Financing Public Investment Through Concessions and Future Budgetary Obligations (FBO) : The Case of Colombia 2002–2018

This document assesses the financial risks involved in funding public transportation through concessions in Colombia over the period 2002-2018. During this period, the Uribe and Santos Administrations launched and ambitious program of concessions, requiring investments amounting to US$20 billion (called the “Fourth-Generation”, 4G), representing about 7% of GDP of 2018, to be executed over a decade.Nearly 70% of those resources were raised through banks (locals provided nearly 50% of the total); capital markets funded another 20% (locals providing 10% of the total); and multilaterals and government supported the remaining 10%. Given the high exposure of local banks to long-term projects (5-7 years), under the more stringent Basel-III rules, several issues of “systemic risk” have been raised.In order to limit such risks, the central government of Colombia had to provide a “financial-cushion” through issuing Future Budgetary Obligations (FBO). It has been estimated that such FBOs currently amount to 12% of GDP in Net Present Value, representing a “contingent” liability that might have to be added to the “explicit” gross debt of nearly 52% of GDP at the level of the general government.Hence, we here discuss the financial pros/cons of this strategy of public infrastructure financed under private concessions supported by FBOs. In particular, we assess: i) the cash and stock effects over public debt after issuing such FBOs; ii) the different types of public guarantees under those FBOs and their “contingent” impact (including risks associated to construction failures, lower than expected traffic flows, and foreign debt exposure supported by tolls in local currency); and iii) the manner in which those FBOs were issued in the short-term having to comply with a Fiscal Rule (since 2014) that targeted a convergence of the structural central government fiscal deficit from levels of nearly 4% of GDP down to 2.2% of GDP over the period 2016-2020