The Projects and Construction Review: Colombia
Despite the covid-19 pandemic and the turbulent social and political environment in Colombia throughout 2021, as well as the beginning of the pre-election period, Colombia persisted in the improvement and implementation of its intermodality and sustainability policies, which were applied as part of the bicentennial concession programme.2 This resolve allowed Colombia to invigorate the economy through creating employment as a means of overcoming the devastating effects of the pandemic. The government expects to create more than 500,000 jobs with the first wave of fifth-generation (5G) concession projects.
Colombia also aims to:
- progress towards fulfilment of the Sustainable Development Goals, which were approved as part of the United Nations 2030 Agenda;
- reduce its greenhouse gas emissions; and
- meet the goals of the Transport and Logistics Pact for Competitiveness and Regional Integration (National Development Plan 2018–2022).
According to the CONPES3 4060 issued on 29 November 2021, the 5G programme seeks to resolve the main bottlenecks that impact the infrastructure sector in Colombia through the promotion of intermodality and the development of institutional (governance), financial, social and environmental sustainability measures throughout the life cycle of projects. This institutional policy has an implementation period of 10 years (2022 to 2031) and an estimated value of 50.26 billion Colombian pesos.
To finance this ambitious programme, the government, aware of the reduced fiscal space and the incapacity of the local financial market to fully cover its scope, is working on innovative solutions to promote new sources of payment (Alternative Sources of Payment for Infrastructure Projects) and financing (carbon, green, social and sustainable bonds).
The launch of the 5G programme received remarkable interest from the private sector. During the bidding stage of the programme's first project – now awarded – eight proposals were received. This suggests that the government's efforts to attract private capital by reviewing the financial, legal, social and environmental components of the contractual scheme have been successful, even though the first quarter of 2021 was characterised by restrictions owing to the pandemic and by social protests and confrontations triggered by the tax reform presented to Congress by the government.
In addition to the commencement of the 5G programme, in 2021 there was also:
- significant progress in the fourth-generation (4G) concession projects;
- the satisfactory start of the contract for the construction of Line 1 of the Bogotá metro and the award of the contract for the structuring of Line 2;
- the execution of various works contemplated in the Territorially Focused Development Programmes (PDET); and
- the award of six projects of the Bicentenary Pact.4
In turn, the mining and energy sector has been another important focus for attracting private capital investment. There has been a focus on the energy transition towards non-conventional renewable energy sources, the incorporation of hydrogen as one of the new sources of clean energy and the promotion of electric mobility, among other mechanisms in the path towards sustainable development.
The year in review
Since 2020, and particularly in 2021, the government has focused on the infrastructure sector as a means of restoring employment and boosting the economy in the aftermath of the pandemic. The construction stage of four projects was completed, the 4G programme concluded with an average progress rate of 60 per cent, and two 5G projects were awarded: the Nueva Malla vial del Valle del Cauca (capex of 1.22 billion Colombian pesos) and the ALO Sur (capex of 1.17 Colombian billion pesos).
Likewise, 2021 witnessed the closure and execution of the agreements reached by the government and the concessionaires in 2020 to mitigate and overcome the effects of the pandemic, including lower revenues from lower collection of tolls and airport taxes, and the standby of machinery and labour. Thanks to these agreements, the Colombian state prevented the pandemic from affecting the execution of concessioned infrastructure projects and from resulting in lengthy and costly litigation.
A settlement was reached in 2021 by Empresas Públicas de Medellín (EPM) and Mapfre owing to the contingency that began on 28 April 2018 in the hydroelectric project Hidroituango – the largest hydroelectric power generation project in the country. The insurer and its reinsurers paid EPM a total value of US$983.8 million in indemnity under the all-risks, construction and assembly policy. This settlement is a global milestone as it is one of the highest payments ever made for a claim of this nature.
In terms of project progress, in 2021, four roads in the 4G programme passed the construction phase: Vías del Nus, Cartagena-Barranquilla, Pacífico 2, and Puerta de Hierro-Palmar de Varela and Carreto-Cruz del Viso. These projects were added to the Girardota-Honda-Puerto Salgar road, which was delivered in 2020. Consequently, there are now five 4G infrastructure projects in the operation and maintenance phase.
The 5G programme, launched in 2020, is multimodal. Aiming to make the transport system more efficient by reducing logistics, time and costs, the programme includes airports, inland waterways and railways. One of its focal points is the search for greater comfort for investors to facilitate financial closures.
In recent years, financial closures have evolved towards the diversification of sources and investors. In 2021, there were 22 financial closures. The recent closures show a significant decrease in the presence of local banks in favour of the progressive emergence of international lenders. Debt funds and other sources of financing have become increasingly important.
In contrast, Colombia's capital market has reduced its participation in this type of transaction. The balance of green bonds issued in the country amounts to 2.3 billion Colombian pesos, and the government announced the issuance of the first social bonds in Colombia in the first half of 2022.
In 2021, the government and the capital district confirmed the construction of Line 2 of the Bogotá metro, which will be 15.8km long. The contract for the feasibility studies and the technical, legal, financial and risk structuring of the project was awarded in 2021. Meanwhile, Line 1, which will be 24km long, is currently in the pre-execution phase. This project was conceived under the parameters of energy and environmental efficiency, operating through clean energy, a 100 per cent electric system and the integration of natural light and ventilation.
