Foreign investment has meant more, not less, work for Colombian contractors
Andrade Moreno is a man on a mission. The head of Colombia's infrastructure agency ANI explains how the organisation is giving foreign companies increasing confidence to invest time and money in the country. David Arminas reports
Change, especially when it touches the highest levels of South American business and politics, can bring with it personal danger. Luis Fernando Andrade Moreno, president of Colombia's National Infrastructure Agency - ANI - was aware of this when he took on the role in 2011.
But Andrade is not a man to shy away from a tough job. That job is leading ANI´s infrastructure programme of more than 47 roadway public-private partnership projects covering more than 7,000km.
The forerunner of ANI, the National Institute of Concessions, INCO, was a government agency in charge of planning and executing not just road but river, sea, rail and port transportation projects. It ran from 2003 until allegations of corruption piled up and it was disbanded, to be replaced by ANI
Organisational change is the stock and trade of Andrade who was educated at the University of Florida and has an MBA from the Wharton School of Business at the University of Pennsylvania. Before joining ANI, he had a prominent position based in Bogota as a director of the business consultancy7505 McKinsey & Company. He was sought after by Latin American clients to restructure their organisations and was an associate consultant in New York for the parent firm.
"I was a management consultant for 25 years and my speciality was designing organisations," he says. "Under the 4G (Fourth Generation) highways programme, we have had 27 contracts and we haven’t had a single complaint, a single investigation and not a single lawsuit. In the past, when putting out tenders for around US$500 million worth of work, we had fights among bidders. But now our transparent processes mean bidders have little to argue about."
When Andrade took over at ANI, procurement of Colombia's toll roads had been fraught with allegations of corruption among contractors and government officials. The business environment was spiralling downwards with foreign investors wary of committing their resources to projects under the now failed 2G and then 3G programmes for road construction.
Change was needed, but at what cost, political and personal? The country is still shaking off the image of a nation wracked by drugs cartels making it dangerous to do business, even though this image is fast becoming dated. Has Andrade had any death threats? "No, and that is fascinating," he says, laughing at the idea.
"I thought I was going to have some death threats. A friend from Argentina said if similar changes were tried in Argentina, you and your family would be threatened and it would be wise to send the children to a school out of the country.
"But I have no bodyguards and I take no security measures outside normal ones for any big city. I have not received one threat in four years. But that doesn’t mean I haven’t received pressure. Because contractors use many tools to apply pressure, such as trying to come up with something in your background to discredit you or they ask politicians to investigate you. All these things they have done, but no violence, not even an insinuation of violence."
That doesn't mean change has been easy, he says. What has helped is political will by the government of Juan Manuel Santos, elected president in 2010, for changing the social and business environment. Since 2012, he and his government have been committed to ending one of the world's longest-running civil wars to allow for social stability. Santos has been negotiating with the Fuerzas Armadas Revolucionarias Colombianas (Farc) guerrilla army to bring it into mainstream politics.
Colombia has been hovering in the mid-range of Transparency International's annual global Corruption Index of the public sector. The country ranked 94 out of 174 countries in 2014, the latest survey. As part of Santos' move toward a more open society, the Inter-American Development Bank inked a $30 million loan to the Colombian government in November to boost efficiencies at the Office of the Comptroller. The office, the public expenditure watchdog, audits spending and oversees transparency of budgets.
Andrade says Santos, who was re-elected in 2014, has been personally firmly behind the changes at ANI, changes cemented through Law 1508, a revamped public-private partnership law enacted in January 2012. The PPP law clearly sets out the procurement process and level of detail that a contract must meet before it is even put out to tender. Concessions can last only up to 30 years, including extensions.
Millions are now invested before the tender process starts, explains Andrade. "Before, there was a lot of political pressure to do things quickly. An elected official always wants to see things completed during his [term in office]. Often only pre-feasibility studies were completed taking maybe three or four months, followed by some discussions and maybe six months preparing the contract. Now, this process can take about a year and half."
