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Colombia thinks big with $70 billion infrastructure program

Article - March 9, 2016

The $70 billion plan to 2035 will improve regional and international connectivity, foster regional development and promote foreign trade by reducing transport times. Other major investments aim to reduce the housing shortage by 50% over the next three years


“We are undertaking the most ambitious investment program in the history of Colombia. I am talking about over $30 billion, the equivalent of four times the expansion of the Panama Canal. It’s a project that includes roads, ports, airports, river navigability and railways,” says Vice President Germán Vargas Lleras.

He is referring to Colombia’s Fourth Generation (4G) road infrastructure program, the largest of its kind in Latin America today. It involves 47 projects spanning 8,000 kilometers of roadway and 3,500 kilometers of four-lane highways as well as expansion of ports and railways, all of which are to be completed by the end of the decade.

Despite its scale, however, 4G is only one front of an even larger ($70 billion large, to be exact) overall infrastructure plan that Colombia is now undertaking. Aware that infrastructure is key to boosting competitiveness and critical in seizing the country’s full growth potential, President Juan Manuel Santos first lit the infrastructure torch with a $55 billion, 10-year plan in 2011. It sought to double the length of Colombia’s four-lane highway network, improve airports (including El Dorado, in Bogotá), upgrade railways and expand ports. He established a national infrastructure agency to oversee it and strengthened the representation of the infrastructure sector within the president’s office.

In 2013, his government unveiled the 4G concession plan, which more specifically targeted road development, and in 2015, President Santos’ administration announced its intermodal transportation master plan 2015-2030, calling for annual investment of $10.4 billion, which in 2015 was equivalent to 1.3% of GDP. Based on a year of research spent indentifying the connectivity needs of each of the country’s 32 departments, the master plan represents a long-term commitment to strategic growth through infrastructure that connects all the country’s regions, and places priority on those projects that will have the greatest impact on the national economy.

Mr. Vargas Lleras said during the announcement of the master plan that it aimed to pick up the country and drop it at the forefront of Latin America. Divided into two strategic arms, it contains an infrastructure plan for the core national network and routes of national integration aimed at boosting productivity and international trade.

The plan connects 18 major city regions, with production representing 85% of GDP, to border areas and Caribbean and Pacific ports. The second arm includes policy for sector regulation, urban mobility, the logistics management of national transport corridors and the creation of an asset management system for regional networks.

The plan has three key objectives: the promotion of foreign trade through reducing costs and transport times, fostering regional development by improving accessibility through transport networks, and the enhanced integration of the country’s territory in order to ensure broader government reach.  The $70 billion plan to 2035 includes 101 basic road projects covering more than 12,500 kilometers, 52 projects aimed at integration of nearly 7,000 kilometers, more than 1,600 kilometers of new railway, maritime projects on eight rivers that cover 5,000 kilometers, 31 airport expansions and port development. In other words, it’s huge.

And it has a very special goal. As Minister of Finance Mauricio Cárdenas Santamaria says, “We have made a significant effort to make our economy more normal, to lower prices in the basic food basket, and we think we can make that situation last. But for this, we need other parts of the economy to perform well. Consequently, we have set a very ambitious program goal in infrastructure and road investment. We have been working on this strategy for three years now so the country can have new leading sectors, which act like a relay, where if one area slows, then another will grow, thus making the economy more dynamic.”

President of the National Infrastructure Agency Luis Fernando Andrade Moreno says that the government believes the economy will grow an extra 1.5% as a result of all these projects. “There was recently a study on the impact infrastructure development had in the Antioquía region, where the roads are already being built. It showed that it could actually be even more positive than what we thought.”

“It’s a big challenge to revolutionize the infrastructure of Colombia, creating a country that is more competitive, that is in motion, with more progress, and closer to the regions”

Natalia Abello Vives, Minister of Transport

By land and sea
Minister of Transport Natalia Abello Vives says the goal is regional connectivity and any means of transport will be used to achieve it. “It’s a big challenge to revolutionize the infrastructure of Colombia, creating a country that is more competitive, that is in motion, with more progress, and closer to the regions. Our motto in the transport sector is: ‘We are a country of regions.’ We want to bring them closer and we will do this through infrastructure and with specific projects for each means of transportation there is.”

Though the largest investments are destined for the national roads, maritime transport is also an important part of the national transport master plan. Colombia intends to become a top destination for cruise ship tourism and to double exports, both goals that require port updates. The government is also intent on improving access on the Magdalena River.