Colombia has also progressed in integrating small and medium-sized territories through the PDET, which aims to integrate the 170 municipalities most affected by violence, poverty and neglect. The initiative, estimated to be worth 12 billion Colombian pesos, focuses on the construction and improvement of the secondary and tertiary road network in these territories.
In short, the infrastructure sector has been a fundamental pillar of Colombia's economic reactivation after the pandemic through its generation of new jobs. Meanwhile, the sector aims to improve the competitiveness of Colombia and the integration of the territory. The dynamism of the sector has been achieved mainly through the implementation of financially innovative schemes.
Documents and transactional structures
i Transactional structures
Infrastructure projects in Colombia are usually structured as a build-own-operate-maintain-transfer (BOOMT) contract and involve the partial financing of the project with private resources. In 2021, the government structured the 5G programme, of which two projects have already been awarded. The contracting of the 5G programme is based on the model used for the 4G programme, with important modifications being implemented.
In terms of social sustainability, the contractual scheme proposed for the 5G programme highlights:
- the need to carry out social prior consultations during the project structuring phase5; and
- the recognition in favour of the concessionaire of 50 per cent of the value of the works or activities not foreseen, resulting from prior consultation with ethnic and afro-descendant communities.
In financial terms, the agreement:
- authorises one or several financial closures;
- regulates new categories of lenders, including foreign institutional investors and subordinates, subsidiaries and lenders controlled by foreign financial entities;
- includes a financial sustainability component called Revenue Support (IS), through which coverage is granted to the concessionaire during the operation and maintenance stage for the variation in revenue from toll collection, measured every 12 months; and
- states that if, at the date of completion of the operation and maintenance stage, the concessionaire has not obtained the present value of the toll collection revenue of the reference month (VPIP), the National Infrastructure Agency (ANI) will not recognise the unearned balance of the VPIP to the concessionaire.
In the 5G contracts, as well as in other public-private partnership (PPP) contracts, the economic aspects of the contract, such as the remuneration and the financing obligation, the stages of the project, penalties, guarantees, risk allocation, termination and liquidation of the contract, and the resolution of disputes are regulated. In this type of PPP contract, by express legal mandate, the concessionaire's right to obtain remuneration is subject to the availability of the infrastructure, compliance with service levels and quality standards.6
With the consolidation of the 5G concession programme, the sources of payment and financing instruments to attract the capital required for this ambitious infrastructure package are diversifying. In Colombia, infrastructure sponsors can access different financial products that mainly vary between the traditional, medium and long-term loans with local or foreign financial institutions or a mix of both, bond issues and private equity funding that guarantee the closure of the projects.
The Financial Development Agency has implemented funding lines in Colombian pesos as a financing alternative for projects that do not have revenues or sources of payment in US dollars. The contracts that support project financing in Colombia are similar to those used in the rest of the world.
iii Delivery methods and standard forms
The delivery methods commonly used in Colombia for contracting in the infrastructure sector are usually design-bid-build contracts and engineering, procurement and construction contracts. The choice depends on several factors, including the nature of the project initiative.
In the case of PPP with public initiative, before opening the selection process, the complete description of the project, including the designs, must be available. In the case of PPPs with private initiative, the private party must submit to the state the complete description of the project, including the minimum designs in the pre-feasibility stage.
The most widely used standard forms in Colombia are the International Federation of Consulting Engineers (FIDIC) contracts, in particular the Pink Book, as FIDIC-licensed multilateral development banks (MDBs) use the harmonised MDB version of the Red Book construction contract for projects financed by the banks.
Risk allocation and management
i Management of risks
The allocation of contractual risks in Colombia is based on the principle of party autonomy to regulate their business relationships. Individuals can agree on who will be in charge of the specific risks of each contract and how to prevent, mitigate or compensate for each risk.
However, within the framework of public infrastructure contracts, there are certain public order provisions that mandate the allocation of contractual risks between the parties. Law 1150 of 2007 established that in the tender documents, or equivalent documents, during the selection process, the estimation, classification and allocation of foreseeable risks associated with the contract must be included. It also establishes that in contracts awarded by public bidding, it is mandatory to hold a hearing to review, together with the bidders, the allocation of risks proposed by the state entity in order to establish the final distribution.7
According to CONPES 3714 of 2011, foreseeable risks are circumstances that, should they arise during the development and execution of the contract, have the potential to alter its financial equilibrium, provided that they are identifiable and quantifiable under normal conditions. This is in contrast to unforeseeable risks, which are those that were not foreseen at the time of the signing of the contract and, therefore, were not subject to allocation between the parties. The CONPES document also describes the existence of risks covered under the guarantee regime,8 contingent obligations9 and risks arising from malpractice.
Risk assessment is the process of characterising the risks that can be foreseen at the different stages of the contract. These include:
- economic risks associated with market behaviour;
- social or political risks relating to changes in government policies and the social environment;
- operational risks relating to the operation of the contract;
- financial risks relating to liquidity risk and financial conditions;
- regulatory risks relating to changes in the legal rules applicable to the contract;
- natural risks;
- environmental risks; and
- technological risks.
