Investor Report

Colombia could turn out to be one of South America’s big winners in this year’s race for investment. Everyone seems to be talking about the country: even US President Obama mentioned it when he touched on trade during his late-January State of the Union address.

And while bullish reports about Colombia were repeated throughout the latter part of the last decade-often with very limited results-there are indications that at least some of the talk will now translate into investment. President Uribe’s government has recently placed in concession several long anticipated projects, including the “mountain” and “sun” highways, and huge hydroelectric plants are moving ahead. Meanwhile, dedicated private equity funds are starting to deploy the roughly $900 million they have on hand.

”There are now projects that have been concessioned and investors are looking at them”, says Pedro Nel Ospina, partner at Ashmore Group, which is running one of the new infrastructure funds. He adds that Colombia’s robust levels of internal savings also help move plans from the drawing board to reality.

FDI Revival

Foreign direct investment in Colombia last year was approximately $8.5 billion, according to the National Planning Department (DNP). This was around 20% below the previous year, but there are few complaints, given that FDI nosedived around the globe as a result of the international crisis.

DNP head Esteban Piedrahita says he expects FDI to rebound in 2010, possibly reaching pre-crisis levels. He also predicts an upturn in local investment through private equity and other sources, such as private pension funds.

“We are forecasting a strong recuperation. We will continue to see realignment in investment, with much of it going to infrastructure, mining and hydrocarbons,” says Piedrahita.

“Colombia has never had the amount of internal savings that it does now… we are talking about an equivalent of 45% of GDP and much of this is thanks to pension funds”, adds Nel Ospina. “This is an extraordinary moment for the country to begin closing its infrastructure gap”.

Bankable Shortage

There is certainly no shortage of projects being touted by president Uribe’s government. The administration has a long list of transport, energy, hydrocarbons and social infrastructure that it claims is ripe for private investment, whether local or foreign.

One of the newest undertakings by the administration is to create public-private partnerships to construct public buildings. “We foresee private investment to build and maintain infrastructure for schools, courtrooms, etc., freeing up state investment for other sectors” Piedrahita says.

Analysts are generally in agreement with the government assessment. But as in other major Latin American economies, like Mexico, they say there are too few projects that are interesting enough to private investors.

“The government has many plans, but not all of them are attractive for private capital. A road without much traffic or a small regional highway will not generate interest among private equity funds”, says Julio Torres, fund manger at Nexus. The company is one of four private equity funds looking to invest in Colombian infrastructure, and has $60 million in assets for its first fund.

Germán Verdugo, economic analysis director with Colombia’s Correval brokerage firm, says he expects investment this year to flow principally into hydrocarbons, energy and transportation infrastructure, in that order. “Investment will be fastest in the hydrocarbon sector, says the analyst.

“There has been exploration and production is increasing, so there needs to be pipelines, storage and port facilities. Road infrastructure is more medium-term. The government’s highway plan is designed for 2014-2016, so we are in the initial phase and there is time to raise capital”, he adds.

Ecopetrol Issues Again

State-controlled Oil Company Ecopetrol plans on $7 billion on projects ranging from exploration to biofuel production. It sold $1.5 billion in bonds last year to help finance expansion and this year has secure preliminary approval of a $ 1 billion loan from the US Ex-Im Bank for a refinery upgrade. Ecopetrol has also become international, with partnerships in Brazil and Peru helping it increase reserves to 1.88 billion barrels in 2009, or 36% above previous amounts.

The DNP says there is a strong possibility that the government might make available around 5% of the shares in Ecopetrol this year, added to the 10% already in private sector hands. A 2007 local IPO raised $2.8 billion equivalent.

A number of private companies are also planning major expansion in Colombia. Canada’s pacific Rubiales Energy aims to double output to 400,000 barrels/day over the next few years. Its plans on investing slightly more than $ 1 billion this year in Colombia.

Torres’ Nexus, which closed its first fund last year, is evaluating investment in hydrocarbon infrastructure. “Growth this year will be stimulated by hydrocarbons. Our fund has in its focus hydrocarbon infrastructure, such as pipelines and storage centers, and energy generation and transmission”, he adds.

The Nexus fund is the smallest of the four private equity funds set to invest in Colombia this year. Also closing last year was the Colombia Infrastructure Fund operated by Canada’s Brookfield, with $ 400 million. Closing in January 2010 was a fund managed by Ashmore, which raised $ 500 million. A fourth fund, operated by Darby-Colpatria, has $300 million.

Private Equity Pile Up

Ashmore is looking at energy generation projects, as well as highway infrastructure. Nel Ospina estimates that there is probably $4.5 billion in hydroelectric projects alone this year and a couple of billion dollars more in highway infrastructure.

Document Taken from LatinFinance www.latinfinance.com March 03 2010