Carlos Umaña, Omar Martinez, Mario Forero and Natalia Estupiñan of Brigard Urrutia in Bogotá look at the challenges to highway construction in Colombia
Colombia, a medium size country located in the North West corner of South America, has been known in the past for the violence associated to the drug cartels and guerrillas during the eighties and nineties. In spite of its violence problems, the country has managed to keep what could be one of the oldest democracies in Latin America and has applied successfully conservative economic policies, which has produced one of the most stable economies of the area.
During the first decade of 2000, Colombia focused on trying to control its violence problems while keeping economic stability and fostering foreign investment. To do that, the Colombian government embarked on an offensive against rightist paramilitary groups and leftist guerrillas, which constituted the main threats to the stability of the country after drug cartels had been dismantled in the nineties. The government offensive led to dismantling the rightist paramilitary groups, whose commanders ended up in US prisons convicted for drug trafficking charges and severally weakened the power of the guerrillas, which are currently conducting peace conversations with the government. From the economic point of view, with the purpose of promoting foreign investment and benefiting economic growth, the government negotiated free trade agreements (FTA) with several countries including the NAFTA countries (USA, Mexico and Canada), Korea, Chile and Peru. Even though during this decade Colombia struggled to control a relatively high unemployment rate and inequality, the country enjoyed high rates of growth that it had not seen for decades.
Colombia started the second decade of 2000 with high political expectations due to the peace conversations with the guerrillas. From the economic perspective, there was some degree of optimism as the inflation rate had been under control for many years and the high unemployment rate seemed to have hit a downward trend. However, the government identified a huge challenge in connection with the FTAs that were signed in the last decade and were about to become enforceable. This challenge was the lack of competitiveness of the Colombian economy with respect to the economies of its trade partners. In particular, it was identified that the road infrastructure was precarious considering the size, population and gross domestic product of the country. For example, according to the Global Competitiveness Report 2013–2014 issued by the Global Economic Forum, Colombia ranked 130 out of 148 countries in quality of roads. In contrast, the Colombian partners of the Pacific Alliance (Alianza del Pacífico), which have FTAs in force with Colombia, have by far better rankings in quality of roads: Chile ranked 27, Mexico 51 and Peru 98.
Then, it became evident for the Colombian government that the country needed to strength urgently its network of roads in order to improve its competitiveness. Therefore, the government decided to work on two fronts. On the one hand, the government developed an ambitious program for toll road projects called “Fourth Generation of Roads Program” through which it intends to build about 40 projects with an estimated investment of US $26.28 million. According to the President of Colombia, Juan Manuel Santos, it is the "most ambitious project" in the history of Colombia.
On the other hand, the government established a committee on infrastructure with the mission of identifying the reasons why the roads infrastructure of Colombia was significantly underdeveloped with respect to the network of its neighbors and commercial partners. The committee rendered its report in October 2012.
Besides a sum of economic, political, and institutional factors, enhanced by the structure of the transportation industry, fiscal constraints and geological and geographical difficulties, the committee on infrastructure identified several “bottlenecks” that prevent Colombia’s road infrastructure from being developed. Such bottlenecks referred to in the report of the committee along with other key issues identified by the government itself can be classified in four groups as follows: land acquisition, environmental permits, previous consultation with indigenous, raizals and afro-Colombian communities and relocation of networks.
If not addressed properly, these bottlenecks can cause a high level of uncertainty when estimating the works schedule of the projects. This uncertainty can impact the stability and predictability of the cash flow of the projects and jeopardize the entire program. Also, the uncertainty can make the tender processes for the Fourth Generation of Roads Program unattractive for large international companies and increase the costs to those local companies that are willing to take the risks associated with such bottlenecks. Considering the size of the Fourth Generation of Roads Program, it is imperative to secure the participation of international concessionaires, the support of local banks and the financing from international banks, private equity funds and national pension funds that traditionally do not invest in these type of projects.
In response to this situation the Colombian government promoted Law 1682 of 2013 (the ‘Infrastructure Law’), which seeks to provide an effective solution to the bottlenecks. In this article we will give a brief description of the bottlenecks and the changes introduced by the Infrastructure Law in order to deal with them. In addition, we will analyse briefly the way the bottlenecks were addressed in the Fourth Generation of Roads Program.
(i) Land acquisition
It was identified that when it is not possible to reach an agreement with the owner of the land required to implement a project, the entire judicial procedure to expropriate such land usually took more than three years and in some cases more than five years. This lack of land readiness delayed the work schedules and caused cost overruns. This situation responded mainly to complex paperwork delays and imperfections in the procedures set forth in the law to expropriate the land.
