5G Contracts: Features and challenges of the new Colombian infrastructure programs

In brief

Historically relied on as an anti-cyclic economic boost, infrastructure development has found a renewed role in reactivating the Colombian economy recently affected by the COVID-19 pandemic. The Colombian government’s launch of the 5G concession program sets forth an opportunity to reactive the Colombian economy. This new program comprises approximately 22 projects, and, according to the National Infrastructure Agency (Agencia Nacional de Infraestructura or ANI), the agency in charge of structuring, awarding and supervising national concession projects, the 5G concession program will entail investments close to USD17.3 billion.

ANI published the new 5G program’s template for the concession agreement (the 5G Contract), which is intended to be implemented in different kinds of transportation infrastructure projects (toll roads, airports, railways or waterways), and is based on the 4G program toll road concession agreement. However, the new template includes certain new features to take into account, which are intended to address the difficulties encountered under the 4G program.

Below we highlight and briefly analyze the new main features of the 5G Contract, which we breakdown into two main sections, namely: (i) the main features of the 5G Contract; and (ii) the bankability features.

Main features of the 5G Contract

Risk allocation

Risk allocation in the 5G Contract remains essentially similar to the risk allocation provided for under the 4G program. Nevertheless, there are certain new features related to the contractual risk management mechanism under the 5G Contract that we highlight below:

Land acquisition requirements

The 5G Contract provides major changes to address land acquisition requirements; in particular with respect to the certification of the termination of the functional units¹ of the project, which has been a recurring issue for concessionaires. Under the 4G program, concessionaires are required to certify property titles to 100% of the required land for a functional unit, in order to be able to have ANI certify the completion of such functional unit, while the 5G Contract allows for certification of the completion of such functional units without having property titles to 100% of the required land to be acquired to construct the functional unit.

In the new 5G Contract, once completion of a functional unit is certified, concessionaires will have 180 days to certify the initiation of the acquisition of all required land (via purchase offers, land awards or land assignment proceedings). After the 180-day period, if land has not been entirely acquired, a new deduction from contract payments will apply for a period of 12 months. If concessionaires do not certify they have initiated all land acquisition proceedings after the first 12-month period, a partial suspension of payments in respect of the functional unit will be applied by ANI.

After the first 12-month period, if the concessionaire has certified the initiation of all land acquisition proceedings, but has not been able to obtain property title to 100% of the land, a percentage of the payments in respect of functional unit will be withheld by ANI in the same proportion as per the land not yet obtained, until the concessionaire certifies property title to 100% of the land. However, if the concessionaire has been unable to obtain property title to 100% of the required land after the 12-month period, the concessionaire will breach this obligation under the concession agreement.

This new feature addresses the complexities of the land acquisition proceedings in Colombia and allows payment allocated to a specific functional unit to be released earlier, as opposed to the 4G program concession agreements. In addition, this feature allows concessionaires to have more flexibility in reaching the project completion date, which became a recurrent problem in financings under the 4G program.

Implementation of new technologies

The concessionaire is required to implement a protocol for electronic toll-road revenue collection. If the concessionaire incurs any cost overruns, ANI will compensate the concessionaire using funds from the Colombian National Contingency Fund (Fondo Nacional de Contingencias). Under the 4G program, ANI compensated concessionaires using funds from the surplus account in the concession trust, or from its budget, if funds in such surplus account were insufficient.

Prior consultation

Under the 5G Contract, ANI will carry out all prior consultation proceedings with ethnic communities located in the project’s corridor before the procurement process begins, limiting the risk for concessionaires to carry out such processes. Under the 4G program, this risk was exclusively allocated to the concessionaire, which in turn, implied an administrative burden. Nevertheless, the concessionaire is still responsible for overseeing and conducting all prior consultation processes to be carried out once the concession agreement has been awarded.

Land acquisition, network relocation and environmental permitting plans

New features to the network relocation and land acquisition plans and a new environmental plan were introduced in the 5G Contract. These plans require making a detailed description of applicable arrangements, mechanisms and a timeline of the necessary documentation required for each procedure, looking to provide ANI and the contract auditor with better tools to assess the concessionaire’s performance and an efficient planning instrument to the concessionaire.

