Improving Colombian Transportation Infrastructure through Private Investment
Info: 8950 words (36 pages) Dissertation
Published: 9th Dec 2019
Colombia has long struggled to reach the socio-economic level that many leaders and academics have envisioned for the region. Although the country has continuously attempted to integrate into the global economy by pushing for greater national economic development, its inadequate transportation infrastructure is limiting the nation’s progress. The lack of proper infrastructure has negative impacts on Colombia such as regional accessibility, leading to regional isolation, economic weakness, and lack of security. Because of its mountainous geography and recent violent history, Colombia’s transportation infrastructure remained an urgent issue that was paid little attention to. The attention to this issue is urgent as economic and social development of a country is closely intertwined with the quality of its infrastructure.
Looking at its history and current state, it is obvious that Colombia continues to face a substantial infrastructure shortage that is constraining the country’s socio-economic development. Estimates suggest that the country suffers from an investment deficit exceeding half a trillion dollars*. Transport investment is needed to connect areas of concentrated population and production with the country’s key ports and rural regions. If Colombia seeks to transform its economy that allows for greater engagement in international markets, then its transportation infrastructure must be a national priority. This is relevant for the Latin America and Caribbean (LAC) region as it has an inefficient infrastructure in comparison to its income level. Although many of the countries in the region are a competing force in the rising global economies, the lack of investment in infrastructure is delaying their progress. Colombia is the fourth largest economy in the region, falling significantly behind from the top three economies, yet it suffers of one of the worst failing infrastructure (Brenes, Camacho, and Siravegna 2016). Among the different sectors of infrastructure (i.e. telecommunications, water, transport, and electricity), the most lacking in investment is the transport sector. This gap in investment greatly hinders its possibilities for social integration and economic prosperity.
Colombia is split by the Andes into three chains and its Pacific coast is obstructed by jungle. These geographical characteristics make it difficult to build transport infrastructure as the average cost of building a kilometer of road in Colombia in the Andes (USD 10 million) is significantly higher than in the United States (USD 2.25 million) or Europe (USD 2.6 million) (Nuno and Vinables 2001). Colombia currently only has about 6,000 km in length of roads, many of them of a single lane and in crumbling conditions (Buendia and Gagan 2012).
Another problem is the design and quality of construction materials that leave the roadways hazardous and susceptible to the country’s heavy rainfall and flooding. This leaves the country with rising transportation costs that are too expensive and leave regions of the country isolated at times. It is accounted for that the devastating quality of Colombia’s roads make it cheaper to send a shipping container to Asia than to transport things from a Colombian port to a main city (Buendia and Gagan 2012). Moreover, existing infrastructure is in poor condition. Colombia has paved only 15 percent of its roads and has just 1,000 kilometers of dual-lane divided highways, leading to the second-fewest vehicles per person in South America. It also has 900 kilometers of railroads and is yet to develop river navigation to transport goods on a large-scale. Facts such as these demonstrate the debilitating effect the poor transportation infrastructure has on the country. Besides the region of Africa, Latin America is the region that spends the least in infrastructure among developing economies – less than 3 percent in comparison to the 6 percent from other regions (ECLAC 2015).
Colombia has attempted to address the poor conditions of its transport infrastructure. The first attempt was the establishment of the 1994 Public Private Partnership (PPP) law in hopes of addressing the issue by accessing private capital resources. This law would further develop through another three project generations, with the most recent one being the PPP Law of 2012 “Ley de Asociaciones Publico Privados” (AAP)*. Each new generation of the law was meant to be an improved version of the previous generation’s flaws. Even so, the newly implemented AAP continues to suffer from flaws that lead to project costs and time overruns, as well as limited participation of the private sector. Colombia is working towards improving the transportation infrastructure sector but must address the issues in the currently implemented laws to successfully expand its infrastructure.
This white paper will explore the negative effects of poor transportation infrastructure on Colombia and how the improvement of private investment policies can help eradicate these effects. Although Colombia has attempted to address its lacking infrastructure, past policies that introduced the participation of the private sector through PPP projects have been extremely flawed and typically lead to greater costs and delays. The generational laws were supposed to be an improvement to previous ones but have failed to address the key issues that lead to policy failure. By taking policies from countries with similar past infrastructure issues into consideration, this paper will explore three policy options. This includes the improvement of project legal and regulatory framework, project risk allocation and management, and project selection and preparation. This paper finds it necessary to implement all three policy recommendations as PPP law provisions. Through this analysis, policy makers in Colombia will be provided with information on how to move forward on implementing a successful transportation infrastructure program.
