Infrastructure funds find role in Colombia's 4G program
June 8, 2018 | Mat Youkee
New financing for a corruption dogged toll road project heralds a turnaround in the country's project finance market.
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The bulldozers and diggers on the Ocaña-Gamarra leg of the Ruta del Sol II toll road concession in Colombia have sat idle since early 2017, when the government removed the troubled Brazilian builder Odebrecht from the contract. But soon, in a positive sign for Colombia's infrastructure sector, construction is scheduled to start up again.
The Ruta del Sol II was not part of Colombia's fourth generation of toll road concessions, but Odebrecht's involvement caused much of the infrastructure sector, including the 4G program, to come to a standstill. The government, in an effort to get things going again, had to use funds from the federal highway budget to restart work on the Ruta del Sol II.
"The scandal over the Ruta del Sol had a strong impact on the banks' confidence in infrastructure projects," says Juliana Aguilar Vargas, an infrastructure analyst at Bancolombia. "No one was sure what the corruption cases would mean for the financing contracts."
Colombia's national infrastructure agency ANI had expected 10 4G projects to reach financial close in 2017. Only five did. Their confidence shaken, Colombian banks sharply cut back on granting new loans in an environment where local financing options were already stretched.
"There seems to be a pattern of holding off until the Odebrecht situation sorts itself out," says Luis Carlos Núñez, head of BlackRock's infrastructure debt business in Colombia. "Overall, the number of projects awarded at the time was ambitious, compared to the number of financial institutions and financial resources available."
Enter the debt funds
BlackRock formed Colombia's fourth infrastructure debt fund in May last year, looking to raise some 800 billion pesos ($280 million) from local institutional investors to finance concessions and public-private partnerships (PPPs). The regional development bank CAF and the emerging markets investor Ashmore Group previously raised 2 trillion pesos for an infrastructure fund, while Sura Asset Management and Credicorp Capital had 1.26 trillion pesos in their own fund and Exponencial had 1 trillion pesos.
But for the fund managers sitting on piles of cash, the delays caused by the Odebrecht bribery scandal left them twiddling their thumbs.
"The 4G projects are long-term assets that behave like bonds and have attracted the interest of local and international pension funds," says Carlos Fradique Méndez, a partner in the Bogotá law firm Brigard Urrutia, "but the pipeline is very quiet, and funds are looking for alternative investments in areas such as renewable energy or social infrastructure, including schools, hospitals and prisons."
The resurrection of the Ruta del Sol II, however, may be symbolic of a sector rejuvenated.
Colombia has enacted new legislation for public procurements, and the national development bank Financiera de Desarrollo Nacional (FDN) has accepted a greater role in financing 4G projects, which has boosted confidence in the infrastructure sector and allowed four highways to reach financial close in the first four months of 2018.
Today, 14 of the 30 4G projects have received $6 billion in financing so far, and six more road concessions are expected to get funding before the end of the year, Aguilar says.
The new procurement law, enacted in January, provides clearer guidelines for lenders in case the government cancels a concession contract. The 4G contracts include detailed liquidation clauses, but many local banks were also exposed to earlier agreements.
"Previously, concessions were treated as corporate contracts, rather than project finance contracts, and banks would loan the entire value of the project when it was only 40% complete," says FDN CEO Clemente del Valle. "We have since radically changed the way projects are financed, based on international standards and providing protection to all creditors."
In the event of cancellation, the liquidation value is set as the sum of all costs, investments and expenses made by a contractor and includes all payments to creditors and banks. The new law also makes it simpler to acquire land rights for a new infrastructure project.
"The previous legislation had a very broad settlement article, and it was difficult to gauge when financial expenses came into play," Fradique Méndez says. "The new law provides security in the case of early termination of the contract. The message from the government is clear: we need institutional trust and for banks to keep lending."
Access to financing in local currency has also improved for project sponsors. The FDN created a peso-denominated credit line for infrastructure projects in May last year and has since signed agreements with other lenders, including the Inter-American Development Bank (IDB) and the China Development Bank (CBD).
Since December last year, the FDN has approved at least 1.8 trillion billion pesos in 4G financing, doling out between 400 billion and 500 billion pesos for the Chirajara-Fundadores, Bogotá-Giradot, Bogotá-Villavicencio and Bucaramanga-Barrancabermeja-Yondó toll roads.
The FDN also granted in November last year 600 billion pesos in financing to the IDB, money that will go to infrastructure projects in Colombia, including PPPs. Then in April, the Colombian development bank opened a credit line for 250 billion pesos for the Spanish state-owned bank Instituto de Crédito Oficial (ICO), which previously participated in the $250-million portion of a loan for the Conexión Norte highway.
"Now that we have more resources at our disposal, the FDN is going to have a strong leadership role in financing 4G projects," del Valle says.
But the development bank is still committed to ushering these projects to financing sources in the private sector, as del Valle explains.
"We can finance 25% to 30% of project costs, and for 2018 we expect local banks to put up 30% to 35%," he says. "We are relying on diverse sources, including international banks and pension funds."
BlackRock's entry comes as a good sign for Colombia's project finance sector and especially for the 4G program. The 18-year fund is now focused on providing long-term financing in Colombian pesos, but the firm's global infrastructure fund opens the possibilities for dollar investments in the future, Núñez says. Also, BlackRock's business in Mexico has a team dedicated to equity investments in infrastructure projects, he adds.
In May this year, the Transversal del Sisga became the 13th 4G toll road to reach financial close with 575 billion pesos in loans. The BlackRock fund and the Ashmore-CAF fund provided the bulk of the financing, while the FDN provided 172 billion pesos in senior credit and a liquidity line for 50 billion pesos for toll road and the ICO put in 90 billion pesos from its credit line from the FDN.
"The 4G contracts are unique in global terms and very attractive," he says. "Following the peace deal with the FARC, we have a golden opportunity to invest in connecting rural areas to cities and expanding the country's agricultural potential. It's a great time for infrastructure investment in Colombia." LF