Following these practices takes the political pressure off technocrats. "If the contract is not prepared in such a way, then ANI and its employees will be breaking the PPP law."
Colombian businesses were initially nervous of the changes, fearing foreign contractors would pick up most of the work. "They said that Andrade is going to allow foreigners to take over our country. But it is the opportunity of a lifetime for many Colombian companies to get more not less of the market. They learn how to operate in an international environment and adapt to management systems of their foreign partners. Also, many international financial institutions do their own due diligence of projects and so Colombian companies learn to work along these international lines."
Andrade points to Spain where a similar situation existed in the 1970s and now many Spanish domestic contractors operate globally. "In time, they will seek contracts abroad based on their experience of working at home," he says.
Part of the government’s commitment to improving ANI was to boost salaries to make them among the best in the public sector and so attract good talent. Not much complaint there.
But an extremely controversial move by Andrade was the introduction of lie-detector tests for all ANI employees. "I was highly criticised, not in public but in private. It was called a humiliation for senior managers. But now, the entire transportation department and their agencies are doing the same thing."
It is all part of the battle against corruption, a global struggle. "You have to do this because corruption has been endemic in this business, not just in Colombia, but globally. Even in Canada there is a problem, as was explained to me during a recent visit to the province of Quebec (see box)."
To date, 27 of the 4G projects have been awarded with the average size around $400 million for about $11 billion worth in total. The planned programme is worth nearly $15 billion, down from around $25 billion due to inflation, although in pesos it remains the same, at around 45 billion.
ANI's work before tendering a contract is now much more rigorous, such as more detailed environmental analysis and social consultation. This has eliminated some construction delays which were endemic under the old 2G and 3G programmes. But some delays were due to contractors moving slowly, which suited them fine. That, too, was going to change. So began what was a "huge cultural change for contractors", he says.
"Contractors had early access to toll money on completed sections of road. So the contractor would use less of his own capital to finance the work and the rate of income from tolls dictated how fast the contractor would work. The result was that a project scheduled to take four years could take as long as eight years. That was the norm, so we had to generate incentives in the other direction: the sooner they finish, the more money they make."
Contractors now work under the availability payment system, as widely used around the world.
"Payments to contractors start once an agreed functional section of the road is open and not before. For large projects, the asset is divided into five or six functional units. We start making payments as each unit is delivered. For example, tolls collected from each part of a functional unit are paid to the contractor only when that functional unit is completely finished. So the faster the contractor delivers, the better his own cash flow."
There was also a issue over additions to contracts as set out in the 3G work. "A contract that had, say, a value of $100 million, a few years later would be up to $200 million or $300 million. Additions would be greater than the original contract and, furthermore, were contracted in any competitive manner," he says.
"For that reason we put a ceiling on the dollar value that can be made to a contract - 20% of the contract’s value. It gives us some space to add works not initially forecast but it doesn't alter the basic economic equation of the contract."
A difference between the now disbanded INCO and ANI is governance, he says. ANI has independent directors on the board – directors independent from the government. Ani also has advisors from the legal, engineering and academic worlds as well as think tanks.
COUNTRY FOCUS
POPULATION:
49 million (2015)
SQUARE MILES:
1,141,748 km2
GDP 2014:
$683 billion (data IMF)
PER CAPITA GDP:
$8,860 (data IMF)
Mountainous terrain within the northern South American country presents formidable challenges to road builders working to connect Colombia's interior cities among the Andes Mountains to major ports along the Atlantic and Pacific coasts. Colombia's Western Trunk highway, part of the Pan-American Highway, crosses to Ecuador, where the highway is called the Sierra Trunk or Troncal de Sierra.
GDP increased at an average rate of over 4% per year between 1970 and 1998. The country suffered a recession in 1999 but growth rebounded to 6.9% in 2007, one of the highest rates of growth in Latin America, according to the World Bank.