History of Crisis
The region’s current infrastructure failure can be traced back to the “lost decade”, a period in the 1980s in which many Latin American countries were unable to repay their foreign debts. Latin American countries increasingly began to borrow money from U.S. commercial banks and other creditors in the 1970s, leading to a total debt level of $327 billion by 1982 (Fay and Morrison 2007). The unbelievably low rates of interest on short-term loans and global economic expansion only further encouraged this behavior.
By the beginning of the 1980s, however, there was a tightening of monetary policy in developed nations that led to an increase in interest rates and a global economic recession (Neves 2018). Simultaneously, commercial banks shortened re-payment periods and began to charge higher interest rates for loans. Latin American countries soon found themselves unable to sustain their debt burdens. The regional crisis was sparked by the announcement of Mexico’s inability to service its debt totaling $80 billion. Another sixteen of the region’s countries quickly followed, leading to the banks responding by halting all new overseas lending and throwing the region into a deep recession (The World Bank 2005). A cooperative rescue effort led by commercial banks, central banks, and the International Monetary Fund to prevent further crisis allowed for the restructuring of countries’ debt and lent money for these countries to pay their loans’ interest. In exchange, the Latin American countries agreed to structural reforms of their economies to eliminate budget deficits and acquire the money needed to pay the impending loans.
Although these actions prevented an immediate global crisis, the region faced a new disaster. As Roubini and Sachs (1989) stated, “In periods of restrictive fiscal policies … capital expenditures are often the first to be reduced (often drastically).” Latin American public investment fell 2.5 percent of gross domestic product (GDP) from the 1970s to the 1980s. Public infrastructure investment in Colombia collapsed soon after the region’s 1980s crisis. The lack of investment in infrastructure due to the regional monetary crisis led to the crumbling condition that it faces today.
The overall picture is that Latin America’s infrastructure sector performed poorly during the era of macroeconomic crises in the 1980s and 1990s. While the rest of the region saw a substantial decline in infrastructure investment, over the late 1990s, Colombia was one of the two countries to witness an infrastructure investment expansion during this period. Colombia succeeded in adding public investment in infrastructure by .04 percent in GDP between 1995 and 1998, while the rest of the region saw an average reduction of 2.06 percent (Fay and Morrison 2007). Although the crisis hit each country hard, Colombia managed to improve fiscal balances without cutting an immense amount of public infrastructure investment in comparison to other countries. Many Latin American countries opened their infrastructure sectors in the late 1980s to private investors. Colombia opened the infrastructure sector of roads in 1993 and the sector of railways in 1997. The rise in private infrastructure investment was uneven not only across countries, but also across infrastructure sectors. The most investment was directed to the power sector in Colombia. The country seemed to be more focused in the development in this sector, as the other infrastructure sectors, particularly the transportation one, lagged in significant investment.
While also suffering from economic hardship, Colombia faced a violent internal war. Civil conflict between the government and various insurgent groups, such as the guerrilla movement known as the Revolutionary Armed Forces of Colombia (FARC), in Colombia had been ongoing for generations. The decades of violence have left close to 220,000 dead, 25,000 disappeared, and 5.7 million displaced (Restrepo). The conflict between the Colombian government and left-wing guerrillas has been ongoing since the mid-1960s as what is recognized as a low-intensity asymmetric war. This has plagued the country with intense violence and remained the focus for the government until its end in 2015. Resources that could have been spent in infrastructure investment were alternately used on military confrontations with the various insurgent groups.
The problems Colombia is currently facing are completely different than those it had to tackle in the past. Previously, Colombia was in the midst of terrorism and in need to recover after a two-decade war on drugs. By 2010, the FARC had been pushed out of urban areas and relegated to the southern Amazonian jungle near the border with Venezuela. Though they are still a threat, the risk of a terrorist attack has been significantly mitigated in the past 10 years. Colombia now faces an economy in dire need of development. Colombia was no longer facing drug lords or “guerrillas”, rather the new conflict the country had to face was an internal one with corruption.
In response, President Juan Manuel Santos developed a five-point plan that would allow him to incentivize the economy and target specific areas such as infrastructure. Infrastructure concessions in Colombia are not new. The country had long established the National Institute of Concessions (INCO), a department specifically purposed to procure and award projects. However, due to recent scandals, such as the development of the Transmilenio’s pioneering bus rapid transit system in Bogota – in which a corruption investigation ensued involving the concessionaire and the Mayor of Bogota, it was clear that the president needed to address Colombia’s corruption problem before proposing a new infrastructure program.