Risk estimation involves calculating the probability of occurrence and the level of impact of the risks that have been assessed. Risk allocation is the process of distributing those risks according to the capacity of each of the parties to manage, control, administer and mitigate them.
As a general rule, CONPES 3714 of 2011 suggests assigning economic, operational, financial, natural, environmental and technological risks to the contractor and social and political risks to the state entity. It is recommended that regulatory risks should be assumed by the party that can effectively manage and administer them owing to their nature and the rules of each regulation. Once assigned, based on the criteria of likelihood and impact, parties should take measures to manage them through avoidance, prevention, transfer, retention or mitigation.
The 5G contracting scheme adopted essentially the same risk allocation scheme as that in the terms of reference used for the 4G roads.10 It highlights the implementation of a banding system for the allocation of:
- risks associated with variations in costs and delays in land acquisition;
- the insufficiency of the estimated value for socio-environmental compensation; and
- variations in the estimated value for network relocation and intervention.
If the estimated value exceeds 100 percent, the following procedure will be followed:
- the concessionaire will assume the additional costs in their entirety between 100 per cent and 120 per cent;
- from 120 per cent and up to 200 per cent, the concessionaire will contribute 30 per cent and the ANI 70 per cent of the cost overrun; and
- if the value exceeds 200 per cent, the ANI will assume the totality of the cost overrun that exceed the percentage.
A new element is that the ANI is responsible for the risk of circumvention by toll users when new public roads not contemplated during the structuring phase are enabled for use, as well as for cost overruns or savings generated by the implementation of new technologies for electronic toll collection.
ii Limitation of liability
In Colombia, the principle of private autonomy provides the contracting parties with wide margins to agree on the rules of limitation of contractual liability and the consequences of non-performance. The contracting parties have the autonomy to allocate the risks of the contract and to agree on liquidated damages clauses and penalty clauses.
Concerning the allocation of contractual risks, it is only possible to allocate the normal risks of the contract:11 it is against the law to assign all the contractual risks to one of the parties in an unlimited manner, without determining their dimensions and magnitude, since doing so would violate the economic equilibrium of the contract. In this context, it is only possible to assign foreseeable risks at the time of the contract, determining what they are and what economic impact their materialisation would have on the project.
Regarding contractual liability, the Colombian legal system expressly prohibits contractual agreements that exempt from liability a party who acts in a fraudulent or grossly negligent manner, including intentional breach of contract.12
Lastly, force majeure, understood as an unforeseeable event beyond the affected party control, exonerates that party from the performance of its obligations and, consequently, prevents considering the non-performing party as in breach of the agreement.
iii Political risks
Among the risks typically identified in the foreseeable risk matrix are those of a political nature. CONPES 3714 of 2011 recommends that this risk be assumed by the state as the state is the best positioned to manage it.
On the other hand, there are unforeseeable risks of a political nature that could affect the economic equation of the contract. In this sense, if the contractual equilibrium is abnormally broken, the contractor could request that the broken economic equilibrium be restored.13
As an exception, this risk could be transferred when hedging mechanisms are available in the market. Nevertheless, as a general rule, it is not possible to obtain coverage for this type of risk through traditional coverage mechanisms. In this regard, special multilateral organisations, such as the Multilateral Investment Guarantee Agency, offer legal instruments and guarantees to mitigate risks such as expropriation, nationalisation, protests and war, among other things.
Private property has express constitutional recognition and protection, so it is not possible for expropriation to take place without the payment of compensation.14 In terms of procedure, what happens in the case of a declaration of public utility or social interest is that the state decrees the administrative expropriation or requests it before the competent judge. The administrative expropriation procedure conducted directly by the public authority through an administrative act will be subject to the control of legality by the judges if this is requested by the expropriated party.
Another fundamental aspect to observe is the international investment protection mechanism. Colombia is a party to various bilateral international treaties (BITs) and international conventions for the resolution of disputes involving foreign investment in the event of a political risk materialising, such as the New York Convention and the Washington Convention.
Another spectrum of protection are the guarantees provided by the free trade agreements and agreements on reciprocal promotion and protection of investments concluded by Colombia. Recent agreements include definitions and protection against indirect or creeping expropriation where, although there is no formal expropriation through the transfer of property, the investment loses its value considerably, for example, in situations such as the cancellation of licences, the withholding of profits abroad and the limitation of decision-making capacity.
Security and collateral
The structure of 5G concession contracting under the PPP scheme incorporates some modifications of guarantees for lenders. Contractual and non-contractual guarantee schemes can have an effect on the cost of debt, making it more economical to the extent that liquidity risk is mitigated. Since guarantees focus on the cash flows and assets of the project, the four mechanisms with the greatest impact on the bankability of projects will be mentioned.
First, in the 4G projects, the revenue difference (RD) was established, whereby the concessionaire receives from the state the difference between the expected revenues and the actual revenues in the years eight, 13, 18 and 29.
The 5G projects replaced the RD with the IS system a, whereby the ANI guarantees a minimum amount of revenue annually during the operation and maintenance phase to partially compensate for lower revenues. Although this mechanism implies a decrease in the guarantee that concessionaires had under the 4G scheme, since the VPIP guarantee disappears during the period in which the IS is obtained, the annual liquidity of the project is guaranteed.
