The new infrastructure challenges facing Colombia

Bnamericas Published: Wednesday, August 03, 2022
The new infrastructure challenges facing Colombia

The term of Colombia’s Iván Duque will end this month with an important legacy in terms of infrastructure modernization through the 4G and 5G programs.

The 5G works include highway, airport, river navigability and rail projects. The tender processes for a large part of them will have to be carried out by the government of Gustavo Petro, who takes office on Sunday.

With significant investment already made in infrastructure to connect large cities, one of the new challenges will be connecting smaller cities and mobility within urban areas.

BNamericas talked about these issues with the VP-senior credit officer of Moody's rating agency, Adrián Garza, who highlights that Colombia is well positioned to attract investment in infrastructure, although with the change of government the market would like to see clear signals about respect for contracts and independent institutions.

BNamericas: What is the current state of Colombia’s infrastructure?

Garza: Compared to other countries in the region, Colombia has done very well in several sectors. I would highlight the highway sector with the fourth generation or 4G concessions scheme.

In some cases, they have also managed to obtain long-term financing through international markets, which in many countries is very complicated for various reasons, including credit risk.

Highway concessions have very important support from the government, which helps them reach investment grade ratings, mitigating demand and toll risks, among others.

Another aspect that’s worth noting is that when it comes to renewable energy auctions, investment in power generation has accelerated, which contributes, among other things, to reducing greenhouse gas emissions emitted by the electricity sector, which in Colombia are low compared to other countries given the high levels of hydroelectric generation.

Additionally, investments in non-conventional renewable energy will help stabilize prices and keep them low.

BNamericas: In which sectors are the biggest infrastructure challenges?

Garza: There are rather generalized challenges, derived from macroeconomic conditions. Inflation and high interest rates are important challenges to access financing, since conditions are not as favorable as before.

Additionally, there are certain concerns regarding economic growth.

After COVID-19, in 2021 Colombia posted robust growth of over 10%, but there are concerns about the macroeconomic environment, which will have implications for credit risks.

Thinking about the local challenges, I would say there’s a lot of uncertainty due to the change of government. There will be a government with a much more relevant social agenda and with an even more aggressive posture regarding the energy transition than the one that has been experienced in Colombia, which will require certain measures.

BNamericas: What are these local challenges exactly?

Garza: On the one hand, conditions of certainty have to be met, showing that the institutions and the concession contracts are solid and will be respected.

Thinking about the energy transition, we have recently been hearing that the transition is going to be more gradual.

There has to be a balance between aggressive environmental goals and the robustness that the system requires.

BNamericas: In terms of transport infrastructure and social sustainability, what are the challenges?

With the evolution that has taken place in Colombia regarding highways, the country is reaching a point where the new projects that will be tendered in the coming years are no longer the main trunk highways that connect the big cities. We’re going to start to see other types of assets in which the demand is less obvious, and also urban transport infrastructure.

There are already highways that connect cities and carry a large volume of vehicles, but the capacity to absorb traffic within cities is also required.

Roads connecting smaller towns, more rural, agricultural communities are also required.

The challenges are also to think about how to solve mobility at the city level and make it a mobility that moves with clean energy.

BNamericas: In terms of demand at the city level, where should the infrastructure go?

Garza: There are two topics that are perhaps complementary: on the one hand, there will be varieties of tolls that can be developed in some areas and that help flows within the city, but also public transport, projects at the local and regional government level, [Bogotá’s] Transmilenio-type infrastructure, subways, which are going to be more relevant every day, with the idea of continuing to grow within the city and complementing the growth that took place outside, connecting the economic zones.

BNamericas: Are there risks to the infrastructure considering climate change?

Garza: From the point of view of the rating agency, in general we don’t see today that this is having an impact on the portfolio of electrical energy and highway projects that we rate, but we do point out that in the medium and long term some of these risks may materialize.

In general, when looking at which regions are going to be most impacted by climate change, Latin America is one of them, which is somewhat unfair because the region has historically contributed very little to climate change in terms of the volume of emissions generated, but will suffer many of the negative impacts.

These are more medium and long-term risks that we do not see today materializing, for example, in the ratings.

BNamericas: The lower economic growth will be due to the uncertainty generated by the change of government or by external factors?

Garza: I think that to a large extent it has to do with what is happening outside of Colombia, external factors, but also internal reactions in Colombia, for example, the expectation that interest rate hikes will continue always has an impact on expectations of economic growth.

Moody's view is that this is temporary, but we’re going to see in 2022 a little pressured growth, especially coming from last year's economic recovery, and 2023 as well, but once the macro environment stabilizes we hope that Colombia continues on a path of solid growth like the one it has had recently.

At the moment, in general terms, not only in Colombia, there’s a lot of political uncertainty about respect for contracts, respect for independent institutions. I believe that clear signs of that respect are something that the market would like to see so that investment continues to be brought to the country.

BNamericas: What are the challenges that Colombia will have in the short term to obtain infrastructure financing?

Garza: Without a doubt, there is a more adverse environment due to the factors indicated.

In financing, in a very concrete way, there will be an impact due to higher rates. This makes projects less profitable and at the same time more expensive. Another important factor is the expectations of economic growth.

Infrastructure projects are very long term and rely heavily on long-term economic growth projections.

We are now at a juncture in which economic growth is going to be lower, at least in the short term, than was originally anticipated, so in the short or medium term the fundamentals of an infrastructure project do not look so attractive, but it's because we're going through a period of slightly slower growth.

BNamericas: In terms of regulations, project sustainability and legal certainty, how is Colombia doing at the moment to attract financing from foreign investments?

Garza: Colombia's institutions and concession framework are solid. The auction scheme carried out by the government of Iván Duque was quite successful, which compares Colombia very favorably with other countries in the region.

To attract investment from outside the country, it’s important that there are projects of a good size and also a portfolio of projects, that the investor knows the country, knows the contracts, knows the institutions.

I see Colombia well positioned.

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