According to DANE, the National Administrative Department of Statistics, in the second quarter 2015 growth was led by an 8.7% expansion in the construction sector. But a slower economic growth for 2015 was forecast because of falling prices for Colombia's oil, coal, coffee and gold. Mining expanded 4.2% and agriculture 2.5% percent, while manufacturing output contracted 1.3%. Annual inflation year-on-year to November 2015 was nearly 7%.ANI also practices "collegiate decision-making" which means decision-making can be "a little bit slower" but the process "is a very good vaccine against corruption and manipulation", he says.
"Once construction work has started, we have a project supervisor and an independent engineering consultancy firm to ensure the contract is proceeding properly. In the past the quality of this engineering company was questionable and the supervisor had a lot of authority whereby between them they could sign off changes. But now, we have bidding for the position of the independent engineering firm and encourage foreign participation in it."
To strengthen the process further, the supervisor is head of a team that includes legal and planning experts. The team meets every week with the head of the independent engineering firm to review progress. "There must be a consensus about making changes which are then put to a contract committee that includes me and six subordinates.
"Every decision in the committee has a ‘life story’, a paper trail of opinion and documents to support the committee’s final decision. If anyone wants to know why the committee allowed changes to the contract or specifications for a road or bridge, the full story is there. My signature is on that piece of paper."
To aid further transparency, the opening of bids are videoed "for anyone who wants to watch", says Andrade. "Anyone below that 10% of the average bid gets eliminated. Why is this done? In 3G we got very aggressive bidding and then, of course, the contractors ran into trouble and they would start to negotiate modifications for the contract and we all would end up in lawsuits."
The usual commitments by the contractor must be there, such as priority to local materials, local hiring as well as quality controls and service levels. "The question then becomes how much money the government must pay the contractor in addition to toll revenues."
Within that 10% band, the lowest price wins, always. Also, there is no competitive dialogue. "Once you start putting other criteria on the table for winning, when you start leaving room for more and more evaluations, that’s when corruption creeps in."
The new way of working came as a short sharp shock to one contractor, says Andrade. "In one of the first 4G contracts, a major contractor was eliminated, much to its surprise." The contractor was one of those bidders who in the past had been accused of using aggressive pricing. That contractor and the market in general."
Andrade says he has had to stand firm in the face of "some pretty negative feedback, mostly from Europe". That process is very long, contentious and subjectivity creeps in. But the end result is that local contractors and the economy in general have benefited from this new regime. Around two-thirds of the equity that consortia put into a contract goes into the local businesses and the economy to build the project.
Andrade acknowledges the road ahead is difficult, but must be travelled if foreign investor confidence is to increase. The government executive agency Procolombia is a first stop for foreign companies wanting to do business in Colombia. However, so far there are very few PPP projects outside the transportation sector, which makes 4G a showcase.
"A lot of other organisations are talking to us about PPP issues. We now also are getting a lot of interest from foreign companies wanting to invest in Colombia. Within the winning 4G consortia, we have more than 15 international companies and over 30 national companies."
The first three 4G projects were financed through Goldman Sachs and other major financial institutions have come on board, he says. Among these are Brazil's Itau Bank - Latin America's largest - and Sumitomo Mitsui Bank from Japan.
"Relative to the size of Colombia's economy, this is a huge boost for us," says Andrade. "People are now saying that this little country is doing well."
Corruption respects no borders
Canada's construction sector, especially in the mainly French-speaking province of Quebec, was rocked with the publication in November of the Charbonneau Commission Report on corruption.
The inquiry that focused on bribes, kickbacks and violence found links between political donations and the awarding of construction contracts in Montreal and other Quebec cities.
Organised crime, including the Mafia and Hells Angels motorcycle gangs, had infiltrated so deeply into the construction industry that they had become "untouchable". They were influencing contract awards through “intimidation, threats, vandalism, racketeering, prostitution and pimping”.
The 1,600 page report included 60 recommendations to stop illegal practices, "the first step in a job that will never end", according to the report’s author Justice France Charbonneau. Investigations led to the resignation of the mayors of Montreal and nearby Laval.
Procolombia
Procolombia is a government executive agency in charge of promoting Colombian non-traditional exports, international tourism and foreign investment to Colombia. Within Colombia, it helps domestic companies with support for working overseas with global partners.
