What are the main objectives of the FDN? What issues is the government trying to address with the creation of the FDN?
DEL VALLE: With the creation of the FDN, the government is trying to address 2 main market failures. One is the quality of bankable projects. So the government wants to have an institution specialized in the infrastructure segment that can really help design, but particularly, structure, bankable projects. The second, very important, objective of FDN is to help mobilize long-term financing, particularly local resources, from institutional investors to banks, that are willing to take project risks. Currently, we are working on several initiatives. One is to create a couple of vehicles to mobilize multilateral money, as well as local private money, to create a pool of resources that will allow us to do more high quality bankable structuring and feasibility and pre-feasibility studies for infrastructure. This is one of the initiatives in which we are currently involved. Under this perspective we are working very closely with the IFC (International Finance Corporation).
The other initiative regards our close working relationship with the ANI (National Infrastructure Agency). We are developing some standardized financing structures that could allow us to offer to the new concessionaires, the ones that are going to participate in the new toll roads concessions, the possibility of accessing some sort of pre-designed structure that will mobilize bonds as a way of refinancing. So we are working closely with the banks as well as the capital markets to create the structure that will give more confidence to the concessionaires, as they will obtain long-term financing, from 20-25 years long, combining both credits and bonds. Credits will be adopted during the construction period, whereas the bonds will be adopted after construction in the operational period. In this way we can guarantee the mobilization of long-term financing from both banks and capital markets.
What actions is the government taking to improve Colombia’s overall quality and supply of infrastructure? How will the FDN work with other local and multilateral bodies?
DEL VALLE: This government, building on the success of the previous government who focused a lot on creating the right conditions for stability and safety, has focused on making a major engineering restructure. The overall infrastructure framework to mobilize private financing and private participation in infrastructure rests in a sound regulatory and legal framework dedicated to PPPs. The government has also created some key institutions. One of which is ANI (National Infrastructure Agency), the originator of the concessions and the institution responsible for operating the concessions. The government has also created FDN, which is the financial arm; that is the institution that focuses on how local and international financial resources can be mobilized to guarantee the financial support to this very ambitious program that ANI is putting together from the origination side.
FDN is inviting the main multilateral organizations, in particular you see CAF (Latin America Development Bank), which is the local Latin American multilateral, to be part of FDN. We think that is going to be a very important contribution, not only in terms of know-how, but also in terms of improving the governance of the institution. We want this to be a very specialized institution with strong governance that will not be captured by politics and that will not take us into operations that are not commercially viable or that are not a clear priority for the country. In that sense, we are already working on how to build a very strong institution here. In the short term, our target is known as what the government calls “Las victorias tempranas”, that is “the early successes”. In terms of toll roads, where already 9 companies have been brought in for bids, we want to make sure that those first toll roads will have adequate financing.
On the structuring side, on the capacity of doing feasibility and pre-feasibility studies, we are putting together a fund. We are inviting IDB (Inter-American Development Bank), and possibly CAF, to create a fund with multilaterals and FDN, and elaborate an innovative way of structuring the key segments of the sector, such as social infrastructure as well as physical infrastructure. We are also exploring the possibility of creating another facility with private players to mobilize another amount of resources, but also to build capacity in our institutions to do more structures. We hope that over the next 6 months we will have 2 important bank pools through which we will be able to mobilize a significant amount of resources and implement a significant amount of structures. These will then feed in the pipeline of bankable projects that the country needs in the area of infrastructure.
How large a capital base do you envision the FDN will need to carry out its stated objectives?
DEL VALLE: The institution started its operations with an initial capital that was given by the government. The government is willing to inject as much capital as is needed for the institution to be able to be a key player. However, we do not envisage for this institution to be a large one. We think of FDN as being more of a strategic institution that does not need a lot of capital. The capital that we have, plus the capital that new shareholders and multilaterals will inject, as well as other potential players, will be the starting point to the financing of these projects. So we do not think that FDN needs a very large capital base because our aim is to mobilize the market and be able to offer enhancements that will engage institutional investors and banks, more than replacing these players.
We are not here to substitute banks or the capital markets. We are here to mobilize all funds that are significant in size, such as pension funds, which have $65bn in their hands, and solid commercial banks that have been capitalized and have plenty of liquidity, currently close to $80-85bn, to play a vital role in financing these projects. Additionally, there will be the possibility of mobilizing foreign banks and foreign funds. Thus, there are a lot of resources available. We think that the issue is not so much the amount of money that we have, but being a key player for those kinds of enhancement and those types of intervention, which aim at mobilizing the necessary capital. That is why we do not think that we should have a very big capital base. Our mission is to use our capital in a strategic way to facilitate the mobilization of the market, as well as leveraging our capacity wisely to activate all of the other resources that are available.
Does the FDN approach differ when it comes to local and foreign investors?
DEL VALLE: We see clearly that the role of foreign funds and FDI is going to be critical over the medium to long term. However, we think that any foreign investors would like to see local money moving into these projects first. In fact, if the local money is there, if local banks and local investors are willing to participate, then foreign investors will feel more confident to participate too. That is clearly a prerequisite for foreign players to feel comfortable in coming in and investing into Colombia’s infrastructure projects. The first step of our strategy is in fact to make sure that local players will participate, particularly local banks and the local capital markets. That would give a sound signal to foreign investors to get involved, as they will see that there is already a lot of liquidity and many local players participating. Once we are more advanced in our design and our context with the local players, we will start approaching foreign players, foreign funds, foreign banks and so forth, because we want them to be part of it too. Their presence will be beneficial for competition and liquidity. We believe it is very important to have both local and foreign players. Clearly, where there will be more structural needs to move forward, this is more on the local side to support. We will have to address that first, so that local investors will be more prepared to be key players. This will make it easier for us to approach foreign players.
