I INTRODUCTION

In past years, Colombia has experienced an infrastructure and project finance boom owing to constant improvements to its legal framework and increased interest from investors. The Fourth Generation (4G) of toll road concessions programme, comprising 42 projects to build approximately 4,970 miles of motorway and requiring investments of around US$24.4 billion, is the government's most ambitious scheme to provide the country with a modern and competitive network of roads. The 4G programme is now in the construction phase and is facing environmental, social and financial hurdles that may prove challenging for certain Colombian institutions (e.g., the Attorney General's Office and the Superintendence of Industry and Commerce), and may also test the suitability of the legal framework in order to achieve the successful completion of current and future projects.

Notwithstanding the foregoing, constraints on the public budget make it necessary to involve the private sector through private finance initiatives (PFIs). However, the city of Bogotá is planning to open a public tender in August 2018 to award six public-private partnership (PPP) projects for the construction and operation of six hospitals. Tailor-made legislation to promote the development of social infrastructure projects is currently under discussion. Other sectors, such as power generation, are currently the focus of investors as the Ministry of Mining and Energy issued Decree 570 of 2018, which regulates public policies to implement long-term energy contracts for non-conventional renewable energy projects. In addition, the Energy and Gas Regulatory Commission has had discussions with energy market agents about new regulations regarding the awarding of firm energy obligations under the scope of the reliability charge.

The enactment of Law 1882 of 2018 represents an improvement in the Colombian public procurement system, introducing mandatory provisions regarding transparency, competition, efficiency and specific rules of procedure for events whose regulation was unclear until now. Moreover, Law 1882 provides further solutions and regulation for issues that are considered to cause bottlenecks for projects currently under way regarding land management and environmental permits. The new law also seeks to overcome the standstill in project financing as a result of corruption scandals, by means of adopting provisions to assure investors that their investments are safe in the event of unlawful conduct of the other agents involved in the projects.

Although the National Infrastructure Agency (ANI) – the government entity in charge of structuring, tendering and supervising the performance of transportation infrastructure projects at the national level – has been very successful in attracting first-tier local and international participants for the 4G programme, the other area of PPP projects that should be closely watched and merits further attention is social infrastructure, such as hospitals, schools, libraries and prisons. In addition to Law 1753 of 2015 (the National Development Plan), which allows for the compensation of concessionaires' investments with real estate rights (without considering it a public funds contribution), the government is in the process of enacting new legislation to incentivise private investment in this sector.

Beyond the national level, other major infrastructure projects are being structured by local authorities. For instance, the city of Bogotá is working on the public tender for the first line of the Bogotá Metro. This project requires investments of around US$4 billion and is expected to be awarded in the first trimester of 2019. Furthermore, Bogotá is undertaking studies and creating designs for the construction of several urban highways and renewal of the buses fleet for the bus rapid transit system 'TransMilenio', which will require investments amounting to at least US$6 billion.

Another sector of interest relates to energy generation. Law 1715 of 2014 promotes investment in renewable energies (mainly wind and photovoltaic) and introduces tax breaks such as deductions in income tax, accelerated depreciation, exemption from VAT and reduction of custom duties for equipment, machinery, supplies and services. In the same vein, the Regulatory Commission for Energy and Gas is issuing new regulations to ensure the bankability of these projects and foster the rebalancing of Colombia's power generation portfolio. These initiatives are complemented by regional transmission line projects undertaken by the Mining and Energy Planning Unit, which are under tender, to transmit power generated in the northern part of Colombia.

Finally, the government is structuring a project for a regasification facility on the Pacific coast, which, along with the brand-new floating storage and regasification unit (FSRU) located at Cartagena, will ensure the supply to gas-fired power plants that generate power during El Niño–Southern Oscillation periods.

The significant number of PPP projects that have been awarded and structured indicates that Colombia will significantly increase its investment in infrastructure, which could be an opportunity to reinforce and improve the new but solid legal framework in this field, as well as the capabilities of its public institutions to supervise the projects while managing potential crises.

II THE YEAR IN REVIEW

The year 2017 was marked by the initiation and continuity of several infrastructure projects across different sectors, including roads, oil and gas, airports, energy, railways and ports.

With regard to the 4G projects, there is evidence of improvement in the corridors that connect the production centres with the ports at the coasts. For example, the Honda–Puerto Salgar–Girardot project (part of the first wave of PPP road projects awarded) reached a work progression rate of 52 per cent, having completed the construction of a new bridge over the Magdalena river, and the Cartagena–Barranquilla project has just connected the largest viaduct in the country (4.7km long) without damaging the environment through the use of cutting-edge technology.

