|Editor's Note: This is the first in a series of stories on IFC’s work to help create markets that give new opportunities to people in developing countries globally. These innovative approaches have helped solve some of the largest problems in countries or, sometimes, entire regions.|
By Vanessa Bauza, IFC Communications Officer
Every morning before first light, Wilson Medina’s truck bounces along the pitted dirt roads of Colombia’s central Andes range, collecting fresh milk from two dozen family farms tucked into the green hills. Business is good. The farmers’ production has increased eightfold since they pooled their resources and founded a cooperative several years ago.
Transportation, though, remains a major challenge. Rutted roads slow down Medina, and the longer he’s on the road the greater the odds of spoiled milk. And the route takes so long, the cooperative can’t collect milk from new farms. “Even an hour,” said Medina, “can make a difference.”
Colombia’s poor infrastructure has slowed economic growth here for decades. Now, following Colombia’s peace deal that ended a half-century of armed conflict, investing in infrastructure is seen by many as key to the country’s future.
The Colombian government put forward an ambitious infrastructure initiative called the fourth-generation (4G) road program, which includes 32 projects to build about 8,000 kilometers of roads. This was no small task and required the resources and expertise of the entire World Bank Group to succeed.
The government turned to IFC for advice on designing the concession model, developing standardized contracts and setting out project management processes. IFC also helped structure the first three transactions for the 4G program. But even with this initial success, the cost of financing the entire 8,000 kilometers was seen by some as prohibitive: $25 billion over the next seven years.
That was when IFC helped the government find innovative ways to attract long-term financing.
The challenge was to create the right framework so institutional investors could venture into what for many was uncharted territory—large-scale infrastructure projects. It was a complex endeavor that would eventually involve assistance from the World Bank and the government. This type of out-of-the-box thinking to create a market has happened periodically in the IFC and World Bank over the past decades, but IFC’s new strategy calls for systematically looking for such opportunities to create markets. As such, the Colombia road project has drawn great interest from several governments around the world.
Colombia partnered with IFC to create Financiera de Desarrollo Nacional (FDN), a financial institution that catalyzes investment in Colombian infrastructure and addresses market failures that undercut infrastructure financing. IFC invested $70 million in FDN and offered advice to support the agency’s ability to create and deliver products and services that encourage investment in infrastructure. FDN became one of the first financiers of the 4G program.
IFC then leveraged new local capital-market regulations that make it easier for pension funds to invest in infrastructure projects. These regulations were developed with support from the World Bank. With this new regulatory framework in place, IFC helped launch one of the first infrastructure debt funds in Colombia, opening a path for pension funds to invest in road projects that are crucial for the country. The fund raised $400 million.
FDN’s approach is “having a major multiplying effect on the way financing is done in Colombia for infrastructure,” said FDN President Clemente del Valle. “We are creating something really very innovative.”
The innovations come at an important time in Colombia’s history. “Now that there is a peace process, becoming competitive becomes critical to reach a level of growth that Colombia deserves,” del Valle added.
The new road network is expected to provide a long-awaited boost for Colombia’s competitiveness and productivity.
One of Colombia’s largest dairy producers, Alqueria buys milk from 13,000 small dairy farmers across the country—including Wilson Medina’s cooperative. Alqueria CEO Carlos Enrique Cavelier says the company hopes to expand its network of farmers and distribution channels. Better roads will be key.
“Our trucks travel 30,000 kilometers a day from our collection centers to the farms and back,” Cavelier said. “If the bad roads turned into good roads we could have possibly a 50 percent increase in productivity.”
IFC has supported Alqueria’s sustainble business model since 2009. The company provides steady and reliable incomes for smallholder farmers, and advice to improve the quality of their milk and increase production. Rural jobs are crucial to addressing the high levels of unemployment and poverty in the countryside that have fueled Colombia’s conflict.
As the new road network reaches Colombian citizens and businesses, planners believe it will demonstrate that partnerships between governments and development banks can play a role in unlocking urgently needed financing—with wide-reaching benefits for the country.
For Cavelier this means replacing conflict with productive business. He sees a day when former coca growing areas will be “transformed” into dairy farms, bringing jobs and growth for the poorest.
This story is also available in Spanish.
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Published in April 2017