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This Nonexistent AA+ Bond Is Colombia’s Plan B for Roads

President Juan Manuel Santos Waves After Voting on May 25
President Juan Manuel Santos, who took office in 2010, finished second in Colombia’s first round of presidential elections on May 25 to Oscar Ivan Zuluaga, an ally of former President Alvaro Uribe. The two candidates head for a runoff on June 15. Photographer: Luis Acosta/AFP via Getty Images

Colombia’s beleaguered efforts to line up financing for President Juan Manuel Santos’s $25 billion highway program now include a bond that doesn’t even exist.

The infrastructure agency helped develop a hypothetical bond over the past two years to serve as a model for peso-denominated notes that could be sold to fund projects. This month, Fitch Ratings said such a security would merit an AA+ grade on its national scale, one level below its top AAA. Now, the agency is showing the rating to builders to persuade them that they could obtain cheaper financing in the bond market than the preliminary rates that banks are offering.

While Santos has made the highway program a centerpiece of his agenda as he seeks re-election, the country has received just seven proposals on the first four projects out of 40 approved bidders. The government says banks’ high interest demands are one of the obstacles for would-be bids, and it’s sought to encourage alternative backers including pension funds and international lenders. Bond buyers are the new hope.

“If we let the market figure it out by itself, it’s going to take too long,” Luis Andrade, the head of the Colombian infrastructure agency ANI, said by phone from Bogota.

Clemente del Valle, the head of the country’s development bank, Financiera de Desarrollo Nacional, or FDN, said the hypothetical bond was among strategies for “mobilizing the capital markets, to complement credit from banks once the construction phase is finished.”

Presidential Elections

FDN also plans to provide subordinated loans to the projects to help builders cover upfront costs while giving banks a bigger cushion against any losses.

Santos, who took office in 2010, finished second in Colombia’s first round of presidential elections on May 25 to Oscar Ivan Zuluaga, an ally of former President Alvaro Uribe. The two candidates head for a runoff on June 15.

Zuluaga campaign officials didn’t respond to an e-mail message seeking comment on whether he would continue the infrastructure program and what he might do differently. In an April 4 statement, his Democratic Center party said the government isn’t offering high enough returns on the projects for builders to close on financing.

The highway program aims to cut travel times between Colombia’s major population centers by as much as 47 percent while reducing the cost of transporting raw goods and finished products between industrial zones in the Andes mountains to Caribbean and Pacific ports.

Upfront Payments

Santos has said that removing transportation bottlenecks can help the country achieve “Asian” growth rates and estimates the infrastructure spending will employ 200,000 Colombians.

Financing for projects has become a bigger challenge since the government stopped making upfront payments to builders, a practice that had led to allegations of inefficiency and corruption. Under the new rules, builders must line up their own financial backing as part of any project proposal.

The government’s hypothetical bond is for 320 billion pesos ($167 million) and is secured by eventual payments that the builder would receive from the government. It carries a partial guarantee from the country’s development bank.

Process Demystified

The Fitch rating helped “demystify” the process and implies an interest rate of at most 6 percentage points above inflation once construction is finished, according to del Valle, FDN’s president. Colombia started working on the bond about two years ago as part of a World Bank program that aims to boost local-currency bond markets, del Valle said.

Bancolombia SA, the country’s biggest bank, said it’s quoting builders preliminary rates of 9 percent over inflation for project loans.

“It’s a creative thing to do, and it kind of makes sense if you can get people thinking a little bit differently,” Norman Anderson, the chief executive officer of Washington-based consulting company CG/LA Infrastructure Inc., said in a telephone interview.

Today the infrastructure agency said that two proposals were received -- out of 10 approved bidders -- for the Pacific 3 concession, a 146-kilometer road project in western Colombia’s coffee-growing region.

The World Bank paid Fitch for the rating, Andrade said. Fitch and the World Bank didn’t reply to e-mailed questions about how much it cost.

Loan Commitments

The Colombian currency weakened 0.3 percent 1,916.60 to per U.S. dollar today in Bogota.

Gonzalo Toro, vice president of business and government at Medellin-based Bancolombia, said in a phone interview that it’s too early to discuss where interest rates on the projects will ultimately land. The lender had already approved 4.6 trillion pesos ($2.4 billion) of loan commitments for the first projects.

Colombia’s banking association said in a statement yesterday that higher financing costs stem from the various risks that have been transferred to builders in the new contracting process.

The country ranks 130th out of 148 economies in terms of the quality of its roads, behind Venezuela at 128th and Madagascar at 129th on the World Economic Forum’s global competitiveness index.

“There’s a ton of money around the world that would love to invest in infrastructure, so I guess the key is how to come up with a model that actually is going to work,” Anderson said.

(An earlier version of this story was corrected for the name of the development bank in 10th paragraph.)

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