Bogotá airport's squat and squalid concrete terminal and miles of cordoned-off, dug-up roads are stark indicators as to why Colombia is pushing transport investment so hard. The country's infrastructure has long been insufficient, so the government embarked on a $24bn recession-busting programme in 2008 to tackle this problem just as the recession bit. The programme is providing a litmus test of the depth and sophistication of the local bank loan and debt markets and is starting to stimulate a private equity and fast-growing institutional asset management industry.
"There was a conscious decision to let the budget deficit rise to allow us to increase long-term spending and maintain social programmes" says Esteban Piedrahita, director-general of Colombia's National Planning Department (DNP). The fact that Colombia can afford to step up spending during a global recession is testament to years of strong economic management and gross domestic product (GDP) growth. "This is the first time that we have had the economic conditions to carry out such an anti-cyclical policy," adds Mr Piedrahita.
The belt loosening comes after a profound crisis in the late 1990s, from which it took a hard seven years for Colombia to recover. The fiscal situation remained a big constraint on spending in the first part of the decade, admits Mr Piedrahita. Government debt is now less than 40% of GDP.
The economic turnaround has brought in plenty of new money. Investors today see Colombia as one of Latin America's most promising markets. That has propelled foreign direct investment from 2% to 8% of GDP since 2002 and public investment has doubled. "The one thing that [President Alvaro] Uribe is obsessed by is investment numbers," says Mr Piedrahita.
Also, developments on regulation of private-public partnerships for infrastructure have moved forward and Colombia has a stronger banking sector to finance them, says Mr Piedrahita. "Risk management is much more professional and capital markets are ever-more open," he says.
Senior bankers echo the government's optimism. Inflation has been vanquished and fell to almost 2% at the end of last year, the lowest level in some 50 years, says Alejandro Figueroa, president at Banco de Bogotá. That is allowing the central bank to pursue a sustained and stable low interest rate policy, in turn, enabling banks such as Banco de Bogotá's to step up lending.
Infrastructure is a priority segment for Bancolombia, which is already particularly active across energy, power and transport, says David Felipe Pérez Salazar, vice-president of financial structuring at the bank's investment banking arm. It is teaming up with local competitors and multilaterals to structure financing as the size of the deals grows. "Even though we are [Colombia's] largest bank, our typical limit is $300m for one deal. Some of these deals are $2bn," he says.
Optimism prevails
Even those that are more sceptical about the government's track record to date are more optimistic about the future. Jaime Trujillo, a partner in Baker & McKenzie's Bogotá office, says that the Uribe government has achieved little in infrastructure, particularly transport, despite talking big. He blames a combination of incompetence, in-fighting, indecision and restructuring. However, greater liquidity in bank and debt markets and the range of projects across industries, particularly in the already popular power and oil and gas sectors, are starting to transform bank and bond markets, he believes.
The most closely watched segment in Colombia today is transport, where significant activity is taking place in large projects, which had proved fiendishly difficult to launch. Government supporters say that years of armed conflict prevented the planning and concessioning of such projects and that in smaller deals, where the government directly contracted construction firms, progress has been notable.
Critics argue that the government has talked about large projects for years and done little. Worse, officials have proven willing to renegotiate existing contracts in favour of the concessionaire, which has led to firms presenting unrealistically low bids in the knowledge that the government will cave in to their future demands. The latest wave of mega-projects will be different as they require professional, institutional money, says Camilo Villaveces, who runs investment management company Ashmore's Colombian infrastructure fund.
The government awarded two contracts in January, covering tranches of the flagship $2.6bn Ruta del Sol, which links Bogotá to the Caribbean coast. Funding for the project will prove a crucial test of the depth and ingenuity of the local bank financing market.
The first section descends the Andes and demands extensive tunnelling. The government awarded a seven-year public works-style contract, which will require some $150m of bank funding, says Hector Ulloa, president and CEO at Structure Banca de Inversión, a local investment bank that is adviser to the government on this and other projects. He sees the local banking system supplying all of this.
The second, 500-kilometre tranche of the highway is a 25-year concession based on discounted net present value of income, says Mr Ulloa. The financing requires a more sophisticated structure, which is likely to come through a five-year local syndicated lending programme in the range of $300m to $350m. Banks are likely to refinance the deal through local debt markets and pension funds may be involved, he says.
Bidders for a third tranche were unsuccessful and the Colombian government has pledged an extra $200m and will re-open this section to bids.
Home comforts
Local banks are eager to participate in some of these deals. "We have a window of opportunity as international banks cut lines to Colombia during the crisis and are still to come back fully to markets. Banco de Bogotá is interested in the second tranche of the Ruta del Sol as well as other smaller transport projects," says Mr Figueroa.
The deals come at a moment when local banks are offering highly competitive rates as they slug it out for market share. Mr Figueroa acknowledges that rivalry is intense. "There is very tough competition between Colombian banks: we are fighting over every single project," he says.
Mr Villaveces has first-hand proof of just how hard Colombian banks are competing. When Ashmore was putting together a local seven-year, $125m deal, its management thought it best to go straight to the New York markets, he recalls. Bancolombia found out about the plan and called up to offer bank lending terms. Ashmore invited the bank to bid, never thinking that it would be able to match the offer in New York, but Bancolombia's bid ended up being on a par with international markets and Ashmore accepted it.
