Construction Growth: Ups And Downs But Still Strong
BMI View: Though the Colombian construction industry continues to be associated with high volatility (as demonstrated by the 12% drop in Q312 construction growth) the government nevertheless continues to push ahead with necessary infrastructure investments, reaping the benefits of its growing minerals industry. In fact, largely protected from the slowdown in the Chinese economy by its strong ties to the US market, Colombia continues to power ahead of its peers. Having been dubbed the 'engine for development', we believe Colombia's construction sector will still see strong real growth of 5.3% in 2013. Yet accompanying these rewards are significant risks, and we continue to highlight the persistent threat - to both people and infrastructure - from Colombia's leftist guerrillas.
In light of the recent Q312 construction figures released by the Colombian National Administrative Department of Statistics (DANE) we have slightly moderated our real industry construction growth estimate for 2012, from 5.5% to 4.5%. However, despite the estimated 12% annual contraction for the quarter, we maintain that such swings are common place in Colombia's relatively volatile construction sector (similar ups and downs were registered in both 2011 and 2010). Hence, backed by ANI's ambitious 2013 concessions programme, dubbed 4G, we maintain a healthy, if not attractive, outlook for the Colombian construction sector.
|Ups And Downs But Still Strong|
|Construction Industry Value (US$bn), Real Growth (%)|
Minerals Still Outweigh Guerillas
Colombia is already South America's third largest oil producer, after having nearly doubled oil production over the last few years. It is expected to reach its target of 1mn barrels per day (b/d) in 2013, and we expect to see this increased further. In order to do so, the Colombian Oil Association is estimating the need for a minimum of US$120bn in investment over the next decade, highlighting vast opportunities for construction players in the field.
There has indeed been considerable effort put into developing Colombia's energy infrastructure, including a pipeline project linking the Llanos Basin to the Pacific Coast, proposed by the Canadian firm Enbridge and intended to provide access to energy-hungry Asian markets. In 2010, Colombia's National Planning Department upwardly revised its forecast for oil and mining for the 2008-2015 period, increasing expected investment from US$50bn to US$62bn, 87% of which is expected to flow into the petroleum sector. Colombia's production is expected to significantly outgrow domestic consumption. As such, export-oriented infrastructure investment is going to be critical moving forward. In the oil & gas pipelines sub-sector alone, we forecast average annual real growth of 11.9% between 2013 and 2017.
However, accompanying these rewards are significant risks. Even though the latter does not prevent investments into the country's rich mineral sector (in 2012, Colombia brought in US$16bn in foreign investment, up from around US$2bn in 2002) Colombia's Fuerzas Armadas Revolucionarias de Colombia (FARC) still represent a significant threat to both infrastructure and people. Most recently, on March 14 th 2013, the FARC was reportedly involved in an attack blowing up the rail line of Colombia's largest coal exporter, Cerrejon (a joint venture between Anglo American, BHP Billton and Xstrata). Hence, though the government has partly quelled left wing guerrilla insurgencies, so that insecurity no longer represents a systematic threat to the state - thereby promoting investment. the risk of violence still persists. Further, this threat to existing assets could deter investors from participating in the operation of assets, and potentially undermine the attractiveness of the concession packages.
Yet another factor to be added to Colombia's prospect is its relatively (from a regional perspective) attractive business environment. Indeed, just as the Colombian oil industry has been attracting increased foreign investment, other governments in the region, including Venezuela and Argentina, have implemented policies with significant deterrent effects on foreign investment. In addition to serving as a credible alternative, Colombia has also been a direct beneficiary of these policies. For example, when Venezuelan President Hugo Chavez nationalized PDVSA in 2002, hundreds of workers and engineers went to work in the Colombian energy sector. Tellingly, one of those is the current CEO of Pacific Rubiales, Colombia's largest foreign producer.
Coupled with strong economic growth prospects - BMI forecasts real GDP growth of 4.3% in 2013 - and sound economic policy making, Colombia has largely over-performed throughout the crisis. In fact, Colombia has been powering ahead, overtaking Venezuela in terms of GDP, and is now in the same zone as Argentina; yet contrary to the latter, Colombia is expected to trend upwards. Hence, we believe a major expansion within Colombia's extractive resources could see a significant demand for new capacity and better quality infrastructure.
Free Trade Possibilities
Though the decade-long trade preferences under the Andean Trade promotion and Drug Eradication Act already covered almost 80% of Colombian exports, the signing of the US free trade agreement in 2012 nevertheless marks an area of official cooperation between the two countries. The deal should encourage further investment in Colombia, and the government believes the agreement added 10% to exports and one percentage point (pp) of economic growth over 2012. Colombia's strong ties to the US market have largely left it unharmed by China's gradual slowdown, contrary to many of its regional peers.
That said, according to the Inter-American Development Bank (IADB), the cost of transporting Colombian exports to the US, expressed as a share of the value of the exports, far exceeded the cost of paying import tariffs to the US government. Hence, in light of this, whilst the trade pact will lower or abolish the remaining import tariffs, it does not alleviate the high transportation costs, which pose a much bigger problem to Colombian exports. As a result, better access to ports and adequate highways will be essential to facilitating the expected rise in exports.
Roads are therefore a top priority for the government. Road & bridges infrastructure industry value is forecast to account for the majority of infrastructure value in 2013, at 55.9%, and is expected to experience annual average real growth of 6.5% between 2013 and 2017. In line with our forecasts, the largest greenfield public-private partnership (PPP) project to have been awarded in Colombia's transport sector, the Ruta de Sol highway, has entered the construction phase.
Corruption Weighs Heavy
Despite economic growth, free trade agreements, and a relatively attractive business environment, delays in infrastructure projects are all too commonplace in Colombia. Strategically important projects, including the Ferroviaro Central concession, the Oriente Tunnel, the Oleducto Bicentenario oil pipeline and the Bogotá Metro, have all experienced delays, owing to issues ranging from corruption to environmental concerns.
Two corruption scandals still haunt Colombia's public works sector, and remain barriers to addressing the country's vast infrastructure requirements. In 2009, a corruption scandal led to the government removing a number of National Institute of Concessions (Inco) employees, including the then director Alvaro Jose Soto. In May 2011, public works contracts in Bogotá came under investigation, leading to the suspension of Mayor Samuel Moreno, who was due to stand trial in May 2012.
Hence, we continue to highlight that concerns over transparency and government institutions could dissuade some investors. However, a concerted effort is being made to stamp out corruption in awarding tenders and this gives us hope for future improvements. In November 2011, the Colombian government approved the creation of a national infrastructure agency (ANI), which replaced Inco as the official entity in charge of infrastructure concessions. Furthermore, the PPP law has the potential to propel infrastructure growth in the country by offering a better project design, more effective implementation and greater protection for private investors.