Colombia Invites Infrastructure Investment, But Is It Safe Enough? - Part 2 of a six-part series
Bogota, Colombia–After years of economic turmoil and social upheaval Colombia is poised to spend big to bolster its languishing infrastructure. But it isn’t going to be easy for this developing country known for its drug kingpins and jungle-based insurgents.
The government of President Alvaro Uribe has made infrastructure development a priority while hoping for a free-trade agreement with the U.S. His government is pushing dozens of major projects worth several billions of dollars. In addition, private companies, particularly those in the energy sector, are pushing multi-million dollar upgrade projects.
All that’s missing is the money for the public works and confidence in the national economy. Laws and regulations skewed against foreign firms are also a problem. But there is hope. Rising oil prices have lifted the Colombian economy and Uribe’s battles against druglords and insurgents and paramilitary units, together with a more stable economy, may be enough to inspire investors.
“There is confidence that these projects will appeal to national and international investors and put us on the right path with the respect to infrastructure development,” says Transportation Minister Andres Uriel Gallego.
The centerpiece of the administration’s effort is the ambitious Plan 2500 that will address Colombia’s long neglected highway system. The $770-million project will include the construction and upgrading of more than 3,100 kilometers of highway by the end of the decade.
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Related Links: Uribe has been pushing the project since taking office in 2002 and, if and when completed, it will be the largest infrastructure overhaul in the country’s history.
It will be a key step forward in a country where almost 70% of cargo is transported by truck. That’s a drawbacl because Colombia has one of the lowest ratios of paved roads per inhabitant in Latin America. Of the estimated 115,000-145,000 km of road, less than 15% was paved as of 2004. Less than 400 km was multiple-lane, paved highway.
Plan 2500 is only one of a series of sweeping infrastructure improvements the government is working to implement. They include at least $285 million for expansion of Colombia’s ports, a $500-million upgrade of El Dorado International Airport in Bogota, refurbishing more than a third of the country’s 3,000 km of railway and the increasing of the more than 11,000 kilometers of navigable inland waterways.
Those efforts are critical for helping the country find the right balance to attract more foreign investment for future development. On the one hand, Colombia has to drastically upgrade its infrastructure to spur development that will make it an attractive investment.
Yet, Colombia is limited in the amount of infrastructure work it can undertake until it wins more foreign investment.
The prospect of a free-trade agreement with the United States has upgraded the issue from a priority to a critical necessity. For the past two years Colombia has been seeking the agreement in conjunction with Peru and Ecuador. Peru signed an agreement with the U.S. in December after Colombia pulled out of discussions a month earlier. Talks between Bogota and Washington are expected to resume in January.
The infrastructure improvements seek to take advantage of Colombia’s position on the northern edge of South America, a location that suggests the country could be a trade gateway for the continent, says Juan Martin Caicedo, a former mayor of Bogota and current president of Colombia’s infrastructure chamber.
“We simply cannot afford to waste our position as an international point of entry,” he said at an infrastructure development conference last November.
While the possibility of a free trade agreement is the impetus for infrastructure improvement, it is the relative economic stability that makes it a realistic possibility.
Colombia, along with much of South America, rode a strong growth trend in the early 1990s that many expected would provide the answer for many of the country’s ills. But the boom came as the drug trade and guerrilla movements began a period of violence that engulfed the entire society.
By the late 1990s, weaknesses in the economic system had become apparent and things plunged downhill.
“It was basically a huge housing bubble that went bust,” says Juan Carlos Echeverry, an economist with the University of the Andes in Bogotá. “As confidence diminished, interest rates spiked and it began to snowball.”
That has turned around 180 degrees in the past few years and the economic outlook for the country is extremely positive, say many experts. According to the International Monetary Fund, Colombia’s GDP grew at 4.5% in 2005, faster than envisaged and the fastest since 1995. Investments and exports pushed the higher than expected growth.
“The amount of infrastructure investment has been stable over the past few years but there is an increase in the amount being planned for the future,” says Fernando Aguirre, infrastructure director for the Colombian Institute of Cement Producers. “We have a lot of projects being planned and we are needing a lot of investment.”