With the enactment of the Infrastructure Law the procedure to expropriate the land required for a toll road either through administrative (performed by a government entity) or judicial way was adjusted and it is expected a reduction of up to 50% in the time that the entire procedure takes. In particular, regarding administrative expropriation, the Infrastructure Law sets forth that the administrative act ordering the expropriation of the property shall be applied immediately. Regarding judicial expropriation, it is noteworthy that the Infrastructure Law introduced the possibility to request early delivery of the land at the time of filing the lawsuit and the judge shall order the delivery of such property at the time of admission of the lawsuit. This change can save years with respect to the former procedure that did not include the possibility of early delivery of the land.
(ii) Environmental permits
The committee on infrastructure and the Colombian Government concluded that the procedure to grant environmental permits was cumbersome and took too long (usually around 18 months or more and in many cases duplicated or even triplicated the legal terms).
In particular, an analysis performed by the Colombian Council on social and economic policies –Conpes- (Document 3762 of 2013) sets forth that 79% of 29 toll road projects analysed had difficulties due to the delay in obtaining environmental licenses. According to such analysis, this situation is attributable to lack of clarity on the procedures to obtain environmental permits and poor coordination among the government agencies that intervene in the process.
In order to address the issues mentioned above, the Infrastructure Law reduced the terms to study and grant environmental permits and set forth that environmental authorities shall fulfill such terms as they will be liable for any damage caused to third parties as a consequence of delays attributable to such authorities.
In addition, the Infrastructure Law requires the National Authority of Environmental Licenses (ANLA) to issue handbooks and guidelines to obtain the environmental permits required to implement transport infrastructure projects with the purpose of simplifying and standardising the paperwork and criteria used to issue such permits.
Furthermore, the Infrastructure Law sets forth several activities related to the construction of roads that do not require environmental permits such as maintenance, rehabilitation and improvement works.
However, even though the changes introduced by the Infrastructure Law have received positive feedback, it is still uncertain how such changes will work in practice because in order to shorten and ease the procedure to issue environmental permits it is also necessary to strength the ANLA and improve its capacity.
(iii) Previous consultation
According to Colombian law, indigenous, raizals (traditional afro-Caribbean) and traditional afro-Colombian communities shall be consulted before implementing any infrastructure project that can affect them. The environmental permit of the project cannot be granted unless the previous consultation process has been duly conducted and completed when such procedure is required by law.
However, the procedure to carry out previous consultation is poorly regulated in the Colombian law and often leads to deadlocks that do not allow finishing the consultation. For example, the procedure does not provide for a maximum term to conduct negotiations or a remedy in the case of disagreement between the communities and a concessionaire. As a consequence, many communities take advantage of the time constraints of the concessionaires to fulfill their work schedules and force the concessionaires to enter into costly negotiations that can last many years.
In this regard, it is clear that a proper regulation that balances the constitutional and international rights of native and traditional communities with the development of transport projects of public interest is needed urgently.
However, due to the special constitutional protection that covers native and traditional communities, the previous consultation process cannot be regulated by an ordinary law such as the Infrastructure Law. To regulate this issue, a statutory law (which requires 8 debates in the Congress in contrast with an ordinary law that can be approved with 4 debates) shall be issued. In addition, such statutory law needs a previous consultation process with the native and traditional communities and will be subject to a detailed review by the Colombian Constitutional Court to assure that it does comply with the constitutional rights of such communities. Furthermore, from a political point of view this issue is highly sensitive as it involves the regulation of the rights of minorities specially protected. Then, submitting a bill to the Congress in this regard will use a huge portion of the political capital of the government.
Therefore, it is expected that a statutory law to regulate the previous consultation process will not be issued in the short term and the matter will continue to be a bottleneck for the construction of toll road projects at least for the next year.
However, even though the Infrastructure Law does not solve this bottleneck, it is worth mentioning that it sets forth that the Ministry of Internal Affairs shall lead the process of prior consultation in the following terms: "the Interior Ministry will lead and accompany the process of prior consultation with ethnic communities when required in order to obtain the environmental license of the transport infrastructure project and the contracting entity shall be responsible for the commitments acquired with the communities." This change is positive as the Ministry of Internal Affairs is the entity in charge of keeping the record of native and traditional communities in Colombia. Therefore, it is that this ministry will have an active role in the previous consultation processes that shall be conducted to implement the Fourth Generation of Roads Program.
