Colombia - El Vino- Pto Salgar Toll Road Project

Report No. PIC4439 Project Name Colombia-El Vino-Pto. Salgar Toll... Road Project Region Latin America and the Caribbean Sector Highways Project ID COPA39082 Borrower Instituto Nacional de Vias (INVIAS) Guarantor Republic of Colombia Implementing Agency Instituto Nacional de Vias (INVIAS) Av. El Dorado - CAN Bogota, Colombia Contact: Mr. Juan Manuel Leano (Project Coordinator) Phone No. Fax.: Date initial PID prepared August 21, 1996 Project Appraisal Date end April 1997 Projected Board Date September 1997 Background. In the past five years the Colombian transport sector has witnessed major changes with regard to its institutional structure and the role of the private sector in the construction and operation of major transport infrastructure facilities. These changes have brought about substantial reductions in transport costs for Colombia's externally traded goods and commerce. Nevertheless, critical weaknesses in the transportation system, particularly in road infrastructure (which serves more than 90% of freight transport excluding pipelines), undermine the competitiveness of the Colombian economy and introduce higher than normal levels of transport costs in all phases of the economy. The main problem of Colombia's road system is the poor operating conditions of the highways that serve the largest consumption and production centers located on rugged mountain ranges (a factor that notably add to the cost of expanding and modernizing the road infrastructure). Years of chronic deficit in public funding, untimely implementation of investments as a result of mismanagement, and poor quality of maintenance of primary highways have compounded those conditions. The main tenets of Government's strategy to overcome these constraints have been to: (1) strengthen sector management by splitting responsibility for planning and policy making from execution, and establishing a road agency --INVIAS-- to manage a well-defined network of export/import corridors and trunk roads; (3) decentralize the provision and management of road infrastructure by passing on to departments and local governments responsibility over secondary and tertiary roads; (4) increase the level of investments from less than 1%  of GDP before 1994 to more than 2.09 for 1995-1998 to clear the existing road infrastructure backlog and accommodate the transport system to present needs; (5) reformulate the system of road user charges to eliminate distortions in coverage among different vehicle classes and across the national, departmental and municipal levels of administration; and (6) expand the role of the private sector by contracting out all road operations and bringing the private sector to finance and manage road projects under long-term concessions. Government has committed itself to an ambitious program of private sector participation in road infrastructure. As presently defined, the road concession program calls for a total private investment for the period 1995-1998 of about US$1.2 billion. Since 1994, 12 concession contracts have been awarded for rehabilitation of about 1,080 km and construction of about 0 km. The final targets, including concessions to be granted beyond 1998, aim at modernizing about 4,900 km or about 30t of the national highway system entrusted to INVIAS. The private sector has responded with interest, though the program targets have been recently downsized to reflect the progress made to date in procuring the projects and more realistic assumptions with regard to engineering the projects and mobilizing the financing needed to support them. As opposed to other infrastructure sectors, most of the financing for the road projects in Colombia has come from local banks, with conditions in terms of maturities and interest rates that are costly and unsecure for developing projects. These arrangements were made possible by the fact that the financing requirements have been relatively modest in size. In contrast, projects of the size of El Vino-Pto. Salgar Toll Road will have to rely on foreign capital markets to raise the needed amounts and maturities of debt financing. Project Objectives. The overall purpose of the project is to improve transport conditions along a strategic road corridor linking Bogot with MedellAn and the ports on the north coast through an effective and sustainable private-public partnership. The specific objectives are to: (a) reduce transport costs by building key links and upgrading existing sections along the highway corridor; (b) attract a competent private project company to mobilize equity and debt through more secure and favorable financing structures to finance road improvements and manage operations; and (c) strengthen INVIAS' capacity to prepare future road concession projects and put into effect key policies for sustainable development of road corridors. Selected indicators of success include: By year 2002 ... vehicle operating costs on the upgraded corridor reduced by 40t for cars and buses and by 65t for trucks from those in 1996; travel time between Bogot and Pto. Salgar reduced to 2.5 hours for cars and buses from an average of 4 hours in 1996; the level of service (expressed by the volume/capacity ratio) on existing road from Villeta to La Dorada increased as a result of deviating truck traffic onto the new highway; By year 2007 ... incidence of injuries and fatalities on the corridor reduced - 2 -  (expressed by average rate per million vehicle kilometers); project established a track record of good