Colombia’s Agencia Nacional de Infraestructura (ANI) started the formal bidding process for the first in a programme of 40 toll-road public-private partnerships on October 21. However, with just five months before ANI expects to begin awarding concession contracts for the individual projects, which will range in value between $500 million and $1 billion, its president, Luis Andrade, acknowledges that the current level of dollar-denominated funding required to attract the international banks is an issue.
“We have received authorization from the finance ministry to commit a maximum of Ps3 billion, or $1.5 billion dollars in foreign-currency denominated payments,” says Andrade. “That is a small amount relative to the size of the financing needs because we will need financing for close to $20 billion [of total private sector financing from Colombia and internationally]; so $1.5 billion is not a lot.”
A project finance banker at a European bank says that his interest in the project will likely be determined by the availability of dollar-denominated payments. Andrade has been in negotiations with the finance ministry about the level of foreign-currency support the state can provide. “For the time being we are going to use up [the $1.5 billion] in the first projects,” he says. “For example, in the very first project we are taking out for bidding [Giradot and Puerto Salgar], 30% of the government payments will be made in US dollars. Then, depending on how the market reacts, we might go back to the finance ministry and ask for more.”
The fourth-generation toll road concession programme will comprise 40 projects worth a combined total of more than $25 billion. At its peak, ANI – which is being advised on the programme by the International Finance Corporation – expects $6 billion of works to be completed in 2016 alone, with a total of 8,100 kilometres of additional highways added to the national infrastructure network by 2021.
The need for the new highways is evident. A report by Fitch, Colombia’s Infrastructure: Connecting the Dots, spells out the burden placed on the recently upgraded investment-grade economy by its antiquated and fragmented road network. “Transportation costs now account for between one-half to three-quarters of the logistics costs of Colombian companies… Greater investment is essential to increase the economy’s growth potential, improve export performance and support greater economic diversification,” the report says.
Colombia’s past experiences have informed the financing framework. All projects will need to be financed purely by private-sector debt and equity. Even projects that involve widening, extending or improving existing highways and that have existing traffic and tolls require this greenfield approach as the ANI will not allow tolls to be used or securitized, or for government payments to be made until the road is complete and available – hence the concept of availability payments. In the past the state had allowed current revenues to be collected by concessionaires, but that just led to delays to the start of construction as concessionaires collected revenues to lower the required levels their of debt and equity.
However, as some individual projects are worth up to $1 billion the government has introduced the concept of functional units – splitting the projects into sub-projects that will lead to government payment to the construction companies during the lifetime of the project. But according to one consultant, who declined to be named because he is hoping to win contracts from the ANI, this adds complexity and cost.
“The government plans to enable projects to be split into sub-projects, but if you divide a $500 million project into five sub-projects of $100 million then you might have four financial closes,” says the consultant. “The concessionaire will need to put all his equity in to build the first sub-project, or equity with a construction loan, because the banks are bond financing and will need to wait until the five sub-projects are finished. This makes the financing for the concessionaire – with the multiple financial closes – expensive and highly leveraged.”
However, Andrade believes the projects will be attractive to international construction companies (23 international consortiums entered the pre-bidding qualification, with 15 of the world’s biggest 20 companies involved, and only the leading UK companies notable by their absence). “The rate of return for equity that we are calculating on our models is 13% net of inflation, or a US dollar-equivalent rate of about 15%,” he says. “That’s the rate of return for the investor – not the builder. If you invest and build, you will also get a return on the construction, so we actually think that rate is very competitive. If you go to other countries there are not that many options.”
The interest from the international construction companies is positive for the ANI’s aim of attracting international banks to participate in the financing. Of the total cost, ANI believes that about $7 billion can be sourced from Colombian banks and between $5 billion and $7 billion from Colombian pension funds. The government is also capitalizing a largely defunct state development bank to provide up to $4 billion in subordinated debt. Some financing and guarantees will come from multinational development banks and the rest from the international banks.
Andrade says the government’s provision of subordinated debt will be crucial: “As we talked to the banks and the financial investors we realized that the banks were asking for a lot of equity because they had a hard time extending the maturity of their loans and they are somewhat risk-averse. So in order to increase the leverage and to get a more reasonable debt/equity profile of 70/30 the government will provide a mid-tier source of funds that is in between equity and debt and that allows the banks to have priority over payments before subordinated debt is paid.”
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