By late July 2015, Colombians had about 149 trillion pesos saved in mandatory pensions, plus 13 trillion in voluntary pensions and more than 9 trillion in severance funds. Some of these resources, which are managed by pension fund administration firms, may now be allocated to finance infrastructure projects in Colombia under Public Private Partnerships (“PPPs”).
This document briefly highlights the regulatory changes that allow using the above resources to finance infrastructure projects.
By means of Decree 1385 of June 22, 2015, the Ministry of Finance amended Decree 2555 of 2010 as it relates to the investment regime for mandatory pension and severance funds, insurance companies and capitalization firms. The change aims at facilitating the participation of institutional investors in the financing of infrastructure projects undertaken in the form of PPP projects; it focused on the requirements for investment in assets where the issuer is a related company, and limits for investment in such securities.
• Qualification Requirements for Investment.
Decree 1385 amended the eligibility requirements for admissibility of investments and changed aspects of the limits on investment: it expressly states that investments will not be admissible in private equity funds that invest in assets, shares and securities where the issuer, acceptor, guarantor or owner is the institutional investor, affiliate or subsidiary of same; or its parent or affiliate or subsidiary thereof. There is an exception for cases of private equity funds that allocate at least two-thirds of their investors’ contributions to infrastructure PPP projects regulated under Law 1508 of 2012.
Notwithstanding the above, in order to ensure transparency of the investments, these must be approved by the board of directors of the institutional investor, which in turn must ensure that the professional fund manager and investment committee members are independent. In addition, the sum of the shares managed by the institutional investor, belonging both to it and to its affiliates, must be less than 50% of the fund’s assets. The Financial Superintendence of Colombia will oversee compliance of the foregoing requirements.
• Limits on Investment.
Investments in securities where the issuer, acceptor, guarantor or originator of a securitization is an entity linked to the institutional investor cannot exceed 10% of the value of each the types of mandatory pension fund. However, with the amendment introduced by Decree 1385 of 2015, the calculation of this limit will not take into account investments made by private equity funds in assets, shares or securities issued or guaranteed by entities related to the fund, when it assigns at least two-thirds of its investors’ contributions to infrastructure PPP projects.
To Keep in Mind.
The possibilities for financing fourth-generation (4G) infrastructure projects have thus been expanded, and pension funds have been allowed to diversify their portfolios to improve their return on investments, which naturally results in a benefit to all of their members.
Subject to compliance with the regulatory requirements to avoid conflicts of interest, the changes introduced by Decree 1385 will expand the range of investment possibilities for Mandatory Pension Funds in a capital market like Colombia’s, which is still shallow. Additionally, it will provide the 4G concessions with additional funding alternatives, which in an environment of volatile interest rates and devaluation of the peso against the dollar, may reduce the financing costs associated with these projects by harnessing local funding sources.
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Author: Carlos Carvajal