Colombia: Selected Issues Paper


Colombia: Selected Issues Paper

Infrastructure Investment1

Colombia posted very strong growth over the past decade, yet the large infrastructure gap, particularly in road transport, hinders the country’s potential growth and competitiveness. The recent reforms in the regulatory and institutional framework were aimed to address past failures, establish a risk sharing mechanism, incentivize private sector participation, and enhance implementation efficiency of infrastructure investment projects. The authorities’ ambitious fourth generation (4G) infrastructure investment program of road concessions over 2014-22 is expected to integrate Colombia’s regions, foster inclusive growth, boost competitiveness, and generate notable socioeconomic benefits.

1. Colombia’s economy experienced impressive growth over the last decade (4.8 percent on average), yet poor infrastructure quality remains a drag on Colombia’s potential growth and competitiveness. The total infrastructure investment in Colombia has been volatile averaging 4.6 percent of GDP in 1995-2004 and only over the last decade it steadily increased to above 7 percent of GDP in recent years.2 Bottlenecks in fiscal, legal, and environmental areas have been the main impediments for infrastructure investment, with the transport sector being the most affected. Over the period 2002-08, transport infrastructure investment was below 1 percent of GDP per year and only in 2009-13 reached 2 percent of GDP. Across its financing components, the public investment share tripled from 0.4 to 1.2 percent of GDP over the period 2002-13, while the private sector share increased four times from 0.2 to 0.8 percent of GDP.

2. Colombia’s infrastructure gap is most acute in road transport. Various studies indicate that infrastructure quality in the country is relatively low and logistic costs are high both at regional and global level. In the World Bank’s 2014 Logistics Performance Index, Colombia ranks 97th among 160 countries, one of the worst performers relative to regional peers, with the poorest outcomes in infrastructure, timeliness, and tracking and tracing. The country ranks 93th among 189 economies in the World Bank’s 2015 Doing Business indicator related to ease of cross-border trade, which predominantly highlights the country’s high inland transportation costs and time in performing a foreign trade transaction. In particular, exporting/importing costs in Colombia are mainly associated with inland transport, and these costs are more than double the LAC and OECD averages. Furthermore, World Economic Forum (WEF 2014-15) ranked Colombia 126 among 144 countries in terms of road infrastructure quality, the lowest ranking in the country’s overall infrastructure quality (ranked 84) and the worst performance among regional peers. The gaps in port and airport infrastructure are less significant, although most of them are already operating at full capacity, and this will only worsen with increased trade and passenger demand.


Logistics Performance Index

(Rank, 2014)

Citation: IMF Staff Country Reports 2015, 143; 10.5089/9781513546261.002.A005

Source: World Bank.

2015 Doing Business Indicators


Citation: IMF Staff Country Reports 2015, 143; 10.5089/9781513546261.002.A005

Source: 2015 Doing Business Indicators.

Transport Infrastructure Ranking 2014-15

Citation: IMF Staff Country Reports 2015, 143; 10.5089/9781513546261.002.A005

Source: World Economic Forum Global Competitiveness Rankings.

3. Upgrading transport infrastructure would help integrate regions, boost competitiveness, and foster inclusive growth. The lack of roads and deficient road conditions are obstacles to rural areas’ connection to the rest of the country. Isolation hinders access to public services, precludes selling of products to larger markets, limits economic opportunities, and restrains regional integration and competitiveness. While upgrading national road network through concessions are important to connecting rural areas with markets, improving the connectivity and quality of secondary and tertiary roads is crucial for both regional development and reducing rural poverty.

4. In 2010-14, the authorities undertook several measures in the regulatory and institutional framework to address past failures and enhance implementation efficiency of infrastructure investment projects. Institutional framework was strengthened by creating the Vice-Ministry of Infrastructure, the National Infrastructure Agency (ANI), and the National Development Bank (FDN). In 2012, a new PPP law was passed which significantly addressed the past bottlenecks and aimed at regulating PPPs in a systematic manner. Progress was also made in expediting the Infrastructure Law by addressing the bottlenecks in relocation of utilities networks and purchase of land.