Furthermore, 11 of the 4G road projects recently achieved definitive financial close. After performing maintenance and reconstruction activities over the railway corridor Bogotá–Belencito, the ANI successfully tested the railway line connecting the capital district with the region of Boyacá, sending a commercial cargo train from one point to the other without major stops. There have since been multiple announcements from companies interested in both using and investing in the railway line.

Airport infrastructure also played a significant role, with investment in renovation and new construction works in the country's main terminals; for example, expansion works at El Dorado Airport were finished recently, including a new, modern terminal and aircraft platforms to cope with increasing air traffic.

In the energy field, the regasification plant near Cartagena is the first of its kind in Colombia; with investment of US$150 million (and significantly higher with the inclusion of the value of the FSRU vessel), it is representative of the projects adopted by the national government to secure the country's energy supply. The government is also in the process of expediting construction of a second regasification plant on the Pacific coast.

However, Colombia has also faced challenges regarding the implementation of the aforementioned projects, especially given the corruption scandals that have spread across South America. However, Colombian authorities and institutions have reacted quickly to these scandals, promoting and issuing new laws and regulations to restore confidence in the infrastructure sector, and reassuring investors that have supported the projects in good faith. The ANI is currently structuring the new PPP projects that will be awarded to complete the Ruta del Sol II roadworks, which is one of the projects most affected by the corruption scandals. In the meantime, the National Roads Institute is in charge of awarding a public tender for maintenance activities along the Ruta del Sol II.

III DOCUMENTS AND TRANSACTIONAL STRUCTURES

i Transactional structures

The road concession contracts entered into by the Colombian government typically follow a build-own-operate-maintain-transfer (BOOMT) model. Thus, the concessionaire builds the road, operates and maintains it for a determined period, which normally coincides with the requisite period for investment return, and then transfers the operational facility to the government. In 2013, the ANI launched a standard BOOMT contract, and this will be applicable for all the 4G projects. The standard contract comprises a series of elements typical in traditional project-financing arrangements that are intended to establish basic principles to contribute to the bankability of the infrastructure projects that are to be developed. The standard contract includes a general part applicable to every project and a special or particular part that shall govern the specific aspects applicable to an individual project. The standard contract encompasses a series of provisions that are relevant for bankability purposes regarding risk allocation, concessionaires' remuneration, lenders' step-in rights, cash-flow management and effects upon early termination, among others.

Before 2012, contractors used to receive an upfront payment for the execution of the works. Upfront payments have now been abolished by Law 1508 of 2012 for all contracts awarded after 2012. Payment mechanisms to contractors now depend on the availability of the infrastructure and the level of service.

ii Documentation

The most important documents in project finance transactions are no different from those used in similar transactions worldwide. These include offtake agreements, supply agreements, engineering-procurement-construction (EPC) contracts, operation and maintenance contracts, ground leases and site purchases, parent guarantees, loan agreements, pledges, mortgages and securities.

iii Delivery methods and standard forms

The most common delivery method for large projects involving international construction companies is the EPC contract. However, when contracts are awarded within a public bidding process, there is no opportunity for the parties to freely negotiate the terms of the contract as these are unilaterally established by the contracting entity in the request for proposal, although during the public procurement procedure, potential contractors may submit comments and observations that can be voluntarily accepted by the contracting authority.

Colombian law does not oblige public entities to use specific models for infrastructure contracts. However, there is the standard contract model developed by the ANI for 4G projects as mentioned in subsection i.

The main aspects that must be contained in concession contracts under Colombia's PPP scheme are regulated, and can be summarised as follows:

    1. contracts must have a maximum term of 30 years, except where studies approved by the National Council for Economic and Social Policy (CONPES) justify a longer duration;
    2. all project funds should be administered through a trust agreement;
    3. contracts should contain payment mechanisms to determine early termination payments;
    4. each contract should identify the property that will be returned to the government or contracting authority on expiry of the contract; and
    5. debarment and unilateral termination clauses should be stipulated in the contract.

In addition, lenders must have step-in rights should the contractor breach its duty to complete the concession contract or the financing documents.

IV RISK ALLOCATION AND MANAGEMENT

i Management of risks

There is no regulation for risk allocation in private law contracts and the parties are free to allocate the risks as they see fit. The risk matrix for these contracts is similar to corresponding international contracts.

Risk allocation for private participation in public infrastructure is dealt with by Article 4 of Law 1150 of 2007, Decree 1082 of 2015 and Guidelines 3107 and 3133 of 2001, 3714 of 2011 and 3760 of 2013 (as modified by Guideline 3800 of 2014), issued by CONPES (the CONPES Guidelines).