Its 18 foreign offices also provide international companies with trade, legal, and educational information about Colombia's markets, products, services and companies.
Change, especially when it touches the highest levels of South American business and politics, can bring with it personal danger. Luis Fernando Andrade Moreno, president of Colombia's National Infrastructure Agency - ANI - was aware of this when he took on the role in 2011.
But Andrade is not a man to shy away from a tough job. That job is leading ANI´s infrastructure programme of more than 47 roadway public-private partnership projects covering more than 7,000km.
The forerunner of ANI, the National Institute of Concessions, INCO, was a government agency in charge of planning and executing not just road but river, sea, rail and port transportation projects. It ran from 2003 until allegations of corruption piled up and it was disbanded, to be replaced by ANI
Organisational change is the stock and trade of Andrade who was educated at the University of Florida and has an MBA from the Wharton School of Business at the University of Pennsylvania. Before joining ANI, he had a prominent position based in Bogota as a director of the business consultancy
"I was a management consultant for 25 years and my speciality was designing organisations," he says. "Under the 4G (Fourth Generation) highways programme, we have had 27 contracts and we haven’t had a single complaint, a single investigation and not a single lawsuit. In the past, when putting out tenders for around US$500 million worth of work, we had fights among bidders. But now our transparent processes mean bidders have little to argue about."
When Andrade took over at ANI, procurement of Colombia's toll roads had been fraught with allegations of corruption among contractors and government officials. The business environment was spiralling downwards with foreign investors wary of committing their resources to projects under the now failed 2G and then 3G programmes for road construction.
Change was needed, but at what cost, political and personal? The country is still shaking off the image of a nation wracked by drugs cartels making it dangerous to do business, even though this image is fast becoming dated. Has Andrade had any death threats? "No, and that is fascinating," he says, laughing at the idea.
"I thought I was going to have some death threats. A friend from Argentina said if similar changes were tried in Argentina, you and your family would be threatened and it would be wise to send the children to a school out of the country.
"But I have no bodyguards and I take no security measures outside normal ones for any big city. I have not received one threat in four years. But that doesn’t mean I haven’t received pressure. Because contractors use many tools to apply pressure, such as trying to come up with something in your background to discredit you or they ask politicians to investigate you. All these things they have done, but no violence, not even an insinuation of violence."
That doesn't mean change has been easy, he says. What has helped is political will by the government of Juan Manuel Santos, elected president in 2010, for changing the social and business environment. Since 2012, he and his government have been committed to ending one of the world's longest-running civil wars to allow for social stability. Santos has been negotiating with the Fuerzas Armadas Revolucionarias Colombianas (Farc) guerrilla army to bring it into mainstream politics.
Colombia has been hovering in the mid-range of Transparency International's annual global Corruption Index of the public sector. The country ranked 94 out of 174 countries in 2014, the latest survey. As part of Santos' move toward a more open society, the Inter-American Development Bank inked a $30 million loan to the Colombian government in November to boost efficiencies at the Office of the Comptroller. The office, the public expenditure watchdog, audits spending and oversees transparency of budgets.
Andrade says Santos, who was re-elected in 2014, has been personally firmly behind the changes at ANI, changes cemented through Law 1508, a revamped public-private partnership law enacted in January 2012. The PPP law clearly sets out the procurement process and level of detail that a contract must meet before it is even put out to tender. Concessions can last only up to 30 years, including extensions.
Millions are now invested before the tender process starts, explains Andrade. "Before, there was a lot of political pressure to do things quickly. An elected official always wants to see things completed during his [term in office]. Often only pre-feasibility studies were completed taking maybe three or four months, followed by some discussions and maybe six months preparing the contract. Now, this process can take about a year and half."
Following these practices takes the political pressure off technocrats. "If the contract is not prepared in such a way, then ANI and its employees will be breaking the PPP law."