Second, both the 4G and 5G contracting schemes establish a mechanism that reduces pressure on the cash flow of the concessionaire. This is the hedging of risks associated with variations in the costs of land acquisition, socio-environmental compensation and network relocation, and intervention discussed in Section IV(i).
Third, the 5G contract structure maintains the step-in right in favour of the lenders, which may be exercised (a) by requesting the assignment of the contract to a person designated by the lenders; or (b) through a change in the shareholding composition of the concessionaire, either on account of a direct or indirect purchase by the lenders or by a purchase carried out by a person designated by the lenders.
Finally, in both 4G and 5G infrastructure projects, concessionaires must be compensated in case of early termination of the contract, according to the formula provided in the respective contract that represents the coverage of debt and equity. Some modifications to the early termination formula were introduced in 5G contracting, including additional requirements for the recognition of eligible costs that require greater precision owing to their subjectivity.
Bonds and insurance
The risk coverage mechanisms in state procurement are regulated in Law 1150 of 200715 and Decree 1510 of 2013,16 which are compiled in Decree 1082 of 2015. Decree 1082 of 2015 establishes the risks that must be covered, specifically compliance with the obligations of contractors or bidders arising from:
- the submission of bids;
- contracts and their termination; and
- the risks arising from non-contractual liability that may arise for the entity owing to acts or omissions attributable to its contractors and subcontractors.17
To transfer the risks that may eventually affect the assets of state entities, Decree 1082 of 2015 permits a series of guarantees that bidders and contractors shall grant to ensure compliance with their obligations, namely an insurance contract, autonomous patrimony or a bank guarantee in the form of a standby.
The 5G contractual scheme establishes as a prerequisite for the subscription of the initiation agreement a single performance guarantee, a non-contractual civil liability policy and all-risk damage insurance in the event that the project includes pre-existing road infrastructure. In terms of permitted guarantees, the 5G model recognises the same three coverage mechanisms referred to above.
Finally, the effectiveness of the guarantees referred to throughout this chapter is subject to the issuance of an administrative act in which the state entity, after exhausting the procedure established in Article 86 of Law 1474 of 2011 or, failing that, in Law 1437 of 2011, declares the occurrence of the respective claim.
Enforcement of security and bankruptcy proceedings
There are various types of guarantees that lenders can use to preserve their economic interests in the case of eventual defaults in the framework of an infrastructure project. Two types of guarantees stand out: movable guarantees and real estate guarantees. As their names indicate, movable collateral encumbers movable property (i.e., pledges), while real estate collateral encumbers immovable property (i.e., mortgages).
Movable guarantees are regulated by Law 1676 of 2013. According to this law, and to make them enforceable against third parties, movable guarantees created in Colombia must be registered in the National Registry of Movable Guarantees (Confecámaras). The registration certificate will serve as an enforceable title to collect the securities in a special execution procedure before a public notary or a chamber of commerce,18 or through an enforceable judicial process.
Real estate securities must be constituted through a public deed, which must be registered in the respective real estate registration folio of the real estate property securing the obligation. When a secured creditor wants to enforce such a security, it must resort to the judicial process regulated in the General Procedural Code,19 within the framework of which a judge will issue a payment order and may seize, confiscate and auction the property to satisfy the rights of the secured creditor.
Insolvency proceedings in Colombia are regulated by Law 1116 of 2006. The most notable are corporate reorganisation and judicial liquidation. Corporate reorganisation comprises reaching an agreement with creditors to preserve viable businesses and protect credit. Liquidation occurs when the reorganisation agreements are breached, or when one of the grounds set out in Law 1116 of 2006 is met, which results in cessation of the existence of a legal entity.
The possibility for lenders holding a guarantee to collect their credits depends on the type of guarantee that has been constituted, since in Colombia there are different types of guarantees (real and personal) and they have different treatments in the priority of credits. Pledges and mortgages are security interests since they encumber a specific asset of the debtor, whether movable or immovable.
Civil law establishes a priority of claims according to which there are four classes of privileged credits and a fifth class of unsecured credits. Relevant to to this chapter are the following:
- in the first class are tax and labour obligations;
- in the second class are pledges, whereby pledgees can only satisfy their claims once the debts of the first class have been settled; and
- in the third class are mortgages, which are secured by a specific immovable property.
Guarantees other than mortgages and pledges are not part of the privileged credits, so they were placed in the fifth class and were collected pro rata with the remaining assets of the debtor; however, this was modified by Law 1676 of 2013, by virtue of which creditors secured by movable collateral may collect their securities by resorting to the collateral regardless of whether the debtor is in insolvency proceedings. This requires that the secured assets do not qualify as a necessary asset for the debtor's operation.
i Licensing and permits
Decree 1076 of 2015 outlines the regulations concerning the environmental sector. The main environmental provision for the implementation of infrastructure projects is the environmental licence, which is mandatory for the implementation of projects that may cause serious damage to renewable natural resources, the environment or the landscape.20
Obtaining the environmental licence implies, for the interested party, the fulfilment of certain requirements and the assumption of different obligations related to the prevention, mitigation, correction, compensation and management of the effects that the project may have on the environment. For instance, compensation actions seek to implement restoration and conservation measures in the affected area, which may include water rehabilitation, planting activities and joint strategies with the affected communities, among other things.
