The Projects and Construction Review: Colombia
The year 2019 was a challenging year for the infrastructure sector in Colombia. Owing to budget constraints, and while new projects were being structured, the national government mainly focused most of its efforts in enhancing the progress of the projects that were already under performing, seeking to boost their social impact and to reduce the country's infrastructure gap. By the first months of 2020, while the government was exploring the development of new projects, it was forced by the the covid-19 pandemic to redirect its attention to adopting legal, budgetary and managerial measures to face the crisis. This has created uncertainty about when the public tenders for new projects will be launched.
Notwithstanding the foregoing, the country has already achieved important milestones in the infrastructure sector as it managed to reach the financial closing of several road projects; to execute new port concession agreements; and to award the first metro line project in Bogotá. The aim of the national government, as stated in the National Development Plan – Law 1995 of 2019, is to give the private sector a bigger role in infrastructure development through initiatives, seeking to extend the term of port concession agreements and to improve the timing and process for approving private initiative private-public partnerships (PPP). Nonetheless, the national government also acknowledges that not all projects are of the appetite of the private sector nor are subject to be awarded under a PPP scheme. Hence, it recently got Congress approval to reallocate part of the resources saved from the mining and oil royalties to be invested in the improvement and expansion of the road network serving rural zones of the country; this initiative will have to be coordinated with the recently taken measures of creating a fund to overcome the negative impacts of the covid-19 pandemic on the productive sector.
Other sectors, such as power generation, have been the focus for investors since 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 Mining and Energy Planning Unit is structuring the bidding process to select the company in charge of building the regasification plant on Colombia's Pacific coast, a facility that is expected to be operational by 2023, providing liquefied natural gas to the centre and south of the country.
Law 1995 of 2019 sets forth several rules aimed at improving the Colombian public procurement system, including provisions to overcome the administrative bottlenecks that seem to be hindering the approval and performance of private initiatives; for instance, it allows to cut in half the time required for the approval of private initiative PPPs, whose scope is the construction of public precincts such as stadiums, coliseums and conventions centres. This aligns with the policy of the current government to boost the growth of creative industries in the country. Moreover, the Law 1995 of 2019 emphasizes the importance of the natural gas supply projects for the country, enabling the development of new plants for the treatment of imported LPG.
The other areas of infrastructure projects that should be closely watched is social infrastructure, such as hospitals, schools, libraries and prisons. Regarding this last item, the National Development Plan allow prisons to be constructed under a PPP scheme. Further regulation is pending but it entails an opportunity to overcome the deficit of inmate capacity in the country.
Beyond the national level, other major infrastructure projects are being structured by local authorities. For instance, the city of Bogotá is structuring what has been defined as a regional metro network comprising two lines of heavy rail and three lines of light rail. The national government has announced its support for the rail projects and has included provision in the National Development Plan to guarantee the financial sustainability of mass transport systems along the biggest cities. Furthermore, Bogotá is undertaking studies and designs for the construction of several urban highways and new dedicated bus lanes and infrastructure for the TransMilenio system, which will require an investment of 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 a reduction of custom duties for equipment, machinery, supplies and services. These initiatives are complemented by regional and national transmission line projects being undertaken by the Mining and Energy Planning Unit, which are under tender, to transmit power generated in the northern part of Colombia.
The momentum of the infrastructure sector in Colombia will be put to the test by the effects of the covid-19 pandemic. However, as with most crisis, it may entail an opportunity to prove the robustness of the Colombian legal framework and the executed contracts, as well as the capabilities of the private and public agents to ensure the performance of the projects while managing the negative effects of the crisis.
The year in review
The year 2019 was marked by the execution of the concession agreement to build the first metro line project in Bogotá. After 70 years of studies and discussions around the construction of the mass transit project for Colombia´s capital, last year the District of Bogotá, financially backed by the national government, awarded the contract to build, operate and maintain the metro project for 27 years to a Chinese consortium. The notice to proceed of this project is yet to be subscribed, triggering the beginning of its preconstruction phase, which includes reaching the financial closing of a project valued at more than US$4 billion.
Along with the metro project in Bogotá, the regional government of Cundinamarca also awarded the first commuter light rail project in Colombia to a Chinese consortium. This commuter train, known as 'Regiotram', will connect the capital city with several towns in the neighbouring region of Cundinamarca, serving both as a tram within the urban centre and as light train in the outskirts of Bogotá.
Following the booming expansion and recovery of the once forgotten rails in Colombia, the mayor of Bogotá has already contracted the studies to expand the first metro line and build a second line. At the same time, it has supported the regional government of Cundinamarca to proceed in the expansion of a regional rail network comprising at least two more lines of the Regiotram's connecting the capital with the north and south of the metropolitan area. This current enthusiasm on rail projects has spread throughout Colombia's largest cities, including the plans for upcoming contracts for a third metro line in Medellin (Colombia´s second biggest city) and for potential metro lines in Cali and Barranquilla.
