This week’s New World comes straight from Colombia. Regular readers will know that I’ve been bullish for a long time on the country, so I’ve decided to spend a month here interviewing key public and private sector players to test some of my theories and hunt for new investment opportunities.
One of my biggest New World calls has been Colombian infrastructure. I’ve written a string of articles telling readers to gain exposure to the sector. My reasoning was pretty simple: infrastructure in Colombia is terrible, and the country’s new government has made sorting it out a priority issue. Of course, Colombia’s infrastructure has been bad for a long time, and plenty of governments have made noises about sorting it out. As Daniel Linsker – Colombia expert at Control Risks, a risk advisory consultancy – joked, investors have been disappointed before: “Colombia identified a key tunnel that would be vital for improving transport in 1937. But it still isn’t finished.” But despite acknowledging these problems I felt that this time the infrastructure improvements would happen.
Luis Andrade’s plan
Of course not everyone shares that view. For example in July The Economist took a pop at the halting implementation of the government’s road building programme. So last week I interviewed Luis Andrade, president of the National Infrastructure Agency that was set up to implement this government’s new plan, and asked him what was going on.
First of all I asked what he thought about the criticism his agency had been getting.
“What is being said is not true”, countered Andrade. If you look at the federal budget for infrastructure and take a historical perspective you’ll see that the country was investing very little in transport infrastructure until 2010. You see a gradual increase before then but the numbers really shoot up in this government. In the last four years of the previous government the average spend was COP2.5trn (about $1bn). But last year it reached COP8trn. The expectation for this year is even higher.”
More spending doesn’t always mean more results, but Andrade is proud of those too. He cited the amount of four-lane motorways being built as a measure of progress. “In the previous decade 600km of four-lane roads were built, so on average they were building 60km a year. But in 2011 we built 100km of four-lane highways, another 202km in 2012 was 202km and in this year it should be almost 300km – five times what the previous government used to build.”
Next I asked him about the environmental licence procedures that have delayed projects. Colombia is the second-most bio-diverse country on the planet, which means there is plenty for environmental officers to worry about. Andrade himself admitted that around 70km worth of four-lane highway construction due this year had been delayed because of problems with environmental issues. But he insists that the situation is improving.
“The specialised environmental licence agency is going through a learning process. Like us they are a new agency but with every month that goes by they are getting better and faster. There is also a new strategy where we work with them when our engineers are planning new routes to make sure that there are no surprises further down the line. When it comes to new transport infrastructure I am confident that environmental licences won’t be a big problem.”
But he is less confident about community protests. Some of the new roads run through areas where minority groups such as Afro-Colombians or Amerindians live. At present these groups have strong legal rights to contest new developments that affect their communities. As Daniel Linsker highlighted in his fascinating presentation, Colombia has seen increased incidents of community groups delaying projects. While many may see this as fair given these groups’ rough treatment in the past, the fear among investors is that this could halt Colombia’s ambitious new infrastructure plan.
“I am concerned about the community consultations”, says concedes Andrade. “It has led to significant delays in some cases, and that worries us. But the president is working on new methodology for social consultations that sets time limits to avoid excesses and abuses. The idea is to guarantee rights but avoid abuses of rights. We are very hopeful that this will help.”
Successful community relations are an essential part of investing across Latin America. Some companies seem to do it well, others not so well. At Control Risks Linsker tells firms in Colombia to take their flashy corporate social responsibility report and get it translated into Spanish. “If you take it to local communities you’ll find that a lot of them don’t agree with what’s being told to investors.” The problem, says Linsker, often stems from unrealistic promises being made to locals.
How to play it?
But important as I think the theme is, I don’t think it will derail (pardon the pun) Colombian infrastructure. This is partly because there is a whole wealth of projects that won’t be affected by community consultations – 80% of the total, according to Andrade.
So if, like me, you are keen to get exposure to the theme, what’s the best way to do it? “There are many ways [for institutional investors] to play it”, says Andrade, a former McKinsey consultant. “As an equity investor in a road concession, an insurer covering the project risk, as a debt holder or an equipment provider.” For example, Ashmore plc, a British fund manager that specialises in emerging markets funds is part of a consortium for a road concession.
“We’ve also seen interest from reinsurance syndicates in Lloyd’s”, says Andrade. “There are a lot of construction and performance risks likely to come with these concessions and we’re expecting a lot of cover to come from the UK.”
Other opportunities can be found in railways and airports. “We’re having interest from some British countries in rail. Holdtrade teamed up with Transnet from South Africa to present a plan for the main north/south railway line running through the centre of country next to the Magdalena River.”
Given Britain’s relative expertise in infrastructure and heavy presence in Colombia – the UK is the second-biggest foreign investor in the country – you’d expect more firms to be involved. But Andrade thinks the real wave of British investment will begin during the next year or so.
“British firms may not be bidding for concessions right now, but once a particular consortium wins [British institutional investors] will bid for equity. After all, some of these developers do not have all of the equity that is required so there will be an opportunity for investment groups to come in and take a slice. Of course, the advantage at that point is that the risks and rewards will be better defined. With a specific road, the decision to invest is easier, so I would hope that large UK investor groups get involved then.”
How much could they be looking to make? At the moment the official rate of return is expected to be around 13% per annum over the 20-year life of the concessions. Not bad, given that revenue streams such as tolls and government subsidies are also inflation protected.
Even easier to get involved
Andrade is also looking to make it even easier for British investors to get involved. His plan is to issue bonds that will earn an income from the concessions’ 20-year lifetime. He reckons it will create a huge $10bn infrastructure bond market that international investors can tap.
Of course, while there are lots of ways for institutional investors and large companies to play the theme, it is harder for private investors like us. A couple of interesting Colombian infrastructure firms have come to market recently, but none of them have made it on to stock markets that are easy for us to access. Meanwhile, the type of Latin American infrastructure funds that British private investors can buy into are often focused on Brazil.
The best bet may be to buy a Colombian bank. That might sound strange… but here’s why. In total, the government’s infrastructure plan involves spending $55bn of public and private money. It’s estimated that the investment should boost the country’s GDP by 1% per year, with another 0.5% coming from a multiplier effect, meaning that the country’s growth rate should grow from around 4.5% to 6%.
An extra 1.5% growth is not to be sniffed at. That difference is enough to lift people out of poverty and finance further investment. But if anything, that 1.5% number understates the benefit of better infrastructure. New roads will bring structural benefits to the economy. Exports from manufacturers and farmers will become more competitive while roads will open up rural consumers to local brands. The planned works will create 200,000 direct jobs across Colombia and another 250,000 indirect ones. Moreover, most of these jobs will be created in the remote areas where roads pass and where jobs are most needed.
In other words, if Andrade confounds the critics and pulls off this infrastructure programme it will give a massive boost to the economy. And one company set to benefit is US-listed Bancolombia (NYSE:CIB). The bank is directly involved in financing infrastructure – for example it oversaw the IPO of Condor, one of those local construction firms that I mentioned earlier. Its investment arm also participates directly in transport infrastructure. Moreover, as Colombia’s largest bank its other divisions should benefit as economic growth picks up. Well-run banks in well-regulated financial systems often act like exchange traded funds, as their wide range of business activities exposes them to growth across an economy. Shares in Bancolombia, which recently posted a loss, have dropped sharply in recent months, creating a nice buying opportunity for brave investors.