Construction remains a tool for growth in Colombia

A combination of public and private investment in infrastructure, as well as the implementation of public housing plans, continue to be the primary drivers for Colombia’s construction sector. Projects ranging from highway construction to expansion of existing port and airport infrastructure are attracting a rising number of international firms to build and operate important infrastructure across Colombia.

Additionally, the need to reduce the housing gap, as well as overall strong real estate development over the past several years, has also had a positive impact on the construction sector. This is especially true for the country’s important urban areas. These favourable conditions are expected to be maintained over the medium term, providing dynamic construction project opportunities for domestic and international contractors over the coming years.

Figures

The construction sector remains an engine of the country’s economic development, both as a driver for employment and a significant contributor to GDP. In 2014 the construction sector grew by 9.9%, and accounted for over 1.4m direct jobs, according to figures by Colombia’s National Statistics Bureau (Departamento Administrativo Nacional de Estadística, DANE). Much is resting on a new stimulus package that was launched in May 2015, the Plan for Production and Employment (Plan de Impulso a la Productividad y el Empleo, PIPE 2), which follows a previous growth plan. Although it combines other measures, such as reducing red tape and giving more robust support to the critical energy and mining industries, the stimulus package highlights the construction sector’s ability to move the economy forward, through both infrastructure development and the building of new homes.

The total programme is valued at over COP16.84trn ($6.2bn) to be spent over the period 2015-19, according to a report by BBVA Research, although not all of it is made up of new financial resources. The plan is expected to have a positive impact on the construction sector, due to its focus on housing, the acceleration of expenditure on large-scale infrastructure and a programme to rebuild public schools across the country (see analysis).

The government’s bet on using the construction sector to stimulate the overall economy seems to have been validated as of mid-2015. Second quarter growth figures, published in September 2015, showed a 3% increase in national GDP, compared to 2.8% over the first quarter of the year. This expansion was fuelled to a large extent by strong construction sector output, which jumped 8.7% in the second quarter of 2015, compared to the same period in the previous year. The Colombian Chamber of Construction (Cámara Colombiana de la Construcción, CAMACOL) expects the construction sector to grow as much as 9.7% for the whole of 2016, according to October 2015 predictions.

PPP Drive

Colombia’s macroeconomic stability has allowed the country to focus its efforts on addressing its infrastructure gap. In order to attract private investment and know-how into a host of large-scale projects, authorities introduced a public-private partnership (PPP) law in 2012. By June 2015, Colombian authorities had approved COP34trn ($12.5bn) in PPP concession deals for a total of 28 projects, according to local media reports. Of these, 25 were road projects, two were airport expansion projects, with the remaining PPP projects consisting of river transport infrastructure. In addition to the immediate positive impact that revamping transport networks can have on the economy, the private sector and government entities anticipate that more efficient transport connections will benefit the local economy overall by reducing transport costs.

Financing

To a large extent, growth in the construction sector has been linked to developing housing for Colombians. According to figures by CAMACOL, the government spent around COP8trn ($2.9bn) in the first four years of Juan Manuel Santos’ presidency on several housing programmes, including a programme known as “100,000 Free Homes”, as well as a host of subsidies to ease mortgage access for middle-class Colombians. According to CAMACOL, expenditure in housing programmes could reach up to COP10.5trn ($3.9bn) with the addition of new housing subsidies and other financial support mechanisms during the current presidential term.

Less clear is the financial feasibility of some of Colombia’s large-scale infrastructure projects. “For the infrastructure sector today, the question is how the government infrastructure programme will be financed under the current budget conditions. This in only on the infrastructure side, because the housing programmes have had most of their money allocated,” Edwin Bonilla, director of economic studies at CAMACOL, told OBG.

Searching For Space

Colombia’s urban landscape has changed significantly over the past decade, driven primarily by the construction of new homes, commercial and office developments. That said, the pressure for real estate growth has been somewhat tempered by the lack of available space to build, which has become an increasingly challenging problem for developers. Vertical construction has become a viable option for expansion within the country’s cities. As of May 2015, a total of 25 towers of 40 or more floors were under construction or planned to begin construction across the country, according to local media reports. These projects were taking place in Cartagena, Bogotá, Barranquilla and Bucaramanga. Commercial real estate developments have also driven demand in the construction sector. The Colombian Association of Shopping Malls (Asociación de Centros Comerciales de Colombia, ACECOLOMBIA), has estimated that between 2010 and 2015 a total of 60 shopping malls will have opened across Colombia, with an additional 75 projects being developed over the coming four years.