President Santos led two initiatives that would bring about the fourth generation of concessions. The Santos administration proposed bill 1508, which was enacted on 10 January 2012, to regulate public-private partnerships and it to dismantled INCO. The National Infrastructure Agency (known locally as ANI) was created to replace INCO. ANI has been introduced as a complete restructure of the system and a way to combat corruption in the sense that all personnel must meet certain educational prerequisites. The agency has introduced a new Public-Private Partnership (PPP) plan that will require an investment of US$50 billion between 2011-2021. The PPP creates the framework to structure and develop major infrastructure projects and to attract and retain private investment in this sector. The law contains an innovative measure that separates PPP projects into two groups of those proposed by the government and projects proposed by private companies. PPP projects that are proposed by the government are the ones the government drafts and selects the company that will successfully carry out the project. The projects proposed by private companies must be analyzed by the government to determine its feasibility, compliance with public policy and benefit to the public interest (Economic 2015). Once this is confirmed, the project is put up to bid to determine the private company that will carry out the proposed project.
The Infrastructure Law was passed by the National Congress in November 2013, which concentrates on improving land acquisition obligations under the corresponding concession agreements. The Infrastructure Law aims to overcome the historical inefficiencies of the land attainment process in Colombia. This has largely been caused by a challenging judicial expropriation system that often led to considerable delays and overwhelming costs. The Infrastructure Law also serves the purpose to facilitate the procedures that must be followed by the concessionaires to execute their projects, such as obtaining the corresponding environmental permits and fulfilling other environmental requirements (Sales 2013). Legislation such as these are vital for an increase in interest by private investors in Colombia’s infrastructure development. It is the hope that the facilitation of project development processes without breaking current agreements will invite further domestic and international investment.
Not only was the Colombian government able to agree on an infrastructure investment budget, it also established the country’s infrastructure priorities in the 2010-2014 National Development Plan. These same priorities are being discussed and reinforced in the negotiation of the 2014-2018 National Development Plan. The most vital project of those planned by the government is the so-called Fourth Generation of Road Concessions (the 4G Concessions program). Its purpose is to create a $25 billion toll road network throughout Colombia by approving and using around 40 concessions agreements (Neves 2018). According to the National Infrastructure Agency, the country will see road distance increase from 6,000km to 11,000km, and the railways from 900km to more than 2,000km under the concession. It is predicted that this will be an investment equivalent to 2-3% of Colombia’s annual GDP. The 4G Concessions program would one of the most ambitious and revolutionary programs in Colombia’s history, and probably one of the biggest PPP infrastructure programs worldwide. Once completed, transport infrastructure in roads and railways will have significantly improved and this in turn will further contribute to Colombia’s economic growth. Despite the lack of proper infrastructures, the country has been able to see significant growth, but with this completed project, Colombia will be a leading economy in its region.
Aside from the 4G Concessions program, the Colombian government also plans on investing in other transport infrastructures, such as ports and airports. The government plans to invest up to $2.1 billion in ports over the period 2015-2018. Over the same period, it plans to carry out ten projects in existing airports –representing an investment of $1.8 billion– and to build two new airports at a cost of $2.3 billion (Economic 2015). Colombia has recognized its downfalls that have prevented it from developing to its full potential and has begun major development projects that will reap great social and economic benefits.
The Colombian government also plans on taking another project to improve the navigability of the Magdalena River at a cost of $1.3 billion. This 1,500km river is the main waterway of Colombia, crossing the country from the center to the north, before flowing into the Caribbean Sea. The improvement of the river’s navigability is vital in Colombia’s transport infrastructure revolution as it will decongest freight transport. It will reduce the number of trucks that cross the country’s roads every day and will expand the use of water transport.
The current Colombian government is committed to revolutionizing the country’s infrastructure network. Its plans have already begun to take shape with the passing of regulations that facilitate the development of large-scale projects such as those required in Colombia and that promote national and international private investments, and the publication of a list of infrastructure priorities and budget forecasts for the investments that are needed. Even so, the proposed legislation lacks certain standards to make the proposed projects a success.
The legislation that is currently implemented or is being considered by congress fails to acknowledge significant issues that have plagued the PPP projects for years. Although the new policies are targeting certain points, such as the facilitation of land acquisition and barriers for corruption, they forget to include a way to improve the legal framework and risk allocation of the proposed projects. The administration needs to look into the underlying issues that have resulted in the failure of previous project generations.
