The infrastructure sector in Colombia is on the rise as a result of the commitments made by its government in relation to project structuring and submissions. A reflection of this can be seen in the new Act 1508 of 2012 on Public-Private Partnerships (PPPs) approved in the framework of Colombia's National Development Plan ("NDP") and Decree 1467 of 2012 which implements that Act.
Colombia has fallen behind other Latin American countries in terms of its infrastructure, which has resulted in the country losing competitiveness and, in turn, suffering lower economic growth. While investment in Brazil and Chile is equivalent to 0.15% and 0.14% of GDP, respectively, in Colombia that figure only reaches 0.03%.
The Transport Ministry has set out significant investment targets for the sector, which it has included in the NDP (COP billion):
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The Colombian government has also committed to ambitious targets in the country's mining, energy and water sectors, which also require substantial investment. According to the NDP, estimated investment in the mining and energy sectors between 2011 and 2014 will be COP 96.6 billion, whereas in the water sector investment in waste water treatment plants and water plans will reach up to COP 11.4 billion.
The aim of Colombia's government is to increase the level of annual investment in infrastructure from 1% of GDP to 3%, meaning an increase from the current US$3 billion per year to US$9 billion.
The new legal framework established by Act 1508 and Decree 1467 should stimulate private participation in productive and social infrastructure, and thus achieve the infrastructure investment targets set out in the NDP, such as:
- The maintenance of 50,000 kilometres of the tertiary road network, the construction of 740 kilometres and 27 viaducts in the primary road network.
- The construction, upgrading and restoration of dual carriageways.
- The construction of one million new homes.
- Increasing the coverage of the aqueduct service by 2.8 million people.
- Port access canals, increasing loading capacity by 50% by 2014 and 100% by 2018.
- Carare railway service and consolidation of the Pacific railway line. The plan is to increase the length of the operating rail network by 50% by 2014 and triple it by 2018; this will result in a total 2,340 kilometres of railway in operation.
- What are PPPs?
PPPs are partnerships or associations between entities in the public and private sectors (materialising in a contract between the parties). In this form of association, the state entity entrusts a private investor with the design and construction of infrastructure and the its connected services, or its construction, repair, upgrade or equipping, which should also involve the operation and maintenance of the infrastructure in question.
This implies transferring risk to the private sector according to its risk management capacity and at all times ensuring that public needs are effectively satisfied.
Therefore, concessions involving operation and maintenance are a type of PPP. However, the new Act aims to refocus the regulations that up to now governed concessions, which in the past suffered from limitations such as: (i) payment was per work, not for the services provided by the infrastructure itself; (ii) the investors did not allocate their own capital to projects and the allocation of project funding and risk was inefficient; or (iii) the state provided a significant number of resources to concession projects (many of them as advanced payments) which was therefore no different from normal public works.
Under this scheme, it will only be possible to carry out projects with an investment exceeding 6,000 times the prevailing monthly minimum wage (approximately €1,462,560).
- Payment of the price and public funding
The price for the infrastructure is paid according to availability, service levels and the quality of the infrastructure and/or service provided. It is understood that infrastructure is available when it is in use and meets the serviceability and quality levels established in the respective contract. Serviceability and quality levels must be expressly established in the contract and may be progressive, whereby proportional deductions will be made to the established price depending on the levels actually achieved.
Exceptionally, and only if approval is received from the National Fiscal Policy Council (CONFIS), the contract may provide for the price being paid in stages when: (i) the project has been structured in different stages, contains separate functional units and the unit for which payment is to be made has become available; and (ii) the estimate budgeted investment for the functional unit is equal to or higher than 175,000 times the prevailing monthly minimum wage (approximately €42,658,000). The contract must expressly establish the mechanism by which the price is to be reviewed.
Public funding for PPP projects cannot exceed 20% of a project's estimate budgeted investment.
Public funding of PPP projects are made from the National Treasury and are contained in the National General Budget, the Budget for Territorial Entities, decentralised entities and other Public Funds such as the General Royalties System. Any contributions made by the State other than by payment from public funds must be related directly to the implementation and start-up of the PPP project and must be valued at market value in accordance with prevailing legislation.