5. Significant changes for infrastructure development were introduced with the adoption of Law 1508 of 2012 on PPPs. The legal and regulatory framework governing Colombia’s PPP has evolved over time since its first adoption in the mid-1990s. The government’s continuous efforts to improve the framework have resulted in the successive modifications to it. Before the implementation of the PPP scheme (first, second, and third generation road projects) the projects imposed high leverage on public resources given the low proportion of equity capital of the license holders and institutional investors. This created a system of poor incentives to private sector participants and led to delays in completion of the works, lawsuits, fines, additional works, extra costs, timetable slippage, and, therefore, financial imbalances in the contracts. The 2012 law on PPPs modified several important aspects of the previous PPP framework, mainly: (i) eliminated the possibility for the private sector to request cash advances; (ii) limited amendments to PPP contracts to a maximum of 20 percent of the value of the original contract; (iii) linked government payments to the quality of infrastructure services provided; (iv) required that the decision to pursue a PPP should be based on sound socio-economic and technical studies; (v) clearly stated the responsibilities of the parties involved in the PPP process both for public and private initiatives; (vi) included an improved gateway process for the Ministry of Finance and Public Credit (MFPC); and (vii) regulated unsolicited proposals for PPPs. In addition, the law introduced as a general principle that risks should be borne by the partner (i.e., the public or private sector) that is better suited to handle them. This has significant implications for the capacity of the government to manage fiscal costs and risks arising from PPPs.

6. The authorities are undertaking an ambitious 4G infrastructure investment program. The program would comprise about 28 projects under public initiative and 21 project under private initiative with total investment of about Col$57.4 trillion (US$24.5 billion) over 2014–22 (about 7.5 percent of 2014 GDP).3 Implementation of the public initiative projects is planned in three waves: 10 projects in the first wave totaling about US$5.2 billion, 9 projects in the second wave amounting to US$5.2 billion, and 9 projects in the third wave of about US$5.2 billion. The first wave projects have already been awarded and financing agreements are expected by the end of this year. Upon completion of the bidding process for the second wave projects, which is open until May, financing agreements should be achieved within a year. Bidding for the third wave projects is in preliminary stage. In addition, the government has approved 5 private initiatives, 11 projects are in a feasibility phase and 5 projects in a pre-feasibility stage, with total investment of about US$8.9 billion. The execution of contracts will take place in three stages: the first is known as the preoperative stage, which in turn is subdivided into a preconstruction phase and a construction phase; the second is the operation and maintenance stage; and the third is the transfer stage in which the concessionaire hands over the infrastructure associated with the project to the ANI to complete the contract.

7. In order to finance investment of such magnitude, concessionaires will need to attract funding from various sources. Authorities estimate the following structure of potential financing: (i) local banks lending 30 percent of total private investment; (ii) foreign debt (including multilateral institutions, banks and institutional investors) providing 26 percent of funds; (iii) equity of the concessionaries (domestic and foreign), with 20 percent of the total; (iv) debt issued to local institutional investors (14 percent of total), attracting these investors for the construction stage; and (v) FDN and multilateral institutions (10 percent of total). After the construction phase, project maintenance and repayment of debt which was incurred in the construction stage would be financed from the concessionary tolls, future cash appropriations from the budget (vigencias futuras), and income from commercial activities by providing additional services in the concession area.


Future Fiscal Commitments for Transport Sector

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 143; 10.5089/9781513546261.002.A005

Source: Ministry of Finance.

8. The new PPP law specifies that the private partner or concessionaire must take the form of an autonomous trust. Its sole purpose is executing the contract for the project awarded to it, with resources administered by a trust company (Figure 1). This must use equity capital or debt to finance the construction of the infrastructure project, which would be divided into functional units. The latter refers to each of the divisions of the project, corresponding to a set of engineering structures and installations that are essential for the provision of services that have functional independence, i.e. those which can operate individually. Then, the private partner will be entitled to receive remunerations accordingly from the three sources mentioned above, as and when each of the fully constructed functional units is delivered in compliance with specific quality standards predefined in the contract. This seeks to align incentives for the private partner to build quickly, and to that extent it is entitled to receive its remuneration, but also to build with good quality materials, as, for the private partner, this will mean fewer resources invested in the operation and maintenance stage.

