Even by the standards of a continent with relatively low levels of infrastructure investment, Colombia desperately needs modernisation. Mired in geographical and political challenges, difficulties operating in or travelling through the country are an economic millstone around its neck. But in turning its fortunes around, Colombia provides an example to other, similar-sized Latin American countries.
Latin America has suffered relative underinvestment in infrastructure over the past 20 years, compared with other emerging markets regions, according to RBS, in its paper, The Roots of Growth: Projecting EM Infrastructure Demand to 2030.
Total infrastructure investment in LatAm reached only US$681bn between 1991 and 2010, according to RBS. Brazil and Mexico dominate that spending, with 40.8% and 26.5%, respectively, of that total. For the smaller markets, such as Colombia, the underinvestment has been chronic.
What infrastructure has been financed throughout the region has largely depended on national governments and regional development banks. “The private sector will not be there without [the public sector],” said Gaston Astesiano, infrastructure and environment sector adviser at the Inter-American Development Bank.
Once synonymous with guerrilla war and drug trafficking gangs, in recent years Colombia has done much to alleviate the concerns of would-be investors. Alongside Peru, it is now among a second tier of trustworthy, investable LatAm countries, behind economic stalwarts Brazil, Mexico and Chile.
Successive governments have made economic progress and the creation of a business-friendly environment a top priority. Where once a lack of continuity between governments undermined long-term planning, there is now a greater level of agreement between political parties about the need to invest in infrastructure.
For example, the decision by a Colombian government more than a decade ago to develop gas infrastructure and promote gas utilisation survived multiple changes of government. Investors can therefore be confident that infrastructure concessions awarded today will be honoured by the governments of tomorrow.
LatAm as a whole has demonstrated a commitment to infrastructure spending in coming years, as a vital element of improving its own economic prospects. “Total infrastructure investment is expected to reach US$1.2trn in 2011–30, with the highest growth expected in Peru, from US$25bn to US$58bn,” stated RBS.
The smaller economies, like Peru and Colombia, will require an even greater commitment than the continental average they are to achieve their potential. And Colombia has shown evidence of its ambition, with commitments to infrastructure spending totalling US$25bn in five years from 2010. That will encompass projects of all different types, though Colombia’s most pressing projects are modernising its road network and its power capacity.
The road less travelled
Roads are a particular concern in Colombia, owing to its geography and the danger posed by guerrillas when transporting goods across the country. To demonstrate the country’s need for improved roads, research by the IDB found Colombian transport costs add more to the cost of exporting to the US than the import tariffs that were removed by the bilateral free trade agreement Colombia signed with the US in October 2011.
“The implicit tax on Colombian exports to the US arising from transportation costs is almost equal to the burden imposed upon Chinese exports to the US, despite the much greater distance between China and the US,” said Standard and Poor’s in a paper on Colombia written in January. For other East Asian countries the cost is much lower, it added. “The cost of sending cargo from Bogota to the coast typically exceeds the cost of shipping from the port to the final foreign destination, reflecting Colombia’s poor road network.”
Colombia already has a lot of projects in the pipeline, many of which are rated by a ratings agency and financed in the capital markets. It can be a challenge to attract investment, both local and foreign, to projects in a country like Colombia, said Eduardo Uribe, an analyst at S&P in Mexico. But the country is in a strong position relative to some neighbours, for example Venezuela or Ecuador: it boasts a developed domestic banking system and relatively mature capital markets, clear natural advantages for any prospective infrastructure project requiring financing.
While not every investor is comfortable investing in LatAm, it is gaining popularity among emerging markets investors. The region as a whole is seeing solid economic performance, while Colombia is one of the countries within the region that has built a fiscal surplus.
For investors with the appetite to invest off the beaten track, the IDB provides financing for projects that would be unable to finance themselves via the usual routes, or where investors will only come forward alongside a reputable partner.
“We don’t want to crowd out private sector participation,” explained Astesiano. To help it tailor its financing to specific circumstances it can fund in a variety of ways, including with or without sovereign guarantees, ensuring investors have the right incentives to participate in projects.
It can also invest at different levels: in some countries the IDB works alongside national governments to get infrastructure projects financed, but in countries such as Brazil, where the national government does not need help, it is more active at the state level, where foreign investors might not have such comfort to participate on their own, and where the borrower is likely to need more technical assistance.
As such, IDB has been extremely important in financing LatAm infrastructure projects. In Colombia it has often invested alongside Empresas Publicas de Medellin, a utilities company owned by municipality of Medellin. For example, in February 2009 EPM obtained US$450m from IDB for a water treatment plant, via a 25-year, six-year grace loan, paying Libor plus 20bp.
More recently, IDB provided financing to EPM to develop the Porce III Hydroelectric Plant, 147 km northeast of the city of Medellin, in the department of Antioquia. The project increased the country’s installed generating capacity by 5%, or by 660MW. Announced in early 2011, the deal made EPM the largest power company in Colombia. The total cost of the project was US$1.3bn, with the IDB financing expenses of US$200m. At that point the IDB had made loans worth nearly US$1.3bn to Colombia’s energy sector, across 12 loans, financing the majority of the hydroelectric power capacity in the country.
Since the start of 2012 the bank has approved supplementary financing for the Cali Integrated Transport System, a rapid mass transit system to which it has now contributed more than US$100m. The only other financing approved this year is a relatively small sum towards a scheme to build new roads for rural micro-finance businesses.
Infrastructure financing starts at home
For the time being, domestic markets remained the most important avenue for financing projects in Colombia, said Uribe. But foreign investors are watching with interest. Last year saw the country’s rating rise to investment grade, opening the door for new investors that could not consider the country in the past. There are strong, rated projects in the country, with high cash-flow generation, while the regulatory framework and FX rating are also favourable. “We will see these projects start tapping the international capital markets when the right opportunity comes,” he predicted.
Yet serious obstacles remain before investors will be truly comfortable in countries like Colombia. It is not clear how the country will fare during a global slowdown. The country has won admirers for its development strategy and has a low level of public debt, but whether it would have access to the markets amid some of the bleaker global economic scenarios, such as a European sovereign default, remains to be seen. It is a relatively small proportion of investors that will be willing to bet how an unknown quantity like Colombia will react in a global crisis without seeing the evidence first.
“It certainly shouldn’t be harder to raise financing for projects in Latin America than it is anywhere else”
In other instances the problem for developing infrastructure is not finding the financing at all. One recurring issue is the constant renegotiating of the terms on which concessions are awarded: according to the IDB, since 2007 70% of all infrastructure concessions have been renegotiated within three years of the original awarding of a contract. This creates an incentive problem, with competition limited during these renegotiations, meaning infrastructure projects are not necessarily being awarded with the most favourable market terms.
Then there is the problem of ensuring money that is raised for a project is spent properly. Colombia is addressing the problem of corruption head-on, and has created a new National Infrastructure Agency, which it hopes will be more effective than the National Concessions Institute it replaces. “Better design and more effective implementation would allow local pension funds to invest more in infrastructure projects, thereby promoting the development of financial markets and infrastructure,” said S&P.
In all, the outlook is positive. Colombia’s investment grade status makes it an interesting proposition for new investors. And although many banks are retrenching, the problems besieging Europe could ultimately see capital diverted to new destinations.
While countries like Colombia are probably unlikely to be completely sheltered from the fallout of Western banking problems, it may be less exposed than other, more developed markets, and if events support this view inflows of capital could become self perpetuating. “It certainly shouldn’t be harder to raise financing for projects in Latin America than it is anywhere else,” said one New York-based LatAm banker.
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