The Projects and Construction Review: Colombia
The year 2020 will be remembered as one of the most challenging and complex in human history. While drafting the outlook and conclusions section for the 10th edition of The Projects and Construction Review, any prediction on the impact and effects of the pandemic was insufficient. After one year of global upheaval related to the spread of the covid-19 pandemic, the prospect is bittersweet. The global economy has experienced a major setback, which has prompted countries to have negative growth rates, record levels of unemployment and social turmoil. By contrast, changes that were expected to take decades have been rapidly implemented: remote work, basic universal income, industry re-shoring, among other aspects, are no longer strange to ordinary citizens.
In Colombia, like in other Latin American countries, the problems have been exacerbated owing to a predominant informal economy and the lack of basic infrastructure (i.e., hospitals, telecommunication networks and public transport). Nonetheless, the challenges imposed by the current situation have a silver lining expressed in a wider consensus about the need of adopting structural reforms to the country's social and economic architecture. With respect to the infrastructure sector, the national government has focused its efforts on reactivating the national economy by implementing an ambitious infrastructure programme aiming to boost public spending, reduce its infrastructure gap and open up new job opportunities. The 5G concession projects programme is the successor of the world-renowned fourth generation toll roads concessions programme (4G), which is currently advancing over an average 50 per cent in its construction schedule with some roads reaching completion milestones. In this new version of concession public-private partnership (PPP) agreements, the national government has broadened the scope of the projects to be awarded by focusing on achieving an intermodal transportation network. In this regard, the 5G programme is comprised by a diverse pipeline of infrastructure projects ranging from toll roads, railways, airports and urban highways to waterborne transport projects. The first group of 15 projects in the 5G programme entail investments for up to 21 trillion Colombian pesos.
The public authorities are aware of the budget constraints imposed by the pandemic and of the impact that this may have in the near future of pivotal infrastructure projects. Nonetheless, the national government has made its priority to guarantee the financial feasibility of the works to be performed and its sustainability over time. For this purpose, a tax reform was recently presented to the Congress seeking to collect more resources (via increases in the rate of income, VAT and wealth taxes, among others) with the aim of covering increasing public spending. The tax bill also allows cities to finance transportation infrastructure by installing toll booths within the urban perimeter and opening a window for cities to proceed with a backlog of projects that were shelved due to the lack of funds. Private investment is also highly relevant for the success of the 5G programme. Out of 15 projects to be awarded in the first wave of the 5G programme, four are private initiative PPPs, which means that most of the capital investment will be disbursed by the private party and recovered through the commercial exploitation of the infrastructure. Initiatives such as ALO Sur, a new urban highway connecting Bogotá with its neighbouring towns, and a new airport in Cartagena, are some of the private initiatives that have been presented to the National Infrastructure Agency.
Moreover, the national government also acknowledges that not all the projects appeal to the appetite of the private sector or are subject to being awarded under a PPP scheme. Hence, it launched a pipeline of projects under the umbrella of the 'Pacto Bicentenario' programme, which is focused on 22 regional roads to serve areas other than large cities, which include investments in remote parts of the country such as Guaviare, Arauca and Casanare, among others. Although the amount of the investments is lower than the 5G programme, the public works contracts for the whole set of projects estimates investment of up to 3 trillion pesos.
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 a bidding process to execute long-term power purchase agreements (PPAs) with new renewable energy projects for the supply of 5,000MW and investments up to US$6,000 million. The foregoing investment trends are likely to see a steady growth as Article 296 of Law 1995 of 2019 made mandatory for energy distributors to purchase at least 10 per cent of its energy demand from renewable sources from 2022 onwards.
Beyond the national level, other major infrastructure projects are being structured by local authorities. For instance, Bogotá is structuring what has been defined as a regional metro network comprising two lines of heavy rail and three lines of light rail. In this respect, the national government has announced its support for the rail projects and has included provisions in the national development plan to guarantee the financial sustainability of mass transport systems throughout Colombia's largest 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. Similarly, Bogotá recently awarded several bus rapid transit (BRT) concession agreements for the supply and operation of a large fleet of electric buses through pivotal sectors of the city.