Figure 1.
Figure 1.

Stakeholders and Interrelations in 4G Contracts

Citation: IMF Staff Country Reports 2015, 143; 10.5089/9781513546261.002.A005

Source: Agencia Nacional de Infraestructura.

9. The autonomous trust will play a crucial role in the development of the project, as it will act as an accounting and payment center. This autonomous trust will be financed with capital injections from the concessionaire,4 with the debt that the latter will obtain from the lenders through a loan contract, contributions from the ANI (budgetary cash appropriations), income from tolls, and development of commercial activities. By contrast, the autonomous trust will make payments to the concessionaire (remunerations) and to its contractors, to the lenders (debt servicing), and to the agent contracted by the ANI. The trust will be administered through a trustee agreement, entered into by the concessionaire and a trust company.

10. According to scenario analysis, Colombian banks have sufficient capacity to help finance the 4G infrastructure program. The financial system supervisor (Superintendencia Financiera de Colombia, SFC) ran a macro-financial scenario to gauge the banking system’s capacity to fund US$14 billion of 4G PPP-based road infrastructure projects. The scenario assumed IMF staff’s baseline macroeconomic projections for 2016 and 2017 and normal growth of credit and provisioning. The results indicate that bank financing for 4G infrastructure investment is manageable without crowding out lending to other sectors or unduly increasing concentration and banks could maintain strong capitalization. The authorities are optimistic about bank’s appetite for financing the 4G projects, including because of lower business prospects for other credit lines due to the cooling of the consumer lending cycle and slowdown in activity.

11. Recent amendments in the regulatory framework were introduced to incentivize investment in infrastructure projects by domestic institutional investors. While pension funds and insurance companies are the largest institutional investors in Colombia, with available resources that could be used for long-term investments, lack of available market instruments and regulations until recently did not incentivize them to participate in the financing of large projects. On April 28, 2014, the government amended the regulatory framework relating to individual credit limits and investment regimes of institutional investors which: (i) increases the individual borrowing limit of credit institutions from 10 percent to 25 percent of regulatory capital, provided that the excess is used to finance 4G infrastructure projects under the PPP scheme; (ii) expands the individual quota limit of indebtedness of the FDN from 10 percent to 40 percent of regulatory capital, provided that the excess is used to finance 4G infrastructure projects; and (iii) allows mandatory pension funds (FPO) with moderate risk and life insurance companies to invest up to 5 percent of their portfolio (up to 7 percent for the high risk FPO) in private capital funds which allocate at least two thirds of their investment-related financing to infrastructure projects under the PPP scheme.

12. New instruments developed by the FDN are also expected to facilitate institutional investor participation in project financing. The FDN introduced several instruments to hedge creditor risks: subordinated debt, partial guarantee, and senior debt.

  • Subordinated debt would be provided to a special purpose vehicle (SPV) at the beginning of the construction phase for 20 years with a grace period of 8 years, interest rate of CPI plus 9–10 percent, with a possibility to capitalize the interest up to 35 percent of the initial subordinated debt value. This structure will help lessen the pressure over the equity, improve the project expected return and reduce the expected loss of the senior creditors.

  • Partial guarantee will serve as a mechanism to cover liquidity risk during the operation and maintenance period. It will be provided to the SPV but the beneficiaries would be the bond holders, as this product is aimed at a capital market issuance. The guarantee will cover the mandatory bond service in case of insufficient cash flow generated by the project as well as in the event of a project’s early termination up to two years. It will work as a revolving credit line with a limit up to 20 percent of the bond outstanding.

  • Senior debt will be provided to the SPV at the beginning of the construction phase for up to 18 years with a grace period of the expected construction length.

  • Besides these three offered products, upon request by the private sector the FDN is currently developing new instruments: a subordinated contingent credit line to cover cost overruns, a senior contingent credit line to advance the cash from the budgetary future cash appropriations, and a project bond structure to promote the financing of the projects through the capital market.

