The road to project finance in Colombia



Over the last eight years there has been a considerable rise in the number of infrastructure projects in Colombia. Most of these projects have been developed under the public-private partnership (PPP) structure and involve state-granted concessions. The construction and operation of toll road projects has been a key element in the rise of infrastructure development in Colombia, mainly since the fourth generation of toll road concessions (4G programme) was launched by the government in 2016. The 4G programme requires investment of at least $20bn between 2015 and 2021 into Colombia’s road infrastructure, with the idea that each concession would be funded and developed mainly under a project finance scheme. Nevertheless, due to some contractual obligations imposed on the concessionaire by governmental entities and other conditions imposed by financial institutions on the sponsors, in practice, 4G projects in Colombia are not being developed under a typical project finance scheme.

This article intends to provide a summary of the fundamentals of project finance to analyse how risk exposure is one of the major problems faced by sponsors of infrastructure projects in Colombia and the importance of legal advisers in the process of remedying this situation.

Fundamentals of project finance

In a common project finance scheme, most of the funds required for the development of the project are obtained from third-party financing. Under this scheme, creditors and lenders support their loans with the future cash flows of the project, and to a lesser degree, with the assets that belong to the project. In this sense, most of the risk for the development of the project is assumed by the lenders, which provide most of the required capital, and not by the shareholders or owners of the concession. The purpose of this mechanism is to secure financing for the project with its expected capacity to produce cash flows once the infrastructure is operational, which in turn allows the sponsors or developers of the project to avoid funding the project entirely with their own resources. Additionally, under this scheme, shareholders are allowed to keep the liabilities of the project out of their balance sheets.

One of the basic principles of project finance is a low risk exposure for the shareholders or sponsors of the project, as it will be primarily funded with resources provided by financial institutions and lenders, and not with the sponsors’ own resources. This low risk exposure, in turn, entails a low profitability of the investment during the first years of the project, as most of the profits will be used to pay the debt and the accrued interests. Another important characteristic of project finance is that the sponsors or shareholders of the project will incorporate a special purpose vehicle that will commit to the government contract and have the responsibility of developing and operating the project. In this way, the risks of the project are borne by a specific legal entity separated from the sponsor or shareholders.

The Colombian scenario – risk allocation and sponsor exposure

One of the major misconceptions of Colombian project finance consists of the risk exposure required from sponsors. For instance, in the 4G programme, concessionaires are required to provide a performance guarantee to secure the overall fulfillment of the concession agreement, which includes not only making the required equity contributions by the sponsors, but also complying with burdensome obligations in areas such as labour and social security, environmental licensing and tort liability with third parties. Additionally, as the special purpose vehicle that will act as concessionaire does not have enough assets to support this guarantee, the governmental entity usually requires counter-guarantees from the sponsors or shareholders of the project. In practice this entails that the sponsors or shareholders will assume a risk exposure that exceeds the amount of the equity effectively contributed to the project, which contradicts one of the basic premises of project financing. When the shareholders or sponsors of the project are required to guarantee it with their personal assets or an unlimited parent guarantee, the essence of the project finance model is lost.

The issue of risk allocation and sponsor exposure in the Colombian context becomes more problematic when a major component of the 4G programme is analysed – environmental licensing. Under the 4G programme, the concessionaire is responsible for obtaining all the environmental licences required to develop the project. This responsibility includes what Colombian legislation defines as the ‘prior consultation process’ with the indigenous communities present in the geographic area of the project. Under this process, the concessionaire and the indigenous communities set the terms under which the concessionaire will contribute to the social and economic development of the community as compensation for the project’s development in their area of settlement. The concessionaire will be liable for not complying with these agreements, hence the sponsors are also open to potential claims in this respect under the counter-guarantees they provided to the concessionaire.

The legal adviser

The misconceptions of the basic principles under which project finance operates by the infrastructure sector and its agents in Colombia have truly enhanced the importance of the legal adviser in this type of operation. Often, foreign investors that are making their first approximations in the industry have considerable difficulties in grasping the burdensome requirements and high thresholds of risk exposure required from sponsors of infrastructure projects.

In this context, the legal adviser has a dual role of significant responsibility. First, it must provide the potential investor with all the necessary elements in order to make an informed and reasonable investment decision. This obligation encompasses the duty of the legal adviser to properly explain to the potential investor that the particularities of Colombian project finance and key aspects, such as risk exposure and expected counter-guarantees, vary significantly from the market standards in other jurisdictions. Second, the legal adviser has, or should have, an educational role with the relevant stakeholders, such as governmental entities, financial institutions and local sponsors, as to the international standards of project finance. In this sense, the legal adviser will have to progressively introduce these standards in the Colombian context and attempt to persuade the local authorities of their importance and widespread applicability.

Of course, this is not an easy task as, in most cases, it requires both the protection of the immediate interests of parties and to think in a more altruistic way and in the long term. For example, if we are advising a bank or an insurance company in a 4G project we would like to obtain as much guarantees as possible, including unlimited parent guarantees or similar. However, if we think long term, a legal advisers’ role should also focus on educating parties and making the market more sophisticated. This, in turn, will make the market more attractive for foreign investors and will speed up the process of infrastructure development in Colombia. Only by demonstrating the immense legal cost of local misconceptions will the local infrastructure authorities and other agents recognise the importance of adopting and observing truly international project finance standards.


Felipe Mariño is a partner, Juan Pablo Caicedo De Castro is an associate and Natalia Velasco is a junior assocaite at Gómez-Pinzón Zuleta Abogados S.A.S. Mr Mariño can be contacted on +571 319 2900 ext. 344 or by email: Mr Caicedo can be contacted on +571 319 2900 ext. 291 or by email: Ms Velasco can be contacted on +571 319 2900 ext. 618 or by email:

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Felipe Mariño, Juan Pablo Caicedo De Castro and Natalia Velasco

Gómez-Pinzón Abogados S.A.S.

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