“Colombia already has 87 port concessions, with an investment in the sector of some $1 billion annually. This has improved the ports significantly,” says Mr. Andrade Moreno. “We are also in the middle of a restructuring process of our ports in the main cities, both in the Pacific and the Caribbean, including the expansion of the ports, deepening the access canals and improving the connection of the ports with the main production hubs in the country, through road, river and airport expansion.”

Air transport in the country has registered tremendous growth, exceeding global growth rates by 2.3%. Colombia expects air passengers in Bogota alone to increase from a current 27 million annual passengers to 40 million within the next five years. “We have the highest growth rate in the world. It has actually been growing by 14% a year, which has made expansion obligatory,” says Mr. Andrade Moreno, adding that there are currently 51 airport projects in place. In addition, a number of railway projects are at the planning and development phase. They include the Dry Canal linking the Caribbean with the Pacific, and the Bogotá Metro.

“Today, many US investment funds are landing in Colombia with investments worth almost $400 million. This was made possible because Colombia has been managed in an economically responsible manner”

Luis Felipe Henao, Minister of Housing, City and Territory

Paying the toll
José Darío Uribe Escobar, governor of the central bank, says a variety of funding sources will be used to bankroll Colombia’s infrastructure transformation. “One of the major bottlenecks to Colombian growth is the lack of adequate transportation infrastructure. Hence, the importance of the ambitious investment program driven by the national government. There are huge opportunities for the funding of the projects, not only for domestic but also for foreign actors, and not only for banks but also for other institutional investors, as is the case in Colombia of the Pension and Severance Funds. Those interested have a strong institutional sector. The main challenges are to adequately define the mix between equity and debt, and between the risk taken by the private sector and the risk taken by the public sector,” he says.

Indeed, the structural changes implemented by the Colombian government in recent years have provided a solid framework that is better equipped for tendering projects and attracting private investors. The interest shown in 2013 by more than 60 Colombian and international companies in the $718 million tender for the Cartagena-Barranquilla road, which will benefit trade and tourism in Colombia’s Caribbean region by connecting the two main cities with ports and free trade zones, confirmed this.

Minister Abello Vives adds that one of the great side effects of the infrastructure plan has been in the evolution of project financing. “This has been one of the great revolutions inside the infrastructure sector, not only in the way the projects are planned, but also in how they are being licensed and carried out. It started as a change in regulations, in which two important legal frameworks were issued, the Infrastructure Law and the Public-Private Partnerships Law. These two laws changed the way in which projects are contracted, licensed, and carried out,” she says.  

A well established value chain emerged, she says, which involves a high level of interaction between the public and private sectors. “We have worked with them on technical issues but also on management, implementing other key tools like standard tender documents, which has created a much more transparent and objective procedure. There has to be an initial stage of pre-planning of every project, so only those which are previously approved and qualified can move to the next stage. We haven’t received a single complaint in all the 4G infrastructure projects, and we have already awarded half of the licenses so it is definitely an important shift in the way things are done. This is all helping us achieve very different results from those we were having in the past.”

Mr.  Vargas Lleras agrees the reaction to tenders has been “wonderful, in terms of the participation and the amount of companies interested in tendering.” But then again, says the Vice President, not all countries have such an ambitious plan or one offering such attractive conditions.

Funding variety has formed a crucial part of the success so far, with the government authorizing the participation of domestic and foreign pension funds. “The domestic banking sector has also responded extremely well. We must not forget that each of these projects has a certain quota of indebtedness in dollars, up to 50% in foreign currency, with the currency rate risk being assumed by the Colombian state. I think these uncommonly advantageous conditions have motivated all those international companies to come to the country and assume these long-term commitments,” adds Mr. Vargas Lleras.

The financing plan for 4G is comprised of a quarter international financing and three quarters domestic financing. Additionally, up to $5 billion of 4G is expected to be executed through the local capital markets, private debt offerings or other arranged funding.

Minister Abello Vives encourages new U.S. investors to participate. “It is very important that the U.S. looks at what we are doing here, and forms a part of this. Spain has been one of our investors. There is also participation from Latin American countries like Chile, Mexico, and Brazil. Our public-private partnership policies, and our medium and long-term concessions, are a guarantee of stability for our investors. Our projects are mature and attractive, we are an emerging and growing community with great opportunities, and with the reliability of a government that is backing all these projects and assuring their success. We invite U.S. investors to come and see for themselves the opportunities for investment and progress we offer,” she says.