Changes have been made to the tax accounting of future payments made by the state in relation to the service that will be provided by the infrastructure; annual authorisation limits have been set in relation to what are known as vigencias futuras, considering them as investment expenses rather than public lending. A vigencia futura is an authorisation by CONFIS to take on obligations that affect future budget items, in other words, authorisations against tax revenues in future budgets with the aim of paying certain expenses.
- How long do the contracts last?
PPP project contracts have a maximum term of 30 years, including extensions. The rules applicable to modifications that result in price increases and term extensions have changed; they will now only apply once three years of the contract have elapsed and only until three-quarters of the initially agreed term has expired. Price increments cannot exceed 20% of the initially agreed public funding and extensions may only be made up to 20% of the initial term agreed in special cases.
However, if it is clear that more time will be necessary while financially structuring the project and before the contract process begins, this may be agreed in the contract once a favourable report has been received from the National Council for Economic and Social Policy (CONPES).
- Projects proposed by either the public or private sectors
If a project is proposed by the public sector, an investor will be selected by public competitive tender. The public entity launching the invitation to tender must provide the following before starting the contractor selection process:
- Preparation of studies: technical, economic, environmental, land rights, financial and legal;
- Description of the project: design, construction, maintenance, duration, financial model, phases;
- Cost/profit assessment, specifying: social, economic and environmental impact.
- Threat and vulnerability analysis.
- Typology, estimate and allocation of risks and potential contingencies and matrix of associated risks.
The factors that will be taken into account during the selection process are:
- Formal requirements: legal, financial or financing capacity, investment and structuring experience.
- Assessment factors: service levels, quality standards, current value of expected revenues, lower level of state funding and consideration offered by the bidder.
If the project is proposed by the private sector:
Act 1508 is innovative in the case of public investment projects originating from the private sector. Private investors are now able to structure projects at their own risk, bearing all structuring costs, and submit them to the public authorities confidentially.
This process is divided into three stages:
This stage is in turn divided into two phases:
- Pre-viability. The private entity submitting the project must provide a complete description of the project (minimum construction design, operation and maintenance, organisation and exploitation), indicate the scope of the project, prepare demand studies and identify sources of financing.
Once the project has been submitted, the state entity has three months within which to assess the project's viability. If its decision is favourable, the private entity may continue to structure the project, although this shall not mean that the state has given its definitive acceptance for the project.
- Viability. The private entity submitting the project must then provide a detailed financial model; describe the phases and duration of the project; submit a risk analysis, environmental, economic and social impact studies and technical, economic, environmental, land right, financial and legal viability studies; indicate the value of the structuring; and produce documents as evidence of its legal and financial capacity and its experience. It should also provide a copy of the contract to be signed, which must include a risk apportionment proposal, among other elements.
Once a project has been submitted, the public entity will have six months within to render its decision, a period which may be extended by a further three months. If the public entity believes that the project is viable, it will notify the private entity of all its conditions for accepting the proposal, including the value accepted for the studies that have been carried out. The proposing entity will then have two months within which to accept the conditions or propose alternative options; the proposed project will be rejected if an agreement is not reached within the above two months.
Selecting a contractor
Once an agreement has been reached between the public entity and the private entity that submitted a project, the following must be ascertained:
- If public funds are available for the project. If so, the public entity will open a public tender for the project. The private entity that has proposed the project will have between a 3% and 10% advantage in the total points awarded to offers. It must be remembered however that public funding cannot exceed 20% of the value of the project.
- If the project does not require public funding. it will be published for a certain period of time on the state's public procurement website. If no other parties are interested, the project will be awarded directly to the proposing entity; if another or other entities express an interest, an abridged process will be opened in which the proposing entity will be able, if necessary, to improve upon the best offer made by the other interested parties.
In either of the two cases, if the private entity that proposed the project is not ultimately selected, the awardee will pay the cost of the studies that were determining factors in the public entity's decision before the tender took place.
Award and execution of the project
- Some provisions that make it easier to structure financing
Public funding and all other resources involved in a project must be administered and managed by means of an independent entity incorporated by the contractor, and will contain all the present and future assets and liabilities linked to the project.
The new Act also establishes that, in the event of a breach by the contractor, the financing entities may – either themselves directly or through third parties – continue to perform the contract until completion. Furthermore, any contracts that develop these projects must include a clause establishing the mathematical formula to determine the parties' reciprocal considerations and any payments due as a result of premature termination of the contract by agreement between the parties or unilaterally by one of them.