Regarding the road projects, the 4G programme has reached a stability point with most of its projects undergoing construction phase and the government playing a leading role to overcome the land, environmental and financial difficulties of those projects that still have not initiated works. Furthermore, considering the diagnosis of decades of backlog of investments in infrastructure sector, the Colombian government has announced the next generation of road projects, the '5G programme', which is aimed at providing the country with a full network of highways connecting the most important production centres with the exporting ports. Within the projects of this programme, the national government has announced its intention of awarding the construction of the second phase of the northern access to Bogotá; the road network of Valle del Cauca; the road connecting Medellin with the port city of Turbo; the Dique Canal project; the improvement of the navigability of the Magdalena River, among others.
Airport infrastructure will continue to attract a big part of the public and private investment in the next few years. El Dorado Airport is currently the focal point of several public and private initiatives. The current concessionaire has submitted a proposal for the construction of a third runway and expansion of the passenger terminals including, in the long term, the construction of a second terminal in the outskirts of Bogotá intended to serve low-budget flights and private aviation. In the short term, the government is undertaking the negotiations to relocate the fuel deposit and build more remote gates to serve the increasing traffic of the terminal. On the Caribbean coast, the studies for a new airport to serve Cartagena are close to be finished, hence allowing the start of the contracting procedure of a new and modern terminal that will receive the growing number of national and international tourist arriving to the historical city. In the same region, Barranquilla has set 2020 as the deadline for the opening of the expansion works performed in its international airport, upgrading the comfort, technology and number of services provided to the users of this airport.
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 more with the inclusion of the value of the floating storage regasification unit), it is representative of the projects adopted by the national government to secure the country's energy and gas supply.
Despite the initial impetus with which the economy and the infrastructure sector started 2020, on 17 March 2020, through Decree 417 of 2020, the president declared a state of emergency throughout the national territory amid the covid-19 pandemic. During this period, the president will be entitled to issue decrees having the force of law aiming to overcome the crisis and to impede the extension of its effects. Some of those norms have been issued to address mostly the suspension of contracts, administrative procedures, and terms, as well as to regulate which activities can or cannot be performed during the mandatory preventive isolation also ordered by the national government. However, the extend and effects on the crisis are still unknown and it is yet to be seen whether the infrastructure sector and the projects awarded and currently under planning will succeed relies on a big part on the length of the pandemic crisis and the subsequent effects on the national and world economy.
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, 3760 of 2013 (as modified by Guidelines 3800 and 3807 of 2014), 3961 of 2019 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 a position to best assume and manage that risk. Risk may therefore be reallocated on a case-by-case basis, depending on the parties' positions, as follows:
|Social and political||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 case-by-case risk allocation, the government has set out specific guidelines for 4G projects by means of the CONPES Guidelines 3760 of 2013 (as modified by Guidelines 3800 and 3807 of 2014), which include, inter alia, the following relevant rules:
- Land acquisition risk: the contracting authority (i.e., the ANI) only assumes a portion of land acquisition risk when its value exceeds 120 per cent of the initial budget destined for land acquisition, and assumes the total value of the risk when it exceeds 200 per cent of the initial estimated budget.
- Regulatory risk: the contracting authority (the ANI) only assumes regulatory risk when, as a consequence of the regulatory change, the concessionaire profits are affected beyond a deviation parameter as stipulated in the contract.
- Environmental risk: the contracting authority (the ANI) only assumes a portion of the 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 whereby 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, civil and commercial law are based on the principle that the parties to a transaction are free to agree 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 policy 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 such clauses also apply to public contracts.
iii Political risks
Foreign investors 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 the 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, since 2019, a full 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, Israel, the European Union and the United States, which include similar protection measures.
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 combining several complex projects and diverse participants, the security package for Colombian project financing transactions has started to become more sophisticated.
Lenders are requesting the following, inter alia:
- 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 make it a security interest trust covering the cash flows generated by the project;
- concession rights pledge agreements;
- construction contract pledge agreements;
- assignment of a 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.
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 relating 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 work, and for the quality of goods provided.
The bid bond performance guarantees may be one of the following: insurance policy, 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.
In 4G transactions, as part of the security package at the EPC contract level, parties have started to include 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 cost overruns resulting from a change to 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 capital expenditure variation between the ANI-recognised termination payment had there been no default of the EPC contractor 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.
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, the purpose of which 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 with the public registry of security interests created pursuant to Law 1676 and the publicity requirement 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 with 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 goods that are not fully identified and receivables regardless of whether or not the receivables are represented in credit documents, among other things.