Real estate developers have also allocated considerable amounts of capital into the construction of office spaces across the country. In Bogotá, for example, total inventory is expected to increase by 35%, from 2,265,600 sq metres in the second quarter of 2015, to 3,068,000 sq metres in 2018, according to recent figures by Colliers International (see real estate overview).

Transport Infrastructure

Road development is one of the most visible recipients of investment, specifically the fourth generation (4G) road concession programme. The 4G scheme is expected to inject up to $25bn into a network of modern highways that will add an extra 8000 km to Colombia’s road network. A total of 40 projects will be tendered in waves under the current 4G plans; the projects are expected to represent an injection of $18bn into the construction sector between 2015 and 2021. The bidding process for the first wave of 4G road projects was finalised in 2014, and several more are scheduled.

These large-scale construction projects have been attracting the attention and commitment of domestic as well as international contractors. In July 2015, Colombia’s National Infrastructure Agency (Agencia Nacional de Infraestructura, ANI), which oversees the country’s PPP’s concession deals, allocated the contract to extend and manage the 80-km road between Pasto and Rumichaca to a consortium made up of Spanish company Sacyr Concesiones and Ecuadorian contractor Herdoiza Crespo. The project, estimated at over $1bn, will entail the construction of a second 80-km carriageway, and a contract to manage the highway for a period of 25 years. The project to build another important road link, the 152-km highway linking Bucaramanga to Barrancabermeja and Yondó, also awarded in July 2015, will be executed by Cintra, a subsidiary of Spanish group Ferrovial.

The project will cost an estimated €880m, with the highway link planned to have two lanes going in each direction for about 95 km. Cintra will also oversee the operation of the highway for 25 years. Construction of a 76-km link between Popayán and Santander de Quilichao, in the country’s southwest, will be done by a Colombian-Ecuadorian consortium – Estructura Plural Hidalgo e Hidalgo – and is expected to cost $473m. In April 2015 Colombian authorities opened the bidding for a total of $5.3bn in road projects, the second wave of the 4G road projects.

Private Initiative

In addition to the large number of government-led projects, which tender a pre-defined project to the market and award the projects to contractors to build and operate the infrastructure, changes in regulation now allow for the private sector to present their own proposals for the construction or revitalisation of strategic infrastructure.

Along with facilitating legislation for PPP concession deals, the 2013 Infrastructure Act also established the processes for companies to present unsolicited bids to authorities. Although these building projects have initially been a focus of social and urban infrastructure, such as hospitals and schools, a rising number of road projects are becoming a reality due to an increase in private sector initiatives.

As of July 2015, eight different private-initiative road projects had been approved by the government, representing a total investment of COP17trn ($6.3bn) of private funds. Although some private initiative projects can receive state funds – the law allows for the state to contribute up to 20% of the cost of a project – the private initiative road projects presented were designed to be self-sufficient, with financing secured through the levying tolls. Allocating public funds will be restricted to projects that cannot be sustained with toll money alone.

Some of the road projects developed under the private initiative model include the 225-km Ibagué to Cajamarca road, expected to cost COP1trn ($368m), the 325-km Malla Vial del Mata, budgeted at COP1.2trn ($441.6m) and the Cambao to Manizales road, which will extend for 256 km and cost COP$1.3trn ($478.4m). These projects have already begun to ease transport congestion in the country.

Above or Below

One transport project that is expected to bring significant economic stimulus to the construction sector is the long discussed plan to build Bogotá’s metro system. The project has been a long-standing issue of several municipal administrations over the years. In October 2014, Santos reinforced the project’s feasibility by stating that the central government would contribute with part of the necessary financing for the project. Despite this, the execution and format of the project are still highly disputed. Aside from the financing aspect, federal transport authorities and the local administration have yet to agree on whether the metro line should be underground or elevated. During a National Infrastructure congress in November 2015, recently elected Bogotá Mayor Enrique Peñalosa stated that the financial resources currently available for an underground metro would be insufficient, given the high cost and the Colombian peso’s devaluation. The cost of construction of an underground metro has been estimated at up to COP13.7trn ($5bn). As an alternative option, Peñalosa has defended the construction of an elevated metro system, in order to save money, which he estimates would cost $30m per kilometre, versus a $200m per kilometre estimate for an underground system, local media reported.

