private sector, but the latter will provide the lion's share, at $14 billion, according to Carolina Rentería, director of the country's National Planning Department (DNP). The investments will be divided among six sectors: mining and energy with $11.8 billion, housing with $5 billion, transportation with $3.6 billion, telecoms at $1.7 billion, water and sewerage taking $1.4 billion, with the balance in agriculture, including irrigation systems, she says.

Rentería admits that the timing is difficult. Her department was cutting GDP growth forecasts for this year from 3% as Project Finance went to press. The fourth quarter of 2008 was very bad, she says. Yet, for now, the global downturn has not substantially decreased private sector interest, she insists. In mid-March at an inter-ministerial meeting, there was re-affirmation that private investors were committed to projects in the oil and mining sectors. She admits, however, that: "the big issue for investments would be 2010, if things don't start to improve in a short period."

Critics say that the recent announcements are welcome, but Colombia has a disappointing recent track record in executing infrastructure projects and the timing could hardly be worse. Transport, in particular, will find it hard to attract private capital.

"One of the negatives of the current administration has been its inability to execute significant projects," laments Jaime Trujillo, partner at Baker & McKenzie in Bogotá. Even fans of President Álvaro Uribe must admit that there is little to show after seven years in government, he says. Teams are inexperienced, creating difficulties in managing projects and raising questions over whether the government will be able to get this program to fly, he says.

The Colombian programme will also face stiff competition regionally and globally, adds Mauricio Lopez, corporate and government manager at Bancolombia. Mexico's Farac program, as well as ambitious spending programmes in Peru and Brazil, have an equally big claim on sponsors' attention, he notes. With the US, which has its own infrastructure binge in progress, as a benchmark for investors, returns in Colombia will need to be higher to justify risk, he adds.

The slew of spending programs also means multilaterals are being much more selective. "We have picked out a couple of sectors where we will concentrate and where we believe we can have a positive impact," says Gabriel Goldschmidt, manager for infrastructure in Latin America and the Caribbean at the International Finance Corporation (IFC). In Colombia, that means tightly focusing on trade logistics, particularly the transport chain, and funding renewables and efficiency programmes in energy, he notes.

Many plans, few sponsors

Investors have been supportive of the Colombian government's sovereign debt issues, notes Rentería. Early in March, the Ministry of Finance replaced its existing Peso-denominated debt with new bonds maturing as far out as 2024 in an auction that was heavily over-subscribed, achieved tight pricing, and has performed well, she points out.

Rentería points to Colombia's high scores for transparency and stable legal framework and solid repayment record, which underpin its investment grade rating. The multilaterals have been willing to support infrastructure in Colombia as well, she says. Colombia is one of the largest recipients of money in the region from the IFC, for example, which recently announced plans to increase disbursements to $320 million, up from $270 million.

The local banking system is well-capitalised and professes an interest in infrastructure credits, while new sources of local funds are also entering the mix. Colombian pension and insurance providers are increasingly interested in long-term, stable cashflows, says Rentería. Pension funds were recently allowed to make allocations to private equity, although these are capped at 5%. Pension funds are interested in infrastructure, providing concessions are structured robustly enough for them to accurately evaluate risks, she says.

The government recently launched the Infrastructure Fund of Colombia, which will start with capital of $500 million, Rentería says. The government, Inter-American Development Bank, and Andean Development Corporation (CAF) worked on the fund's design and awarded the contract for the fund's management to a joint venture of Ashmore Investment Management and Inverlink in February.

That has sparked attempts to create other, similar funds. Trujillo is advising on structuring a second fund of between $400-500 million, and suggests that 25% of the money will come from international sources and 75% from local funds. With leverage, these infrastructure funds could contribute $1 billion apiece, he reckons, adding a third fund may be possible. Still, he recognizes that while the sums are not insubstantial, they are not close to matching total needs.

That is the nub of the problem: the sheer size of requirements dwarf available local financing. The local banking system and pension funds resources are insufficient, which means foreign investors will be key, Lopez notes. While these investors say they are selectively open to countries that are fiscally responsible, such as Colombia, in practice they have showed little enthusiasm and "we have our doubts that they will have a prominent role in the process," he says. The government will need to focus on key projects and may need to postpone some, he reckons.