Colombian businesses were initially nervous of the changes, fearing foreign contractors would pick up most of the work. "They said that Andrade is going to allow foreigners to take over our country. But it is the opportunity of a lifetime for many Colombian companies to get more not less of the market. They learn how to operate in an international environment and adapt to management systems of their foreign partners. Also, many international financial institutions do their own due diligence of projects and so Colombian companies learn to work along these international lines."
Andrade points to Spain where a similar situation existed in the 1970s and now many Spanish domestic contractors operate globally. "In time, they will seek contracts abroad based on their experience of working at home," he says.
Part of the government’s commitment to improving ANI was to boost salaries to make them among the best in the public sector and so attract good talent. Not much complaint there.
But an extremely controversial move by Andrade was the introduction of lie-detector tests for all ANI employees. "I was highly criticised, not in public but in private. It was called a humiliation for senior managers. But now, the entire transportation department and their agencies are doing the same thing."
It is all part of the battle against corruption, a global struggle. "You have to do this because corruption has been endemic in this business, not just in Colombia, but globally. Even in Canada there is a problem, as was explained to me during a recent visit to the province of Quebec (see box)."
To date, 27 of the 4G projects have been awarded with the average size around $400 million for about $11 billion worth in total. The planned programme is worth nearly $15 billion, down from around $25 billion due to inflation, although in pesos it remains the same, at around 45 billion.
ANI's work before tendering a contract is now much more rigorous, such as more detailed environmental analysis and social consultation. This has eliminated some construction delays which were endemic under the old 2G and 3G programmes. But some delays were due to contractors moving slowly, which suited them fine. That, too, was going to change. So began what was a "huge cultural change for contractors", he says.
"Contractors had early access to toll money on completed sections of road. So the contractor would use less of his own capital to finance the work and the rate of income from tolls dictated how fast the contractor would work. The result was that a project scheduled to take four years could take as long as eight years. That was the norm, so we had to generate incentives in the other direction: the sooner they finish, the more money they make."
Contractors now work under the availability payment system, as widely used around the world.
"Payments to contractors start once an agreed functional section of the road is open and not before. For large projects, the asset is divided into five or six functional units. We start making payments as each unit is delivered. For example, tolls collected from each part of a functional unit are paid to the contractor only when that functional unit is completely finished. So the faster the contractor delivers, the better his own cash flow."
There was also a issue over additions to contracts as set out in the 3G work. "A contract that had, say, a value of $100 million, a few years later would be up to $200 million or $300 million. Additions would be greater than the original contract and, furthermore, were contracted in any competitive manner," he says.
"For that reason we put a ceiling on the dollar value that can be made to a contract - 20% of the contract’s value. It gives us some space to add works not initially forecast but it doesn't alter the basic economic equation of the contract."
A difference between the now disbanded INCO and ANI is governance, he says. ANI has independent directors on the board – directors independent from the government. Ani also has advisors from the legal, engineering and academic worlds as well as think tanks.
COUNTRY FOCUS
POPULATION:
49 million (2015)
SQUARE MILES:
1,141,748 km2
GDP 2014:
$683 billion (data IMF)
PER CAPITA GDP:
$8,860 (data IMF)
Mountainous terrain within the northern South American country presents formidable challenges to road builders working to connect Colombia's interior cities among the Andes Mountains to major ports along the Atlantic and Pacific coasts. Colombia's Western Trunk highway, part of the Pan-American Highway, crosses to Ecuador, where the highway is called the Sierra Trunk or Troncal de Sierra.
GDP increased at an average rate of over 4% per year between 1970 and 1998. The country suffered a recession in 1999 but growth rebounded to 6.9% in 2007, one of the highest rates of growth in Latin America, according to the World Bank.
According to DANE, the National Administrative Department of Statistics, in the second quarter 2015 growth was led by an 8.7% expansion in the construction sector. But a slower economic growth for 2015 was forecast because of falling prices for Colombia's oil, coal, coffee and gold. Mining expanded 4.2% and agriculture 2.5% percent, while manufacturing output contracted 1.3%. Annual inflation year-on-year to November 2015 was nearly 7%.ANI also practices "collegiate decision-making" which means decision-making can be "a little bit slower" but the process "is a very good vaccine against corruption and manipulation", he says.