The Colombian transport sector infrastructure revolution has many stakeholders at play. The most important players in this process are the Colombian government and the private investors involved. The Colombian government plays the biggest role in the country’s plan for development. After facing the region’s economic turmoil in the 1980s, Colombia has stepped up internal investment that will further develop the country. The projected development that will be a result from the legislation passed, will help Colombia reach a level of social and economic prosperity it has never seen. If the plans go accordingly, Colombia will see about 4,970 miles of roads built and cut travel times by 30 percent (Buendia and Gagan 2012). Another obstacle the country has faced in recent years is the prolonged conflict between the government and various insurgent groups, the most recognizable being FARC. Because of its poor infrastructure, many of the insurgent groups from the country’s violent period were able to grow and continue undetected by the Colombian government. The isolation of rural communities from Colombia’s main cities prevented Colombian authorities from ever being able to properly confront these groups.
With the improvement in the country’s infrastructure, the Colombian government will be able to properly impose its rule of law without obstacles. The improvement of Colombia’s transport sector infrastructure will encourage a surge in economic activity that the country has not been able to experience and even possibly play a role in the peace process it is undergoing.
Private companies are playing a vital role in the improvement of the country’s transportation infrastructure. Overall, these proposed road projects will be constructed through public-private partnerships that include local and foreign groups. The facilitation of processes such as land acquisition, has encouraged the participation of private enterprise to be involved in Public-Private Partnerships that Colombia is using to further expand their projects. These road projects will include local and foreign groups that receive some support from the government, as they are a way of helping to overcome the historical lack of infrastructure in Colombia at little or no cost to the public purse. Ports and harbors are an important aspect of the infrastructure development in Colombia. With its privileged geographical positioning and growing economy, the country is investing heavily to meet the demand and attract more shipping companies such as Business Sweden, which has already set eyes on investing in the Port Barranquilla (Sales 2013).
The private sector plays the most important role in Colombia’s investment for transportation infrastructure. Prior to tapping into private capital funds, the Colombian government tried to finance major projects out of public money. Due to the complexity and size of the proposed transport projects, this was a difficult task for the government to take on alone. The introduction of the private sector into Colombia’s ambitious plans was a solution to the funding problem. Despite incentives by the government, the private sector believes that the extent of these projects is too risky, even for some of the biggest companies. Although the Public Private Partnership is meant to be mutually beneficial, the greatest risks are allocated to private investors. Therefore, private sector participation has been low in recent years, leading to a decrease in competition and projects left unprocured.
As a developing country, Colombia has yet to ascend to the level of other western countries. Its quest for successfully developing its transport infrastructure has been noted across the world that can learn from other countries’ experiences with the same problem. The most prominent experience comparison is that of South Korea’s. Through the trials and errors of Korea’s experience with considering private capital for infrastructural development, the government of Colombia can have some insights in what can work and what can fail. Korea is widely known for its use of the PPP system for infrastructure development, which led to effective and successful infrastructure project operation*. However, lessons can also be learned from its failures, such as the country’s experience with the minimum revenue guarantee (MRG).
Similar to Colombia, the government of Korea faced an imperative infrastructure shortage while having insufficient funds in the government budget needed for infrastructure expansion. As a solution, Korea introduced the innovative PPP system for the first time addressing fiscal budget constraints while using the private sector as forms of financing. Starting in the 1980s, public manufacturing and infrastructure facilities were privatized as the wave of globalization swept across the world. Privatized infrastructure served as a means to use private capital savings for funding projects that tackled the inefficiencies of the public sector*. By using the PPP system, twenty percent of Korea’s total infrastructure investment came from private capital by the early 2000s.
Korea’s success in introducing and implementing the PPP system can be attributed to the following factors: the development of a proper legal and regulatory framework, recognition of incentives and risk-sharing policies, and the government’s will to continuously improve the PPP system. Although the success of Korea’s experience with PPP can be clearly recognized by its modern economic development, it was not without any mistakes. The most notable example of these mistakes was the heavy reliance of the MRG mechanism which the PPP system was built upon*. By the mid-2000s, the abuse of the mechanism by private actors caused its termination. After the MRG’s termination, private sector participation in infrastructure development significantly dropped. As of today, the only projects with any prospect of procurement are the ones with high traffic demand within the Seoul metropolitan area*.