13. Execution of private and central government projects in the pipeline would maintain the dynamism of transport infrastructure investment of the recent years. Over the whole financing period, transport infrastructure is projected to be front-loaded requiring investment of about 2.1 percent of GDP on average per year in 2014–22 (Table 1). This would occur assuming that all concessions of the 4G program are implemented with financing agreements for the three waves of projects via attracting private capital and leverage of multilateral institutions through FDN.

Table 1.

Transport Infrastructure Financing

article image
Sources: Ministry of Finance and Public Credit; DNP; ANI; and Ministry of Transport.

14. Successful implementation of 4G infrastructure investment agenda with private sector participation would generate fiscal savings of about 0.2-0.4 percent of GDP per year. ANIF (2014) estimated potential fiscal costs in case of lack of private sector participation in the 4G projects. To this end, a public works index (PWI) was constructed to prioritize 4G concession projects that could be implemented by means of public works if some risks related to project implementation from the private investor’s perspective would impede materialization of strategic projects in terms of regional competitiveness-connectivity.5 According to the PWI, about a half of the second and third wave projects were characterized by high construction risk and high impact in terms of regional connectivity and at most risk for being implemented through public works. Other projects were classified either in the intermediate (uncertainty) range—implying they would likely be carried out either through public or private financing, or combination of both—or as most likely to be implemented via private sector concessions. Implementation of the additional projects with the highest probability to be carried out through public works would result in public deficit of 2.3 percent of GDP in 2018 and 1.2 percent of GDP in 2022, requiring 0.2-0.3 percent of GDP adjustment in other budget items to meet the fiscal rule targets. Assuming that in addition to these projects the government would also implement and finance the projects that were classified in the intermediate range, overall public deficit would increase to 2.4 percent of GDP in 2018 and 1.3 percent of GDP in 2022, i.e. respectively 0.4 and 0.3 percent of GDP higher deficits than required by the fiscal rule.

15. 4G infrastructure investment is expected to boost Colombia’s potential growth and competitiveness. According to CONPES (2013), infrastructure investment would raise potential growth from 4.6 percent6 to 5.3 percent by 2024, including the productivity gains stemming from reduction in time necessary for goods transportation and better availability of road network. This impact on potential growth would come along with larger interconnectedness between the sectors and regions of the economy. Total factor productivity (TFP) with the new investment stimulus is expected to increase from baseline 0.7-0.8 percent per year to 1-1.3 percent in 2019-24. Likewise, investment rate would rise from about 30 percent of GDP to 32 percent in 2017-19 and remain about 1 percent of GDP above the baseline scenario in the following years. Time savings between the major Colombia’s cities and ports would range between 25 percent (Medellin – Cartagena) and 47 percent (Medellin – Cali). In view of reduced travel time and costs of vehicle operation, 4G projects are expected to generate cost savings between 16 percent in case of Medellin - Cartagena route and 30 percent for Medellin – Cartagena corridor.

16. Road infrastructure upgrade is also expected to generate notable socioeconomic benefits. CONPES (2013) estimates that the planned investment will boost employment in almost all regions and help reduce unemployment rate to about 7.6 percent by 2024.7 In addition, better connectivity will allow extend influence areas of the major cities by improving supply of qualitative public services in rural areas. Less travel time will also give impulse to tourism development in traditionally isolated regions thus generating opportunities for employment and investment.

17. The recent changes in the legal framework established a risk sharing and mitigation mechanism to enhance implementation efficiency of 4G infrastructure investment projects. The most notable change is the gradual shift of risks associated with PPPs from the government to the private sector. This shift reflects the attempt of the government to move away from the previous practice of overcompensating private sector concessionaire and to attract new financial investors. In addition, to ensure the most efficient implementation of the investment program, risks are assigned to the contractual party which is in the best capacity to deal with them and manage different mechanisms of risk mitigation (Table 2). Such risk management is expected to minimize costs of risk mitigation and control. In particular, it refers to risks assumed by the government which are susceptible to translate into contingent liabilities, as described further.