“There was recently a study on the impact infrastructure development had in the Antioquía region. It showed that it could actually be even more positive than what we thought”

Luis Fernando Andrade Moreno, President, National Infrastructure Agency

A place to call home

Further opportunities for investors are present in Colombia’s housing sector. President Santos intends to reduce the chronic housing shortage in the country by 50% over the next three years. “We will achieve this by implementing public policies for the coverage of different segments of the population. For those in extreme poverty, we will move forward with the plan of free houses. We have already carried out the first phase with 100,000 free homes, and now in this second phase, we will focus on smaller towns in rural areas,” explains Mr. Vargas Lleras.

Five different plans have been designed for different income ranges. The My House Now program will provide 100,000 middle class families with support for down payments, a second program subsidizes the interest rates on social housing, a third targets renters, allowing them to pay for the home with the same amount as their monthly rent payments, and a fourth is aimed at higher income earners. The fifth program continues to grant free homes to those living in extreme poverty.

“This way we cover every population segment, from those who would not be in the banking system to the middle class. Our goal is to build 450,000 houses through these three programs. In Colombia, this is revolutionary. In China, it might not be an impressive figure, but in Latin America, it is enormous,” says Mr. Vargas Lleras.

Not surprisingly, Colombia’s construction sector is booming. It grew by 7% in 2014, with an investment of $29 billion in new homes, a historic record for the country. It is also credited with creating 1.5 million new jobs and with having a direct impact on 28 subsectors of the economy. In addition to new homes, President Santos has announced that the state will invest $6 billion in the construction of new schools, parks and daycare centers.

Minister of Housing, City and Territory Luis Felipe Henao says that ultimately what the government is doing is creating an equitable and sustainable society. “We don’t just have a housing policy, we have a city policy. This means developing more democratic and environmentally sustainable cities, with the clear objective to reduce poverty and slum housing. One of the most serious problems of Latin America is slum housing, and we have the potential to become the country with the highest urbanization rates in the region. Therefore, we want to generate policies to guarantee access to housing not only for the upper classes but for every Colombian citizen and to make Colombia a more equal country,” he comments.

“Consequently, it is an investment we are making not only for the benefit of the family that receives a home, but for the future of the country. We hope that children growing up in these homes will receive better education, better access to public services, better conditions for future employment and better development opportunities.

A democracy depends on all of us having the same starting point, and that means equal opportunities. So we are not only taking care of the society’s most vulnerable, we are also generating a middle class as a country. Our obsession is to generate a middle class, and it will be generated through access to housing.”

Henao says that the housing program provides the emerging Colombian middle class with extra purchasing power, an essential component of an active economy, but that it also provides security for building contractors. “There have never been so many incentives for economic development. We needed to show the country and the world that Colombia is capable of building massively. Now, we are showing the country and the world that we are capable of making the nation’s resources reach the bloodstream of the economy, and that every peso invested in housing will generate three pesos in the economy,” he adds.

Part and parcel of the housing program is developing a framework that is also attractive to the constructors. Both domestic and international large scale contractors are now actively investing in the country. “Companies like Fénix have built 6,000 free houses and they are building 10,000 more for investors.  The rules of the game are clear for the market. When you have the best players in the field, when you have players like (soccer stars) James Rodriguez and Leo Messi on your team, it means that people want to work with you. That’s what we have achieved with our housing policies. People who were not interested in investing in social housing have now changed their minds,” says Mr. Henao, adding that a number of American and European real estate investment funds have also set up business in the country. “Today, many US investment funds are landing in Colombia with investments worth almost $400 million. This was made possible because Colombia has been managed in an economically responsible manner.”

Roberto Moreno Mejía, president of developer Amarilo, says the sheer size of the construction projects are a lure for constructors, and it has also made them more efficient. “In the 100,000 Homes program, we quickly saw that the way it was structured meant that those who offered the best product were awarded the contracts. So we had to become efficient. Competition is very important,” he explains.

Mr. Mejia, who has spoken at Harvard’s Kennedy School three times on the subject of creating sustainable communities, said that his company began to think in terms of creating a city, not just homes. “These macro projects have made us think differently. In Colombia these days, you have to think big. It is not just about building houses, but everything that goes along with it, like schools, health centers, libraries, playgrounds, and shopping malls. It’s a model of community, of a city and of sustainability, and every day we work on perfecting it.”