The environmental licence must be obtained prior to the start of any project or work that requires it and will be granted for the term of the project's useful lifetime.21 It is also necessary to have an environmental impact assessment (EIA), which must contain an evaluation of the environmental impacts, a characterisation of the area of influence of the work and the demand for natural resources of the project, among other things. The EIA must be accompanied by the environmental management plan, which describes the mitigation strategies of the environmental impacts.
The activity to be undertaken by the holder of the environmental licence must be limited to the precise terms of the licence and its conditions, so that the environmental authority can impose sanctions for non-compliance with the terms of the licence.
Projects that require an environmental or urbanisation licence will be subject to the elaboration of a preventive archaeology programme, regulated in Decrees 1080 of 2015 and 1530 of 2016, which aims to evaluate the possible impact on archaeological heritage caused by the construction and operation of the works. The works may not begin until the plan has been formulated and approved by the Colombian Institute of Anthropology and History.
Another relevant aspect in socio-environmental matters is prior consultation and other mechanisms for the protection of rights. Ever since the promulgation of the 1991 Constitution, the legal system has been increasingly demanding in terms of environmental protection and the collective rights of communities, which is why these issues are of particular relevance when developing infrastructure projects. Colombia has signed several international human rights instruments that privilege the relationship of indigenous and tribal communities and their territories, as part of their vision of the world and their ancestral customs.
The fundamental right to prior consultation implies that any administrative or legislative measure that affects or may affect ethnic communities must be consulted with them. The 5G contractual scheme requires prior consultations to be carried out during the project structuring phase.
There are other institutions at the service of the communities whose use is not limited to ethnic groups, such as the popular action and the popular consultation. The objective of popular actions22 is for the competent judge to adopt decisions to avoid the contingent damage; to put an end to the danger, threat, violation or harm to collective rights and interests; or to restore things to their previous state, when possible, without being able to annul the respective infrastructure contract for which the law has not granted it jurisdiction.
These collective interests are not limited to the protection of the environment as expressly defined in Law 472 of 2018: included are the benefit of a healthy environment, administrative morality, protection of natural resources, the benefit of public space and respect of construction standards, among other things.
On the other hand, popular consultations are mechanisms for citizen participation provided for by the Constitution and developed by Law 134 of 1994. They comprise a call by the president, the governor of a department or the mayor of a city through which citizens are respectively consulted on a national, departmental or municipal issue. The public authority is bound by the results of the consultations. Consultations have mainly dealt with environmental issues, in particular the impact of certain mining and energy projects.
In conclusion, social and environmental issues have become particularly relevant when dealing with a public or private infrastructure project in Colombia. Issues such as the environmental licensing of the project, the implementation of the environmental management plan and the constitutional mechanisms for the protection of rights have become one of the main challenges of the sector, to be considered by lenders, concessionaires and others involved in project finance.
ii Equator Principles
The Equator Principles are a tool adopted by some financial institutions to manage social and environmental risks arising from the project finance phase. They are essentially a code of corporate practices that apply to four types of financial products: project finance advisory; project finance over US$10 million; corporate loans over $100 million; and bridge loans.
The principles essentially aim to categorise projects proposed for financing based on the magnitude of their environmental and social impacts; therefore, for projects with certain levels of risk, the financial institution will require the applicant to undertake various assessment processes to address, mitigate and compensate for the environmental and social risks, including consultation and participation of the affected communities. Failure to comply with the mandates of these principles may lead to the failure to access the requested credit or, if already granted, could constitute an event of default with the financial institution, allowing for early repayment to be demanded.
There is no regulation that makes the adoption of the Equator Principles by financial institutions mandatory. The principles are voluntary, and Bancolombia, a Colombian financial institution, is the main exponent in this country, having adopted them since 2008.
PPP and other public procurement methods
Law 1508 of 2012, the country's main regulation on PPP, is the result of two major necessities. On the one hand, there was a relatively poor regulatory framework for the construction of infrastructure with private participation; on the other hand, it was necessary to integrate new financing models that would require less public spending and meet the growing demand for infrastructure by citizens.
In 2012, Law 1508 came into force, establishing the legal framework for PPPs in Colombia.23 The concept seeks to integrate private capital into the public infrastructure sector through mechanisms that typically involve the commercial operation of the new infrastructure for a prolonged period, normally through the concession mechanism.
The contractor in Colombian PPP contracts is in charge of the construction, operation and maintenance of the infrastructure for the period agreed between the parties, without exceeding, as a general rule, 30 years. Additionally, most of the construction risks are transferred to the contractor, who is responsible for their integral management.
In Colombia, it is mandatory for PPP projects to have an investment amount of more than 6,000 legal monthly minimum wages. The contracts also have exceptional clauses to the private law of interpretation, modification and unilateral termination, caducity and reversion. Among other characteristics, in contracts under the PPP model, the remuneration of the contractor is subject to the availability of the infrastructure and compliance with the service levels and quality standards required by the entity.
