Financing road infrastructure through combination of domestic and international investors

Conexión Pacifico 3 Highway

Context

• Pacífico Tres was created in 2014 to facilitate the construction of a c. 150km highway linking three of Colombia’s most commercially important regions
• The project is part of Colombia’s 4G road infrastructure program, which aims to construct or upgrade 8,000km of roads, including 1,200km of highways

Problem

• Colombia struggled to meet the need for private sector participation in infrastructure investment to overcome the government's limited financial resources available for investment
• Commercial banks faced a growing challenge- an increased sector-concentration and emerging regulations restricting their capabilities to provide debt finance for projects

Innovation

• The FDN (Colombian National Bank) issued the first UVR1-denominated, overseas bond for a Colombian toll road project, attracting investment from international capital markets
• The government also increased its support for private sector participation in infrastructure development e.g., improving public-private partnership framework and providing incentives for investors

Stakeholders Involved

• Colombia’s Ministry of Transportation — Extensively involved with the 4G program through various entities
• Conexión Pacifico Tres S.A.S. — Jointly owned by three of Colombia’s leading construction companies
• Goldman Sachs — Book runner for bonds
• Financiera de Desarrollo Nacional S.A. — Government financing corporation, provided credit enhancement

Results/Impact

• The project secured a funding package equivalent to USD 650M in three separate loan tranches
• The financing raised enabled road improvement and construction, including two tunnels and several bridges
• The Conexión Pacifico 3 Highway was the first project in Colombia's 4G program to reach financial close
• Approx. 3000 direct and indirect jobs were created by the project and its associated spillover effects

Key lessons learnt

• Constraints in domestic infrastructure investment capabilities can be mitigated by issuing bonds in overseas capital markets. These bonds can be denominated in foreign currency rather than local currency to reduce exchange fluctuation risks for investors, thus making them more appealing
• Improvements to PPP frameworks and the issuing of guarantees to mitigate investor risks can increase appeal of PPP solutions for foreign investors
• Opportunities exist to mobilize untapped domestic institutional investors such as pension funds by issuing bonds tailored to their needs (e.g., long tenor and inflation indexation)