  • Fiscal risk. After the global financial crisis of 1997, Colombia put into effect law Act 448 of 1998 which regulates the budget management of contingent liabilities. A year later, the DNP estimated contingent liabilities of the nation at 154.1 percent of GDP, confirming the importance of the issue and the need to manage it. Law Act 448 requires national and state entities to include in their debt servicing budgets the necessary appropriations so that potential losses from contingent liabilities in their care are covered. State agencies required to appropriate contingent liabilities are to make contributions to the contingency fund for state entities in order to provision the risks. In line with this, the MHCP has developed methodologies for assessing and valuing contingent liabilities in infrastructure PPP projects. The contingent liabilities include revenue guarantees (guaranteed income mechanism, expected income), currency risk, environmental risk, and geological partial guarantees. The evaluation process is done on a case-by-case basis and determines whether contingent liabilities exist and whether the project must contribute to the contingency fund. As referred by KECG (2013), only a handful of countries have legal provisions for contingent liabilities, and Colombia has become an example at the regional level for having established standards for budgeting, accountability and fiscal transparency.

  • Land risk. This risk is related to the necessity to obtain land in order to execute the project and supply infrastructure services complying with the availability and quality requirements. It is associated with two main causes: (i) land acquisition management, which falls under the responsibility of the concessionaire, and (ii) costs of land acquisition and corresponding socioeconomic compensation which would be covered by a partial guarantee of the ANI and financed from the contingency fund. The partial guarantee to cover cost overruns of land acquisition would be structured as follows: (i) between 100 and 120 percent inclusive, the concessionaire assumes all costs; (ii) between 120 and 200 percent inclusive, the concessionaire contributes 30 percent and the ANI—the remaining 70 percent; and (iii) above 200 percent, the ANI assumes all cost overruns.

  • Environmental commitment risk. It corresponds to the necessity to obtain environmental licenses or other permits, licenses and concessions of environmental nature that are required to execute the project and comply with the indicators of availability and quality of services. This risk is associated with: (i) management of regulatory permits (responsibility of a concessionaire); (ii) costs of socio-environmental compensation (shared under the same abovementioned mechanism of covering cost overruns of land acquisition); and (iii) unforeseen actions required by the environmental authorities, incurred after expediting of the license and not attributable to the concessionaire (responsibility of the ANI).

  • Political/social risk. Refers to an impossibility to install, relocate or move tollbooths in projects, which would entail variation in potential income flows of the concessionaire. This risk will be assumed by the ANI and covered by the contingency fund. Likewise, the risk of violation of the right of way would be assumed by the concessionaire, which will require implementing measures of vigilance and protection of the relevant corridors and receive support of the local authorities in cases dealing with restitutions of the right of way.

  • Utility network risk. Refers to a commitment to transfer or relocate the networks of services or protect them and thereby avoid interference with the project design. In case of risks entailing large costs due to network interference, a partial guarantee would be applied as in case of the abovementioned land acquisition and environmental compensation.

  • Traffic/commercial risk. This risk implies deviation in the present value of income flow from tolls vis-à-vis income projections estimated by the ANI during the structuring and awarding of projects. Importantly, income projections which depend on traffic are related to macroeconomic variables which are exogenous to the project development and therefore beyond the control of the concessionaire who is in charge of efficiently managing the quality and availability of infrastructure services provided by the projects. In order to ensure a long-term financing of the project during its operation and maintenance stage and given a notable degree of uncertainty in estimated future traffic that affects income projections, the authorities have created a relevant risk-coverage mechanism. To this end, the commercial risk will be assumed by the state, whereby the concessionaire will be compensated during certain periods of the contract term in cases when actual income from tolls falls below the projected and income shortfall is caused by deviations in traffic projections. Such compensations will be managed through the resources contributed to the contingency fund.

  • Currency risk. It is associated with potential losses or gains in case the concessionaire obtains external financing for the project, where liabilities will be denominated in dollars, while income flow—in pesos. Currently, a partial mitigation of currency risk is granted by fixing the rate at which budget transfers are made in foreign currency. In particular, the government has approved 25 percent of total future cash appropriations from the budget in U.S. dollars for the first wave projects and about 40 percent for the second wave projects. However, if additional quota in dollars is required, the MFPC will estimate the impact on fiscal sustainability from disbursing future cash appropriations in dollars above the existing limits.