Regarding selection of the contractor, different procedures are followed depending, initially, on whether it is a public or private initiative. In the case of a public initiative, the contracting entity has the possibility of using a system of pre-qualification of bidders if the value of the project exceeds 70,000 legal monthly minimum wages. The contracting entity must choose the most favourable offer (i.e., the one that represents the best offer or the best cost-benefit ratio for the contracting entity).24
In the case of private initiative PPP, the costs of project structuring must be borne by the private party, both at the pre-feasibility and feasibility stages. Once the feasibility stage has been completed, a distinction must be made between those that require public resources25 and those that will be financed entirely by the private sector.
If public resources are used, the contract must be awarded by public tender, where the originator of the project will be awarded additional points of between 3 per cent and 10 per cent for the structuring of the project. If the originator is not awarded the contract, the amount invested in the structuring of the project will be recognised.
If the project does not require public resources, the agreement reached by the originator of the proposal with the contracting entity, together with the preliminary studies and the terms of the contract, will be published in the Electronic Public Procurement System (SECOP) for a period of between one and six months. If another bidder is submitted, an abbreviated selection procedure for smaller amounts with pre-qualification must be carried out using the selection criteria for public initiative projects. If the originator is not awarded the contract, it will have the right to improve its proposal.
Colombia has been a regional leader in public infrastructure projects using PPP schemes. In 2017, it was recognised by The Economist as one of the leading countries in the sector in Latin America and the Caribbean. Meanwhile, the World Bank ranked Colombia in 2018 as the third most competitive country in the world in this area, behind only the United Kingdom and Australia. The projects have focused mainly on road infrastructure, but they have also dealt with hospital, education, energy and basic sanitary infrastructure.
ii Public procurement
The General Procurement Statute of the Public Administration26 (EGCAP) regulates the procedures for the selection of contractors in Colombia; however, there are exceptions for certain public entities and certain types of contracts for which compliance with the content of the statute is not necessary.
Entities subject to the EGCAP must apply one of the following procedures for the selection of their contractors: public tender, merit-based competition, abbreviated selection, minimum amount or direct contracting. The entities exempted from the EGCAP are free to establish their own mechanisms for the selection of contractors, which they must include in their procurement manual. All public entities, regardless of their contracting regime, must follow the principles that govern the administrative function, contained in Article 209 of the Constitution: equality, morality, efficiency, economy, speed, impartiality and publicity.
The contractual activity of the entities subject to the EGCAP must also be governed by the principles of transparency, economy and accountability.27 The principle of transparency seeks to ensure that the actions of public entities in the contractual process are open to controversy and accessible to bidders and citizens; thus, the principle of objective selection, derived from the former, seeks the selection of the most favourable offer for the entity, with subjective motivations being inappropriate for this purpose.
On the other hand, state entities in their contracting processes must guarantee the principle of equality – a guiding principle of the administrative function. This principle is essential for the treatment of bids from abroad to which the contracting entity must grant national treatment. This treatment must be granted if:
- the offer is covered by a trade agreement;
- the goods or services are subject to national treatment by reciprocity; or
- the services come from a country of the Andean Community.28
A fundamental aspect for public infrastructure projects is the possibility to challenge unilateral decisions of public entities. Initially, the nature of the act issued must be analysed to determine the appropriate remedies. In the case of a particular administrative act, such as declaring the tender void and rejecting the proposal, an appeal for reconsideration before the same entity and a claim for nullity and re-establishment of rights before the Contentious Administrative Jurisdiction is admissible. As an exception, no appeal may be lodged against the administrative act awarding a public contract, and only the nullity of the act may be sought through the courts.
No appeal is available for administrative acts of a general nature (e.g., the tender specifications) either, so it is only possible to seek their nullity through means of control of simple nullity. These remedies do not suspend the contractor selection process, and in the case of going to court, if the claim is successful, the individual would only be entitled to full compensation for the damage caused by the act in question and not to the award of the state contract.
Foreign investment and cross-border issues
As a general rule, foreign investments in Colombia are permitted in most sectors of the economy without any restrictions, special taxes or fees. As an exception to this rule, investments in national defence, national security or activities related to toxic, dangerous or radioactive waste are not allowed.
Additionally, foreign investments in certain sectors and companies (e.g., oil and gas, mining, insurance and finance) require authorisation from the respective government authority, such as the Mining Authority (ANM), the Hydrocarbons Authority (ANH) and the Financial Superintendence of Colombia.
The Central Bank is the government authority in charge of foreign exchange regulation and policies. All foreign investments in Colombia – including the ones in local companies, foreign loans, foreign payments, imports and exports – shall be registered before the Central Bank. Registration of foreign investments operates automatically with the filing and presentation of the correspondent foreign exchange declaration, which is to be made at the moment of conversion of the foreign currency into Colombian pesos.
Foreign investments in Colombian companies or assets (including trusts and branches), as well as investments by Colombian residents abroad, need to be duly registered before the Central Bank. The Central Bank must also be informed of foreign loans to Colombian residents. Non-compliance with those regulations and duties could lead to the imposition of fines by the Central Bank.
As a general principle, payments between Colombian residents may not be made in foreign exchange currencies; they may only be made in Colombian pesos. Colombian residents are entitled to hold foreign accounts in foreign currency only with financial institutions abroad, not in Colombia. The foreign accounts are known as compensation accounts and must be declared and registered before the Central Bank and the Colombian Tax Authority.
