Overcoming Delays To Become Outperformer
BMI View: After considerable tender delays in the first half of 2013, the infrastructure sector has sta r ted to pick up momentum again with the awarding of large road projects. Though the Colombian construction industry has been highly volatile in the last decade, the government continues to push ahead with necessary infrastructure investments, primarily in the transport sector which continues to represent the highest proportion of infrastructure projects. This is a priority for the government in order to reap the benefits of its growing mining industry and improve the competitiveness of its exports in general. Having been dubbed the 'engine for development' by the government , we believe Colombia's construction sector will see a strong real growth of 5.49% in 2013 .
|Forecasting Stable Growth|
|Construction Industry Value (US$bn), Real Growth (%)|
Emphasis On Roads To Support Exports Competitiveness
Improving transport infrastructure and especially roads is a top priority for the government in order to benefit from the booming extractive industry and the increasing number of FTAs. Following delays in the tendering process, the government's fourth generation concessions ('4G') package has finally started to pick up momentum as confirmed by the recent announcement of the concession of a US$718mn road project in the north of the country. The unprecedented number of expression of interest proposals for this project (22 in total) indicates that confidence in the market has returned, boosting the country's appeal to investors. Road & bridges infrastructure industry value is forecast to account for the majority of infrastructure value in 2013, at 41.6%, and is expected to experience annual average real growth of 6.8% between 2013 and 2017.
The increasing number of trade agreements that the country has recently signed will add significant pressure to the transport infrastructure in order to support export competitiveness. Apart from the US, Colombia has also signed a trade deal with South Korea, numerous agreements with China, it is undergoing negotiations for a trade agreement with Japan and it is pending approval of a FTA with the EU. The most recent announcement is the Pacific Alliance framework that Colombia signed with Chile, Peru and Mexico in order to target the Asian Market.
Minerals Still Outweigh Guerrillas
Colombia is already South America's third largest oil producer, after having nearly doubled oil production over the last few years. It is expected to reach its target of 1mn barrels per day (b/d) in 2013, and we anticipate this to increase further. 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. In the oil & gas pipelines sub-sector alone, we forecast average annual real growth of 12.1% between 2013 and 2017.
However, accompanying these rewards are significant risks. Fuerzas Armadas Revolucionarias de Colombia (FARC) still represent a significant threat to both infrastructure and people. Most recently, on March 14 th 2013, the FARC was reportedly involved in an attack blowing up the rail line of Colombia's largest coal exporter, Cerrejon (a joint venture between Anglo American, BHP Billton and Xstrata). Despite undergoing peace negotiations talks and the significant weakening of the FARC by government security forces so that insecurity no longer represents a systematic threat to the state, the risk of violence still persists. Given that the FARC have been known to target infrastructure and energy assets, this threat could deter investors from participating in the operation of assets, and potentially undermine the attractiveness of the concession packages.
|Supporting Infrastructure Demand|
|Colombia Oil Production And Real GDP Growth|
Yet another factor to be added to Colombia's prospects is its attractive business environment. From a regional perspective, Colombia ranks third after Chile and Mexico in our Risk/Reward Ratings. Indeed, just as the Colombian oil industry has been attracting increased foreign investment, other governments in the region, including Venezuela and Argentina, have implemented policies with significant deterrent effects on foreign investment, including numerous nationalisations.
Coupled with strong economic growth prospects - BMI forecasts real GDP growth of 4.3% in 2013 - and sound economic policy making, Colombia has largely over-performed throughout the crisis. In fact, Colombia has been powering ahead, overtaking Venezuela in terms of GDP, and is now in the same zone as Argentina; yet contrary to the latter, Colombia is expected to trend upwards. Hence, we believe a major expansion within Colombia's extractive resources could see a significant demand for new capacity and better quality infrastructure.
Despite economic growth, free trade agreements, and a regionally attractive business environment 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 is encouraging for future improvements. The creation of the new National Infrastructure Agency (ANI) in 2011 and the PPP law have the potential to propel infrastructure growth in the country by offering a better project design, more effective implementation and greater protection for private investors. In addition, the government has started to implement the OECD Transparency Mechanism for contract procurement. In order to increase transparency and efficiency, this mechanism identifies the stages in the process that are vulnerable to acts of corruption and suggests timely measures to correct them.