Expanding P3 Opportunities in Colombia

Colombia paved the way for the use of public-private associations/partnerships (P3s) to encourage and facilitate privately financed initiatives for public infrastructure projects when it enacted legislation last 10th of January 2012 (Law 1708 - The P3 law) giving public entities, at the national and regional level, the ability to contract with the local and foreign private sector the provision of public infrastructure and its related services.

The new legislation, which includes the new Decree 1467 issued last 06 of July, provides a broad-based framework that authorizes new P3s in infrastructure development for Colombia, in a true effort to jumpstart much needed projects to fill in the painful infrastructure gap, to speed up design and construction timelines and to give private local and foreign enterprises the opportunity to propose and innovate on much needed infrastructure endeavours.

As in many other non-P3 jurisdictions, Colombia has suffered from inadequate consideration of life-cycle costs when designing, constructing, operating and maintaining an infrastructure asset. Predominantly, each component has been dealt and paid as a separate process with scarce public budgets. In addition, the country has adhered to cost-based contracts that have created perverse incentives for contractors to increase and adjust costs without any budget limits. It has been constant to see inefficient allocation of project resources and risks.

Colombia has also lacked of institutional capacity to develop and retain official internal expertise to design, structure or manage large P3 projects.

Today Colombia has made the right legal and institutional changes. The National Infrastructure Agency (ANI), www.ani.gov.co which was established at the end of 2011, is leading the P3s drive under the new legal framework, together with the policy guidance of the Ministry of Transport.

The most important contributions of the new legal framework in force to P3 projects are:

- It applies to all types of infrastructure projects. Hard, soft, social or productive infrastructure projects are covered.

- Projects must have a minimum size of 6.000 minimum monthly legal wages, which is equivalent to approximately US$1,76 million.

- Project origination may be either public or private. Each initiative will have a clear and expedient awarding process.

- A private initiative will only apply for new projects, which excludes proposals on ongoing contracts and concessions or on projects that have been previously structured by the government.

- The maximum agreement term including extensions is 30 years, except as for special cases that need to be approved by CONPES if they require a longer term.

- Investors may submit P3 proposals financially supported on irrevocable investment commitments from private equity funds. Such funds shall have among its investors a local or foreign pension fund. If it is a commitment from a foreign Private Equity fund, such fund must meet the investment admissibility requirements established by the Financial Superintendency for Pension Funds.

- It establishes limitations to contract additions and extensions to a maximum of 20%.

- All P3 contractual payments are subject to project achievements tied to: (i) Infrastructure availability; (ii) level of service compliance and/or (iii) quality standards.

- It is mandatory that project funds be managed by a fiduciary trust.

- The law establishes budgetary changes in order to secure future payments ("vigencias futuras").

All the above legal terms and conditions may soon bring the private capital to serve Colombia´s hard infrastructure goals to be met by 2014, which are: 100% increase in 4-lane highways; 50% increase in length of railways in operation; airport passenger movement increase by 35% and moving up handling capacity at the country’s ports by 50%.

Although no unique foreign P3 experience is fully applicable to Colombia, local private and public sectors need to rely on foreign world-class expertise and capital in upcoming P3 initiatives.

Thanks to its successful deal history and P3 institutions, Canada has for Colombia a positive and solid P3s track record and reputation. Canadian P3 deal makers, such as finance, legal, engineering or construction companies, have huge advantages with Colombia among other foreign P3 competititors.

Canadian and Colombian companies may rely on a mutual comprehensive legal framework. A Free Trade Agreement with services and investment chapters, a labour Agreement and an Environmental Cooperation Agreements are all in force. In addition, a convention for the avoidance of double taxation with respect to taxes on income and on capital will be in force between the two countries in fiscal year 2013.

If you have further questions on P3s legal issues or opportunites, please contact Ricardo Duarte Duarte at rduarte@col-law.com (Duarte Garcia Abogados) www.col-law.com