Colombia Offers Infrastructure Investment Opportunities Despite Downgrade

International investors in Colombia face a gamut of social, financial and security risks, yet the country's 4G and 5G infrastructure programmes remain an exciting opportunity, writes Claudia Navas, Analyst for Control Risks in Bogotá...

 By Claudia Navas, Analyst for Control Risks in Bogotá

President Iván Duque’s administration continues to prioritize the development of the infrastructure sector in Colombia, leading to significant business opportunities. Duque continues the implementation of the Fourth Generation (4G) road infrastructure programme drawn up by his predecessor. Meanwhile, since October 2018, the government has also been working on a new Fifth Generation (5G) concessions program which encompasses 24 projects, including highways, airports and ports, worth a total of $4.8billion. The first wave of 5G concession projects has 15 projects, 12 of which will be awarded in 2021.

The main goals of the 5G programme are to ensure greater adherence to Environmental, Social, and Governance (ESG) and to meet the rigorous administrative standards of the Organization for Economic Co-operation and Development (OECD). They will also materially improve the quality of life of the communities in nearby areas. The government is implementing a number of lessons learned from the 4G programme to ensure the success of 5G, including the need to reduce the risks of delays associated with red tape, contracting, social license, and financing difficulties.

Duque’s infrastructure plans will no doubt face difficulties from political, economic, social and security dynamics. The economic and fiscal impact of the Covid-19 pandemic, as well as the beginning of the electoral season in the run up to the 2022 general elections, where left and centre-left political parties and movements aspire to reach the presidency and win more seats in Congress, will affect the already complex political and social environment. The weak implementation of the 2016 peace agreement that led to the demobilization of the Revolutionary Armed Forces of Colombia (FARC), and the persistence of illegal economies, will rekindle security threats that many people mistakenly hoped would end as a result of the agreement.

The security landscape

Colombia has experienced a deterioration in security over the past three years, and the situation is unlikely to improve in the foreseeable future. The state security forces face a more complex security environment since the signing of the peace agreement between the Santos government and the FARC. This is due to the fragmentation of the FARC into various dissident groups, the strengthening of the National Liberation Army (ELN) guerrilla group and Organized Armed Groups [GAOs by its Spanish acronym] that grow criminal economies, namely coca plantations and illegal gold mining.

"security risks are not an unmanageable obstacle to business…"

The likelihood of ELN or FARC dissidents directly targeting large-scale infrastructure projects remains marginal. Generally speaking, these groups will avoid attracting the attention of the government through significant actions that could trigger operations against them by the security forces. Although GAOs (or the ELN) typically avoid extorting or threatening roadway concessionaires, local contractors and their staff will continue to face high extortion risk, which poses legal and reputational risks to investors. Roads in remote areas of the country will remain exposed to sporadic attacks by these groups, for example as diversionary tactics related to major drug trafficking. According to figures from the Ministry of Defence, there was a significant increase in attacks against road infrastructure in 2020, with a total of 93 incidents recorded compared to five in 2019.

Although the security environment is unlikely to improve in the foreseeable future, security risks are not an unmanageable obstacle to business. The government will provide security for 4G projects and eventually 5G projects, however, companies and investors will need to carefully assess the security risk outlook at the national and local levels, and design appropriate security risk management strategies to prevent or mitigate potential threats posed by guerrilla and criminal groups in some areas of the country.

The social environment

Obtaining environmental licenses, in particular, will remain extremely time consuming and expensive. Government entities at the national, regional, and local levels tend to offer conflicting guidance regarding obtaining the required permits. Slow government budgeting and other forms of red tape will also cause delays for infrastructure projects. Finally, prior consultations processes with ethnic communities that are poorly managed can ultimately lead to non-compliance, sow distrust in the communities, and prompt social opposition in the future.

The infrastructure sector will face growing social pressures given the economic deterioration brought on by Covid-19. Environmental activism, the persistence of corruption, limited social mobility and political polarization will continue to fuel social protest. The recent wave of demonstrations that took place across the country suggest growing social demands and anti-government sentiment, particularly among the young. In the absence of effective and immediate responses from the government, it is likely that these social pressures will be directed towards the private sector. Social actors will expect the private sector to be more active in fostering job creation and providing labour guarantees and appropriate environmental management protocols, as well as transparent and socially responsible corporate practices.

Integrity risks

Corruption has had significant effects on the infrastructure and transportation sector, particularly the fallout from the corruption investigations engulfing the Brazilian construction conglomerate Odebrecht, which have spread across Latin America. Odebrecht allegedly bribed officials with $27million to win the Ruta del Sol roadbuilding contract. Although the contract was not part of the 4G agenda, its annulment created widespread legal uncertainty regarding contracting and liquidation values in the event of corruption. This has led to the suspension of large-scale projects, costing both private investors and taxpayers.

Corruption will remain a key risk for infrastructure companies and investors, more prominently during the bidding and contracting processes. Bribes, influence peddling and cost overruns are the most common corrupt practices, with the risk of bribes increasing during election periods, as politicians often finance their political campaigns by demanding commissions in exchange for the awarding of contracts. The 2021 Capacity to Combat Corruption (CCC) Index [on page 58 of this issue], which evaluates and ranks 15 Latin American countries based on how effectively they can combat corruption, ranks Colombia in seventh place, its overall score having fallen by 10% from 2019 to 2021. Almost all drivers within the legal capacity category declined, reflecting perceptions that Duque has placed less independent figures in key positions, such as the Ombudsman, Attorney General and the Inspector General.

Despite the fact that Colombia’s infrastructure plans will no doubt face difficulties from political, economic, social and security dynamics, the country is a prominent investment destination in the infrastructure sector. Investors will need a proper understanding and management of the risk environment to ensure the resilience and success of their investments. This can include rigorous due diligence, including human rights, understanding the local communities and their expectations, fears and needs, as well as identifying and engaging the correct partners to find common ground, as well as ensuring that physical asset and personnel protection is properly incorporated into overall risk management strategies. Yet Colombia’s democratic system, strong institutions, and openness to foreign investment mean it will remain attractive for infrastructure investors in the region.