COLOMBIA AND PERÚ: BOOSTING GLOBAL COMPETITIVENESS BY INVESTING IN INFRASTRUCTURE

(Part 2 out of 2)

by Cristina Camiz, Troy Ford, Matheus Schmidt, and Daniela Toleva

According to the Competitiveness Report, published by the Consejo Privado de Competitividad in Colombia, some minor factors also impact the infrastructure in these countries, including serious competition among industries for transportation resources, poor fleet quality, and a high level of informality. The recent boom in the mining and oil and gas industries in Colombia and Peru has increased the demand for logistics resources and, thus, transportation costs. With regard to fleet quality, the average vehicle age is 22 years old in Colombia and 18 years old in Peru; it is closer to seven years old in the U.S. An old fleet increases transportation costs (e.g., higher maintenance and poorer fuel efficiency) and negatively impacts society (e.g., pollution). Along with the absence of formal contracts in the transportation industry (informality), these factors lead to low standards in service delivery, adversely affecting the sector’s competitiveness.

The Role of Government  

Due to each government’s control of construction licensing for infrastructure projects, observers cite the need for public funds to make many transportation infrastructure projects financially viable along with the need for a long-term strategic plan that extends beyond most private investors’ time horizons. Responsibility for successful long-term infrastructure development falls wholly on governments. As noted above, government officials in both Colombia and Peru are aware of their responsibility and the importance of increasing the pace of infrastructure investments to maintain and bolster their countries’ level of competitiveness. Both governments have already undertaken a number of initiatives to improve transportation infrastructure, ports, and roads.

While Colombia is focused on all aspects of its road system — from primary to tertiary — it has not formally created a comparable decentralized program and is still managing similar projects under its umbrella roadway institution, the National Roads Institute (INVÍAS). The benefit of this type of program is its ability to provide focused coordination, promotion, and technical assistance to local authorities and municipalities for prioritizing, developing, and structuring transportation infrastructure investments. On the regional and municipal levels,Peru implemented a decentralized program, called PROVÍAS, focused on paving and maintaining secondary and tertiary roadways. Richard Webb, a former president of Peru’s Central Bank, argues in his new book,Conexión y Despegue Rural, that since 2006 this program has developed institutional capacity in road infrastructure management and has already rehabilitated 15,000 kilometers of roadways. This work successfully decreased land travel times between impoverished areas and primary cities from 13.2 hours in 2001 to just 5.0 hours in 2011.

In addition, to increase the pace of new projects, both countries have passed legal reforms that simplify and promote infrastructure investments. One example is Peru’s recently enacted eminent-domain law that streamlines the use of land for priority infrastructure projects, such as roads and the construction or expansion of ports and airports. Colombia has also instituted similar legislation.

While these efforts have spurred progress, there are still large hurdles to overcome. The scale of infrastructure projects relevant on the national level can easily exceed hundreds of millions or even several billion dollars. This magnitude of investment and the required personnel with the necessary training and expertise simply cannot be provided by public institutions alone. Thus, both Colombia and Peru have turned their attention to resolving these issues by creating an environment that attracts and promotes private investment through public-private partnerships (PPPs). Inviting private domestic and multinational firms to participate and lead large-scale infrastructure projects provides access to economic and human resources not otherwise available to these governments. As discussed below, the shift to focus on PPPs is a first step, but is not an easily attainable solution.

The Role of Public-private Partnerships

 The unique structure of PPPs makes them appropriate to finance public projects with high initial costs and long asset lives. As Javier Serrano Rodriguez writes in his 2010 paper, “Financing Transportation Projects,” the main objectives of the PPP structure are to transfer construction risk from the government to the construction contractor, who is arguably in a better position to manage such risk, and to postpone government payments, stretching them over a 20-30-year term, commensurate with the useful life of the project, thus allowing the government to better manage its fiscal position.

Colombia was the first country in South America to utilize PPPs, beginning in 1993. Now in their fourth generation, these partnerships in Colombia have seen a significant number of contract renegotiations due to unforeseen economic challenges, necessitating a complete overhaul of the structures on a go-forward basis. Under the current PPP structure, projects are bid out to private companies — both domestic and international — that are responsible for the financing, construction, and operation, while the government, in return, makes payments based on road availability and quality. If the maintenance and operation of a project are not deemed to meet the standards of the contract, payments by the government can be reduced by up to 10%. Payments by the government will be covered by tax revenues, as established by Law 1508, thus providing a dedicated source of payment that reduces uncertainty for investors while still holding operators accountable for nonperformance. Certainty of government payments and nonperformance disagreements were issues seen in previous iterations of the PPP structure. Under this new structure,Colombia successfully undertook the financing of Ruta del Sol, a 1,000-kilometer highway connecting the country’s capital to other major cities.

In contrast, transportation projects in Peru have been financed under a PPP scheme that separates construction and operational risks. The current structure, in place since 2006, ascribes construction risk to private companies and commercial banks. However, once the project is finished, the government inspects the road and issues a certificate of completion, which then effectively allows the bank debt to be replaced with a 20-30-year bond guaranteed by the government. Investors in the completed project then take sovereign risk rather than company risk, which results in greater access to international financial markets.

With the recognized need to attract private investment,Colombia and Peru have passed laws and enacted policies to create a friendlier environment for accomplishing this. Both countries have sought to (1) provide transparency for all the parties in the bidding and construction processes; (2) create legal, political, and tax stability; and (3) treat foreign and domestic investors equally — all critical factors for building investor confidence.

Colombia has also formed new institutions, such as the National Infrastructure Agency (ANI) and the National System of Competitiveness and Innovation, and strengthened other institutions, such as INVÍAS, to execute the country’s infrastructure plan more effectively. ANI, in particular, was created to build relationships with private investors, manage all aspects of project evaluation and prioritization, and ultimately improve the country’s PPP programs. Other initiatives by Colombia include the introduction of the Royalties Act, which will provide 10% of the General System of Royalties for infrastructure construction.

While all of these efforts to increase the flow of private capital into Colombia and Peru are important and relevant steps on the path to improving global competitiveness, there are still significant challenges ahead. The changes implemented to date under these programs will require time to be proven and accepted by the capital markets.

Fuente: KNOWLEDGE@WHARTON

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