"Once construction work has started, we have a project supervisor and an independent engineering consultancy firm to ensure the contract is proceeding properly. In the past the quality of this engineering company was questionable and the supervisor had a lot of authority whereby between them they could sign off changes. But now, we have bidding for the position of the independent engineering firm and encourage foreign participation in it."
To strengthen the process further, the supervisor is head of a team that includes legal and planning experts. The team meets every week with the head of the independent engineering firm to review progress. "There must be a consensus about making changes which are then put to a contract committee that includes me and six subordinates.
"Every decision in the committee has a ‘life story’, a paper trail of opinion and documents to support the committee’s final decision. If anyone wants to know why the committee allowed changes to the contract or specifications for a road or bridge, the full story is there. My signature is on that piece of paper."
To aid further transparency, the opening of bids are videoed "for anyone who wants to watch", says Andrade. "Anyone below that 10% of the average bid gets eliminated. Why is this done? In 3G we got very aggressive bidding and then, of course, the contractors ran into trouble and they would start to negotiate modifications for the contract and we all would end up in lawsuits."
The usual commitments by the contractor must be there, such as priority to local materials, local hiring as well as quality controls and service levels. "The question then becomes how much money the government must pay the contractor in addition to toll revenues."
Within that 10% band, the lowest price wins, always. Also, there is no competitive dialogue. "Once you start putting other criteria on the table for winning, when you start leaving room for more and more evaluations, that’s when corruption creeps in."
The new way of working came as a short sharp shock to one contractor, says Andrade. "In one of the first 4G contracts, a major contractor was eliminated, much to its surprise." The contractor was one of those bidders who in the past had been accused of using aggressive pricing. That contractor and the market in general."
Andrade says he has had to stand firm in the face of "some pretty negative feedback, mostly from Europe". That process is very long, contentious and subjectivity creeps in. But the end result is that local contractors and the economy in general have benefited from this new regime. Around two-thirds of the equity that consortia put into a contract goes into the local businesses and the economy to build the project.
Andrade acknowledges the road ahead is difficult, but must be travelled if foreign investor confidence is to increase. The government executive agency Procolombia is a first stop for foreign companies wanting to do business in Colombia. However, so far there are very few PPP projects outside the transportation sector, which makes 4G a showcase.
"A lot of other organisations are talking to us about PPP issues. We now also are getting a lot of interest from foreign companies wanting to invest in Colombia. Within the winning 4G consortia, we have more than 15 international companies and over 30 national companies."
The first three 4G projects were financed through Goldman Sachs and other major financial institutions have come on board, he says. Among these are Brazil's Itau Bank - Latin America's largest - and Sumitomo Mitsui Bank from Japan.
"Relative to the size of Colombia's economy, this is a huge boost for us," says Andrade. "People are now saying that this little country is doing well."
Corruption respects no borders
Canada's construction sector, especially in the mainly French-speaking province of Quebec, was rocked with the publication in November of the Charbonneau Commission Report on corruption.
The inquiry that focused on bribes, kickbacks and violence found links between political donations and the awarding of construction contracts in Montreal and other Quebec cities.
Organised crime, including the Mafia and Hells Angels motorcycle gangs, had infiltrated so deeply into the construction industry that they had become "untouchable". They were influencing contract awards through “intimidation, threats, vandalism, racketeering, prostitution and pimping”.
The 1,600 page report included 60 recommendations to stop illegal practices, "the first step in a job that will never end", according to the report’s author Justice France Charbonneau. Investigations led to the resignation of the mayors of Montreal and nearby Laval.
Procolombia
Procolombia is a government executive agency in charge of promoting Colombian non-traditional exports, international tourism and foreign investment to Colombia. Within Colombia, it helps domestic companies with support for working overseas with global partners.
Its 18 foreign offices also provide international companies with trade, legal, and educational information about Colombia's markets, products, services and companies.
