Jorge Di Terlizzi and Laura Rey of prietocarrizosa in Bogotá discuss the latest developments in the country’s plan to improve its road infrastructure
Colombia´s biggest bottleneck to development is the lack of infrastructure. We rank 103 out of 140 in the Business Environment and Infrastructure Index of the World Economic Forum. Specifically, we rank 130 out of 140 in the ground transportation infrastructure indicator of that Index. Throughout our history we have had low public investment rates in road infrastructure as the public expenditure has been pretty much focused on developing the energy sector.
On the other hand, our position in the Cross Border Commerce ranking of the Doing Business 2013 (which evaluates the proceedings that must be carried out to export/import goods as well as the timing and costs of the relevant transaction) is 91 out of 185. The high costs and the required timing for those cross border transactions greatly affect our performance in the index.
Notwithstanding the above, Colombia has executed several free trade agreements with important economies worldwide, which require the country to bring its infrastructure up to date and be more competitive. Our industry needs roads and railways to efficiently take its products from the center, south and west parts of the country to our ports in the Atlantic and Pacific oceans. Moreover, Colombia is in the process of becoming a member of the OECD and has been taking important steps towards demonstrating its robustness and stability as a regional economy. It is now time for Colombia to develop its ground transportation infrastructure.
1 Fourth generation of road concessions
With this reality in mind and knowing the importance of ground transportation as a means of cargo transport (71%), the current Government has set out as one of its four priorities the development of this type of infrastructure. Without a doubt, this will have a positive impact on Colombia´s competitiveness and will provide our economy with one of the most important endowments to development.
As a first measure, the Government promoted our first PPP (public-private partnership) law, which created the framework to structure and develop important projects capable of attracting and retaining private investment in infrastructure. Additionally the Government presented and promoted the Infrastructure Law, (as defined in Section 4 hereto) which, as described below, created new and important tools to shorten the processes and timing related to land expropriation processes.
By the same token, since 2011 the Government began to structure the Fourth Generation of Road Concessions (the ‘Program’). The purpose of the Program is to create a US$20 billion toll road project pipeline. According to the Government’s plans, an amount equivalent to 2-3% of the annual GDP will be invested to develop those projects. The National Agency of Infrastructure (governmental entity in charge of awarding the projects) has stated that roads under concession will increase from 6000km to 11000km and railways will increase from 900km to more than 2000km.
The Program is aimed at lowering our infrastructure deficit and consolidating the national road network by creating continued and efficient connectivity between the production centers, the main ports and the country borders. Despite our challenging geography, the country should be interconnected.
In order to make the Program a reality, the Government created a highly qualified team of financial, technical and legal advisors that has been supporting and counseling the National Agency of Infrastructure throughout the structuring process. The team is comprised of qualified entities such as the International Finance Corporation. The Colombian Government has made important efforts to assure that the projects are awarded with definitive designs and elaborated budgets. Our Government and its advisors have effectively taken the time to listen to the local construction companies as well as to the international players and will enter into sophisticated concession contracts, which have been structured with bankability standards in mind.
The Program is comprised of 25 initial toll road projects. They will be awarded between the second quarter of 2014 and 2015 and their construction will take place between 2015 and 2025. The projects are public PPPs and will be awarded through public bids. For the first 25 projects, not only were local construction companies prequalified, but important European, Asian and Latin American companies were also preselected. In addition certain private equity funds with robust financial capabilities were also prequalified. I would say that the success of the initial projects within the international community is a direct consequence of the magnificent efforts performed by the Government in the Program´s road show around the world. The National Agency of Infrastructure not only promoted the projects but also received and attended important feedback from construction companies and prospective lenders, all of which has helped it to improve the standards of the projects.
The Government and its advisors have made significant efforts to increase bankability of the projects, to enhance participation of international construction companies and foreign banks and to improve contracting and technical standards. Moreover, the concession contract template for the Program has been socialised with the industry and the financial sector in many occasions and both the Ministry of Finance and the Ministry of Transportation have taken important steps towards implementing the comments and addressing their concerns.
Without a doubt we are standing in front of one of the most ambitious and well prepared infrastructure programs in our history. The Program could even qualify as one of the biggest PPP infrastructure programs worldwide.
2 The projects
Below please find some general comments on a number of the most important aspects of the Program projects, which, in my opinion, are pretty innovative for the local market:
• Functional units: due to the size of the projects, they will be divided into functional units. Those are species of construction milestones but are comprised of a road tranche (tunnel or bridge) that is functional/serves a purpose on its own. The division into functional units has an important impact on concessionaire’s remuneration, as described below.