  • Regulatory risk. In cases when amendments in regulatory framework change the contractual scheme of toll tariffs, the corresponding compensation to the concessionaire will be covered from the contingency fund. Likewise, when regulatory changes imply modifications in technical specifications of the projects, the risk and associated costs will be assumed by the ANI.

Table 2.

Distribution of Risks

article image
Source: Financiera de Desarollo Nacional and CONPES (2013).

18. Hence, risks associated with the 4G infrastructure investment projects would be borne by the party that is better suited to handle them. The risk sharing mechanism will help ensure that the private investors have the support and guarantees to undertake the financing of the projects. This support would become effective with a limited uncertainty in the income flow for the project, given the mechanisms for risk mitigation created by the ANI and products developed by the FDN. In its turn, private sector participation and safeguards provided by the contingency fund would limit fiscal risks for the government.


  • ANIF, 2014, “Concesiones de Infraestructura de Cuarta Generación (4G): Requerimientos de Inversión y Financiamiento Público-Privado.

    • Search Google Scholar
    • Export Citation
  • ANIF, 2013, “La Inversión en Infraestructura en Colombia 2012–2020. Efectos Fiscales y Requerimientos Financieros.

  • Banco de la República, 2014, “Reporte de Estabilidad Financiera”, ISSN-1692-4029, September.

  • FDN, 2014, “Avances en la Financiación del Programa 4G: Logros y Retos”, presentation by Clemente del Valle, FDN President, November.

    • Search Google Scholar
    • Export Citation
  • FDN, 2014, “El Rol de la FDN en el Desarrollo de la Infraestructura”, presentation by Clemente del Valle, FDN President, July.

  • FDN, 2014, “A New Approach to Infrastructure Financing in Colombia”, presentation by Clemente del Valle, FDN President, April.

  • CONPES, 2013, “Proyectos Viales Bajo el Esquema de Asociaciones Público Privadas: Cuarta Generación de Concesiones Viales.

  • Korea Expert Consulting Group (KECG), 2013, “Support for Public Private Partnership Infrastructure in Colombia.


Prepared by Kristine Vitola. We are grateful for comments from Valerie Cerra (WHD), Poldy Paola Osorio Alvarez (ANI), Sergio Clavijo (ANIF), Andres Mauricio Velasco Martinez (MHCP), and Juan Pablo Espinosa (Bancolombia).


National Planning Department.


Information provided by the ANI in May, 2015. The data is different from the one reported in “Colombia—Staff Report for the 2015 Article IV Consultation”, which was obtained during the 2015 Article IV consultation in March.


The capital contributions from the concessionaire (or equity transfers) are mandatory in nature and must be deposited in the autonomous trust for predetermined periods, which are agreed between the lender and the concessionaire, or by the ANI, during the structuring of the contract. The concessionaire may make these equity transfers with capital contributions from the partners, from placing of shares, or by debt acquired by the partners that is subordinated to the senior debt.


PWI consists of five indicators: (i) the existing traffic and potential traffic as proxies of future demand for a certain road corridor; (ii) geological and construction risk, where engineering complications augment the potential of unforeseen risks and cost overruns requiring larger injections of public resources; (iii) investment amount; (iv) the percentage of construction corresponding to new works, where it is assumed that this type of construction could be better executed by public sector (given the aforementioned risks); and (v) regional competitiveness-connectivity, where the government should expedite strategic projects without expecting financial closure by the private sector that could result in delays or termination of certain projects. Larger weights are attributed to the variables that capture future demand of roads (potential traffic), construction risk, and connectivity-multimodality risk, all of which have 20 percent weight in the index.


Projected scenario in the Medium-Term Fiscal Framework (MTFF).


Under the baseline scenario, unemployment rate would decline only marginally to 8.7 percent.

Colombia: Selected Issues Paper
Author: International Monetary Fund. Western Hemisphere Dept.