During the past decade, project financing structures have been actively used in Colombia in connection with the construction and improvement of infrastructure facilities and the expansion of access to basic

public services. In particular, private investment has been active in concessions, the privatization and capitalization of public entities, BOT, BOO and BOLT schemes and other financing techniques.

The Colombian economy has been recognized as one of the most stable in Latin America since the 1930s, with consistent positive GDP growth and controlled two-digit inflation figures. In fact, Colombia was, along with Chile, one of the first two countries in Latin America receiving investment grade ratings for its foreign debt. Notwithstanding the above, Colombia’s economic performance has sharply declined over the past four years and has prompted the Colombian government to redirect the economic policy towards correcting the fiscal deficit. In line with the above, the Colombian government is committed to a severe economic adjustment programmed for the 2000–02 period consistent with agreements signed with the IMF.

On the political and public order side, the rate of violence in the country is very high as a result of the actions of drug traffickers, guerilla groups and extreme right-wing paramilitary groups. Although Colombia is one of the oldest and most stable democracies in America, the gravity of the situation has prompted the government to seek local and international cooperation in pursuing a comprehensive strategy to address this critical problem. Presently, the government and insurgent groups are conducting peace talks and negotiations to put an end to the domestic confrontation.

Notwithstanding the economic and political turmoil, there are plenty of opportunities in infrastructure project finance and other areas for foreign investment and international trade. This article surveys the most recent developments in the legal framework which are relevant to the structuring of projects in Colombia and discusses

investment opportunities for the near future.

Regulatory environment and recent developments

Project finance structures always require an interdisciplinary approach as they touch upon different areas of the law. In addition to the obvious international trade, tax, securities, corporate and contract-related matters typically arising in the context of structuring a project, we have highlighted a few areas which deserve particular attention.

Government contracts law

To the extent that the project requires the participation of a public entity, Law 80 of 1993 (Law 80 or the Government Contracts Law) and administrative law would be a key consideration. Law 80 sets out a number of provisions dealing with bidding procedures and mandatory provisions in government contracts. In addition, if the project involves the privatization or capitalization of public assets, Law 226 of 1995 (Law 226) which sets out the general rules pertaining

to privatization of public assets or shares would have to be considered. In general, Law 226 provides for a general framework to ensure the appropriate valuation of the assets to be sold, preferential conditions to employees and labor associations and transparent proceedings to ensure fair competition among potential investors.

Foreign exchange regulations

The Colombian foreign exchange regime is fairly detailed and complicated, so the funding of a local project with foreign equity or debt requires careful planning and execution. Resolution 8 issued in May 2000 by the Central Bank of Colombia sets out the general framework pertaining to foreign exchange transactions. Resolution 8 brought about  certain amendments to the earlier regime, which are relevant to project finance structures.

First, the prior foreign indebtedness regime generally required Colombian residents to make a six-month, peso-denominated, no interest-

bearing deposit with the Central Bank, in an amount equal to 10 per cent of any amounts disbursed under a foreign loan. Under Resolution 8, the deposit requirement was effectively eliminated by reducing the percentage of the deposit to zero. Second, Resolution 8 thoroughly amended the rules pertaining to derivative transactions (including a full exemption of margin loans from the deposit requirement) which would facilitate the hedging of financial risks arising in the context of infrastructure projects. Finally, Resolution 8 clarified the rules pertaining to the foreign exchange treatment of international lease transactions, non-perfected in-bound foreign investment transactions and the transfer of funds between a Colombian branch and its parent company.

