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Colombia Deep Dive: Building Local Currency Bond Markets to Finance Infrastructure

September 22, 2015

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The Colombia Deep Dive is helping to build long term local currency bond markets to finance infrastructure. Through WBG advisory and investment interventions, the project has helped strengthen the local bond market, strengthen the new infrastructure development bank (FDN), create new products and services, and improve the PPP framework and PPP project preparation.

Challenge

Like many emerging market countries, Colombia faces rising infrastructure financing demands that are too large to be met by the government and banks—at least 7.4% of GDP annually over the next 12 years.    Local bond markets are needed to mobilize long term financing from institutional investors, especially Colombia’s large pensions funds and foreign institutional investors.  The country aims to finance a $25 billion toll road program to create a major road network spanning the country, with 8,000 kilometers—in an aggressive timespan.  Efforts are needed to strengthen the local bond market, Colombia’s new infrastructure development bank, and local investors (e.g. pension funds) so together they can generate the needed financing. The new infrastructure financing ecosystem would in turn attract international institutional investors in search for yield and a reliable investment framework.

Solution

The project leverages WBG advisory, investment and Treasury resources from 8 WBG units to help address the wide range and large-scale of Colombia’s challenges.  This includes:  (1) advisory services to strengthen the local bond markets;  (2) a $70 million IFC investment (FIG) in FDN complemented by advisory services to enhance FDN’s ability to create and deliver products and services that encourage investment in infrastructure;  (3) training to build up pension fund capacity to invest in infrastructure bonds directly and through debt funds; (4) possible investment in a local debt fund to encourage pension financing; (5) advisory services to strengthen the PPP framework and related institutional capacity and financing models for PPPs.  

Results

The project has achieved significant results and laid the foundation for more to come.   Most notable are efforts that are strengthening: 

(1)    The local bond market by enhancing pricing benchmarks and creating new regulations for issuing (May 2014) and investing in infrastructure bonds, including introduction of debt funds (April 2014)—to facilitate pension investment.

(2)    FDN’s ability to support the marketplace, through a $70 million IFC equity investment plus WBG advisory to enhance FDN’s products, services, and operations to encourage domestic and foreign investment – e.g., design of different guarantees that FDN could provide to projects (July 2014); establishment of a $4 million Project Preparation Fund to help develop a project pipeline.

(3)    Domestic pension fund capacity and interest by supporting changes in performance benchmarks and investment regulations that encourage industry competition, and through hands-on training on investing in infrastructure deals.   

(4)    The enabling environment for infrastructure PPPs by advising the national infrastructure agency (ANI) on standardizing documents and project structures.

(5)    Transaction support for the 4G program by working to create an IFC project bond guarantee and possibly investing in a local debt fund.   As of January 2015, 9 projects worth $4.5 billion were awarded, out of a total of 40. 

Bank Group Contribution

The WBG has contributed considerable staff time to the Deep Dive, through the F&M Practice, IFC and WB Treasuries, IFC FIG, WB and IFC infrastructure teams, MIGA, and the CMUs plus financial resources through IFC FIG’s $70 million investment in FDN.   IFC expects to invest in a local infrastructure debt fund and credit- enhancement for  a project bond which will increase financial contributions significantly as will MIGA’s possible cross-border guarantee.   SECO has been a major financier, providing a total of $ 1.35 million in TF through the ESMID securities market development program and the PPIAF program, both managed by the F&M Practice and 139,000 through the WB Treasury managed “ Government Debt and Risk Management Program ”.   

Partners

In addition to the extensive internal partnerships noted above, the Colombia Deep Dive has strong partnerships with external entities that are financing the program and others that are implementing it.   As noted, SECO is the main external funder and has provided considerable financing support.   The program works closely with FDN in an on-going engagement developing financial guarantees.   Other critical partners are ANI, the national infrastructure agency, the Ministry of Finance, and  the Superintendency for the Financial Sector.    

Moving Forward

A second phase of the program is expected to start in late FY15, funded by SECO for approximately $2.5 million, to reinforce critical components, expand their implications to a wider set of infrastructure development needs, and help ensure their overall longevity.   Building on results to date, Phase II will reinforce FDN’s capacity to develop financing solutions for PPP infrastructure projects at the national and sub-national levels; further strengthen investor capacity and interest, with a focus on foreign investors; and deepen and expand the regulatory environment.   Implementation of WBG financial contributions currently being developed, e.g. an IFC bond guarantee and investment in an infrastructure debt fund, MIGA’s cross-border guarantee, would strengthen Phase II’s impact.    

Beneficiaries

Numerous people throughout Colombia will benefit directly from the higher economic activity and employment opportunities that will be generated. The new road network is expected to cut transport costs by around 28 percent with an estimated annual impact of 1.5 percent on GDP growth.