During the last few months, the Colombian government has been promoting the fourth generation of concessions for roads, a massive programme of more than $20 billion of investment, designed to dramatically improve the road network of this South American country. But, why is it called “fourth generation” like mobile phone technology?
The answer in a single word: Evolution.
Unlike most of its neighbours in the north of South America, Colombia has allowed private participation in infrastructure projects since the early 90s. However, at the same time the country started this process it was battling against an economic crisis, drug-related violence and was at the peak of its internal conflict. Sunk in a spiral of trouble, Colombia lost its investment grade and probably any appeal for international investors.
Despite this convulsive situation the country did not stop. From the 90s until now the most relevant infrastructure projects of the country have been privately financed with little participation from international investors or financers, with mixed results.
Some projects can be showcased as good practice cases, such as the Transmilenio Phase 2 infrastructure, a PFI programme of more than $600 million delivered on budget, on time and financed at the lowest interest rate available. The concession contract of the second runway of El Dorado Airport is also considered a good practice example by the Asian Development Bank while the concession of the airport in 2006 showed that Colombia was ready for world-class mega projects.
Of course, other privately financed projects turned out to be a disaster, hitting the national budget hard and people’s confidence in these kinds of models.
20 years later, the fourth generation of road concessions is an infrastructure programme that is applying lessons learnt and is up to the new challenges, making the Colombian PPP market very particular. It is not a country embarking on PPPs for the first time, but it is the first time it is embarking in a project of this size, targeting international markets.
That condition is shaping the programme. It has been structured as a transaction of international standards, allocating risks in an economically efficient way for the project, introducing availability payments and performance indicators, although leaving some liquidity risk to the private investor since the project is partially funded with tolls. At the same time, this project is applying lessons learnt in the past in order to improve complex processes such as land acquisition, environmental licences and public utility network management. Engagement with communities and indigenous/ethnic groups is also addressed.
So don’t expect to find a PPP contract from a British textbook. Since the country has developed its own particular way to finance infrastructure, and actually has a strong and liquid market to do so, you will find some clauses that may be unusual, but useful in the Colombian context. But any international investor or legal practitioner will feel very familiar with many other parts of the contract, as they are international standards.