The long-term benefits of the public policies adopted due to the pandemic may outweigh the economic distress it created in the first place. Furthermore, it is undeniable the change of paradigm in certain issues such as environment protection, the relevance of telecommunication networks, the migration out of big cities and the focus on infrastructure that not only boosts economic growth but also improves the safety, health and social conditions of the involved communities. Keeping those points as guidelines, Colombia has set the route to a fast and durable recovery. Undoubtedly, infrastructure will play a leading role in achieving the proposed goals. Hopefully, efficient government investments and private financial support will drive the country's progress for years to come and has paved the way to a brighter and healthier future.
The year in review
Perhaps the biggest highlight of 2020 was the commencement of the works for the first metro line in Bogotá, after 70 years of studies and discussions around the construction of the mass transit project for Colombia´s capital. Last year, the concessionaire, one of the biggest Chinese construction companies, executed the construction commencement minutes giving a way to initiate the performance of certain key works on site. This document entails a point of no return for the city to finally materialise its long-expected metro project. After achieving said milestone, the Mayor of Bogotá appointed a new manager for Bogotá's metro company, Empresa Metro de Bogotá, who is responsible for overseeing the performance of the construction and continuing with the structuring of a second line, which will serve the populous localities of Suba and Engativá in the northwest of Bogotá.
Along with the metro project in Bogotá, the regional government of Cundinamarca has reached important breakthroughs regarding the first light rail project in Colombia, known as Regiotram, which 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. The first trains are expected to operate in 2023 and will connect in the future with the first metro line in a joint effort of the city and the regional government to create a rail network serving the metropolitan area. In this sense, the city of Bogotá and the Department of Cundinamarca subscribed, in 2020, to a contract to proceed with the feasibility studies for the rail line connecting the capital with the northern towns of Chía, Cajicá and Zipaquirá. The foregoing projects are also part of a bigger initiative of the national government to recover and expand the railway infrastructure in Colombia. Under the railway master plan issued by the National Planning Department, freight and passenger railway projects have been planned to connect the most important cities in the Caribbean region (Barranquilla, Santa Marta and Cartagena) as well as the Pacific and Antioquia.
Regarding the road projects, the 4G programme has projects reaching the operation and maintenance phase (e.g., Pacifico 2 and 3, Honda–Puerto Salgar, Barranquilla–Cartagena) and most of the concessions who had a delay in their works schedule are working hard to enhance their work progress. In 2020, after years of delays due to cost overruns and issues with contractors, the national government inaugurated the Tunnel de la Linea, which is the longest tunnel for the transit of vehicles in Latin America. However, such record will not stand for a long time, as the Toyo Tunnel in Antioquia, at 9.8 kilometres, is set to claim that position in 2022.
In the energy field, the first bid for renewable energy projects advanced by the Ministry of Energy and the Mining and Energy Planning Unit led to the award to PPAs of wind and solar projects with an estimated capacity of 1,3GW. In the same way for sustainable and green investments, Transmilenio SA (the company in charge of the BRT system in Bogotá) has awarded several concession agreements whose scope is the supply and operation of 1.485 electric buses to serve the integrated public transport system in the capital. These buses will become the biggest electric fleet in Latin America and reaffirm the leading role of Colombia in its transition to more sustainable ways of transportation.
Documents and transactional structures
i Transactional structures
The road concession contracts entered into by the government typically follow a build-own-operate-maintain-transfer (BOOMT) model. Thus, the concessionaire builds the road, operates and maintains it for a determined period, which normally coincides with the requisite period for investment return, and then transfers operations to the government. In 2013, the National Infrastructure Agency (ANI) launched a standard BOOMT contract applicable for all 4G projects, and a revised model of such contract has been rendered for the 5G projects with further attention to social and environmental obligations. The standard contract comprises a series of elements that are typical in traditional project financing arrangements and intended to establish the basic principles needed to achieve the bankability of the infrastructure projects that are to be developed. The standard contract includes a general part applicable to every project and a special or particular part that shall govern the specific aspects applicable to an individual project. The standard contract encompasses a series of provisions that are relevant for bankability purposes regarding risk allocation, concessionaires' remuneration, lenders' step-in rights, cash-flow management and effects upon early termination, among other things.
Before 2012, contractors would receive an upfront payment for the execution of the work. Upfront payments have now been abolished by Law 1508 of 2012 for all contracts awarded after 2012. Payment mechanisms to contractors now depend on the availability of the infrastructure and the level of service.