A different rail project, based on a private initiative, is also being considered for the capital. A consortium comprised of Colombian firm Constructora Concreto, as well as European companies Torrecamar, Vossloh and FGV proposed the construction of a railway system to link the centre of the city to surrounding suburbs. The system under consideration is composed of two railway lines: an 18-km line linking Sabana to Soacha and a 44-km connection from Facatativáy to Sábana. Budgeted to cost COP$.5trn ($920m), the project would be 80% financed by the consortium.

Mining And Energy

Although they represent an important source of income for the country, the slowdown of the resources boom that has helped Latin American commodity exporters such as Colombia for several years, has had a palpable impact on the country. In spite of the fall in commodity prices, operators have taken a long-term perspective and are maintaining capital expenditure plans. In March 2015, Red Eagle Mining announced it had secured the necessary $65m in financing to be able to move ahead with the construction of its San Ramon gold mine in Colombia. Investment is also set to benefit the energy sector. In July 2015 authorities began constructing the country’s first regasification terminal in Cartagena.

Dollar High

Similarly to what has happened in other countries in the region, Colombia has been impacted by a stronger US dollar during 2015. Between November 2014 and the same month in 2015 the Colombian peso lost 30% of its value, bringing some challenges to construction firms. According to figures by CAMACOL, which analyses the building side of the sector, the construction sector consumes an average of $12bn worth of inputs per year. Of these, about $3bn, or 25% of total inputs, are imported. As of August 2015, the chamber also found that of the 99 products that impact the business, a total of 34 products were being directly affected by the rising value of the US dollar.

Combined these could account for up to 18% of the cost structure of a project. “One clear example are elevators, which have increased 25% in cost, and are having a heavy impact on the total cost of non-residential construction,” Bonilla told OBG.

For other construction inputs, firms find different ways of adapting. “When the US dollar is high, such as the present case, construction companies purchase machinery from Japan. On the other hand, when the US dollar is low, they import it directly from the US. It is a matter of playing with volatility,” Iván Villegas Bermúdez, general manager at Proyekta, a building contractor, told OBG.

On the other hand, the stronger dollar is having a positive impact on the housing side of the construction sector. Remittances for Colombians living abroad account for 1.6% of GDP, and represent about 40% of total money spent on housing acquisition in rural areas, according to CAMACOL.

Regulation

Changes in legislation have helped stimulate sector activity, however improvements to the system are still needed. Regulations that are designed to help private companies and contractors better predict the tender deadlines for some of the large-scale projects would make it easier to plan out financing needs. “The Colombian bidding system has improved considerably in the last decade, but it still needs to advance a step further to reach maturity. Timings remain uncertain,” Francisco Lozano, president of consulting firm Concesia, told OBG.

Municipal elections in 2015 have also brought new possibilities to important construction markets, such as in the capital Bogotá. The previous mayor’s Territorial Development Plan (Plan de Ordenamiento Territorial, POT) had confined the sector by establishing building limitations, such as restrictions to new developments on the city’s limits, which aimed to focus housing developments in the city centre. The POT also restricted multi-storey housing and commercial developments. This reduced the sector’s capacity to plan long-term investments in the country’s main urban centre. “The Bogotá market lost 25% of its annual sales because of the POT. If the new mayor makes more land available, this will reflect very positively on the construction market. In Bogotá the demand is so high that almost everything that comes out is sold,” Bonilla told OBG.

The construction sector remains hopeful of the regulatory changes that are expected to come with the new mayor. “We are confident that the new public administration of Bogotá will facilitate solid procedures of construction and property development that have proved to be extremely difficult and extremely uncertain with the current public administration,” Alejandro Gaviria, general manager of Juan Gaviria Inmobiliaria, told OBG.

Outlook

Authorities have placed a heavy emphasis on the construction sector to help support GDP growth, especially as other sectors such as mining and energy have seen their ability to generate income for the country diminish. This gives the sector a critical role, but also an advantageous position. The PIPE 2 stimulus package aims to ensure that the necessary financial resources continue to flow into housing and infrastructure; this will be important for the sector if it is to continue its high growth rates. Allocation of financing alone will not be sufficient; improving regulation in order to ensure that expenditure plans are followed will be essential.

This is especially true for developments set to take place in the regions, which are sometimes delayed by a lack of adequate coordination between central and local authorities. In addition to these regulatory improvements, it will also be very important for the authorities to show a clear path to large-scale infrastructure financing, which can be sustained.

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The Report: Colombia 2016

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