Article 4 of Law 1150 states that requests for proposals should identify, estimate and assign foreseeable risks arising from proposed contracts. Contractual risk is generally understood as any circumstances that may arise during the development of a contract and can alter its financial balance.

For the purposes of risk regulation, the CONPES Guidelines distribute contractual risk in five branches or categories, which include foreseeable risks, unforeseeable risks, contingency risks, risks covered by performance bonds and risks generated by misconduct of the contractor. The CONPES Guidelines regulate foreseeable risks allocation.

Below is the basic matrix for risk allocation as recommended by the CONPES Guidelines. In general, the guidelines try to allocate risk according to which party is in position to best assume and manage that risk. Risk may therefore be reallocated on a case-by-case basis, depending on the parties' positions.

Risk allocation

Risk

Concessionaire

Government

Operational X
Economic X
Financing X
Nature X
Environmental X
Social and political X
Technology X

Under the latest CONPES Guidelines, land acquisition risk has been incorporated within the definition of operational risk, while regulatory risk has not been allocated to a specific party. The guidelines instead recommend a case-by-case basis for allocation of regulatory risk, dictated by the parties' abilities to manage risk.

As an example of such case-by-case risk allocation, the government set out specific guidelines for 4G projects by means of the CONPES Guidelines 3760 of 2013 (as modified by Guideline 3800 of 2014), which include, inter alia, the following relevant rules applicable for 4G projects:

    1. Land acquisition risk: the contracting authority (ANI) only assumes a portion of land acquisition risk when its value exceeds 120 per cent of the initial budget destined to land acquisition, and assumes the total value of the risk when it exceeds 200 per cent of the initial estimated budget.
    2. Regulatory risk: the contracting authority (ANI) only assumes regulatory risk when, as a consequence of the regulatory change, the concessionaire profits are affected beyond a deviation parameter previously stipulated at the contract.
    3. Environmental risk: the contracting authority (ANI) only assumes a portion of environmental risk when the value of compensation required by the environmental authority exceeds 120 per cent of the initial budget destined to be environmental compensation, and assumes the total value of the risk when it exceeds 200 per cent of the initial estimated budget.

The CONPES Guidelines also set down two exceptional circumstances where a public entity should assume certain environmental risks, and these arise in situations where no environmental licence is required or where such a licence has yet to be obtained prior to the closure of a public procurement process.

In cases of operational risks, the contracting entity may structure mechanisms or issue guarantees to partially cover these risks.

ii Limitation of liability

As a general rule, Colombian civil and commercial law are based on the principle that the parties to a transaction are free to agree upon the terms and conditions of the relevant contract, such as stipulating liability limits. Thus, parties are entitled to stipulate provisions that deviate from the rules established by the Civil Code in that respect; however, this principle is subject to exceptions.

In certain cases, the parties are required to observe rules that are mandatory because they involve public order considerations. In this context, the Civil Code provides rules that prevent the parties from limiting liability for damages arising from gross negligence or wilful misconduct, or that might allow a party to willingly breach its obligations under a contract. These types of limitations would be invalid and unenforceable in Colombia.

Additionally, a party to a contract shall be excused from performing its duties in force majeure events, which are legally defined as unforeseen circumstances that are beyond a party's control to avoid or overcome (Article 1 of Law 95 of 1890). Since Law 80 of 1993 does not establish exceptions or particular rules concerning limitation of liability clauses, the aforementioned general rules and exceptions to limitation of liability clauses also apply to public contracts.

iii Political risks

Foreign investors in Colombia are fairly well protected from political risk. Although political risk is allocated to the contractor pursuant to the CONPES Guidelines, Article 58 of the Constitution expressly forbids the possibility of expropriation without indemnification.

Specifically, Article 58 of the Constitution protects private property and other rights under civil law, so the Colombian state cannot ignore or violate those rights with subsequent legislation. However, when a law is enacted for reasons of public or social interest, and its application conflicts with rights of individuals, the private interest must yield to the public or social interest. In such cases, expropriation will be determined by the competent judge and the affected individual indemnified by the state. In certain cases, established by law, the expropriation process may be made through an administrative proceeding, and subject to further judicial control.

Moreover, Colombia is undertaking the process to become a member of the Organisation for Economic Co-operation and Development, which supports additional expropriation and foreign investments protection measures. In addition, free trade agreements have been signed with Chile, Canada, South Korea, the European Union and the United States, which include similar protection measures.

V SECURITY AND COLLATERAL

The concession agreements under the 4G programme, which will be developed over the next 30 years, require long-term debt, high-equity commitments from sponsors and strong support from the government. In this scenario, combining several complex projects and diverse participants, the security package for Colombian project financing transactions has started to become more sophisticated.