Due to the limitations of the government to amass its own funding, private investment is key to moving forward on such projects, Aguirre says. The IMF noted that foreign investments are on the upswing and the trend is expected to continue. Currently, Colombia sees about $10 billion of investment from foreign sources. According to the central bank, foreign direct investment topped $546 million in the first quarter of 2005, up from $326 the year prior.
One internal financing option is Colombia’s $11.3-billion private pension system. Luis Fernando Alarcon, president of the Association of Pension Fund Administrators, Asofondos, says the fund administrators are very interested in investing in infrastructure projects planned for the country in the next few years. “The real...
...problem we have seen in Colombia is that the private sector is just now beginning to understand the importance of going to capital markets,” he says. “With respect to many in the infrastructure sector we have to inform them better of the opportunities for investment.”
While the government is limited in the amount it can directly invest in infrastructure projects, it has taken an active role in making Colombia more attractive for financial investments. The IMF commended the Uribe administration’s economic reform efforts in knotty areas of the economy that have previously hindered growth–pensions and taxes. The country’s primary economic reform for 2005 dealt was in the area of pensions with the goal of controlling the deficit. In April, the International Monetary Fund set the deficit at 2.5% of the GDP as part of an 18-month, $613-million loan agreement–a target the country is expected to meet.
“Many think that Colombia has come from being one of the worst area for investment to one of the best,” says Franchesco Fernandez, economic counselor with the U.S. embassy in Bogota. “Everything indicates a very positive situation in the future.”
In part, the economic strength is part of a region-wide improvement pushed primarily by rising oil prices.
In 2003 Colombia had 4,350 km of gas pipelines, 6,134 km of oil pipelines, and 3,140 km of refined-products pipelines. An accord to begin exploration activities offshore Colombia was signed by Exxon Mobil Corp. with Brazil's Petrobras and Colombia’s state oil company. The initial exploratory phase could reach $130 million, officials say.
A key force pushing domestic growth has been the surge in consumer spending and internal investment due to the success of Uribe’s efforts fighting guerrillas, paramilitaries and drug traffickers. Since taking office, Uribe has taken a hard line on security issues, bolstering the country’s military and taking an active role in the peace process.
Crime continues to be a problem. According to the Presidential Program for Human Rights, more than 1,250 persons were abducted in 2004 , a big drop from the year prior. And, since 2000, coca cultivation in Colombia has been more than halved to about 197,700 acres. Cocaine production is way down, too, according to the United Nations Office on Drugs and Crime.
“It is getting better but it is not going to end,” Aguirre says. “And it is very dependent on where you are. If you are working near Bogota, you won’t have that great a problem but if you are working in the jungle, there is going to be risk involved.”
In the past, such economic and security success stories have been short-lived. But many are optimistic the positive trends will continue due to the presidential election this year. Uribe, who took office in August 2002, is running for re-election in April and most observers believe he will win. Recent polls show his approval rating is high.
Typically, elections in South America are a source of anxiety for investors but and the prospect of a second term for Uribe are very good, said Andres Escobar, chief economist for LatinSource. “We are seeing the confidence effect still in place and reelection optimism,” he says. “And, on the other hand, we also have good opposition candidates.”
Despite the good news, real hurdles remain for Colombia as it tries to move forward. Most observers say there are still huge problems with the legal and financial regulation foreign firms face when doing business in Colombia. And despite tax reforms, the system remains complex and relatively hostile for foreign investment. The legal system also presents many complex hurdles for private investors since it lacks clear rules and those that do exist are constantly changing.
Another concern is the concession system. Initially reformed in the 1991, the first generations of contracts were marked by problems that cost the government millions and left contractors wary of the system. Now on the third generation of concessions, both sides are optimistic that the problems have been greatly resolved.
And the lessons of Colombia’s economic misadventures live on in many minds. ConConcreto, Colombia’s largest construction company, was forced into bankruptcy by the recession. Jose Torres, the company’s regional infrastructure director, says the company is now poised to take an active role in the push to improve Colombia’s infrastructure but it remains pragmatic about the situation.
“The government is going to say everything is fine but we have to take a realistic view of what may happen,” he says. “When the risks are very great, when you do not see that the conditions of the game are clear, when there too many risks and you have to assume the cost of the project, finally you decline to do it.”