performance, allowing similar projects to tap financing on international scale without need of a Bank guarantee. Government exposure to minimum revenue contingent obligations released after seven years of operation (as opposed to previous road concessions in which it remains throughout the concession period); social disturbances and misallocation of traffic along the corridor avoided as a result of setting toll rates that are commensurate with user's willingness to pay and the increased level of service along the corridor; about 2,000 Ha. of endangered Subandean forest in the region preserved through a compensation reserve established through the project; a competent private operator continues effectively operating the corridor, providing road users with modern security and emergency services under a long-term concession. Project Description. As currently envisaged, the project will comprise operating about 560 km of one of the most strategic road corridors in Colombia, improving transport conditions between Bogot and Medellin and, via the Troncal del Magdalena, the Atlantic ports. The project entails (1) building about 74 km of a high-standard two-lane highway between Tobiagrande and Pto. Salgar, (2) improving critical sections of about xxx km of existing highways between El Vino-Tobiagrande and La Dorada-San Alberto, (3) maintaining the existing alternative route between Tobiagrande and La Dorada, and (4) collecting tolls and providing modern safety and emergency services along the 560 km corridor throughout a long-term concession. INVIAS will select through a competitive process the private project company that will undertake and partially finance the project. Laws 80 (Public Procurement Law) and 105 (Transport Law), both of 1995, form together the legal basis for the concession. The concession grants the selected project company the right to operate and collect tolls on the project for a specified period of time, in return of undertaking the road works mentioned above and fulfilling minimum service and performance standards as defined in the Concession Agreement (CA). The project has high cost but high revenue growth, with the early years being the most financially precarious. Government will make an up-front capital contribution for the project to be capable of defraying construction costs and covering debt service and a reasonable return on equity based on (1) expected cash flows during a concession period (say 20 years) that is shorter than the economic life of the project assets, and (2) reasonable toll rates that would avoid excessive traffic diversions and erode the benefits to be accrued to the transportation system as a result of building the project. The proposed public-private partnership is sought as the best means to channel additional resources to supply the necessary services in a shorter time, and to increase the efficiency in construction and operation of the project. Operating the project through a concession will also allow putting in place modern security and emergency services which in this case are deemed essential for the safe operation of the various tunnels considered under the - 3 -  project. The project composition and costs is as follows: Component US$million Turnkey contract for road construction and improvements 396 Eligible contingencies in tunnel construction 40 Operation of the highway corridor (including equipment for toll collection and safety services) 15 Stand-by Liquidity Facility 60 Project development and supervision, and other financial consultancies; interest during construction 31 Total 542 Project Financing. The project would be funded jointly by Government and the private sector. The proposed Bank instruments were chosen to provide credit enhancement to the project. They include a stand-by loan to finance eligible contingencies in tunnel construction, and support a liquidity facility for the revenue support structure that will be available during the first years of operation of the concession, and a partial risk guarantee to protect lenders against debt service default due to lack of compliance by GOC with its payment obligations as defined in the CA. The obligations covered under the guarantee will include non-insurable force majeure or other calamities, and sovereign risks (ie., expropriation, termination, toll adjustments, convertibility). Subject to caps to be specified in the bidding documents, the amount of the government contribution and the size and availability period of the revenue support structure will be determined by bidders. The use of the Bank guarantee will also be optional and it will be available for amortizing loans and capital markets instruments with maturities of 10 years or longer. The financing during construction is estimated as follows: Source US$million Government capital contribution 235 Private sector (equity and debt)/1 147 Revenue from existing tolls during construction 60 IBRD stand-by loans for (1) contingencies in tunnel construction, and (2) liquidity facility 100 Total 542 1/ At the option of bidders, up to US$80 million of debt may be covered under the Bank partial risk guarantee Project Implementation. INVIAS will have responsibility for (1) defining the project standards and acquiring the right-of-way for project execution, (2) granting the concession to the selected concessionaire, (3) channeling the government's capital contribution to the project and fulfilling its obligations under the CA, (3) auditing through designated experts the concessionaire's compliance with the performance