Lenders are requesting, inter alia, the following: blanket liens over all the assets of the project company; share pledge agreements; amendments to the existing trust agreement to modify the concession trust to become a security interest trust covering the cash flows generated by the project; concession rights pledge agreements; construction contract pledge agreements; assignment of concessionaire's consideration under the concession agreement to a different trust in which the lenders will be beneficiaries; offshore and onshore accounts control agreements; trust rights pledge agreements; subordinated loan pledge agreements; and material project documents pledge agreements.

The structure of project finance security packages implemented in Colombia before the 4G programme – which involved a share pledge agreement, a commercial establishment pledge agreement and a trust agreement – has now changed to a very complex structure to cover every asset necessary for the ownership, development, construction and operation of the project in the event of default by the borrower.

VI BONDS AND INSURANCE

Decree 1082 of 2015 sets out the performance bonds and insurances required in public procurement. Pursuant to this regulation, during the government procurement process, contractors are required to submit a bid bond to guarantee the seriousness of their proposal. The successful bidder is then required to submit a performance bond to ensure compliance with its contractual obligations. The risks covered by the performance bond are those related to the breach of the terms of the bid or the awarded contract. In construction contracts this bond will normally include coverage for wages and salaries, for the quality and stability of the works, and for the quality of goods provided.

The bid bond performance guarantees may be one of the following types of guarantee: insurance policies, collateral trust or bank guarantee. In addition, foreign bidders without domicile or branches in Colombia may submit standby letters of credit issued abroad as guarantees. The coverage amounts of the guarantees are determined by law.

Recently, in 4G transactions, parties have started to include as part of the security package at the EPC contract level, a completion bond guarantee issued by an insurance company and designed to cover EPC contractor defaults under the construction contract, including specifically: any expenses and costs overruns owing to a change of the EPC contractor; fines, sanctions and deductions applicable to the concessionaire as a result of an EPC contractor default under the construction contract; and the CAPEX variation between the ANI-recognised termination payment had no default of the EPC contractor taken place and the actual final termination payment recognised by the ANI. Therefore, this policy aims to cover the risk that the project will not be completed and able to operate at the time required and at the budgeted price because of an EPC contractor default under the construction contract.

In construction contracts, the government will also require a third-party liability insurance to be submitted by the contractor. In this case, the only accepted type of guarantee is an insurance policy.

VII ENFORCEMENT OF SECURITY AND BANKRUPTCY PROCEEDINGS

Based on recommendations by the World Bank and on the UNCITRAL Model Law, and to have a complete and non-fragmented regulation regarding guarantees over movable assets, the Colombian Congress enacted Law 1676 of 2013, whose purpose is to promote the access to credit through a complete and efficient regulation regarding the legal regime applicable to guarantees over movable assets.

Law 1676 covers three main topics: definition of guarantee over movable assets; creation of a universal registry of guarantees over movable assets; and the efficient and effective enforceability of the guarantees.

Under Law 1676, a security interest over movable goods is created by means of a contract (security agreement) executed between the debtor and the secured creditor. It is important to highlight that the rights granted by the security interest shall only take effect against third parties when the publicity requirements have been fulfilled. The publicity requirement of non-possessory securities is the recording in the public registry of security interests created pursuant to Law 1676 and the publicity requirements of possessory securities is the delivery of possession or control of the encumbered asset to the secured creditor or a third person appointed, unless the parties otherwise agree. Furthermore, the constitution of a mortgage or of a pledge over assets such as vehicles, vessels or shares requires some additional procedures such as the issuance of public deeds and registration of the security before the competent authorities.

The definition of movable assets is broad and expressly covers goods that will be acquired in the future by the pledgor, inventories over non-entirely identified goods, and receivables regardless of whether or not the receivables are represented in 'credit documents', among others.

Law 1676 includes a centralised and electronic public registry for all guarantees regarding movable goods in chronological order. The registry is available at a national level and will be updated with all the information regarding the guarantees (amendments, extensions, cancellations, enforcements, among others).

Under Law 1676, it is possible to enforce the guarantees through an out-of-court (non-judicial) proceeding before any chamber of commerce or public notary duly authorised by the government (subject to certain special rules). Furthermore, Law 1676 provides that parties to a security agreement are free to decide upon the foreclosure procedure and rules. This would significantly reduce the time and costs of enforcement. Before the enactment of Law 1676, the foreclosure of movable assets under a pledge agreement had to be implemented through a judicial proceeding.

On the other hand, collateral over real estate is typically facilitated by a mortgage. Mortgages are perfected by having the mortgagor and the mortgagee execute a public deed before a public notary (or a Colombian consular officer overseas), which must include information that identifies the mortgagor, the mortgagee, the secured obligations and the real estate subject to the mortgage; and recording this public deed at the Registry of Public Instruments at the place where the real estate is located. The mortgage is not valid or enforceable unless and until it has been properly registered. A certificate issued by the Registrar of Public Instruments evidences the creation and validity of the mortgage.

