Colombia’s development bank has brought in private-sector discipline

IT COSTS more to send a 40-foot container by road from Bogotá, Colombia’s capital, to Buenaventura on its Pacific coast than to ship it on from Buenaventura to Shanghai. According to the World Economic Forum, Colombia’s roads are among the worst in Latin America. For more than 20 years governments have tried to improve matters, with little success. Now Colombia is trying again.

Central to the latest attempt, called the Fourth Generation (4G) road-development programme, is the National Development Finance corporation (FDN), which was launched in 2013. Unlike most development banks elsewhere, it funds at most 25% of any project. It must seek out private investors, at home and abroad, and package projects to offer acceptable risks and returns. Colombia’s needs are so great, says Clemente del Valle, the FDN’s president, that it “can’t just sit around and wait till those markets are developed.”

That forces it to support only viable proposals, says Ramiro Lopez-Ghio of the Inter-American Development Bank (IDB). The result is that the FDN’s involvement is a signal of quality. It gives investors comfort in other ways, too. The bank offers a peso credit line that helps foreign investors offset their exchange-rate risk. And it lobbied congress to make it easier for Colombian pension funds to invest in the infrastructure-debt funds it helped set up.

Another aim of the FDN is to help fight graft. This is common in government infrastructure projects the world over. Colombia has been no exception. In one recent scandal, dubbed the Merry-Go-Round, construction firms overpriced work and bribed politicians, including Bogotá’s former mayor, who was sentenced to 24 years in jail. (He is appealing.) And it is one of at least ten Latin American countries where Odebrecht, a Brazilian construction giant, bribed politicians to win contracts.

Respected foreign institutions have been brought in to try to change all that. Though Colombia’s government is the FDN’s majority shareholder, the International Finance Corporation and the Andean Development Corporation each hold around 8-9%. The Sumitomo Mitsui Banking Corporation, a private Japanese bank, holds a similar share. They appoint three board members between them, matching the government’s quota. A final three, also chosen by the government, must be from outside politics. For a 4G project to get FDN financing, the board must sign it off. The hope is that the foreign and independent members will reject those that show signs of rigged bids or padded contracts.

So far the model appears to be working well. By the end of 2018 the FDN expects to have closed financing for 17 projects, worth $ 8.4bn, of the 30 planned under the 4G banner. Of that, 24% will come from abroad. It is now branching out from roads to other investments, including Bogotá’s Metro, which will be Colombia’s priciest infrastructure project to date, at an estimated cost of $ 4.6bn for 25km of elevated track.

The bank will soon need more capital. In 2016 the Colombian government sold its stake in Isagen, a power-generating company, to a Canadian investment fund for $ 2bn, and used the money to buy FDN bonds, giving the institution the wherewithal to fund its endeavours. But to continue long-term infrastructure financing, says Mr Valle, an IPO will soon be needed.

A bigger problem, says Mario Dib, who manages one of the infrastructure-debt funds set up by the FDN, is that Colombians hate road tolls. Earlier this year tolls were suspended in Urabá, in the country’s north, after protesters burnt toll-points and killed three people. The government has agreed to pay FDN concessionaires any money they are unable to collect.

That is supposed to give investors the certainty they need to keep coming. But it would weaken the rationale for the FDN if taxpayers are stuck with bills they were never supposed to pay. And it raises fears that a future government might sour on the institution. The next presidential election, in 2022, coincides with the expected completion of many 4G roads. If the tolls spark more protests, and someone less market-friendly than the centre-right incumbent, Iván Duque, wins, public-private partnerships might fall out of fashion. That would be rotten luck for those trying to fix Colombia’s rotten infrastructure.

This article appeared in the Finance and economics section of the print edition under the headline “The highway, my way”