After experiencing decades of rapid economic growth starting in the 1960s, Korea recognized the infrastructure shortage of roads and other modes of transportation as a threat to its progress. The country’s first response was to expand public financing to invest in transportation infrastructure. A form of public financing was the imposition of a tax on gasoline and diesel throughout the 1990s that were solely for the use of financing transportation investment. Apart from this public financing, the Korean government introduced the PPP system through the Act on Promotion of Private Capital Investment in Social Infrastructure in 1994*. Government regulation over the system was strict and risks between the private and public sector were not clearly defined in the legislation. From the introduction of the act in 1994 to its revision in 1998 is known as the first generation of PPP in Korea*.
As a result of the 1997 Korean financial crisis and strict government regulation, the newly introduced PPP system was failing. In response, the government of Korea revised the PPP act in 1998*. This period from the revision of the first act in 1998 to the next act revision in 2005 is known as the second generation of the PPP system. This pushed the government to loosen its tight hold on regulation and allow for greater risks. The revision also included the introduction of the minimum revenue guarantee (MRG) program which promised private investors a minimum of 90% of estimated revenue during the concession period, usually lasting close to 30 years*. Clarifications on the buyout right system and solicited projects were included. However, the revision also implemented a much stricter PPP project selection process that required an extensive study on project feasibility by the Public and Private Infrastructure Investment Management Centre (PIMAC) that was supervised by the Ministry of Strategy and Finance (MOSF)*.
Aside from the revised PPP laws that implemented a more detailed and stricter process, other related legislation was passed including: the PPP Act, the PPP Enforcement Decree, the PPP Implementation Guidelines, and the PPP Basic Plan*. The first two listed legislation better define the roles of both the private and public sector, including the functions and responsibilities of the MOSF, the procurement process, project eligibility, etc. the Basic Plan gave instructions for financing and refinancing options, risk management mechanisms, and directions for government policies*. These legislations created a more structural and well-defined approach to the PPP system. The Korean government added these provisions to avoid confusion and set basic ground rules. The clear definitions of roles and missions of the various players and institutions in the PPP system facilitated the process and established better control.
The Korean government’s approach to provisions of the original PPP act served well. Out of the many approaches that the government took towards solving its infrastructure shortage, the establishment of a solid legal and regulatory framework is by far one of the most successful. It set the dos and don’ts of all actors involved in the PPP system to avoid confusion and allow for the development of proper project management. Without this solid framework, cost overruns, delays, and corruption tend to be more pervasive. The legal framework of Korea is a key model for Colombia. Even with the system’s flaws, the regulations in place properly address any problems that may arise. Because each function is clearly defined, and a stricter PPP system is in place, problems can be recognized at a higher rate. The hierarchy of the system ensures fast detection of potential problems and eradication of failing policies.
As previously mentioned, transportation infrastructure projects under the PPP system carry many risks for both the private and public sector. An important success factor for PPP projects is risk management and sharing between both sectors. To avoid excessive risks on any side and cause subsequent negative effects, policies that clearly define them is necessary. Key risks in the PPP system are construction risk, revenue risk, land acquisition risk, among others.
Large Korean construction companies have advanced so rapidly in the past half century that they are considered among the top in developed countries. Part of their advanced knowledge includes the establishment of a detailed cost database for transport infrastructure works that estimates approximate construction costs*. Historically, it was common for construction costs to exceed initial estimates by domestic construction companies since design changes were constantly made during the construction phase. These unexpected cost overruns had the potential to damage the sector responsible for construction risk. Unlike Colombia, the construction risk is a responsibility mostly for the private sector in Korea. The public sector only procures projects that have been proven economically feasible by their MOSF’s strict study. If changes to the projects plans occurred during the construction phase that were believed to cost more than 20% of the original estimate, then another feasibility study had to be made by the ministry*. In conclusion, the Korean government’s strict regulation on cost during the construction phase of a project ensured that the construction risk was solely burdened to the private sector, which was agreed upon by both sectors since the implementation of the PPP system.
Another risk associated with PPP projects is the income risk, also known as the demand forecast risk. In the eyes of the private sector, the profits to be made from transport infrastructure PPP projects are minimal, therefore, it was agreed upon that the government would provide a contribution during the construction phase. Depending on the complexity and riskiness of the project, subsidy from the government ranges between 10 to 50 percent of total cost*. However, both sectors agreed that no subsidies would be given during the operating phase, meaning that project revenue solely relied on a toll or tariff. In this case, the demand forecast of a PPP project during the concession period of up to 30 years is critical in determining how profitable it will be.
