The 4G programme is truly astounding in scope. What is the progress like so far and what are the expectations for this year?
The programme is going very well. We have already awarded 30 projects worth close to US$15bn, and we will continue with a lot of other activities this year. We are hoping to get at least 6 projects awarded in 2017, maybe more, to the equivalent of roughly US$3bn. We are happy to see sustained interest on behalf of investors, as well as involvement from the banks.
How has some of the uncertainty we have seen in recent months influenced the infrastructure financing environment in Colombia?
Interestingly enough, what is most concerning is not the macro environment, including questions around US policy under President Trump, but rather the ongoing corruption scandal with Odebrecht. The company is leading two very important projects in Colombia. These are the Ruta del Sol, the main highway linking Bogota with the Caribbean coast – which has an investment close to US$2bn. The second is a project to rejuvenate the Magdalena river, a key transport artery, with a 900km extension. It has created a lot of concerns among the banks – some would even go so far as to call it a crisis of confidence.
The banks did not anticipate this risk. When we had our discussions on structuring the 4G programme, the government and the banks focussed on the main risks – including FX risk, geological risk, and concerns about additional costs, including those for environmental licencing. The concessions plan was built to manage those risks – and I believe that we were successful in achieving good balance in distributing those risks between private and public sectors by setting up some financing mechanisms and limits. However, “reputational risk” was not initially priced in, so the banks are now understandably worried. They financed projects with highly reputable sponsors that provided significant amounts of money, but now they find themselves in the midst of a corruption scandal.
For example, on Ruta del Sol, the concession owes about US$800mn dollars to the banks – and as a result of the corruption investigation, the contract will have to be terminated. The banks are now quite concerned about the liquidation process, how it might affect their balance sheets, as well as about other projects that were awarded around the same time. That is one of the major challenges we face – partly because it was not really possible to anticipate.
What are the chances of controlling the damage by quickly finding replacement concessions? Would it be possible to fast-track such new concessions? How would the prices have changed?
We believe it will be possible. Once the contract is liquidated, we need to open up new tendering process for PPPs, which takes time – getting government approvals, applying due diligence on the bidding process, and so forth. That could stretch as far as 18 to 24 months. As many of the projects have a longer horizon, we are considering shifting some of the work in progress to other contractors so they can continue working on them while we award the PPPs.
We have fiscal constraints – we don’t have the budget available to keep the pace of investment that we would have had in the absence of the Odebrecht scandal. That is a problem, and we are working on minimizing the damage, but it means that deadlines on those projects will need to be revised forward. There have also been some social tensions in areas where the two projects were taking place, as up to 4,000 people were employed there – and now many are being laid off.
With the Magdalena river project the situation is similar, though not identical. The difference is that here Odebrecht did not confess to paying bribes on the project. As there are still concerns that those concessions could have been fraudulent, work on these projects had to be halted, and new projects cannot be awarded to Odebrecht. This means we need to find another company that is prepared to take the concession, which has been difficult. We have had some interest from international investors, including the Slim group from Mexico, and a Chinese firm, Power China, which took part in the original auction, but were eventually disqualified.
What concerns us regarding the investment programme under way is whether this scandal could have a systemic effect, with banks beginning to question their exposure in infrastructure. Our strategy, as a government, is to try and dissolve these contracts quickly and diffuse any uncertainty; in doing so, we are also setting a precedent on how future problems of this nature will be handled. If we manage this properly, anxieties will subside.
Could this be an opportunity to introduce new kind of instruments to hedge against such reputational risk?
We have been innovating throughout the financing of this programme, but the size of our banks and the economy poses some limitations. The entire loan book of Colombia’s banks is about US$70bn, and our capex requirement is US$15bn, accounting for over 20% of the commercial loan book. It is simply not sustainable for the banks to take on that much exposure. That is why we needed to bring in foreign banks and institutional investors to make the programme sustainable. We also need to maintain government support.
Our initial solution was quite interesting: we provided dollar payments as a percentage of the total liabilities to allow foreign banks and investors to come in and fund projects. Up to now, about 50% of the resources have come from outside Colombia; the leading international banks involved in syndicating loans and issuing securities linked to these projects include Goldman Sachs, SMBC, and Credit Agricole. We are quite happy to see so much international participation.
We also created a new asset class in the regulation of pension funds. We allow them to invest in project finance loans but they have to go through a specialized asset manager. Colombian pension funds can now invest up to a maximum of 5% of assets into these project finance SPVs. That also provides an additional vehicle for long-term loans that complements bank lending. It is an interesting innovation that we now see spreading in other Latin American countries.
In view of these positive developments, do you expect to see more issuances in the coming months?
I think we will see more bonds issued, although of all these projects only two so far have issued internationally, while the rest were financed mostly through syndicated loans and other standard financing schemes. Having said that, those two international bonds were very successful and I’d expect to see more over the course of this year.
What is your outlook for the coming 12 months, in terms of targets and also potential challenges?
At the moment, we have several bidding processes either underway or about to launch. There are no signs that these will fail – we are seeing sustained interest. In the first quarter, we will still be in the process of resolving the fallout from the Odebrecht case, so obtaining financing in the next two months is likely to be challenging. Colombia’s exposure to this scandal has been limited to only two projects, far less than is the case in many other countries in the region.