Public - Private Partnerships: Strengths and Weaknesses of the Colombian legal System

The largest obstacle to further accelerate economic development and growth of investment in our country is undoubtedly the notable lag in infrastructure; this has a negative impact on all sectors of production and, ultimately, reduces the competitiveness of Colombia.

The previous public procurement system, specifically the concession - based model, had serious limitations which would have made it difficult to meet the ambitious goal set forth by the Government to overcome this infrastructure lag. It meant disbursement of considerable amounts of public funds, including advance payments, additions and extensions that far exceeded the initial value of the contract and the results did not differ substantially from those of public work contracts. The projects implemented were not designed to create effective investment and financing plans; neither was risk allocation efficient in most projects. Added to all this, corruption permeated much of the system and altered its substance.

In an effort to overcome this lag quickly and foster private investment in Colombia’s infrastructure, the legal framework to implement Public - Private Partnerships in our country was approved and became effective in 2012. The result was Law 1580 of 2012 and its Regulatory Decree 1467 of 2012.

In practice, this new legal framework became effective as of February 2013 with the publication of the first four Invitations for Prequalification by the newly created National Infrastructure Agency (Agencia Nacional de Infraestructura), which form part of the initial group of projected “early victories” of the Fourth - Generation Concessions Package.

Within this context, it is still too early to identify the specific strengths and weaknesses of the young legal regime; these strengths and weaknesses will gradually be revealed as the legal framework is applied and tested through the processes which has just started.

At any rate, there are some features that are worth underlining, and can provide an idea of ​​what advantages and disadvantages are likely to become apparent throughits application. For greater details and information, it is suggested to read and apply the recommendations set out in the report of the Infrastructure Committee, which were given to the Colombian Government and the industry more generally,as of last October 2012.More information can also be found in the Study on Public Private Partnerships in Colombia: Strategy for Canadian Businesses, prepared for the Canadian Embassy on the Colombian PPP model and process.

Strengths

The first feature which can be interpreted as a strength is the guarantee of disbursement of public funds for the total duration of the project. The Law includes the possibility of approving future periods of general national or regional authorities’ budgets for all tax years corresponding to the duration of the project, provided that availability, service levels and stipulated quality standards are complied with.

Another strength of the scheme which is one of its most important features and marks a break from the old system of corruption that occurred in many projects by some concessionaries, is the mechanisms established in the legal framework which guarantee transparency and efficiency in the bidding process and in the implementation process of concessions.

These guarantees are embodied in the legal limits set for additions and extensions to these contracts, which may not exceed 20% of the initial term and budget.

On the politically contentious issue of land acquisition, especially in transport infrastructure projects, I consider the manner in which the issue has been dealt with to be a strength; although it is a critical issue, it is being carried out to enable numerous actions in the near future so that it stops being a bottleneck.

On the one hand, the standard contract published by the National Infrastructure Agency adopts a cost-sharing approach between the entity and the dealer that reduces the burden and risk for the latter. In any case, proponents must carry out a land inventory prior to the bidding process in order to assess risks and problems.

Additionally, a new procedure was adopted in the reform of the Code of Civil Procedure, which includes a measure allowing whoever initiates the process of expropriation of a property to request its delivery provisionally before the ruling is issued.

A Bill of Law was also filed at the Congress on March the 22^nd, 2013 “whereby measures and provisions are adopted for transport infrastructure projects”, including special provisions on acquisition of properties which are intended to facilitate and accelerate judicial and administrative expropriation.

Finally, another important advantage of this regulation is the incentive system created for Private – Public Partnership projects with a private initiative, whereby the originator is assigned a score of between 3 and 10% of the total score during the bid awarding process. This system most undoubtedly encourages submittal of these projects and potentially attracts private capital to them.

Weaknesses

As for the characteristics of the system which may be understood as weaknesses in term of their application, we found that the main concerns are related to issues which directly affect infrastructure projects, but that are not regulated by the Public Private Partnerships Act or Decree. Such issues include the prior consultation process with communities, as well as lags and difficulties in issuing environmental permits, in particular as regards the determination of the party whereupon the risk of costs and delays in management shall fall.