Transportation over-load

The most challenging sector will be transportation, where there is most doubt about the ability of the government to realize large, complex projects and the need for private money is most acute. Colombia's history of insecurity and its tricky geography, a product of mountainous terrain and fault lines, have left the road network under-developed.

The record of the Ministry of Transport has been poor, reckons Trujillo. The government has not only not able to start new projects but the condition of roads has been deteriorating, as basic maintenance has been inadequate. The ministry and Invias, the highway agency, have often argued, and widely publicized disagreements have been aired in the media between the ministry and the Colombian Infrastructure Chamber, adds one senior banker.

The maintenance and building program is accelerating, says Minister of Transport Andrés Uriel Gallego. He admits that there have been some delays in upgrading local infrastructure, but says more attention is now being focused, pointing to the award of a $1 billion public contract to maintain a number of key highways, dubbed "the competition corridors". That deal encompasses 14 key roads, he says. The project was about to be awarded as Project Finance went to press.

This business is tying up local contractors, meaning that international peers will need to be heavily involved in greenfield projects, reckons Felipe Perez, vice-president of structured finance at Bancolombia. Greater use of international contractors raises the thorny issue of currency hedging for US dollar payments, he notes. This is a key issue and has become more pressing as the peso exchange rate has deteriorated against the US dollar.

Colombia has built good relationships with contractors, Gallego says. And even if there is no interest from international financial institutions, projects will be financed from local sources, including institutional and retail funds, he says.

A series of ambitious concessions will test his assertions. Under the microscope is the much-delayed Ruta del Sol, a 1,071km highway that links Bogotá to the Caribbean coast, and the country's largest infrastructure project. Bidding documents were being published as Project Finance went to press, with interest expressed from companies based locally as well as in Spain, Brazil, Italy and Canada, says Gallego. Bid submissions are slated for 27 August.

Ruta del Sol: Complex build, complex finance

Although the road was conceived 10 years ago as an 80km new link between Bogotá and the Magdalena river, it has undergone major extensions and now links Bogotá to the Caribbean coast with upgrades of existing roads, says Hector Ulloa, president and CEO at Structure Banca de Inversión, a local investment bank active in advising the government on large projects.

The concession was sub-divided into three sections last October as a response to the global financial crisis, because three smaller projects were considered more palatable for foreign investors, says Goldschmidt at the IFC, which has been advising the government. In March, further changes were made, with the government approving a $3.5 billion subsidy to help finance construction and cover part of the operations and maintenance costs as well as leverage additional financial resources, he adds.

The first, and only greenfield, section consists of the 80km descent from Tobiagrande-Villeta, about 90 km north of Bogota in the Andes, to the low-lying Magdalena River, with 20km presenting geological risks, while the other two sections are technically straightforward, notes Gallego.
The first section is now structured as a seven-year public works contract with a four-year design and construction phase and three years of operation and maintenance, says Goldschmidt. During construction, payments to the concessionaire are based on construction progress measured monthly. During operation, the concessionaire receives fixed government payments, with the government's total obligation capped at $900 million, he says. The winner will be the concessionaire offering the lowest present value of government payments.

The concessionaire should have to find between $100 million and $150 million to support the concession. That debt could have a tenor of 18 months and be rolled over for the four years of the construction period, Ulloa notes. The financing looks more like a build-finance arrangement than pure project financing and local banks and multilaterals will find it attractive, he reasons.

Dubbed the fourth generation or private-public partnership concessions, the second and third sections, each costing roughly $850 million, will be variable-length concessions. The concession ends when the present value of toll revenues and government payments requested in the financial bid is reached, explains Goldschmidt. During the five years of construction, excluding preconstruction, the concessionaire will be entitled to government acceptance payments based on progress. That subsidy will complement toll revenues from existing toll plazas (and one new station for section two) as an income source for the concessionaire, he adds.