Mr Ulloa agrees that local banks are ever-more competitive and says that is especially the case for peso financing, where the price of the international currency swap means the all-in price, of about 700 basis points (bps) to 800bps over Libor in early March, are equivalent to the local market, he says. The only difficulty has been in securing longer tenors in the local bank market. Tenors went out as far as 10 to 12 years before the crisis, but have dropped back to seven to 10 years, he adds.
Financing for the other giant planned road, the Autopista de las Américas, which links Panama to Venezuela tracking the Caribbean coast, is much less of a certainty. There are question marks over the economic viability of the route and the terrain is less known. "No serious constructor will be able to assess the cost of the highway by May when the bid is due," says Mr Villaveces. But Banco de Bogotá is analysing the Autopista de las Américas route and may be interested in participating, says Mr Figueroa.
Institutional fund financing
The most exciting and unknown part of the equation for completing infrastructure projects is the role that pension and private equity funds will play.
Sources of institutional funding have increased dramatically in the country since the mid-1990s, says Santiago Montenegro, president of pension fund association Asofondos. Pension funds had 80bn pesos ($42bn) under management at the end of last year, up 37% in 12 months due to high returns and strong inflows of new contributions.
Moreover, pension funds are undergoing a liberalisation, which will see equity limits for younger contributors raised, probably to 70% from today's 40%, says Mr Montenegro. If this seems like a gold mine for the project finance sector, particularly as pension funds tend to like long-term concessions and stable cash flows, there are still many obstacles before such potential can be harnessed. Funds currently invest 20% in infrastructure, mostly through general corporate debt and in the power sector, and have steered clear of transport deals, he says.
Mr Montenegro blames regulations and restrictions for pension funds' reluctance to participate in the road sector. "The government has not been able to put together a good model for institutional investors. Studies to assess risks in areas such as geology, environmental impacts and legal issues are not very rigorous," he says. The habit of renegotiating contracts deters funds as well, he says.
New structures could help to unlock pension assets for projects. Private equity fund managers think they could help bridge the gap between sponsors and pension funds.
Private equity players with infrastructure funds are certainly in vogue. International players, including Canada's Brookfield Asset Management and Darby Overseas of the US, have been attracted in to the infrastructure fund market. Local funds, such as a $53m infrastructure fund run by Nexus Capital Partners, are also present.
Banks such as Bancolombia are setting up their own funds, says Mr Pérez. The problem is that many funds have raised the cash but do not have the projects lined up on which to spend the monies, he says. Bancolombia will identify attractive opportunities first and then raise the money to pay for them, he adds.
Mr Villaveces says that Ashmore has commitments of some $200m. He believes that pension funds' reluctance to invest is caused by unsophisticated management and that a diversified infrastructure fund investing in safe projects will enable them to get on board. More sophisticated contracts will ease concerns over renegotiations once concessions are awarded, he adds.
Local debt market financing
The power generation and oil and gas sectors already show just how attractive Colombia can be as an investment destination. After years of running deficits and a major black-out in 1991, rules for the power sector were overhauled and today Colombia has one of the best-regulated industries in the region. The country already exports to Ecuador and is negotiating to export to Venezuela, which is suffering from severe black-outs, despite strained commercial relations.
Last year was a bumper year for the debt markets and Bancolombia was the most active manager, bringing 13 deals to market and raising almost $1bn. Citi came next with $914m through 14 deals. That increase in activity was in large part due to power and energy companies.
Lower interest rates and difficult international markets made the local market the obvious choice for deals, says Mr Pérez. The bond markets in Colombia have been growing spectacularly and blue-chip companies can finance themselves swiftly, adds Mr Figueroa.
The pipeline of deals looks attractive too. There will be $6.5bn in investments between 2009 and 2018 through nine new projects, which will add almost 3500 megawatts in generation. All eyes are on the build-and-operate contract for the 2400-megawatt Itaungo hydro plant, which requires investment of $2.3bn. Seven consortia have prequalified for the bid, which will likely be structured as an international project finance deal.
The oil and gas sector is in fighting form with auctions for a number of new blocks slated. State-owned Ecopetrol plans nearly $7bn in capital expenditure this year and has had a flurry of deals in markets. It carried out a $3bn initial public offering in 2007 and went on to issue a heavily oversubscribed $1.5bn, 10-year bond deal last year. It is planning a $2.86bn bond deal in local or international markets, if it can get investor approval.
Banks are also directly financing oil and gas companies. Banco de Bogotá is involved in a range of projects including financing for the Colombian business of Canada's Pacifico Rubiales and Ecopetrol and pipelines as well as natural gas projects, says Mr Figueroa. The bank is continuing to evaluate other projects in energy. Despite the fast growth, the bond market is relatively conservative and is confined to AAA rated companies, he says.
The still-illiquid equity market is also benefitting from the oil and gas sector. Pacifico Rubiales, which operates wells in partnership with Ecopetrol in Colombia and is bidding for other blocks in the country, became the first company to list on the Colombian Stock Exchange and has become one of the most actively traded stocks since. Other firms in this area, such as Canacol Energy, are set to list on the exchange.
The positive scenario for Colombia seems immune to politics. The Supreme Court's decision in February that President Uribe could not run for a third term is mostly shrugged off by Colombian bankers and markets reacted calmly. The likely policy of the new government is continuity, analysts agree. That will help Colombia build out the infrastructure and the financial institutions and markets it so desperately needs.