Regarding environmental licenses, the infrastructure bill presented by the Ministry of Transport above regulates the environmental variable for projects from their pre-feasibility stage, containing the necessary input to manage the environmental license such as the Environmental Diagnostic of Alternatives and during the feasibility stage, the Environmental Impact Study.

However, delays in issuance of these permits are related to the difficulties of an institution which is in the making; thus it is a challenge which will be overcome, once institutions reach their highest level of activity.

Another constant criticism from all sectors involved in this sector, is the limit established for Public - Private Partnership projects of a private initiative, under which they may only have a 20% share of public funds investment on the value of the project.This prevents private stakeholders from submitting private initiatives for social infrastructure which require a greater amount of public resources and in many cases, 100% of the investment.

It seems as though this has been precisely the intention of policymakers, i. e. that of avoiding the risk that private agents may define the agenda of the public sector by means of the submittal of their projects and, consequently, avoid a private share in the execution of its budget.

Another aspect of the law which has generated debates is the regulation of the Functional Infrastructure Unit: The availability – based payment system, service levels and quality standards stipulate that during the construction phase concessionaries shall receive no payment until the infrastructure is fully available and operational.

The legal system created the Functional Infrastructure Unit in order to mitigate this drastic situation. Said units must by definition be independent and autonomous, they shall meet service standards and quality levels and have an estimated budget of investment of at least 175,000 minimum legal monthly salaries (about US55 Million).

Whilst the Functional Infrastructure Unit is necessary to prevent concessionaries from being forced to go through the whole construction phase of the project without any cash flow, it is also true that the large sum required as estimated investment budget for each functional unit has been controversial. In practice, it is assumed that these payments can be widely deferred over time, thus threatening project funding.

With regard to the award procedure, in accordance with the system adopted in the Colombian legislation, the list of prequalified bidders may be up to ten. Canadian experience in the development of Public- Private Partnership projects shows that the prequalified bidder list is usually a list of up to three bidders with whom the remaining stages are developed, and the terms of the contract are defined.

A smaller group of prequalified bidders has developed in Canada because preparing the proposal is a costly process, and also because there is a possibility that there may be too many proponents in the list of prequalified bidders, thus discouraging private stakeholders from participating. Additionally, collaborative meetings are carried out in the post - prequalification process in order to find the optimal version of the project based on the needs of the contracting entity; this would be a difficult process with such a large number of participants.

Another obvious weakness of our system is lack of regulatory mechanisms to start a Public- Private Partnership that is derived from a higher agreement between governments (Government to Government Agreements). Nowadays, countries like Canada have very high interest in contributing private capital from their jurisdictions pursuant to Government to Government agreements for infrastructure. Initial funding of projects by foreign governments with a subsequent inclusion of private capital is another great alternative needed by infrastructure development in Colombia.

As recommended by the Committee on Infrastructure, along these lines of thought it would important to regulate the rights of use of works, as well as such sensitive issues as the guarantees which governments would assume with regard to compliance and stability and availability of infrastructure. The truth is that, pursuant to the very definition of a Public- Private Partnership contract under Law 1508, a party must always be a natural person or legal entity at private law. In the fourth –generation of projects bidding processes, in order to overcome the argument of whether or not the Prequalified may be a foreign state entity, it has been established in the invitation to prequalify documentation, that “public entities are considered Entities at Private Law for purposes of this prequalification”. Clear and enabling regulations are recommended, rather than interpretations of this sort.

We hope these weaknesses, which briefly reflect the main concerns raised by stakeholders in the development of ongoing projects as well as forthcoming ones in the near future, are overcome with the bill of law on infrastructure submitted. This bill of law contains regulations on land acquisition, environmental licenses, transfer of utility networks and conflicts with mining permits, as well as the statutory law for prior consultation and the issuance of decrees which adapt the system in order to achieve more effective implementation thereof.

In sum, there is a clear institutional will to overcome the lag in infrastructure as well as the vices and difficulties of the previous concessions system. Within this context, it is important for existing institutions to be willing to “listen” both to the domestic and foreign private sector, verify their processes, contract the best bidders into a well-paid public sector, and interpret and apply the new regulations in a way that is most efficient and beneficial for the Country.