Security interest

Collateral documents are one of the key areas of Colombian law vis-á-vis project finance structures, partly because of the fact that they are almost always governed by Colombian law and partly because of the complexity of the issues typically involved. In addition to straightforward mortgages, Colombian law allows for a number of variations in respect of pledge agreements; including closed-end and open-end pledges, pledges with and without possession of the owner of the asset, pledges on commercial establishments and pledges on shares, each subject to specific registration

rules and tax regimes. Colombian law also permits a variety of trust based structures such as source of payment and guarantee trusts, administration trusts and cash flow concentration trusts. In any case, the structure and negotiation of trust agreements is critical as the laws do not address the rights and obligations of the parties to trusts agreements and therefore properly structured and worded contractual provisions are fundamental. Finally, collateral and credit enhancement structures have oftentimes included conditional assignments, guarantees and sponsors support, equity contributions and/or maintenance agreements. In any case, the procedures for perfection, registration and enforcement of security interests must be reviewed with Colombian counsel in detail, as the Colombian system greatly differs from the general rules typically applicable in common law-based systems.

Workout agreements

On December 30 1999, the Congress of Colombia passed Law 550 of 1999 which sets out a general framework to facilitate and promote the negotiation of workout agreements for troubled companies in the mist of a generalised systemic crisis. Workout proceedings supersede the traditional insolvency proceeding rules (concordato) during a five-year period starting on January 1 2000. Although Law 550 was aimed at creating a flexible mechanism, it has became a specialized field on its own right, partly because of the length and complexity of the Law itself and the number of decrees, resolutions, directives and other regulations that have been issued since enactment of the Law.

In general, Law 550 applies to private and public companies other than financial institutions and broker/dealers of securities. As a result workout proceedings are highly relevant in the context of developing project finance structures as they would be regularly applicable to the project company or vehicle. In particular, there are certain areas of Law 550 which deserve careful evaluation in structuring a project or dealing with an ongoing troubled project.

First, the voting rights of creditors in the course of workout proceedings need to be determined. In general, each creditor of the company is entitled to a number of votes equal to the value of the past-due principal amount, excluding any interest, fines and penalties (except in the case of the National Tax Administration which is entitled to include the amount of accrued interest and penalties for purposes of the determination of votes). The principal amount due is to be adjusted for inflation for the period between the date on which the obligation became due and payable and the date of the company’s financial statements filed together with the petition to initiate proceedings. Although Law 550 does provide for certain rules as to the determination of credits, it is not entirely clear how these rules would apply to long-term credits, financial lease obligations and other financial arrangements regularly used in the context of project finance transactions.

Second, Law 550 casts doubts as to the ability of a foreign lender to accelerate outstanding obligations in the event that the debtor files for, or is submitted to, workout proceedings. This would require an evaluation of each particular situation, including the wording of the clause, the governing law of the agreement, the execution date of the

agreement, etc.

Third, the initiation of workout proceedings has a number of consequences, including the following:

➤ no collection proceedings may be initiated thereafter against the company, and ongoing proceedings are stayed  immediately;

➤ creditors secured with liens granted by, or created on, assets of a third party are required to choose between either enforcing their security interest or participating as creditors in the course of workout proceedings;

➤ the company requires a special prior governmental authorization to amend its by-laws, create security interests on its assets, agree to set off transactions and pay or otherwise discharge obligations other than obligations arising in the ordinary course of business.

Fourth, the execution of workout agreements would have a number of consequences:

➤ enforcement of security interest or guarantee trusts involving assets of the company is suspended while the workout agreement is in force, unless expressly otherwise authorized by the agreement;

➤ any creditor may request the reduction of any security interest or guarantee created before commencement of the workout negotiations and exceeding an amount equal to 150 per cent of the secured obligation;

➤ beneficiaries of guarantee trust agreements created over real

estate assets as well as mortgagees may be forced to forgo their rights in exchange for trust certificates or mortgage rights issued in respect of portions of the same real estate; provided that such newly-issued certificates or rights represent no less than 150 per cent of the secured obligations;

➤ the regime of privileges of credits and the rights of defaulted lenders is modified pursuant to specific rules set out in Law 550.