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 guarantees (amendments, extensions, cancellations, enforcements, among others).
Under Law 1676, it is possible to enforce 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.
However, collateral over real estate is typically facilitated by a mortgage. Mortgages are perfected by (1) the mortgagor and the mortgagee executing a public deed before a notary public (or a Colombian consular officer overseas), which must include information that identifies the mortgagor, the mortgagee, the secured obligations and the real estate that is the subject of the mortgage; and (2) recording this public deed with 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 need 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 internal creditors (shareholders) and the external 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 relating to the liquidation of the business and those relating 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 file an objection before the Superintendency of Corporations, which 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, a secured creditor is allowed to enforce 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, Law 1676 expressly provides that the aforementioned rules are applicable to real estate assets.
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 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 affect 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 among 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.
PPP and other public procurement methods
i Public procurement
Public procurement 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 certain sectors that, 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:
- objective selection, which requires that the contracting authority selects the most favourable offer without considering any subjective factors;
- 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
- 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.
As a general rule, public entities are obliged to select a contractor through a public tender procedure, with the exception of those cases specifically determined by law whereby they can follow the abbreviated selection, the merit-based selection, the 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 of these, bidders are required to submit guarantees for the purposes of risk mitigation.
To address the country's infrastructure shortcomings, and following a fast-track legislative procedure, the president of Colombia enacted Law 1508 of 2012 (the PPP Law) on 10 January 2012, 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 use private capital for the provision of public goods and related services. Under the previously applicable legal framework, public-private initiatives were strictly limited to certain public works projects, and projects relating 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 made only 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; 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 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.
However, private-initiative projects requiring government funding (up to a maximum of 20 per cent of the project costs for road projects and 30 per cent for other types of projects, as modified by Article 17 of the current 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, 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 types of projects in which it is possible to set functional units, including airports, water treatment facilities, tunnels and railways, hence facilitating the remuneration of the work performed therein. Regarding territorial entities, Law 1882 repeals the restriction that prevented districts and capital cities from executing PPP agreements in the respective local government's last year of administration. This provision will allow 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.
Foreign investment and cross-border issues
Foreign investment is permitted in all sectors of the Colombian economy except for activities relating to defence and national security, and the processing, disposition and disposal of toxic, hazardous or radioactive waste not originated in the country. Generally, foreign investments do not require prior authorisation. However, some types of investment in the insurance and finance sectors may require prior authorisation by the relevant authority (e.g., the Financial Superintendence of Colombia). Additionally, certain percentage limits may apply to foreign participation in some sectors of the economy, such as telecommunications.
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:
- transfer abroad dividends resulting from the investment;
- reinvest dividends and income derived from the sale or liquidation of the investment; and
- 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 in each case.
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 control 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 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 transfers of foreign currency for donations, inter alia.
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 a 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 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:
- the parties to an arbitration agreement had their domiciles in different states at the time the agreement was concluded;
- the place where a substantial part of the contractual obligations are to be performed, or the place to which the subject matter of the dispute is primarily related, is located outside the domiciles of the parties; and
- 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 a party to international treaties such as the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), 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 the following requirements:
- the judgment does not relate to in rem rights vested in assets located in Colombia at the time the proceedings were commenced;
- it does not contravene public policy;
- it is a final award not subject to further challenges;
- it does not refer to any matter over which Colombian courts have exclusive jurisdiction;
- it does not refer to a matter under pending litigation in Colombia or already ruled upon in Colombia;
- 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
- 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.
Outlook and conclusions
Colombia continues its pursuit of reducing its infrastructure gap and the world seems to trust that the conditions are right in order to invest in such a project. With a better understanding of past experiences, the country continues to improve its legal framework seeking to compete with other nations that are either catching up or seeking to maintain their position as investment destinations. 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 seems to be moving forward to overcome the difficulties associated with corruption practices in the past, a task that has been aided by the enactment of Law 1882 of 2018. Now, the national government through the enactment of Law 1995 of 2019 and its multiple regulatory decrees seeks to bring the experiences and lessons learned from the road projects to a broader range of projects including rail, public buildings, water sanitation and prisons. So far, it is still uncertain the magnitude of the effects unleash by the covid-19 pandemic, however, at present, the Colombian government has acted with promptness in addressing a range of matters that affect the performance of most infrastructure projects.
Therefore, if there is a prompt end to the pandemic crisis, 2020 will be marked by the beginning of activities in the long-awaited Bogotá metro project, as well as the Regiotram, and the award of the first public tenders for the projects of the 5G programme, including the tender for improving the navigability of the Magdalena River. If so, Colombia would potentially be about to see a real revolution in multimodal transport.
1 Carlos Umaña is the managing partner, Julián Parra is a senior associate and Rafael Bernal is a junior associate at Brigard & Urrutia.