Like other countries in Latin America, Colombia has been expanding its road network through different public-private partnership (PPP) models, and a number of projects have been awarded under a broad range of contractual structures. Over the years, however, many of these projects suffered construction and maintenance delays, leading to contract renegotiations. In addition, these projects attracted very limited participation from international investors and local pension funds.
Colombia’s geographical quirks—dual coasts, drastic variations in altitude, and a large landmass—contribute to the challenge of developing an effective transportation infrastructure. The country’s post-1991 constitution attempts to address these longstanding issues, and the resulting waves of projects, known as road concession “generations,” have created unprecedented opportunities.
In the following section, Handshake tracks the evolution of four generations of Colombian road PPPs. An interview with Luis Andrade, the President of the National Infrastructure Agency for Colombia, hints at what may lie ahead for Colombian roads. The final feature on the prize-winning Ruta del Sol, which laid the foundation for the fourth “generation,” shows how this new strategy is already setting the standard for road projects in the region. Colombia’s uniqueness—once considered a liability—may prove the inspiration for an entirely new approach to infrastructure.
In the Colombian road sector, the 11 contracts signed between 1994 and 1997 are considered the first generation of concessions, and these concessions benefit from a government-provided minimum revenues guarantee. However, the financial crisis of the late 1990s prevented the government from fulfilling its contractual obligations under the guarantee payment. This resulted in many renegotiations to reestablish the economic equilibrium of the concessionaire.
Adding to these woes, the government did not require turn-key contracts that bound concessionaires to a pre-agreed construction cost, and this resulted in government paying up to 30 percent more than originally planned for capital expenditures in some cases.
Two contracts signed in 1997 and 1999 applied new contract provisions in response to the challenges that arose in the first generation. These provisions included:
- A more detailed consideration of risk allocation;
- Provision for more detailed technical documentation during the bidding process;
- Protection of investors through contractual compensation mechanisms; and
- The inclusion of step-in rights for lenders.
In addition, the minimum revenues guarantee was abandoned. (A World Bank line of credit allowed the government to make good on its outstanding obligations.) Instead, contracts varied in length through a mechanism set at bid. Each bidder was required to propose an expected future level of total revenue. The bid presenting the lowest value won, and once revenues reached this expected amount, the concession would end.
These solutions improved the status quo, but problems continued. For example, road capacity was planned on the basis of 20-year traffic projections, and all the investments were made in the first three years, which resulted in overcapacity. Also, there was no integrated vision; each project was considered on a stand-alone basis rather than as part of an integrated network. Lastly, land acquisition remained a government risk and responsibility (just as for the first generation), which resulted in delays and increased costs due to the government’s few dedicated resources.
After 1999, a third generation of concessions aimed to address these issues. These changes included:
- Introduction of the concept of a “road corridor” to connect the consumption and production centers (connecting between each, as well as to ports);
- A move toward performance-driven contracts, with the introduction of key performance indicators; and
- A minimum projected revenues amount proposed by each bidder as the only criterion of the tender.
Problems continued, however. The elegant one-criterion tender evaluation led to very aggressive bids where the bidders’ strategy was basically to propose low offers to win, with the idea to re-open the contract negotiation further on to add more construction work. The government was in fact required to renegotiate all these PPP contracts. Incentives to deliver and finalize the construction were absent, resulting in unmanageable delays. It was even possible to comply with the concession contract and the construction requirements without bringing real cash equity to the table.
Ruta del Sol, an ambitious project split into three different road PPPs, attempted to resolve these remaining challenges. Between 2007 to 2010, this $3 billion road between Bogotá and the north coast was structured and tendered. It required cash injections from sponsors, an engineering, procurement, and construction turn-key contract, and a clear payment mechanism. Environmental and social risks were transferred to the concessionaire to ensure effective management of these high profile, high impact issues. Ruta del Sol has become the foundation for the fourth and current generation of Colombian road PPPs.
The signing of a new PPP law (“Ley 1508”) distinguishes this generation from its predecessors. The law limits additions up to 20 percent of the total value of the concession contract, and allows prequalification. Additionally, this fourth generation will provide a standardized contract, reflecting the lessons of the earlier challenges. It will facilitate work for bidders as well as the government. Nevertheless, from a technical standpoint, environmental and social risks will remain at the heart of discussions, as private players will have to assume an important part of these risks.
The scale of the fourth generation road PPP program is vast, with over 5,000 km of road under consideration. Its size has piqued the interest of many international players, but this causes some concern. Estimates put the financing need at over $5 billion, a tall order in a global environment comprised of tight capital markets and a limited revenue base from tolls or government coffers.
Participation of international players is critical to the fourth generation’s success. After all, Ruta del Sol introduced international best practice, but even this mega-road project could be financed through Colombia’s financial market. Today the scale is greater, as is the potential. The fourth generation has everything it takes to demonstrate that Colombia has the transparency, capacity, and international good business practices to attract the international audience that will propel it onto the global stage.