Even though Law 1676 was enacted to regulate security interests over movable assets, it can be construed that the foreclosure regime under Law 1676 is also applicable to mortgages of real estate. As Article 2448 of the Colombian Civil Code provides: 'A mortgage creditor, to pay itself with the mortgaged assets, shall have the same rights as those of a pledge creditor under a pledge.' However, as this issue remains unclear, if this is the valid interpretation the foreclosure procedure of real estate assets would not strictly require to be conducted under a court proceeding. This would significantly reduce the time and costs of enforcement.

Insolvency proceedings of business entities in Colombia are regulated by Law 1116 of 2006. The main insolvency proceedings regulated by Law 1116 are business reorganisations and judicial liquidations.

The purpose of the business reorganisation proceeding is to reach an agreement between the inside creditors (shareholders) and the outside creditors, and to promote the viability of the business through the restructuring of the assets and liabilities of the debtor. Generally, during the reorganisation proceedings and the performance of the reorganisation agreement, the debtor will continue to operate the business, and, generally, ongoing contracts cannot be terminated because of the commencement of this type of proceeding.

On the other hand, the judicial liquidation seeks the termination of the existence of the company and the business by selling or adjudicating the debtor's assets to the creditors. Creditors must be paid promptly with the proceeds from the sale and any remaining assets will be adjudicated pursuant to an adjudication agreement entered into by the creditors or by judicial ruling if the creditors are unable to reach an agreement. Once the judicial liquidation process has commenced, the debtor is authorised to engage only in activities related to the liquidation of the business and those related to the maintenance of the assets. The transfer of any asset of the debtor to satisfy an obligation caused prior to the commencement of the judicial liquidation proceedings will be ineffective.

Payments under a business reorganisation or in a judicial liquidation process must be made in the priority order set out under the law.

Law 1676 modified substantially the rules on enforcement of security interests within insolvency proceedings. In fact, Law 1676 provides that, under certain circumstances, the secured creditors may enforce the security interests even though the debtor is subject to a reorganisation proceeding, unless the asset is required for the operation of the debtor. Note that the operational assets must be identified by the debtor in the reorganisation request. However, if the secured creditor does not agree with the classification of the asset as operational, it may object before the Superintendency of Corporations, who will rule on the nature of the asset, and therefore, on the possibility of the security interests being enforced by the creditor.

Furthermore, in a judicial liquidation proceeding, the secured creditor is allowed to enforce the secured interests over those assets of the debtor that hold a duly registered secured interest as said assets are expressly excluded from the liquidation. Prior to Law 1676, under a judicial liquidation process those assets were deemed part of the assets subject to liquidation and distribution between the creditors depending on the priority order set forth by insolvency law.

Even though Law 1676 was enacted to regulate security interests over movable assets, in the context of an insolvency scenario, Law 1676 expressly provides that the aforementioned rules are applicable to real estate assets.

VIII SOCIO-ENVIRONMENTAL ISSUES

The 1991 Constitution is said to be a 'green constitution' because of the degree and importance of reference made to environmental principles and the rights given to nationals seeking protection for the environment from the government and the judiciary. The Constitution expressly states that a healthy environment is considered as a fundamental right; citizens may seek protection of this right by means of class actions and civil actions, among others. These constitutional principles gave rise to a proliferation of environmental regulations.

Law 99 of 1993 introduced the most significant changes to the environmental laws, the most important being the introduction of the concept of environmental licences (now regulated by Decree 1076 of 2015). In this regard, Law 1333 of 2009 tightened the liability regime, initially established by Law 99 of 1993, for violations or other actions harmful to the environment. Thus, the use of renewable natural resources or the performance of any activity that affects the environment in Colombia is subject to strict controls.

As a general rule, an environmental licence is required to initiate any project, operation or activity that may entail the exploitation of natural resources or may have an environmental impact. Activities that typically require an environmental licence include the construction of ports, roads, railways, airports and hydroelectric facilities. The activity of the holder of an environmental licence is limited to the precise terms and conditions of the licence.

The environmental authorities may impose sanctions, penalties or fines for non-compliance with the conditions set out in the environmental licence or any other violation of environmental regulations, permits or authorisations including the commencement of activities without the relevant environmental licence, permit or authorisation, when required. Furthermore, certain violations of environmental law are considered criminal offences, such as illicit holding or handling of hazardous substances, illicit use of biological natural resources, illicit exploration or exploitation of mines.