standards set in the CA, (4) authorizing tariff adjustments and enforcing traffic regulations throughout the concession period , and (5) maintaining in good condition the roads connecting with the project corridor. The special purpose private Project Company, will be responsible -4 -  throughout the duration of the concession for (1) mobilizing the funds (equity and debt) and resources needed to undertake the project, (2) setting a Trustee acceptable to INVIAS to administer project funds, expenditures and operation revenues, (3) refining the engineering designs and undertaking the highway improvements defined in the CA, (4) operating the facility in compliance with minimum service and performance standards set in the CA, (5) collecting tolls on the project, and (6) returning the facility to INVIAS upon completing the concession period (or reaching the maximum return requested at the bidding stage, whichever is earlier). Other governmental agencies involved are (1) the Ministry of the Environment (MOE), responsible for granting the environmental license for the project, and (2) the Corporacion AutAnoma Regional (CAR), responsible for the permits (location of campsites, protection of water sources and use of quarries). Project Sustainability. The sustainability of the project benefits derives from (1) the ability of the concessionaire to complete the project and comply with the long-term performance standards set in the CA, and (2) the acceptance of the proposed toll rates by road users. Choosing a competent project sponsor, with sufficient qualifications as an operator of long-term concessions minimizes this risk. The initial toll rates will be fixed by INVIAS taking into account the user's willingness to pay and possible impact on traffic diversions. Government contribution is intended to make the project financially viable with affordable toll rates. In turn, the project must generate enough revenues to enable the concessionaire service the debt and cover operation and maintenance expenditures. A critical factor is to mobilize long-term debt to avoid excessive exposure during the first five to seven years of operation of the concession. Lessons learned from past operations in the Country. Both, the project's design and the choice of Bank instruments build on the experience available internationally and, in particular, the results obtained so far in Colombia with the on-going plan for infrastructure development through private sector participation. Most of the implementation issues experienced with the road concession program so far can be addressed emphasizing quality-at-entry in project preparation, by (1) retaining financial advisors with international experience to structure the project, prepare the legal documentation and advise INVIAS throughout the procurement process, (2) re-designing the bidding process to attract high quality international investors (including a well-targeted promotion campaign and a simpler bid evaluation criteria to prompt bidders' attention on the few parameters upon which strong competition is critical for achieving long-term efficiency), (3) making available to prospective bidders detailed engineering data but allowing them the time needed to quote their own estimates, (4) using state-of-the-art technology to produce traffic forecasts, and (5) addressing in advance environmental and social issues that may arise from the proposed route location, the toll rate structure, and location of toll collection facilities. Financial sustainability of a BOT project of the size of the El Vino- Pto. Salgar project requires mobilizing more secure and favorable - 5 -  financing structures than those prevailing in current road concessions in Colombia. This necessitates ensuring access to international markets by (1) improving the allocation of risks among the parties in the current concession contracts (in particular termination clauses); (2) redefining government support through fewer obligations but directly aimed at helping the concessionaire meet is debtor obligations, particularly at the beginning of the concession; (3) giving liquidity to these obligations through clear and credible compensation mechanisms; and (4) minimizing the impact of the foreign exchange risk (in view that all project revenues are in local currency). Poverty Category. Not applicable. Environmental Aspects. The project has been rated 'A' since entails new road construction through sensitive areas: (1) some patches of primary Andean forest on steep hillsides affected, (2) areas of unstable geological formations, which may accelerate erosions, (3) relocation of about 20 families dispersed along the new road alignment, and (4) some areas of suspected archaeological importance. The Ministry of the Environment issued the environmental license for the project in 1994. Subsequent changes in about 40t of the initial road alignment during project preparation have further reduced potential environmental impacts (most rural communities have been avoided, the need for relocation of families has been lowered, and unstable areas either have been avoided or will be crossed by tunnels). The selection of the route location was subject to intense consultation with the affected communities. The updated EA report will be presented to local communities, NGOs and municipalities. Relocation plans will be consulted with affected population. Program Objective Category. EA Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by The Public Information Center week ending November 22, 1996. - 6 -