The problem with predicting the demand forecast is that it is easily influenced by external factors. Future socio-economic conditions, land use, and forthcoming alternative transportation networks are some of the factors difficult to foresee. This makes demand forecast extremely risky, especially for the private sector that has no type of subsidies during this period. This associated risk has been Korea’s most controversial issue within the PPP system.
The introduction of PPP in 1994 did not have any defined rule on revenue risk sharing. As a result, there were nearly no project procurements by the private sector, as the risk was too high to take on alone. With no guarantees on making profit from PPP projects, private investors didn’t dare to risk it. In response, the government of Korea introduced the minimum revenue guarantee (MRG) program in 1999. The MRG assured private investors that if actual revenue fell below 90 percent of the estimated revenue, then the government would subsidize the difference during the concession period*. Although this presented an alternative to risk allocation, therefore encouraging greater private sector participation, it placed a large burden on the government.
Before the introduction of strict study policies, predicted traffic demand was double the actual traffic demand in many of the projects. In response, the Korean government simultaneously introduced the strict feasibility study system supervised by the MOSF that was mentioned previously in this paper. But the government acknowledged that the lack of PPP project procurement would continue unless revenue risks were shared between both sectors, leading to the creation of the MRG program.
Despite implementing stricter feasibility studies at the end of the 20th century, the government of Korea continued to overestimate expected revenue for PPP projects. With the first PPP project in 2001 alone, the Incheon International Expressway, MRG subsidy amounted to almost 60 percent due to low actual revenue in comparison to the predicted revenue*. In many of the following projects, government subsidies would average 50 percent. The total amount of MRG subsidies would range anywhere between KRW 7.6 billion to 100.9 billion annually*. As more projects were procured in the coming years, the total MRG subsidies were continually increasing, becoming a large burden for the government in the early 2000s. The greatest criticism of Korea’s PPP system to this day has been accumulation of MRG subsidies that has only worsened as more projects have been opened. Despite staunch support of the MRG program by the private sector, the government was forced to progressively reduce it.
The government of Korea took severe measure by reducing the MRG rate and guarantee period to address the accumulation of MRG subsidies for PPP projects. In 2003, the guarantee period was halved from 30 years to 15 years and later to 10 years in 2006. Simultaneously, the guarantee rate was gradually reduced from 90 to 80 to 70 and finally 65 percent*. Aside from major reductions in the MRG program, the private sector was also responsible for an actual revenue minimum of 50 percent of estimated revenue to receive any MRG subsidies. The program was terminated in 2006 for unsolicited projects and in 2009 for solicited projects*.
The same year as the complete abolishment of the MRG program, the government of Korea introduced a new replacement risk-sharing mechanism. The revision to the PPP Basic Plan ensured government financial support but only when it was financially and reasonably justified. Under the new mechanism, revenue risk is shared between both the private and public sector through compensating risk-sharing revenues, such as the “sum of private investment costs and the interest rate of government bonds.**” As similarly implemented with the MRG mechanism before its abolishment, the new mechanism is only guaranteed to government-solicited projects that attain an actual revenue over 50 percent*.
Land acquisition and environment risk is another possible complication in the development of PPP projects. To facilitate the process, the PPP act guarantees land expropriation rights to private investors. The purchase of land, citizen loss compensation, and the resettlement of resident are all under local government responsibility. Prior to land acquisition, consultation is desirable before it can be expropriated for public use. After project approval, a compensation plan is announced by the responsible local government that notifies all parties involved, including land owners. An estimation amount is calculated and after consultation, a contract is developed. After a consultation with affected parties, the land acquisition must be approved by the Ministry of Transport (MOT). The PPP Act facilitates land acquisition by having competent ownership directly acquire land and skipping a step. A historically ineffective approach was to have the private company in charge of the project to acquire the land and have to go through a rigorous process before turning it over for governmental approval. This would take a significant amount of time that transport infrastructure could not afford. As it is, the construction phase and the processes beforehand are time consuming. The new system has authorities execute land purchases, the compensation process, and other tasks to avoid further delays.
The government of Korea has had some successful policies dealing with risk allocation that can serve as models for Colombia’s quest in improving their PPP system. By sharing risks, a single sector is not responsible for hazards, leading to a more effective system and higher participation rate by the private sector. With that being said, it’s also important to note Korea’s system flaws that can serve as lessons and avoid repetition. Korea’s introduction of the MRG mechanism was originally successful in incentivizing private investors to flock to project procurement, but at a large expense to the government. After an accumulation of millions in subsidies, the government abolished it and implemented a logical system that still provided financial support to the private sector without overly burdening the government. at the same time, the PPP system process can be facilitated and quickened by simple reforms such as Korea’s land acquisition policy that cut time and prevented further delays in projects. Although it is not a perfect model, Korea’s risk allocation development can influence future policies being considered in Colombia.