In addition to the foregoing, pursuant to Law 70 of 1993, for an environmental licence to be granted to a project that may have an impact on indigenous or Afro-Colombian communities, the execution of prior consultation agreements with the leaders of these communities is required with respect to the protection of their rights and the compensation by the project sponsor of any negative effects that the project may have.

Consequently, environmental and social issues are one of the most important aspects to be considered by potential infrastructure investors in Colombia. In the past few years, several large infrastructure projects have been affected by such issues, and when managed inadequately these can lead to serious cost and deadline overruns.

IX PPP AND OTHER PUBLIC PROCUREMENT METHODS

i Public procurement

Public procurement in Colombia is seen as an important tool for the achievement of state goals in the public sector, subject to certain principles and specific regulated procedures. Thus, regulation of public procurement is structured according to the principles of state and the objectives set out in the Constitution, such as the principles of free market and free competition, transparency and ensuring the nation's economic and social welfare.

Public procurement is mainly governed by the Public Procurement Statute (PPS), comprising Law 80 of 1993, Law 1150 of 2007 and numerous regulatory decrees. The PPS is applicable to almost all public agencies and procurement procedures, with the exception of some sectors, which according to their specific needs and characteristics are regulated independently, as is the case for residential public utilities, information and communications technologies, the domestic public loan operations of territorial entities and their regional bodies, renewable and non-renewable natural resources exploration and exploitation contracts, including mining concession contracts, and sales of state-owned property.

The PPS establishes a list of main principles to be followed by public entities in procedures for the award of public procurement contracts. In general, these principles are transparency, economy, planning, responsibility, preservation of the financial equilibrium of the contract, objective selection of bidders and respect for legal due process. In addition, the PPS establishes a reciprocity principle, allowing foreign bidders to participate in public procurement procedures to execute contracts with state entities in Colombia under the same conditions that apply to a Colombian bidder participating in procurement procedures in the foreign bidder's country of origin. The most important principles include:

    1. objective selection, which requires that the contracting authority selects the most favourable offer without considering any subjective factors;
    2. the reciprocity principle, which entails that foreign bidders may participate in selection processes to enter into contracts with state entities in Colombia under the same conditions as Colombian bidders; and
    3. the right to due process if any government agency wishes to use its powers to impose fines or declare a breach of contract.

In accordance with these public procurement principles, the PPS has established several procedures for the selection of bidders, which are classified depending on the purpose of the contract, its amount or the particular circumstances that motivate the contractual need of the relevant public entity. These procedures are: public tender, abbreviated selection, merit-based selection, minimum amount selection and direct selection.

Public entities are obliged to select the contractor as a general rule through a public tender procedure, with the exception of those cases specifically determined by law where they can follow the abbreviated selection, the merit-based selection, minimum amount selection or the direct selection procedures. In general terms, one of the main differences between the public tender and the other special procurement procedures is that it takes longer to award a contract by public tender because of the legal stages incorporated in the PPS.

The public tender procedure is the most complete and is the basis for the other public procurement procedures. In most procurement procedures, bidders are required to submit guarantees for purposes of risk mitigation.

ii PPP

To address the country's infrastructure shortcomings, on 10 January 2012, following a fast-track legislative procedure, the President of Colombia enacted Law 1508 of 2012 (the PPP Law), a new law incentivising the development of infrastructure projects in Colombia with a view to attracting new foreign companies to invest in this field. The PPP Law creates new opportunities to build and operate public infrastructure projects, provides additional comfort to lenders and substantially improves the country's previous private finance initiative regime.

The main objective of the PPP Law is to utilise private capital for the provision of public goods and related services. Under the previously applicable legal framework, private–public initiatives were strictly limited to certain public works projects, and projects related to public housing, courthouses, schools and prisons did not fall within their scope. The new PPP Law significantly broadens the types of permitted projects to include a wide variety of construction and infrastructure projects and their operation.

In addition, under the new regime, payments to contractors are only made once the project has reached the stage of commercial operation, and payment depends on meeting certain service levels and quality standards. In essence, contractors will not be paid for work performed until the project is completed in accordance with the original project plan.

Generally, the PPP law and Decree 1082 of 2015 provide for a maximum term of 30 years for PPP projects. However, subject to a favourable ruling by CONPES, this maximum term may be extended under special circumstances.

The PPP Law also includes elements typical in traditional project financing arrangements. For example, the Law requires that the project's resources must be administered through a trust fund, to which all assets and liabilities of the project must be transferred. This requirement provides greater assurances to lenders with respect to outstanding payments and enforceability of any security interests. Likewise, the PPP Law expressly confers on project lenders step-in rights in the event of a default under the applicable loan agreement. Finally, the PPP Law requires that any PPP contract must include an early termination formula, which serves as additional security for the lenders.

