Extractive Boom Drive Growth
BMI View: To exploit its booming extractive sector, and to reap the benefits of a US free trade agreement, the Colombian government is putting all efforts into updating its deficient infrastructure fleet. Having been dubbed the 'engine for development', we believe Colombia's infrastructure sector will see strong growth of 6.7% in 2012. The latter is further reinforced by an improved security picture with respect to both military and diplomatic progress between the government and the FARC guerrilla.
Extractive Bonanza Spur Opportunities
Colombia is already South America's third largest oil producer, after having nearly doubled oil production over the last six years. Furthermore, it is now aiming to achieve a 1mn b/d production target this year, and then to subsequently sustain and build upon those production levels in the future. In order to do so, the Colombian Oil Association is estimating the need for a minimum of US$120bn in investment over the next decade - highlighting vast opportunities for construction players in the field.
There has indeed been considerable effort put into developing Colombia's energy infrastructure, including the a pipeline project linking the Llanos Basin to the Pacific Coast, currently proposed by the Canadian firm Enbridge, and intended to provide access to energy-hungry Asian markets. Colombia's National Planning Department upwardly revised its forecast for oil and mining sector investment in 2010 for the 2008-2015 period, increasing expected investment from US$50bn to US$62bn, 87% of which is expected to flow into the petroleum sector. To be sure, Colombia's production growth is expected to significantly outgrow domestic consumption. As such, export-oriented infrastructure investment is going to be critical moving forward.
Another factor attracting investors is Colombia's business environment. Indeed, just as the Colombian oil industry has been attracting increased foreign investment (jumping from US$278m in 2003 to US$4.3 billion in 2011), other governments in the region, including Venezuela and Argentina, have implemented policies with significant deterrent effects on foreign investment. In addition to serving as a credible alternative, Colombia has also been a direct beneficiary of these policies. For example, when Venezuelan President Hugo Chavez nationalized PDVSA in 2002, hundreds of workers and engineers went to work in the Colombian energy sector. Tellingly, one of those men is the current CEO of Pacific Rubiales, Colombia's largest foreign producer.
Hence, coupled with strong economic growth prospects - BMI forecasts real GDP growth of 4.5% in 2012 - and an improved investment and security climate, we believe a major expansion within Colombia's extractive resources could see a significant demand for new capacity and better quality infrastructure.
Free Trade Makes In-Roads
Though the decade-long trade preferences under the Andean Trade promotion and Drug Eradication Act already covered almost 80% of Colombian exports, the signing of the US free trade agreement earlier this year nevertheless marks an area of cooperation between the two countries.
The deal should encourage further investment in Colombia, and the government thinks the agreement will add 10% to exports and one percentage point of economic growth in 2012.
However, according to the Inter-American Development Bank, prior to the signing of the bilateral agreement, the cost of transporting Colombian exports to the US, expressed as a share of the value of the exports, far exceeded the cost of paying import tariffs to the US government.
In light of this, whilst the trade pact will lower or abolish the remaining import tariffs, it does not alleviate the high transportation costs which pose a much bigger problem to Colombian exports. As a result, better access to ports and adequate highways will be essential to facilitating the expected rise in exports.
Roads are therefore a top priority for the government. Road and bridges infrastructure industry value is forecast to account for the majority of infrastructure value in 2012, at 39.5%, and is expected to experience annual average real growth of 5.5% between 2012 and 2021. In line with our forecasts, the largest greenfield PPP project to have been awarded in Colombia's transport sector, the Ruta de Sol highway, has entered the construction phase.
|Bullish Factors Align|
|Colombia Construction Industry Value (US$bn), Growth (%)|
Peace Talks Support Investment
Though Colombia has experienced a significant security turnaround in the past decade, the guerrillas represent a serious menaceand are still targeting both infrastructure and people. The May 15 2012 attack on former interior minister Fernando Londono in Bogotá cast a shadow over the proclaimed improved security situation, as do the continued attacks on the country's lucrative oil industry. In January and February of this year, Colombia's main pipeline came under attack 13 times, resulting in significant transport delays.
However, progress has been made, both military and diplomatically, which has resulted in a significant increase in foreign direct investment. This in turn has opened up vast areas of Colombia to legitimate economic activity - in particular, mining and the construction of relevant infrastructure. Since taking office in 2010, President Santos has demonstrated his willingness to engage in peacetalks with the guerrillas, yet he has also led some of the most crushing military strikes against Colombia's Revolutionary Armed Forces of Colombia (FARC). At the end of 2011 FARC leader, Alfonso Cano, was killed. The group's current leader, Timleon Jimenez, signalled a potential revival of peace talks in March. In fact, the Colombian government and FARC representatives agreed to begin negotiations on October 5 th in Oslo, and then continue in Havana, Cuba, to discuss "justice, demobilisation, impunity and drug-trafficking, among others."
That said, though we highlight significant progress, we nevertheless remain cautious; the guerrilla was responsible for more than one in four kidnappings in Colombia during 2011, according to the defence ministry. Hence, though the government has partly quelled left wing guerrilla insurgencies, so that insecurity no longer represents a systematic threat to the state - thereby promoting investment - the risk of violence persists.
Corruption And Red Tape
However, despite economic growth, free trade agreements, and security gains, delays in infrastructure projects are all too commonplace in Colombia. Strategically important projects, including the Ferroviaro Central concession, the Oriente Tunnel, the Oleducto Bicentenario oil pipeline and the Bogotá Metro, have all experienced delays, owing to issues ranging from corruption to environmental concerns.
Two corruption scandals in Colombia's public works sector illustrate the country's main barriers to addressing its vast infrastructure requirements. In 2009, a corruption scandal led to the government removing a number of National Institute of Concessions (Inco) employees, including the then director Alvaro Jose Soto. In May 2011, public works contracts in Bogotá came under investigation, leading to the suspension of Mayor Samuel Moreno, who was due to stand trial in May 2012.
Hence, we continue to highlight that concerns over transparency and government institutions could dissuade some investors. However, a concerted effort is being made to stamp out corruption in awarding tenders and this gives us hope for future improvements. In fact, in November 2011, the Colombian government approved the creation of a national infrastructure agency (ANI), which will replace Inco as the official entity in charge of infrastructure concessions. Furthermore, the public-private partnerships (PPP) law has the potential to propel infrastructure growth in the country by offering a better project design, more effective implementation and greater protection for private investors.