Authorities from Korea’s central and regional governments are the ones that select PPP projects. These authorities are required to evaluate and approve a project plan with sound investment structure and clear characteristics. The PPP Basic Plan lays out the basic principles for project selection. In addition, potential projects must fall under one of the PPP Act’s 46 facility types, while being affordability and benefits are evaluated*. It is the responsibility of the selected authority to assess the candidacy of proposed projects by evaluating the completion of qualifications.
Historically, the Ministry of Land and Transportation (MOLT) overlooked the implementation of transportation infrastructure plans that projects were required to follow. Until the 1990s, these requirements were mainly based on macro socio-economic data and experts’ advice but was soon replaced by computer modelling work*. Following, analysis databases were further developed by the government to improve evaluation processes. The use of computer modelling work and databases led to the development of the best alternatives in financing resources. Although the advancement was beneficial, the Ministry of Land and Transportation tended to invest in transportation infrastructures without accounting for the government’s budget constraint. As a result, an excessive amount of infrastructure projects lacked prioritization.
In response, the Ministry of Strategy and Finance implemented a preliminary feasibility study (PFS) system to address the situation. Proposed projects that required more than KRW 30 billion in government subsidy was required to undergo through the PFS system. Using economic and policy criteria, the PFS examined project feasibility to decide if the project was suitable for PPP procurement*. The only economic index is the benefit-cost ratio, but policy indices include contribution to regional development, source availability, regional economic impact, among others*.
An important aspect that determines the success of the PPP system that should be taken into consideration is project selection. An effective system must be in place that clearly states PPP project requirements and selection process. Korea’s transition into the preliminary feasibility study (PFS) system implemented a more effective evaluation of eligibility of proposed projects. It takes into consideration both the economic and policy aspects that can have an impact on the proposed region. An operative selection process is vital to the success of PPP projects because it serves as one level of filtration against potential risks.
Korea’s experience with its PPP system can serve as a comparison model to Colombia’s current efforts to expand its transportation infrastructure. In this section, some of Korea’s greatest and worst policies were examined as a basis for the proposed recommendations. If Colombia is able to recognize what did and didn’t work and consider its regional circumstances, then it can use similar policies to Korea.
Regulatory Framework Reform
In regard to its legal and regulatory framework, Colombia continues to be ranked below its Chilean, Peruvian, Brazilian, and Mexican counterparts. This is partly due to the continuous renegotiations of PPPs by previous administrations, transfer of payments to succeeding governments, and the accumulation of deferred concession payments debts reaching almost 5 percent of GDP*.
Starting page 15: http://ppp.worldbank.org/public-private-partnership/sites/ppp.worldbank.org/files/documents/infrastructure-report_colombia.pdf
Social Infrastructure When the first PPP law was enacted in 1994, the primary purpose was to induce private capitals into transportation infrastructure investment as much as possible. Although the first PPP law did not induce private capital in the mid-1990s, the amendment of the law in 1999, particularly the introduction of the minimum revenue guarantee (MRG) program, had attracted a lot of private capitals into transportation infrastructure investment. Many buildoperate-transfer (BTO) contracts were signed during 1999 and 2005. So if the primary purpose was only considered, it seemed to make a great success. However, at the same time, it was worried that the MRG payment would cause some problem in the future. The worry soon became the reality when the first BTO project, Incheon airport expressway, was opened in 2001. It became much worse when more BTO projects have been opened. That was why the PPP law was amended again to cut continuously the guarantee period and rate of the MRG program for BTO projects. The continuous cut of MRG period and rate caused the large reduction in BTO projects. This caused to introduce another PPP method to induce private capitals. The build-transferlease (BTL) method was introduced in 2005 along with the BTO method. But it was thought that transportation infrastructure was not appropriate for the BTL method which is designated for infrastructure projects with too low financial investment returns to attract financial investors and lenders. Likewise, the BTL method might be appropriate for social infrastructure. What kind of social infrastructure should be then? Several considerations were made. The necessity of infrastructure type from the society‟s viewpoint might the first thing to be considered. The infrastructure type could be excluded when it has been currently well invested. Each project might not cost too much because a large-scale project might cause a great burden in the future. So the land and urban development projects were excluded for the BTL projects. In the end, the revised PPP law was enacted in January 2005 to introduce the BTL method. A private sector builds infrastructure, transfers ownership to the government, and recoups the investment by operating the facilities. Even though a private sector participant under the BTL method typically assumes the risk of operating the facilities, the risk is quite low compared with the BTO method. Now PPP projects were diversified to social infrastructures such as educational, welfare, military, and cultural facilities. As shown in Table IV-5, the BTL method has been mainly used for social infrastructure projects, except 73 for two railways, which have been regarded largely as socially oriented projects in Korea. Table IV-5 | Korea – Number of Signed BTL project as of September 2009 Source: KDI, 2011, PPP Infrastructure Projects: Case Studies from the Republic of Korea, p.42 As of September 2009, a total of 242 BTL projects were signed, with a total investment cost of amounting to W 12.2 trillion. They include; 8 signed, 92 under construction, and 142 in operation. 136 are primary and middle schools, 56 are environmental sewage facilities, 10 are military residential facilities, and 18 are cultural facilities. Since the introduction of PPP law into social infrastructure, so many private capitals flowed in. Some fiscal austerity was necessary so that it led to the introduction of approval system for all BTL projects by the national assembly, as mentioned in the previous section
Colombia is in desperate need to further develop their transport infrastructure to increase overall national productivity and market competitiveness.