Finally, Law 550 creates a suspect period for an 18-month term prior to the initiation of the workout negotiations. Among the agreements that may be challenged are those providing for payments in cash or in kind, guarantee agreements, performance bonds, trust agreements covering assets of the company, agreements creating security interests over the debtor’s assets, and any other agreement whereby the company’s assets are disposed of, encumbered or subject to liens. This is obviously a key consideration in setting up a project finance structure in Colombia.

Investment opportunities

Private participation in infrastructure development is one of the priorities set by the government in the National Development Plan prepared for the period 1998–2002. In particular, the government is engaged in ambitious programs in several key infrastructure areas including energy and mining, transport, water and sewerage and telecommunications.

Energy and mining

Electricity

The Colombian market in Electricity is primarily regulated by means of Laws 142 and 143 of 1994. The main regulatory authorities in the sector include the Ministry of Mines and Energy, the Gas and Electricity Regulatory Commission (CREG) and the Energy-Mining Planning Unit. The national interconnected system is composed of

generating plants, interconnection and distribution grids and endusers electricity loads.

Generation capacity is close to 13,000MW with two-thirds of the total being generated by hydroelectric plants. Nonetheless, the government expects to raise the percentage of thermal generation to be close to 40 per cent given the vast coal, gas and fuel oil reserves of the country. According to estimates, Colombia will need to add 6,200MW from 2001 to 2010, with public utilities being expected to own no more than 33 per cent of total generation capacity by

2010 as compared to 76 per cent in 1996.

In particular, the government has launched the privatisation of ISAGEN, the third-largest generation company in Colombia, with a total hydro-thermal generating capacity of approximately 1,660MW. The process is expected to be up and running by the year-end following the resolution of pending disputes surrounding the conditions for the participation of prospective bidders.

Transmission activities consists of two subsystems connected to 500kV lines and organized via the National Transmission System (NTS), owned by 10 electricity companies. The government has announced the privatisation of Interconexión Eléctrica SA – ISA, the largest national transmission company, owner of close to 75 per cent of the NTS.

Distribution is handled by approximately 20 companies in the Regional and Local Distribution Systems which operate through networks below 220kV. Marketing is conducted by more than 70 marketing companies (including distributors) which sell electricity to end-users. The government has also announced its plan to continue to allow private investment participation in the energy distributing companies and to grant concessions for the operation and expansion of non-interconnected systems. In particular, the government has anticipated that it will privatise nine separate utilities comprising the Central and Southwest distribution system.

Oil and gas

It is expected that a number of projects will be undertaken in exploration in the oil sector, partly due to the fact that Colombia ranks highly in terms of crude reserves and daily production, and close to 80 per cent of the territory remains unexplored. In fact, ECOPETROL, the Colombian state-owned oil company, recently awarded 13 exploration and incremental production agreements to 15 foreign and Colombian companies which are expected to invest more than US$600 million before the year 2006; it is anticipated that production by 2010 would be around 1 million barrels per day. In addition, it is expected that a heavy private investment would be required for the construction of a petrochemical complex near Cartagena. In terms of Gas projects, the government is encouraging industrial and residential use of gas and the participation of the private sector in local distribution activities.

Coal

Colombia is the world’s fourth-largest coal exporter and has the highest coal reserves in Latin America. On October, 2000, the Colombian government sold a 50 per cent stake in the Cerrejón Zona Norte coal complex for US$384 million (on top of a US$70 million working capital adjustment and the assumption of a US$20 million company’s debt by the bidders) to a consortium formed by subsidiaries of UK’s Billiton Company NV, South Africa’s Anglo American plc

and Switzerland’s Glencore International AG.

Transport

A number of projects in the transport sector are anticipated in the immediate future, including investments in roads and railroads, aviation, ports and urban transportation.

Roads

The main rules dealing with the road sector are set out in Laws 80, 99 and 105 of 1993. The current framework reflects an improvement of the concession schemes that had been launched in 1994 and 1998, including an active assumption of risk on the part of the National Institute of Roads. The government has designed an aggressive road infrastructure development programme for the years 2000 and 2001, which includes the construction of more than 1,160 km,

the rehabilitation of close to 3,700 km and the maintenance of more than 6,100 km which represents one-third of the total national road system.