We see clearly that the role of foreign funds and FDI is going to be critical over the medium to long term. However, we think that any foreign investors would like to see local money moving into these projects first. In fact, if the local money is there, if local banks and local investors are willing to participate, then foreign investors will feel more confident to participate too.
How significant a role will the private sector play in carrying out and financing Colombia’s infrastructure projects?
DEL VALLE: The new approach for infrastructure, and the way infrastructure project should be financed, is to bring private participation. The major engineering policy for Colombia is that, in order to achieve the levels of infrastructure investments needed to catch up with many decades of under investment in infrastructure, we need to bring in private participation. Such an ambitious project could not been done purely by relying on government funds. This is because the government wants to be a disciplined fiscal institution. So, in that sense the government has limitations on how much they can allocate to infrastructure. Obviously, this government is allocating numbers that are much greater than the historical numbers allocated to infrastructure in the past. But still, given the size of the program, which is so ambitious, the only way that Colombia could succeed in the completion of these infrastructure programs is by attracting private participation. This is why we have been investing so much in defining a good framework for PPPs, because we believe that a good and credible framework is the only way to attract private players, both investors and lenders, for a program as ambitious as this one.
In that sense the government has been putting in place the regulatory framework and the institutional capacity to operate these PPP programs. This new framework has been defined in the last couple of years. Now, we are in front of the projects that are starting to become true. In the next years we will see the new projects operating under the new framework. So the big effort in the past was to put the framework in place, whereas now the major effort is its implementation. Institutions like ANI and FDN are going to play a vital role, making sure that the projects are bankable and that the money is going to be available to implement the infrastructure projects. Of course, we will have to continue refining the framework, but I think that the overall structural framework is in place and that is what is going to increase the appetite in the market.
Colombia, in my opinion, has been very, very successful. Historically, we have been known for having good macro-economic conditions, but we have made extra steps to consolidate the economic environment and at the same time we have made very important improvements in the whole area of safety, because this is also a key element to attract investors and private players, particularly in the infrastructure sector that goes into areas of the country where safety in the past has been an issue. Finally, I think Colombia has been building all the key blocks, such as safety, macro-economic stability, the PPPs framework, as well as the institutional capacity to reform the financial sector, and has a solvent and solid financial system. So we have been building all the key components that we need for this kind of program to be successful.
How does the FDN plan to attract institutional investors into Colombia’s infrastructure projects?
DEL VALLE: I think that not only in Colombia, but globally, there has been a big change in the way projects are financed. Historically, banks played a huge role in financing infrastructure projects. However, the world today is seeing a major change, partly because of the new rules, such as Basel III, but also because of the growth of institutional investors, which have developed significantly. This has occurred all over the world and Colombia is not an exception. Colombia is going through a major change in the way it is staying in this channel. Currently, for us, capital markets players have a key role too. We want banks to continue playing a major role. However, we would like to see also the capital markets joining in. That is where pensions and insurance companies are going to be strategic players. This requires also major changes in the capacity and the approach that institutional investors take, and that is how we want to be helpful.
We want to facilitate the transition for institutional investors to become involved. Initially, investors will be paramount during the operational cycle of the project, but eventually, once they learn more about the project and feel more comfortable, we would like to see them going into the construction period, which is what is happening in Canada, Australia, Europe, and so forth. We also want to benefit from those transformations globally, because we want to attract those players, those pension funds and insurance companies, which already have experience in infrastructure projects in Canada, Europe, and so forth. We also want to attract them here, so they can share their expertise and know-how with our local institutional investors. That is a significant challenge we have, and hopefully we, as a specialized institution of the government, can facilitate this process.
I think there is a huge consensus in Colombia today over infrastructure, as it represents one of the major bottlenecks for growth. Colombia has done a lot of its homework. Of course, there are still challenges on the social side, which need to be addressed as well, such as education and so forth, but clearly infrastructure is one of the major bottlenecks. This is going to be a major area of work and investment for Colombia for the next 2-3 decades. Unfortunately, this is something that we are very behind on. To the level of economic development that Colombia has, its infrastructure is not consistent with the level of development. The program is very challenging, because we are talking about approximately $45bn of investments in just physical economic infrastructure, that is, toll roads, railways, ports, and river solutions.
The whole program includes all of these inter-modal infrastructure possibilities, which are close to $44bn, of which 55% is just toll roads. In that sense, this is by far the most ambitious program not only in Colombia, but in the region. There are not many countries in the region that have set such an ambitious program. Globally, in the emerging markets, probably India and maybe China, are the only places that have in the last decade initiated such ambitious programs in the infrastructure segment. Colombia is making a major change from its historical approach by demonstrating that it is willing to do such an enormous amount of investment in infrastructure. So it is important to have that in mind. The ambitious program that has been set by this government will be a core objective for the governments to come in the future too.