• Concessionaire´s remuneration:
- Concessionaires´ remuneration is comprised of (i) government payments aimed at remunerating construction of the infrastructure; (ii) tolls; and (iii) the commercial exploitation income of certain road surrounding areas (i.e. gas stations, restaurants, hotels, etc). On average, government payments will represent 70% of the total remuneration and the remaining 30% will come from tolls and commercial income.
- Concessionaire´s remuneration will be partly in Colombian Pesos and partially in US Dollars. Tolls and commercial exploitation income will be 100% in Colombian Pesos. On the contrary, upon concessionaire´s request, government payments may be denominated in US Dollars. Each project will have a cap for the US Dollar amount, which, on average, amounts to 18%-25% of the total government payments for each project.
- Availability payments: the remuneration to concessionaires is structured as an availability payment. Therefore, during the construction phase concessionaires will not be entitled to receive their remuneration. The latter will be paid once a functional unit has been finalised, delivered to the National Agency of Infrastructure and is operating.
The purpose of dividing the projects into functional units was to allow contractors to start receiving part of their remuneration without having to wait until construction of the whole project is over. Each functional unit has a specific weight, which determines the multiplying factor to calculate the percentage of the remuneration, which will be paid to contractor once that functional unit has been delivered and thus is available.
Concessionaire´s compensation may be subject to deductions upon breach or partial compliance of certain O&M indexes and levels of service. The deductions are capped at 10% of the monthly remuneration so that banks may easily estimate income haircuts associated therewith for their base cases.
• Traffic risk: even though no minimum revenue is guaranteed to concessionaires, traffic risk is undertaken by the Government. On years 8, 12, 15 and 29 of the concessions, the National Agency of Infrastructure will perform partial traffic settlements to calculate if there is a shortfall between expected and real traffic. Negative gaps will be covered in cash by that governmental entity. It is worth mentioning that, due to the low frequency of the settlements, liquidity risk of the shortfalls is assumed by concessionaires.
• Termination payment: upon early termination of the concession contracts, a liquidation formula will apply to calculate the termination payment of the relevant project. That payment is aimed at remunerating, in general terms, invested capex (less fines and deductions that have not been paid). The Government has insisted that the termination payments of the projects will be sufficient to cover the outstanding debt of concessionaires at any time during the life of the projects even if the contracts are terminated early for an event attributable to those contractors. Obviously each lending bank will have to undertake its own financial analysis to check if, based on the debt/equity ratios of the relevant base case, the formula is sufficiently robust. The size of the termination payment has a direct impact on the debt sizing as in the project finance schemes it might end up being the last source of payment.
3 New Infrastructure Law
Some of the projects of the Program are greenfield and, therefore, require an important extension of land to be purchased/expropriated. Even the brownfield projects require new pieces of land as second/third lanes will be constructed.
Historically, the land acquisition process in Colombia has been challenging and inefficient. When voluntarily acquisition negotiations have failed, concessionaires have faced long judicial proceedings to get the expropriation order, which have caused delays and cost overruns in the toll road projects.
As part of the Government´s effort to solve Colombia´s lack of infrastructure, Congress passed our new infrastructure law (the ‘Infrastructure Law’) at the end of 2013. The Infrastructure Law was enacted to provide additional tools to help concessionaries comply with, among others, their land acquisition obligations under the concession agreements of the Program.
The acquisition/expropriation costs and the management of the processes will be the concessionaires’ responsibility. Prior to the enactment of the Infrastructure Law, local and international construction companies, sponsors, lenders and advisors raised their concerns in connection with potential delays and cost overruns to be caused by judicial expropriation.
The Infrastructure Law was enacted as one of the responses to those concerns. First, it strongly promotes administrative expropriation as opposed to judicial expropriation. The former is a process to be carried out before the National Agency of Infrastructure - the governmental entity that will award the projects - and not before a judge. It is simpler and more efficient than the judicial process. The Infrastructure Law even allows the use of the police force by concessionaires to get access to the real estate assets, if the owners do not deliver the relevant piece of land within 15 business days following the date in which ANI ordered the expropriation. Disputes in connection with the price will not stop the expropriation as they will be solved separately.
Second, the Infrastructure Law states that the lands required for transport infrastructure projects are assets of “public interest”. Therefore, they are subject to expropriation without the need of a future ad-hoc analysis on the relevance of the project and the importance of the asset with respect to it.