(iv) Relocation of networks
Other important issue that became a bottle neck for several toll road projects is the performance of the works necessary to protect or relocate networks infrastructure such as public utilities networks, telecommunications networks and pipelines in order to construct a toll road. In particular, it was not clear who had to bear the costs of the works to relocate or protect a network, there was no legal term to conduct negotiations with the owners of such networks or remedies in the case that no agreement was reached. Therefore, often the presence of a public utilities network or a pipeline in the area of the project was a synonym of important delays in the works schedule and costs overruns.
However, the Infrastructure Law introduced a regulation to solve the issue. In particular, the Infrastructure Law clarified that the concessionaire shall bear the costs associated with the relocation or protection of networks except when (i) there is a permit or authorisation for the construction of the network which was granted under the condition precedent that the transport infrastructure was built; (ii) there is an agreement between the parties that provides for a different arrangement; or (iii) the networks were installed in a zone reserved by law to be part of the road corridor. In these events, the owner of the network shall bear the costs to perform the works to protect or relocate such network.
It is also important to mention that the Infrastructure Law sets forth a procedure to conduct negotiations between the concessionaire and the owner of the network in order to discuss the type of works and costs to protect or relocate the network. According to such procedure, if it is not possible to agree within certain term on the costs of the designs and works necessary to protect or relocate a network, the government entity in charge of the project can perform the works required but shall comply with the applicable technical regulations and shall guarantee that the network protected or relocated fulfills the same technical conditions than the original network.
(v) The Bottlenecks addressed in the draft concession contract for the Fourth Generation of Roads Program
The draft concession contract for the Fourth Generation of Roads Program addresses the bottlenecks by including an interesting system of compensations that complements the solutions given by the Infrastructure Law. As a general rule, the concessionaire shall not be compensated unless it finishes the works of each tranche in which the project is divided (functional units) within the works schedule.
However, the contract recognises a special compensation to the concessionaire if issues related to land acquisition, environmental permits or relocation of networks, which are recognised in the contract as force majeure events, arise and delay the works schedule. Such special compensation is calculated in proportion to the percentage of investment made by the concessionaire in the respective functional unit with respect to the total investment required to complete the works of the functional unit. The concessionaire will be entitled to receive special compensation as of the date in which the functional unit was supposed to be finished, provided that it executed at least 40% of the investment of the respective functional unit and such tranche can be used at least partially for the transit of motor vehicles complying with minimum safety and technical standards.
In any case, if a force majeure event arises but the concessionaire does not meet the requirements to receive the special compensation, it can be compensated for its stand by costs, which include direct costs but no loss of profit, during the time that the force majeure event produces effects.
The special compensation and the stand by costs cannot be paid for more than 730 days counted as of the expiration of the original deadline to complete the functional unit affected by the force majeure event. It is expected that during this term the force majeure event is mitigated either because the facts that caused it were overcome or because the concessionaire and the government amended the contract to change the scope of the works of the functional unit. If no agreement can be reached by the concessionaire and the government to amend the contract within such term and the force majeure event is still preventing the works to be performed, any party can request the early termination of the contract.
Upon its early termination, the contract shall be liquidated according to a liquidation formula defined therein. In general, such a formula compensates the concessionaire for its equity and debt contributions, investments and costs recognised according to the contract but deducting the applicable fines and penalties.
In conclusion, the Infrastructure Law addressed successfully many of the bottlenecks that prevented the development of toll roads in Colombia. However, the costs caused by delays in obtaining environmental permits and, particularly, in conducting the previous consultation process (which is necessary to obtain the environmental permits) are still bottlenecks for the implementation of road concessions. That is because in this case the concessionaire will be compensated only for its stand by costs. In order to address these two bottlenecks, the Colombian legal framework requires structural modifications.
About the author
Mr Umaña has been managing partner of Brigard & Urrutia since 2012 and partner since 1990, with more than 25 years of experience. He splits his time between several practice areas and is particularly commended for his knowledge in infrastructure, public procurement and competition work. Moreover, he had advised national and international clients in connection with public services law, administrative law, energy projects, commercial law and insurance such as Siemens, Johnson & Johnson, 3M, Iberia, Votorantim, LAN Chile, Monsanto, among others.
About the author
Prior to joining Brigard & Urrutia, Mr. Martínez worked for a law firm in Colombia and for the World Bank and the IDB in Washington D.C. Mr. Martinez has focused his practice in public-private partnerships and infrastructure rendering legal advice to public entities, private companies and international development banks. He has provided legal advice in the structuring of several infrastructure projects in public transportation, electricity, telecommunications and toll roads. In addition, Mr. Martinez has been part of the litigation teams of several arbitration proceedings in connection with infrastructure matters.