S&P lists construction risks for Colombia's 4G highway program

Credit agency Standard and Poor's (S&P) has listed four potential construction risks for Colombia's fourth generation (4G) highways program.

Although the agency cited the success of the government in granting concessions for 30 highway projects, S&P said it was concerned the fact that there is a heavy presence of sponsors and domestic contractors with only short track records in building large projects.

" In S&P's view, the more experienced the contractor, the higher probability of the project's construction on time and within budget, " it said in the report "Can Colombia's 4G Toll Road Concession Program Shift To A Faster Lane?"

So far, the 4G highways have attracted 11 international sponsors for 30 projects, while Colombian groups have won contracts in 25 of the 30 processes. For S&P, this is also concerning because some of these companies are handling more than one project, which might affect their financial flexibility.

Another potential risk is the construction design complexity, which requires the building of many bridges and tunnels for greenfield infrastructure projects due to Colombia's difficult geography and also the heavy rains that affect the country.

"In addition, uncertainties over the construction difficulty could relate to the type of soil and other factors such as archeological finds on construction sites," the report notes.

S&P is also concerned by the short time given to complete construction, given the aforementioned geographical issues. In this regard, most of the 4G contracts have durations of five years. The agency considered this to be fairly short, particularly if delays occur during the pre-construction phase, and it points out that this has already happened in seven projects.

Finally, the agency listed the risk allocation mechanism, which the government designed to expedite the environmental licensing and land purchases, since it hasn't been tested to prevent overruns and delays.

"The risks of cost overruns for land purchases and environmental licensing are borne by the project up to 144% of the contractual budget. The cost overruns above that percentage are borne by the Colombian government in the form of reimbursements from [infrastructure agency] ANI. Nevertheless, this might not prevent construction delays," S&P explains.

FINANCING MECHANISM

Meanwhile, Colombian president Juan Manuel Santos announced that financial development institution FDN will approve a mechanism that will allow international banks with no presence on the country to finance the 4G projects in pesos.

"This will make things much easier and will give dynamism to the economy," Santos said in a government release.

The 4G program is currently underway with works worth a total of some 40tn pesos (US$13.8bn) all across Colombia.