The foreign exchange market in Colombia is divided by law into the commercial exchange market and the free market. The first is the main one, since most trade and financial transactions have to be mandatorily traded in that market and through authorised exchange market intermediaries, which include local commercial banks, local mortgages banks and local financial corporations, among others.
Foreign exchange operations between Colombian residents and foreign residents that are mandatorily required to be channelled through the commercial exchange market, include equity investments transactions, import-export transactions, foreign indebtedness transactions and foreign investments made by Colombians abroad. Foreign exchange accounts registered as compensation accounts can be used to pay obligations that must be mandatorily channelled via the commercial exchange market. The exchange rates at which commercial exchange market transactions are made can be freely negotiated between the parties involved.
Dutiful registration of foreign exchange investments before the Central Bank grants the following foreign exchange rights to the investor:
- the right to repatriate freely all gains and dividends from the investment;
- the right to reinvest or repatriate any gain or profit resulting from the selling or liquidation of the investment;
- the right to repatriate any profit or gain derived from reduction of the company's capital or branch; and
- the right to access controlled foreign exchange markets for further remittance of gains.
All remittances and repatriations of profits must be registered before the Central Bank. Additionally, all remittances or repatriation of gains, profits or dividends derived from the construction projects can be carried out through the commercial exchange market, and no authorisation from the Central Bank is required.
Once the Colombian foreign investment is duly registered before the Central Bank, remittances of investment returns have no limitation or restriction from a foreign exchange point of view. Registration of foreign exchange investment will grant foreign investors access to foreign currency through the controlled foreign exchange market. No taxes are applicable to the remittances of dividends or gains so long as the project company generating the same has paid relevant taxes in Colombia (dividends, withholding tax, etc.).
For a Colombian project company to legally convert Colombian pesos into foreign currency to make payments under a foreign loan, the lender must be included in the list of lenders recognised by Central Bank. A foreign declaration must be filed every time a disbursement is made under the loan.
Provided that foreign indebtedness and loans are considered foreign exchange operations, the same must be duly registered before the Central Bank. Once the loan is registered before the Central Bank, any loan payment to other jurisdictions has no foreign exchange restrictions. In addition, there are no tax incentives that are preferentially provided to foreign investors or creditors in Colombia.
Finally, Colombia has entered into several double taxation agreements with nations with foreign investments and related activities in the infrastructure sector in Colombia, such as Italy, the United States, Spain, Chile, Portugal, India, South Korea and Canada, and the recent double tax agreements with France and Luxembourg entered into force in 2022.
Colombia has also executed bilateral investment treaties for the protection of investments with China, India, Switzerland, the United Kingdom, Spain, Japan and Chile, among other jurisdictions. The aforementioned double tax agreements and bilateral investment treaties grant additional protection to foreign investors in Colombia in terms of foreign investments and cross-border issues.
i Special jurisdiction
As a general rule, disputes arising from infrastructure contracts should be resolved by the Contentious Administrative Jurisdiction, which specialises in hearing disputes and litigation arising from acts, contracts, deeds, omissions and operations, subject to administrative law, in which public entities are involved, or private parties when exercising administrative functions.29 Nevertheless, as is done in the 5G contractual scheme, it is common that in those types of projects, compromissory clauses are agreed for disputes to be resolved through arbitration.30
ii Arbitration and ADR
Law 446 of 1998 and Law 1563 of 2012 establish arbitration, amicable composition and conciliation as alternative dispute resolution (ADR) mechanisms. Further, the contractual parties can directly resolve disputes arising between them through the settlement mechanism.
The presence of dispute boards has increased in infrastructure projects. This instrument of common law origin allows for the swift resolution of disputes arising during the execution of the contract in such a way that they do not escalate to other instances. Dispute boards are not regulated in Colombia, despite them being used, especially in projects that are contracted based on a standard FIDIC form, as their terms and conditions generally include this mechanism, the main purpose of which is to resolve matters of a technical nature that do not involve legal considerations.
Arbitration concerning contracts entered into by public entities must be institutional, and the award must be made in law. If the arbitration agreement does not specify a term for the duration of the process, the term will be six months, counted from the end of the first hearing. This term may be extended once or several times, without the total of the extensions exceeding six months.
An extraordinary appeal for annulment may be lodged against the arbitration award on the grounds provided for in Law 1563,31 as well as the extraordinary appeal for review,32 which is heard by the Contentious Administrative Jurisdiction in matters involving public entities.
Arbitration is international when any of the grounds provided for in Law 1,563 apply.33 The parties are free to determine the seat and language of the arbitration. In the absence of agreement, the arbitral tribunal shall determine them, taking into account the circumstances of the case and the convenience of the parties. The arbitral tribunal decides in accordance with the rules of law chosen by the parties.
Amicable composition is an ADR mechanism whereby the parties delegate to a third party, called an amiable compositeur, who has the power to define for them, with binding force, a freely disposable contractual dispute. The amiable compositeur acts as an agent of the parties, and his or her decision has the legal effect of a settlement. The procedure may be fixed by the parties directly or by reference to an arbitration centre's rules of amicable composition.