Another important change introduced by the PPP Law is the enactment of a special procedure for contractor proposals for new projects and the award process for such private-initiative projects; and this has created incentives that did not exist under the previous regime.

The PPP Law establishes two different bidding procedures, depending on whether the private-initiative project requires any public resources. Once accepted by the contracting authority, projects that do not require any public resources will be publicised for a period of one to six months, during which time interested parties may express their intention to bid for the project. If there are no other interested parties, the contracting authority will award the contract to the original proponent, subject to certain minimum participation requirements being met.

If other parties express an interest in bidding for the project, they must post the required bonds, at which point the government will open a simplified tendering process in which the original proponent of the project has the right to match a better offer submitted by a third party.

On the other hand, private-initiative projects requiring government funding (up to a maximum of 20 per cent of the project costs in road projects, and 30 per cent in other types of projects, as recently modified by Article 17 of the National Development Plan) will be awarded through an ordinary tender process in which the original proponent of the project will receive additional bonus points (ranging from 3 per cent to 10 per cent of the points already awarded) for its submitted bid. By way of background, government agencies generally assess bids received and assign points to each bidder on the basis that the bidder that receives the highest scores will generally be selected for the performance of the contract.

Regardless of whether a private-initiative project requires government funding, it must comply with certain technical, socio-environmental, financial and legal requirements. The proposing contractor for any private-initiative project must meet any expenses incurred in connection with the structuring process. However, if ultimately the proposing contractor does not win the project bid, the winning contractor must reimburse the expenses incurred by the proposing contractor in the structuring of the project.

In addition, the recently enacted Law 1882 of 2018 provides the option to pay the concessionaire with real estate rights over properties that are not necessary in the provision of the utility associated with the infrastructure. Furthermore, Law 1882 broadens the projects in which it is possible to set functional units, including airports, water treatment facilities, tunnels and railways, hence facilitating the remuneration of the works performed therein. Regarding territorial entities, Law 1882 repeals the restriction that prevented districts and capital cities of the departments from executing PPP agreements in the respective local government's last year of administration. This provision will allow the local administrations to move forward with several projects that are currently being structured.

Following the first wave of PPPs in road projects, which are still being implemented, all these new regulations are intended to incentivise the structuring of PPP projects in social infrastructure and a considerable number of these kinds of projects can be expected in future.

X FOREIGN INVESTMENT AND CROSS-BORDER ISSUES

Foreign investment is permitted in all sectors of the economy in Colombia except for activities related to defence and national security, and processing, disposition and disposal of toxic, hazardous or radioactive waste not originated in the country. Generally, foreign investments in Colombia do not require prior authorisation. However, some types of investment in the insurance and finance sectors may require prior authorisation by the relevant authorities (i.e., the Financial Superintendence of Colombia). Additionally, certain percentage limits may apply to foreign participation in some sectors of the economy, such as the telecommunications sector.

All foreign investment must be registered with the Colombian Central Bank. Only foreign investments duly registered with the Central Bank confer on foreign investors the right to:

    1. transfer abroad dividends resulting from the investment;
    2. reinvest dividends and income derived from the sale or liquidation of the investment; and
    3. transfer abroad any income derived from:
      • the sale of the investment within the country;
      • the liquidation (winding-up) of the company or portfolio; or
      • the reduction of the company's capital.

Additionally, however, when the activities of the foreign investors are deemed to be a permanent business, the foreign investor must incorporate a Colombian branch or subsidiary. Although Article 474 of the Code of Commerce lists some examples of activities considered to be permanent, such as the granting of a concession by the government, analysis of whether an activity undertaken by a foreign company may be deemed permanent is made on a case-by-case basis.

i Removal of profits and investment

Colombian law allows the Central Bank to intervene in the foreign exchange market if the value of the Colombian peso is subject to significant volatility. The Central Bank may also limit the repatriation of dividends or investments temporarily whenever the international reserves fall below an amount equal to three months of imports. Generally, Colombia has some level of regulated foreign exchange liberty. This means that Colombian investors may freely transfer foreign currency if they comply with all applicable regulations and reporting requirements.

The Central Bank establishes the main regulations and procedures in connection with transactions that must be completed through the foreign exchange market, while the Superintendency of Corporations and the Tax Office are in charge of controlling and monitoring.

As a general rule, remittances can be carried out through the exchange market without the Central Bank's prior authorisation. All transactions and remittances carried out through the foreign exchange market are subject to specific registration with the Central Bank and therefore to the filing of reports and foreign exchange declarations specifically regulated by the Central Bank.