The plan seeks flexibility by leaving decisions on road widening and improvements until after traffic flows are better understood. After three years of such history, the government can sell the concession or extend its length, he notes. If justified by traffic levels, the government will pay for lanes to be added to key sections.

This is "an interesting structure but very dangerous as you don't know the final cost of the concession," says one banker. While the model may work if limited to one project, it may eat up a large part of the budget if it is applied to many such projects, he says.

The other issue is that the project has become overly complex, says Rodolfo Huici, principal transport economist at the Inter-American Development Bank. The government has bowed to local political pressure and included a large number of side roads linking small municipalities with the main highway, increasing the road's cost from initial estimates of $1.5 billion, making the project difficult for the private sector to finance, he says. "It's like a Christmas tree. When you hang too many things off it, it can't take the weight", he says, adding: "In the current financial situation, you won't find private investors willing to invest this amount in Colombia. The government needs to re-assess its strategy or analyse whether they can do this through public financing."

Even if there is no interest from international banks, the project can be financed locally, insists Gallego. The government has worked closely with the IFC on the project and is adapting the project to market realities, he says.

If successful, the Ruta del Sol model may serve as an inspiration for other similar-sized projects, although each concession needs to be treated individually, cautions Gallego. They include the brownfield Autopista de las Américas, slated to connect Colombia's coastal cities, with a projected cost of $4.5 billion; the central Buenaventura to Cúcuta road, with a price tag of $2.8 billion, also a brownfield; and the $3 billion, brownfield, Autopistas de la Montaña, connecting Medellin with hinterland cities. Gallego points out that road investments will be staggered over many years, giving the government more budgetary flexibility. By the time the government raises funds, financial markets will be very different and the crisis will be over, he reasons.

The other risk is that this expensive road-building program threatens to overshadow other priorities, particularly ports. "We don't see the government working as fast as the country needs in ports", says Huici, adding that proposals for entirely new ports on the Pacific coast are detracting from modernization at existing ports. Ulloa points out that the Caribbean port has already secured financing while the two Atlantic ports have lined up financing at least for first phases.

That more money for infrastructure in Colombia is needed is not in doubt. Spending as a percent of GDP is very low, at between 1.5-2%, points out Ulloa. A dash of urgency has been added as popular president Uribe is serving out the end of his second term and a third term is outlawed by the constitution. It is unlikely that he will be able to achieve all that he wants in such a short span.

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Resources concessions look more promising

If the budget for transport looks lumpily concentrated on key roads, there is more optimism in other areas, thanks to a combination of greater investor interest and more state money. The petroleum and mining sector dominate the investment program and seem to have been only mildly affected by the commodities downturn, agree bankers and government officials. Part of the reason for the sustained interest in the petroleum sector is Ecopetrol, the formerly state-owned company, which has been progressively liberalized since 2003 and is now allowed to issue debt in its own right for the first time.

Ecopetrol plans to issue between $4-8 billion in fixed-income debt, a substantial figure for Colombia, says Baker & McKenzie's Trujillo. Complementing the proceeds will be investments from privately-owned oil companies. They include BP, Chevron, Total, Repsol, Shell and Oxy among a total of 35 player, according to the DNP's Rentería. The National Hydrocarbons Agency has been active in auctioning oil fields and more recently expanding into the Caribbean Sea, she notes.

Uncertain oil prices remain the wild card. The likely upshot of volatility is that producers will focus on Colombia's more attractive lighter grades, which require less refining than the country's heavy oil, Rentería acknowledges. "We have seen interest in remaining in this industry and companies have been very aggressive in exploration and production," she says.

Major oil companies have not yet suspended projects, she adds. Those that have already started will be continued, believes Bancolombia's Lopez, cautioning that price will dictate whether large new ones will get started.

Furthermore, local banks have the money to support the housing plan, while the Central Bank has lowered rates by 300bp, making long-term financing more plentiful. Surprisingly, mining and coal companies are pushing ahead with projects. In February, US coal producer Drummond was set to begin exporting output from its El Descanso coal mine in Colombia.