In terms of cost overruns, the scheme is basically the same as the one provided for under the 4G program. Thus, under the 5G Contract, if the estimated amount for land acquisition and socio-economic compensation, environmental compensation and network relocation costs is exceeded, the concessionaire will bear up to 144% of the cost overruns, and any cost overruns above the 144% will be borne by ANI.

Designs and studies

ANI is in charge of producing all geometric designs and detail studies based on feasibility features available from the procurement process. And the concessionaire is required to carry out the final studies based on ANI´s information, which in turn provides the concessionaire a more detailed and complete base of information to produce their final studies.

The concessionaire’s payment is based on infrastructure availability. Toll revenues, ANI contributions and commercial revenues are the main revenue sources for each project; however, such payment is subject to any applicable fines, discounts, and deductions, similar to what was established under the 4G program concession agreements.

Notwithstanding the foregoing, the 5G Contract provides that ANI would be entitled to withhold a portion of the payment for each functional unit until all outstanding items are completed for such functional unit. The concessionaire will be allowed, however, to receive the bulk of the payment once the outstanding items are completed, as opposed to the 4G program, which provided for completion of outstanding items in a 180-day period after delivery of a functional unit, failure of which will result in the concessionaire being eligible to only the portion of the payment that corresponds to the completed items of the functional unit, until all items are completed. This new feature is certainly an aspect for lenders to take into consideration in their respective bankability analysis of the projects.

On the other hand, in terms of commercial revenues, a larger amount of commercial revenues is awarded by ANI (50%) as opposed to the 4G program concession agreements (2.2%), seeking to increase commercial efforts by concessionaires in the projects.

Force majeure

The 5G Contract contains the same force majeure events included under the 4G program concession agreement; however, it provides for certain amendments in the treatment of such force majeure events and the addition of a general force majeure event for any proceeding taking place with governmental authorities.

This general force majeure event encompasses any event in which more than 150% of the legal term to conclude a proceeding against a governmental authority is surpassed.

In addition, new circumstances, such as delays in expropriation and public land assignment, have been added as new land acquisition force majeure events.

Sustainability

Many of the new features under the 5G Contract are aimed at developing sustainability and environmental aspects of the project, some of which we briefly analyze below:

• Greenhouse Gas Mitigation Plan: If financial close is not reached with a multilateral institution (which requires the concessionaire to have a greenhouse gas mitigation plan), concessionaires must create and apply a plan of their own.
• Climate Change and Social Works Account: The concessionaire must create a climate change account in the concession trust in order to receive payments from collaborating entities to finance climate change mitigation programs. Additionally, it must create a social works account which will have a limited amount of funds destined to carry out socially oriented works requested by communities with the project’s area of influence.
• Environmental Permitting Plan: As mentioned above, the 5G Contract has introduced an environmental permitting plan which has to be handed to ANI and the contract auditor detailing every environmental and social permitting action to be undertaken by the concessionaire, by reference to by each applicable works milestone. This allows the concessionaire to have a clearer plan to obtain the required permits and facilitates the compliance of construction obligations in a timely manner.

These new features address issues that in prior programs (such as the 4G program) were hard to overcome by concessionaires and unbalanced the risk allocation of the project, making the 5G Contract more interesting for all prospective sponsors.

Liability exemption events

The 4G concession agreement provided for the possibility for either party to terminate the concession early if a liability exemption event (i.e. a utilities relocation, environmental and social or land acquisition force majeure event) occurred and was not overcome in a 90-day period. The 5G Contract provides that the parties have to mutually agree to the early termination of the concession or seek approval from a mechanism similar to the dispute resolution boards (amigable componedor) prior to early termination, limiting the parties’ ability to terminate the concession early upon the occurrence of a liability exemption event. Thus, lenders will have to take account of this new early termination event in their respective bankability analysis of each project.

Bankability issues

The new 5G Contract seeks to apply sustainability on four different levels:

• the institutional level, seeking the implementation of government and inter-institutional cooperation standards;
• the environmental level, seeking to migrate to climate change adaptative infrastructure;
• the economic and social level, seeking to promote inclusion, communication and support from communities within the 5G projects´ areas of influence; and
• the financial level, seeking to assure compensation and an efficient risk allocation.