We believe that the Infrastructure Law will reduce from years to months the expropriation of the real estate assets required for the Program projects.
4 Financial aspects and capital needs
Estimated investments for each of the 15 initial projects range between US$0.5 billion - US$2 billion. Due to the capital needs of the projects and the size of the Program, they represent significant financial challenges; as stated above, the total expected investment in the Program is US$20 billion.
In addition to the intensive capex and opex requirements of the projects, concessionaires will have to make important financial efforts. On the one hand, the concession agreements will require minimum equity contributions that cannot be cashed out before the end of the first year of the O&M phase of the projects.
On the other hand and as stated above, concessionaires will only be entitled to receive their remuneration once the functional unit has been delivered and accepted by the National Agency of Infrastructure. Thus, concessionaires will not receive income during the construction phase of a functional unit. There are cases in which the situation is more complex as the functional units individually are not subject to being operative; the whole project must be finalised so that each functional unit starts operating.
Certain greenfield projects such as Mulaló-Loboguerrero are examples of this extreme case in which construction will start in 2015 and the remuneration will only be paid as from 2021. Therefore, significant grace periods will be needed.
As a consequence, structured financing schemes will be necessary. Most likely, projects will have a medium term financing to fund construction costs and later a refinancing facility that opens the possibility of longer tenors and allows more efficient debt/equity ratios. The financings will probably be structured through project finance schemes and eventually through capital markets take outs in the local and in the international markets (which might end up allowing not only refinancing of the bank debt but also cashing out part of the sponsor´s equity). We might even see securitisation schemes based on which concessionaires will securitise the government payments and will issue notes with underlying country risk.
Taking into consideration the demanding financing needs of the Program, in addition to counting on the local banks, Colombia will need to rely on the international banks, export/import agencies, multilateral banks and even on institutional and financial investors that might make capital injections to concessionaires. Hopefully all those players find the projects appealing.
We believe that Colombia will offer during the coming years, business opportunities to a wide range of local and international players.
Jorge Di Terlizzi
Partner
prietocarrizosa
Bogotá
About the author
Jorge Di Terlizzi focuses on contract law and corporate matters. He has been involved in important privatisation and M&A projects. He currently advises several telecommunications, energy, roadway, airport and port concession companies on all matters relating to their PPPs and their financing, construction and equity-funding contracts.
During the 2010 Colombian Presidential transition Mr Di Terlizzi served as a member of the Expert’s Committee on Infrastructure Issues with the Presidential Transition Committee. Member of the board of directors of B Braun Medical (since 1998); Member of the board of directors of HSBC Bank in Colombia (2008-2014); Member of the board of directors of Banistmo Trust in Colombia (2005-2007); Member of the board of directors of HSBC Trust in Colombia (2007-2009); Member of the board of directors of Cables de Energía y Telecomunicaciones (2010).
Vice President of the Colombian Chamber of Legal Services (CCLS) (2009), association which gathers more than 18 of the top-ranked law firms in Colombia; President of the CCLS (2010); Member of the CCLS’ Executive Committee (2008-2010); Member of the Bogota Board of the National Business Association (2010); Member of the Colombian Chamber of Infrastructure (CCI) (2007-2014); Frequent speaker in the CCI’s Infrastructure forums.
Laura Rey
Associate
prietocarrizosa
Bogotá
About the author
Laura is a member of the infrastructure and utilities group. She advises our local and international clients in structuring their public private associations (PPA) both when they are a private initiative and when they are part of a governmental plan. She advises our clients in important toll road infrastructure projects including acting as counsel in connection with structuring the project documents and agreements with international standards.
Given her prior experience, she supports our clients through the whole process initiating the corresponding public bid and finalising the structuring of the project including, in many cases, the development of capital markets solutions for infrastructure projects.
Laura used to be a member of the banking and finance group, where she got her experience in financial regulation, derivatives, structured finance and in transactions related to reduction of CO2 gases in utilities projects.
Prior to rejoining our Firm, Laura worked at Bancolombia Investment Bank as a capital markets in-house counsel (2013) and at Clifford Chance, New York, as foreign associate of the DCM/ECM team (2012-2013). She has also worked at Acosta y Carrizosa Abogados (2006) and Manrique y Asociados (2007).
During her LLM, she was a member and secretary general of the Columbia Latin-American Business and Law Association. She was a member of the Admissions Committee of the Phoenix Institute – Colombia (a scholarship association for summer programs at the University of Notre Dame) and she is an active member of the non-profit organization A New Life for All (Fundación Nueva Vida para Todos).