The foreign exchange regime makes a distinction between two different markets: the foreign exchange market and the free market.

The foreign exchange market is strictly regulated and comprises foreign exchange transactions that must be completed through authorised foreign exchange intermediaries (i.e., local banks or local financial entities) and compensation accounts (offshore bank accounts held by Colombian residents and registered with the Central Bank). Foreign exchange transactions that must be completed through the foreign exchange market include import and export of goods, foreign debt operations, and investment of foreign capital in Colombia.

The free market comprises foreign exchange transactions that may be completed voluntarily through the foreign exchange market, which is the case for payments for services and transfer of foreign currency for donations, inter alia.

XI DISPUTE RESOLUTION

i Special jurisdiction

It is common for the parties involved in project finance transactions or construction contracts, including those entered into with the government, to submit their disputes to arbitration. Arbitration is generally more efficient and faster than the judicial system in Colombia. The duration of the arbitration is subject to maximum term agreed by the parties in the corresponding arbitration clause. If the parties have not established a maximum duration for the arbitration, it can last no longer than six months from the completion of the first procedural hearing. This term may be extended once or several times, as long as the total of the extensions does not exceed six months.

Since the issuance of Law 1564 of 2012 (the General Procedure Code), in theory, regular proceedings before local courts must not exceed one year for a sentence to be passed in the first instance, and six months in the second instance. In practice, it has been known for judicial proceedings in Colombia to take three to five years.

Law 1563 of 2012 (dealing with domestic and international arbitration) allows parties to agree to a valid international arbitration based on foreign law, even where the contract itself will be carried out in Colombia. Arbitration is considered to be international when the following conditions are met:

    1. the parties to an arbitration agreement had their domiciles in different states at the time the agreement was concluded;
    2. the place where a substantial part of the contractual obligations are to be performed, or the place that the subject matter of the dispute is primarily related to, is located outside the domiciles of the parties; and
    3. the dispute under arbitration could affect the interests of international trade.

In addition, under Law 1563 of 2012, no state or government-owned company can invoke its own right to withdrawal from an arbitration agreement.

ii Exequatur procedures

Enforcement of foreign judgments in Colombia must take place via exequatur procedures. In addition, despite Colombia being party to international treaties such as the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, foreign arbitration awards must comply with Colombian validation proceedings.

Validation proceedings must be commenced before the Supreme Court of Justice and will be granted if the foreign judgment or award meets with the following requirements:

    1. the judgment does not relate to in rem rights vested in assets located in Colombia at the time the proceedings were commenced;
    2. it does not contravene public policy;
    3. it is a final award not subject to further challenges;
    4. it does not refer to any matter over which Colombian courts have exclusive jurisdiction;
    5. it does not refer to a matter under pending litigation in Colombia or already ruled upon in Colombia;
    6. if the sentence has been handed down in contentious proceedings, the court must provide a proper citation and the defendant will have the right to appeal, in accordance with the law of the country of origin; and
    7. it was rendered without fraud and complying with due process.

During exequatur procedures the counterparties to the arbitration award may also participate, object, request and gather evidence, and file the corresponding motions. Once the validation is granted, if the ruling or award is not fulfilled voluntarily by the losing party, the interested party may commence collection proceedings before a lower court to enforce the foreign ruling or award. The only defence available to the defendant is proving payment or compliance with the ruling.

XII OUTLOOK AND CONCLUSIONS

Colombia's ambitious infrastructure programme has attracted international attention. During 2012 and 2013, Colombia understood that significant modifications had to be made to its legal framework to ensure the success of infrastructure projects. In this context, three key pieces of legislation were enacted by Congress: a bill that aimed to provide a specific legal framework for PPPs (approved in Law 1508 of 2012 and Decree 1082 of 2015); a regulation that aimed to resolve the main bottlenecks that had hindered previous infrastructure projects (approved in Law 1682 of 2013); and a regulation pertaining to security interests and enforcement of guarantees (approved in Law 1676 of 2013). The country is now trying to overcome the difficulties associated with various corruption scandals, a task that has been aided by the enactment of Law 1882 of 2018, which not only provides stronger measures to protect current and future projects, but also promotes new investments by setting clear rules and procedures for national and foreign investors.

In a similar vein, there will be projects in the coming years that will test the government's aims, principal of which is to close the infrastructure gap that prevents the country from achieving higher growth rates in gross domestic product. However, current projects nearing completion, such as El Tunel de Oriente and El Tunel de la Linea (the third- and second-longest tunnels in the country after Túnel del Toyo), the New Pumarejo Bridge over the Magdalena river connecting Barranquilla and the 4G corridors that have already achieved over 50 per cent completion, are positive indicators of the successful path the country has started to follow.