ANI has published the 5G Contract for the toll road concession agreement, which is based on the 4G toll road concession agreement, but includes certain new features to take into account in the bankability analysis of such agreement, some of which we briefly highlight below.

VPIP Termination

The 4G concession agreement provided for a minimum term of 25 years, which could be extended to up to 29 years if the present value of the toll revenue expected to be collected during the term of the concession (VPIP) is not reached during the minimum 25-year term of the concession. However, the concession would not terminate early if the VPIP reached before the end of the 25-year term of the concession. The 5G Contract toll road concession agreement template provides for a concession term of 29 years. Aside from the four-year extension to the initial concession term under the 4G infrastructure program, the 5G Program concession term will not be subject to extensions (even if VPIP has not yet been reached) and if the VPIP is reached before the end of the 29-year concession term, the concession automatically terminates. Ultimately, they exclusively allocate the risk of reaching the VPIP to the concessionaire, which in turn may have a negative impact on project cash flows.

Payment top-ups (Soporte de Ingresos)

The 4G concession agreement provided for a top-up payment mechanism (diferencia de recaudo) that allowed concessionaires to received payments top-up from ANI at certain year-milestones of the O&M stage of the concession to compensate for any difference between the VPIP and the actual toll revenue collected at such year-milestones. The 5G Contract provides a new mechanism in which such difference will be calculated on a yearly basis during the O&M stage of the concession and ANI will make payments top-up (soportes de ingresos) for each year in which such difference is positive. This new mechanism will provide annual income support to concessionaires during the O&M stage of the concession, which in turn, reduces their need for liquidity instruments to compensate for low toll revenue periods and, consequently, their funding costs.

However, it is important to note that the first project tendered under the 5G program did not include payments top-up, given the road's historic high traffic. Unfortunately, under the current pandemic circumstances and with limited mobility in the country, there is uncertainty as to whether such historic high traffic will be maintained.

Financial close

The 4G infrastructure program provided a specific term for the concessionaire to reach financial close by delivery ANI (i) the executed credit agreement; or (ii) a certification by each lender containing a minimum of terms (such as term, economic conditions, security package and disbursement conditions). The 5G Contract maintains the same terms and conditions to reach financial close under the concession agreement but substitutes the certification for a firm commitment by each lender and states that if financial close is evidenced via a firm commitment, the concessionaire has nine months as of financial close to deliver the executed credit agreement. This new timeframe per achieving financial close will add pressure to closing financings within a specific deadline.

Step-in rights

The 5G Program toll road concession agreement template includes a new event that triggers step-in rights under the concession agreement as a result of the banning by a Colombian competent authority to contract with the Colombian government. This new step-in rights event is the direct result of the constant amendments concessionaires had to negotiate with ANI under the 4G infrastructure program due to the requests from lenders to make the project bankable in this regard.

Termination payment

Under the 4G program, the termination payment was calculated as:

• the concessionaire's aggregate investment in the project discounted at a pre-set discount rate; plus
• amounts owed by ANI to the concessionaire at the termination of the concession agreement; minus
• the sum of:
  • payments made to the concessionaire; and
  • any applicable deductions, penalties and fines.

Under the 5G Contract, the concessionaire's discounted investment amount will be replaced by the lower of (i) such investment amount and (ii) the sum of equity contributions made and, during the construction and O&M stages, the principal amount of project debt outstanding on the date of termination. This does not mean, however, that the termination payment will in all cases be at least equal to the outstanding principal amount of project debt.

Conclusion

Given the importance of the reactivation of the economy, in part through infrastructure projects, we recommend that investors look into the issues of the 5G Contract raised in this update. Also, we recommend reviewing, on a case-by-case basis, the new provisions of each concession agreement, taking into account that the clauses may vary depending on the previous studies and the type of project.

¹ Currently, the national concession projects under a PPP regime are subdivided into independent, fully functional infrastructure sub-divisions called functional units which, upon completion, have a participation percentage in the calculation of the concessionaire’s revenues.