Managing Fiscal Risk in Colombia – A new methodology improves risk analysis and
paves the way for infrastructure financing through public-private-partnership programs


Colombia has made transportation infrastructure a priority, investing US$24 billion to create a
nationwide toll road network.

The Colombian government has partnered with the World Bank's Government Debt and Risk
Management (GDRM) Program for developing a new methodology to better manage the fiscal
risks of infrastructure.

The new methodology will improve the mitigation of contingent liabilities for infrastructure
projects.

Colombia has a unique topology that makes building any transport infrastructure challenging.
Not only is the country split into three regions by the Andes mountain range, but the Pacific
coast is also obstructed by jungle—with economic activity highly concentrated in geographically
separated territories.

To achieve connectivity across the nation, the government made transportation infrastructure a
priority in the early 2000s. Using an effective public-private-partnership (PPP) program, Colombia
increased investment almost by 50 percent of GDP from 2000 to 2014. The government is now in
the process of undertaking the fourth generation of concessions—the 4G—investing 50 trillion
Colombian pesos* (equivalent to US$13.6 billion) over six years to create a nationwide toll road
network. Additionally, the government announced the template of the concession agreement for
the 5G in Spring 2020.

But such megaprojects also create significant fiscal risks. As a part of the PPP agreements, the
government faces two critical sources of risk. One of them is a cost overrun, which can
materialize if the project goes beyond the estimated budget during the implementation phase
due to land acquisition, environmental factors or utilities. This cost creates direct, explicit
liability.

The other risk is the low toll-road tariff collection rate, where the government pays the
difference between the actual revenue and the estimated revenue to the partners in the PPP. In
this type of risk is also the payment of differential tariffs in which some people near the toll road
obtain a lower price in the tariff. These payments by the government to close the revenue gap
create an explicit contingent liability as the cost is incurred when the income is lower than
expected in the project.

In the early stages of the PPP program—until 2004—obligations for demand guarantees in
electricity, telecommunications, and highways resulted in cumulative payments of 2% of GDP;
prompting the Colombian government to explore methods to improve risk assessment and
mitigation of contingent liabilities from the infrastructure projects.

Partnership with the World Bank to improve fiscal risk assessment
Colombia is a long-term member of the Government Debt and Risk Management (GDRM)
Program, a World Bank initiative, funded by the Swiss State Secretariat for Economic Affairs
(SECO).
The government advocated for including the development of the new methodology as a topic
under the GDRM umbrella. The program had previously supported Colombia in revising and
refining its methodology for quantifying the contingent liabilities of sovereign guarantees for
state-owned enterprises, and lawsuits against the government.

In 2019, the Ministry of Finance and Public Credit developed a new methodology for improving
risk assessment and mitigation of contingent liabilities across the infrastructure sectors to
increase fiscal resilience to crises and spur investment The ministry worked with the project-
implementing institutions, such as the National Infrastructure Agency (ANI), to apply the new
methodology for proposing more accurate budget allocations to the contingency fund. The GDRM
program team provided topical expertise through peer reviews, acted as a sounding board for the
development of the new methodology, and supported the dissemination to the public.


The Colombian government launched the deployment of the new methodology in March 2020 to
subnational governments and private companies, which will be responsible for developing and
implementing infrastructure projects.

At the launch event, the Minister of Transport, Angela Maria Orozco, emphasized the importance
of infrastructure to Colombia—and noted the efforts made by different public entities to close
the gap that Colombia has in roads, ports, and airports.

"The new methodology aims to overcome the limitations of the previous model,� Doerte
Doemeland, Practice Manager for Global Macro and Debt Analytics in the World Bank’s
Macroeconomics, Trade & Investment Global Practice. “This will allow the government and the
project-implementing agencies to achieve a tailored quantification and mitigation of the risks,
project by project,� she said. “It will also let the risk estimation to be in line with the progress of
the work. Because it is based on precise and robust formulas that allow sufficient provision for
explicit contingent liabilities".

César Arias, Director of Public Credit and National Treasury at the Colombian Ministry of Finance,
said: "These methodologies may be a benchmark for good practices for territorial entities that
develop infrastructure projects with private participation. Undoubtedly, it is a breakthrough that
will avoid headaches for both the nation and the subnational governments of the country." He
said the new methodology will also be a better tool to estimate risks and to incorporate real
scenarios in the quantitative analysis.

Paola Molina, Head of the PPP unit at the Colombian Ministry of Finance, stressed the importance
of continuing efforts in order to guarantee the best practices in risk management with the aim of
improving quality infrastructure in the country.

In September 2020, the English version of the new methodology was published, for broader
investor participation. Looking forward, the government will conduct a series of training sessions
for the local authorities, such as cities and municipalities, for incorporating the new methodology
into their plans as they move forward with their public-private partnership projects. Ultimately,
all these efforts will contribute to Colombia's macroeconomic and fiscal management and
reducing Colombia's vulnerability to risks through strengthened fiscal risk management.
    * August 2020 exchange rate

    RELATED
-   Event video: https://www.youtube.com/watch?v=0BN40npfIuw&t=7942s
-   Metodología de valoración de obligaciones contingentes


    Photo:

    https://www.istockphoto.com/photo/colombia-andes-road-from-bucaramanga-to-san-gil-in-the-
    santander-department-near-gm840040772-136792661