The four generations of the Colombian PPP system have come with improvements with each new generation that is introduced. Each are followed with enhancements that address previous generations’ flaws.
As an example, comparing the transport infrastructure of countries such as Haiti and Colombia with Spain and Canada support the argument that poorer nations lag behind wealthier nations in part because of lack of regional accessibility*. Even Colombia’s neighbors, Brazil, Argentina, and Chile whom have a better-quality transport infrastructure are more developed.
In addition to poor conditions to establish or improve the transport infrastructure, the supply of trans-border transportation services is limited. Foreign companies can only provide multimodal freight services within or from Colombian territory if they have a domiciled agent or representative legally responsible for its activities in Colombia (Buendia and Gagan 2012).
The first steps in implementing policies that will improve this sector of infrastructure are to determine potential problems from current policies, minimize the costs of these mistakes, and to find reliable forms of financing for future projects. Colombia can minimize its infrastructure service gap by efficiently spending on the right things (Nieto-Parra, Olivera and Tibocha 2013). It is assumed that while Colombia does need to invest more in its transport sector, it does not have to significantly, rather it should efficiently spend that money. By doing so, not only would the transport infrastructure see an improvement, but the government would not be necessarily wasting its money. Another important problem of Colombia is form of financing for these projects. It currently relies on public investment in which much of its income comes from its oil exports but must find international factors willing to invest so the Colombian government can use this money for other sectors (Nieto-Parra, Olivera and Tibocha 2013).
A poor transport sector can lead to the isolation of a country and inhibit its participation in the global and regional market. This in turn has effects on the creation of jobs, the unification of a country through transportation, and the economic and social development of a country. A successful transportation infrastructure is essential for the overall advancement of a country as well as for the facilitation of global and regional integration. Given the major gaps in infrastructure in Latin America, the comparison of quality and quantity to other emerging nations is significant. The most important gap is that of the transportation sector that will need a high and efficient investment in the upcoming years.
Colombia is the country with the biggest gap in the transport sector in the Latin America and Caribbean region, especially when comparing its per-capita GDP to its neighboring countries (Fay and Morrison 2007). The country must search for solutions if it wishes to continue its quest for economic dominance in the region, as well as to restore itself after decades of conflict. The bettering of the transport sector is vital to Colombia especially now that the peace agreement that ended a prolonged conflict has been implemented. Infrastructure has the power to unite communities and provide economic opportunities which is now more important than ever to ease Colombia’s progress towards peace. The improvement of the transportation sector can lead to new employment opportunities, improved communication between regions, and a heightened economic activity. The financial data speak for themselves. According to the World Bank, the GDP per capita of the country has doubled over the last decade, passing from $5,826 in 2000 to $12,424 in 2014 and total international trade –including both exports and imports – has more than quadrupled over the same period, passing from $24,915 million in 2000 to $118,824 million in 2014 according to the National Administrative Department of Statistics (DANE in Spanish). Moreover, for the third year in a row, Colombia has been one of the top 20 destinations for foreign direct investment, which in 2014 amounted to $16,054 million, nearly ten times what it received ten years ago. What is more, this positive growth trend is expected to continue in the coming years. In this sense, the International Monetary Fund’s forecasts place Colombia –along with Peru– at the top of the table of growing economies in the region.
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