Railways

Colombian railway network comprises 3,150 km of track, of which only 1,746 km is operational. The railway system primarily serves the coal industry, although the utilisation rates of the system stands at a mere 10 per cent of its estimated capacity. Rolling stock consists of 34 engines and approximately 1,500 obsolete passenger and freight wagons. The government has plans to design schemes to improve the railway system and make it efficient and competitive with roads.

Aviation

The aviation sector is subject to the general transport laws. Colombian aviation sector comprises slightly more than 500 airports and landing strips, including 313 privately owned. There are 10 international airports, with the most occupation being registered in Bogotá, Cali, Barranquilla, Medellín and Cartagena. As of today, three international airports have been privatised, these being the Cartagena and Barranquilla Airports in 1997 and the Cali Airport during the first semester of 2000. In addition, the second runway of the Bogotá’s el Dorado Airport was constructed in 1998 under a

17-year concession agreement. Following the successful privatization of the Cali Airport, the government announced that the Medellín and the Bogotá Airports will be privatised in the short term and that smaller airports will also be open for private capital participation thereafter.

Ports

The privatisation of maritime ports was initiated with the opening of the economy launched in the early 1990s. The legal framework pertaining to the ports sector comprises Law 1 of 1991, which provided the rules on operation, expansion, concession and tariffs, and Decree 838 of 1992, which defined the concession regime applicable to port operations. Colombian’s ocean ports were privatised in 1993 and since then are operated by regional port companies. The government has encouraged port expansion programs and the privatization of access channels to increase the installed capacity of existing port facilities.

Urban transport

In addition to the general transport laws, the urban transport sector is subject to Law 86 of 1989 (as modified by Law 310 of 1996). As of today, Medellín is the only Colombian city to have a metro system which was inaugurated in November 1995. The concessions for the structuring of the First Bogotá Metro System and the Cali light rail transit system are underway. The US$3 billion Bogotá metro project would consist of a 29.36km rail corridor with 23 stations and two terminuses and is expected to carry more than 120,000 passengers per hour. The 18km Cali Light Train would be structured as a 20-year BOMT project at an estimated total cost of close to US$450 million.

Water and sewerage

In light of the fundamental importance of this sector, the government has given top priority to improving water quality and coverage which require an estimated investment of more than US$2 billion for the 1998–2007 period. Inefficient management and obsolete technology open up windows of opportunity for private investors for the construction, operation and maintenance of water treatment plants with local and regional governments in Colombia.

The regulatory framework for the water sector includes Law 9 of 1979, Decree 1594 of 1984, Law 99 of 1993 and Law 373 of 1997, in addition to the Public Utilities Law and the Government Contracts Law. The authorities in the water and sewerage sector include the Ministries of Development and Environment, the Drinking Water and Basic Sanitation Commission, the Institute of Hydrology, Meteorology and Environmental Studies and the so-called Autonomous Regional Corporations.

Telecommunications

The telecommunications sector is expected to expand dramatically in the coming years, as competition and new technologies make an impact on the market. In fact, the agenda of the Ministry of Telecommunications include an estimated investment of close to ten billion Dollars for the 1998–2007 period and estimates indicate that the sector

would grow at a rate near 30 per cent following the year 2000.

Active private-sector participation began in 1994 with the introduction of cellular telephone companies following the guidelines set out in Law 37 and Decree 741 of 1993. In addition, in 1998 the government granted basic long-distance licenses to private operators for an automatically renewable 10-year term.

One of the largest infrastructure projects undertaken in the year 2000 was the failed capitalization process for the Telecommunications Company of Bogotá, valued at more than US$2 billion (excluding long-distance operations and investments in a local cellular company). Notwithstanding the above, there are a number of opportunities in respect of local telephony, postal services, local multi-point distribution systems, personal communication, trunking and paging systems and Internet-related projects.