The 5G contractual scheme expressly sets out some matters that the parties agree to submit to a panel of amiable compositeurs, whose decisions may be submitted to the arbitral tribunal only in cases that refer to a possible ground for nullity or rescission of the decision.
iii Exequatur procedures
The enforcement of foreign awards, namely those rendered by an arbitral tribunal of which the seat is outside Colombia, requires prior recognition by the Supreme Court of Justice. Awards rendered in international arbitration of which the seat is in Colombia are considered national awards and, therefore, are not subject to the recognition procedure and may be directly enforced without the need for recognition, except when the appeal for annulment has been waived, in which case recognition shall be required. Once the award has been recognised, the interested party may seek its enforcement before the competent judge.
Outlook and conclusions
There are several points of optimism following the conclusion of 2021:
- the progress of ongoing projects, in particular, the 4G roads;
- the consolidation of the 5G programme and its intermodal nature;
- the efforts of the country to develop sustainable infrastructure and strengthen the institutional framework of the sector;
- the intense search of the government for mechanisms of financial innovation that attract ever greater investment in infrastructure; and
- the long-term vision that has led to the positioning of Colombia as a model in the region in terms of the construction of large infrastructure works.
Infrastructure in Colombia is consolidating itself as a key sector for the country's economic growth as it is a major source of direct and indirect employment and a suitable vehicle for attracting foreign investment that contributes to the development and integration of regions through intermodal connectivity.
In 2022, the development of the 5G programme is expected to continue, the first wave of which includes seven road projects, four airport projects, two projects related to navigability and one railway project. Of particular note is the project to restore the navigability of the Magdalena River, the main tributary of Colombia's 668km long river between Bocas de Ceniza (Barranquilla) and Barrancabermeja (Santander), which should be awarded in 2022. Airport projects include the expansion and new international terminal at Rafael Núñez Airport (Cartagena) and the airports in San Andrés and Providencia.
The government also expects that the 4G projects will reach an 80 per cent progress in 2022 and that 18 of them will be in the operation and maintenance stage. The early intervention of secondary and tertiary roads will be a challenge for the economic integration of the territories, as well as port expansion, which is a primary objective for the development of multimodal national infrastructure; however, these programmes will have to pass the test of the 2022 presidential elections.
1 Carolina Ariza Zapata and Camilo A Marín Acosta are co-founders and partners at Ariza & Marín.
2 The bicentennial concessions refer to a series of multimodal transportation infrastructure projects, which are also referred to as 5G concessions.
3 A document issued by the National Council for Economic and Social Policy in which the government sets out its long-term public policies.
4 A programme coordinating the policies, plans and programmes between the government and the departments in respect of the commemoration of the bicentenary of Colombia's independence (Arauca, Boyacá, Casanare and Santander) that aim to promote the competitiveness, institutional strengthening and social and economic development of the region.
5 Article 39 of Law 1682 of 2013.
6 Article 5 of Law 1508 of 2012.
7 Article 4 of Law 1150 of 2007.
8 Article 7 of Law 1150 of 2007.
9 Decree 423 of 2001.
10 CONPES 3760 of 20 August of 2013.
11 Council of State, judgment of 27 March 2014, Case 24845; Award 18-09-2000, Santana SA v. Distrito Capital and Award 10-02-12 Gases de Occidente SAS ESP v Ministry of Mines and Energy.
12 Article 1522 of the Civil Code.
13 Article 27 of Law 80 of 1993.
14 Article 58 of the Political Constitution.
15 Law 1150 of 2007, article 7.
16 This decree repealed the provisions of Decree 734 of 2012, which in turn repealed Decree 4828 of 2008.
17 According to Article 188.8.131.52.3.1.5. of Decree 1082 of 2015, the risk of non-contractual liability can only be covered by an insurance contract.
18 Articles 64 of Law 1676 of 2013.
19 Articles 467 to 468 of General Procedural Code.
20 Article 3 of Decree 2041 of 2014.
21 The administrative procedure for obtaining the environmental licence is regulated in Article 184.108.40.206.6.1 et seq. of Decree 1076 of 2015.
22 Law 472 of 2018.
23 Recently, the government has been issuing compilation decrees, including Decree 1082 of 2015, which unified the regulations in the administrative planning sector. This decree brings together most of the regulations on public-private partnerships, in particular the regulatory decrees of Law 1508 of 2012.
24 According to the criteria set out in article 12.2 of Law 1508 of 2012.
25 Limited to 30 per cent of the total value of the project and 20 per cent in road infrastructure projects.
26 Integrated, mainly by, Law 80 of 1993, Law 1150 of 2007, Law 1474 of 2011, Decree 1082 of 2015, Law 1882 of 2018 and Law 2195 of 2022.
27 In accordance with Article 23 of Law 80 of 1993.
28 Colombia Compra Eficiente, Manual for the Management of Commercial Agreements; Article 220.127.116.11.4.1.3 of Decree 1082 of 2015.
29 Article 104 of Law 1437 of 2011.
30 Article 14 of Law 1682 of 2013.
31 Article 41 of Law 1563 of 2012.
32 Article 45 of Law 1563 of 2012.
33 Article 62 of Law 1563 of 2012.