In the middle of the most ambitious infrastructure programme in history of Colombia (4G) emerged the deepest ever corruption scandal in the region. The Odebrecht crisis forced all stakeholders to revisit their internal policies and work out together a solution to mitigate the risks that have subsequently materialised in certain projects across Latin America.
Although compliance and anticorruption rules have been substantially strengthened during the past few years in Colombia, lenders, sponsors and the government have realised that there is still room for further refinement. Colombian laws and court precedents appear to be insufficient as regards the consequences of declaring a concession agreement null and void when the bidding process has been affected by corruption. Therefore, the termination formula agreed on the relevant concession agreement does not seem easily applicable and debt may not be repaid properly or in a timely fashion based solely on the existing rules and contractual framework. In addition, the 4G concession agreement model does not expressly provide lenders´ step-in rights when the concessionaire is declared legally unfit to perform public procured agreements due to corruption practices.
In light of this, stakeholders are taking certain measures to mitigate risks in addition to improving contractual structures with more sophisticated anticorruption clauses (which we will go over in part II of this article). As to general strategic measures, the following points are particularly worth mentioning.
Firstly, the government has agreed to amend concession agreements to provide lenders with step-in rights when the concessionaire is no longer allowed to perform the contract due to a court ruling regarding corruption practices. Furthermore, if lenders decide not to step in as regards the project, the government should terminate the agreement and apply the early termination formula. Due to its complexity and ambiguity the early termination formula ought to be thoroughly revised with specialists to determine likely outcomes and the effects of those outcomes vis-à-vis the lenders' funds advanced to finance the project. Although this has been implemented in few projects, it is expected to become the norm.
Secondly, the government, with the advice of sponsors, law firms and financial institutions, has proposed law amendments to make it clear that, in cases where a concession agreement is declared null and void, investments made by the concessionaire should be compensated to assure debt service. This new legislation is still under discussion.
Thirdly, lenders have requested more stringent covenants, condition precedents and events of default packages to be included in the financing documents.
There is still a long way to go. Stakeholders need to understand the real impact of the risks and build solutions that effectively resolve the problems. Proper due diligence and thoughtful analysis will be paramount to avoid overreaching contractual regulation that, in order to mitigate the risks, may result in inconvenience – including unnecessary events of default, for example – for everyone concerned.
|Carlos Fradique-Méndez and César Rodríguez|
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