The most important documents in project finance transactions are no different from those used in similar transactions worldwide. These include offtake agreements, supply agreements, engineering-procurement-construction (EPC) contracts, operation and maintenance contracts, ground leases and site purchases, parent guarantees, loan agreements, pledges, mortgages and securities.
iii Delivery methods and standard forms
The most common delivery method for large projects involving international construction companies is the EPC contract. However, when contracts are awarded within a public bidding process, there is no opportunity for the parties to freely negotiate the terms of the contract as these are unilaterally established by the contracting entity in the request for proposals, although during the public procurement procedure, potential contractors may submit comments and observations that can be voluntarily accepted by the contracting authority.
Colombian law does not oblige public entities to use specific models for infrastructure contracts. However, there is the standard contract model developed by ANI for 4G projects as mentioned in Section III.i.
The main aspects that must be contained in concession contracts under Colombia's PPP scheme are regulated and can be summarised as follows:
- contracts must have a maximum term of 30 years, except where studies approved by the National Council for Economic and Social Policy (Conpes) justify a longer duration;
- all project funds should be administered through a trust agreement;
- contracts should contain payment mechanisms to determine early termination payments;
- each contract should identify the property that will be returned to the government or contracting authority on expiry of the contract; and
- debarment and unilateral termination clauses should be stipulated in the contract.
In addition, lenders must have step-in rights should the contractor breach its duty to complete the concession contract or the financing documents.
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 (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 risk 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., 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 (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 (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. Finally, except for river waterborne transport projects, the 5G programme was not accompanied with the issuance of new Conpes Guidelines. Therefore, most of the risks remain as indicated for the 4G programme, with certain new risks assigned to the concessionaire such as commercial risk for toll avoidance due to the use of new public roads not foreseen at the time of the structuring of the corresponding 5G project.
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 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 investment 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. These elements of the 4G programme will be similarly implemented in the 5G programme.
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 ANI-recognised termination payment had there been no default of the EPC contractor and the actual final termination payment recognised by 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 Congress enacted Law 1676 of 2013, the purpose of which is to promote 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 an appointed third person, 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 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:
- 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
- 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 other things. 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 (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 PPP 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 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 (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 (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
Regardless of the economic downfall brought about by the pandemic, Colombia continues to invest significant resources in improving and expanding its infrastructure network. Having consolidated an attractive legal framework, pivotal public institutions (like ANI and FND, a state development bank), stable macroeconomic indicators and nurturing private initiative, Colombia expects to resume the development path followed for several years prior to 2020. In this context, the progress in the deployment of vaccines, the presidential elections in 2022 and the upcoming tax, labour and pension reforms are key factors that may impact the plans of the national government.
The 5G programme is expected to emerge as a major success, starting with the awarding of the Malla Vial del Meta road project, which saw a high number of bidders including international companies from Europe, China and Latin America. This success confirmed investors' appetite to continue investing in the country. In the coming year, ANI expects to award another 14 projects, including the Accesos Norte II, Puerto Salgar–Barrancabermeja (former Ruta del Sol) and Buga–Loboguerrero road projects, among others.
Air transportation certainly was one of the most affected industries by the pandemic. Many of the airports in the country saw a substantial reduction in the traffic of passengers, mostly due to the travel bans in force for most of 2020. Nevertheless, the national government trusts that the industry will see a steep recovery once restrictions start to ease. Therefore, the 5G programme includes the construction of a new airport in Cartagena as well as another project for the expansion of the existing terminal. In addition, ANI is currently studying the feasibility of the Sistema Aeroportuario de Bogotá – SAB 2050 private initiative. This initiative sets the road map to continue with the expansion of the most important airport in the country by means of expanding the current terminal in the short term and building a completely new terminal in the long term. The estimated investment for this project exceeds US$3.200 million.
Finally, next year may become an important milestone for the PPP project to improve the navigability of the Magdalena river, as Colombia's main waterway for the transportation
of cargo from its central region to its northern region. The national government expects to open the tender to award the project to recover the navigability of Magdalena River from the section that comprises the municipalities of Bocas de Ceniza in Barranquilla to Barrancabermeja, including the port zone of Barranquilla, approximately 908 kilometres, for an estimated value of US$436 million.
1 Carlos Umaña is the managing partner, Julián Parra is a senior associate and Rafael Bernal is an intermediate associate at Brigard Urrutia.