Colombia’s Ituango Hydroelectric Project highlights the risks and opportunities for reinsurers in Latin America

The first power generating unit of Colombia’s largest hydroelectric project Ituango Hydroelectric Power Plant is expected to come into service towards the end of this year.

The mammoth project has been beset by delays and a series of localised collapses that obstructed the diversion tunnel during the filling of the reservoir.

The hydro project will generate 17% of Colombia’s energy when completed, it is one that highlights both the crucial role that reinsurers have to play in Latin America’s economic development, as well as some of the major risks and opportunities that Latin America poses.

HidroItuango is comprised of eight 300MW units and a 2,720bn m³ reservoir. The structure of the embankment dam is 225 meters tall, almost one and a half times the hight of 20 Fenchurch Street in London, better known as the Walkie Talkie.

It is estimated that huge financial losses resulting from the diversion tunnel collapse will exceed $2.5 billion, of which, (re)insurers (including the London market) have paid out approximately $1bn.

What went wrong?

Like most of the major engineering collapses, it is likely that not one, but a series of events triggered this massive collapse.

The dam (over the river Cauca, more than 160 km north of the city of Medellín) was just months from completion when a series of landslides blocked the flow of water from the single operational diversion tunnel. Since the project was almost finished, two other diversion tunnels had already been sealed.

The diversion tunnel blockage caused the water level in the reservoir to rise dangerously. This would have not been a major problem if the structure of the dam, including the spillway, had already been completed, but they were not.

Allowing the water to continue to rise would have the potential of overtopping the structure of the dam, causing a potential catastrophic collapse of the massive structure. The decision at that point was to allow the water to flood the powerhouse using it as a diversion pathway.

The move did reduce the water levels, however it also caused irreparable damage to electromechanical equipment and the structure of the powerhouse cavern itself, along with the consequential construction delays and therefore not having the possibility to produce energy as scheduled.

Infrastructure opportunities

Though unique in terms of its scale, in many ways HidroItuango is a typical example of the important role that London market insurers have to play in Latin America’s economic development, as well as the opportunity that the region poses.

Infrastructure development across Latin America is booming, from roads to ports, bridges, and tunnels, to major energy projects.

In an interview last year, Henrique Martins, CEO at Brookfield Brazil, an asset manager which has invested tens of billions of dollars in toll roads, ports, railways, water, and gas distribution across Brazil, told the Financial Times that Latin America remains “one of the best opportunities in the world” because of its enormous need for infrastructure and the limited ability of governments to finance it. 

Alongside transport and social infrastructure, renewable energy, primarily wind and solar, has seen tremendous investment throughout the region, with some countries, including Colombia, promoting legislation and reforms to encourage its adoption.

While wind and solar projects become larger and are spreading out throughout the region, due to the vast number of water resources, and engineering expertise, hydroelectric developments continue to be a source of energy generation, despite of engineering or construction losses.

Indeed, at McLarens we have dealt with a number of hydro project losses across the continent in recent months alone. Global events and continued energy market instability, in addition to the green movement, will no doubt further increase demand for renewable energy infrastructure.

Natural disaster

These are complex projects where problems and delays to construction can cost $millions, even $billions. There a notable risks involved, many of which relate to Latin America’s challenging terrain and geological conditions.

Indeed, there’s no doubt that while the geography and topography of Colombia offer unique characteristics to build a project the size of Hidroituango, it also had a major role to play in the issues that have hampered the project. 

The Andes Mountain range (one of the largest in the world), includes volcanos, dense forests and jungles, rivers, and a diverse climate - all factors that pose challenges for infrastructure development. At the same time the risks of earthquakes, flooding, landslides and storms are significant.

Tunnelling through a mountain can be a complex and costly operation, whilst a 100km road being built in Colombia or Brazil may cross several different climates and geographies and be exposed to numerous risk points along the way.

Looking to the future

The complexity and scale of projects such as Ituango mean that the international insurance markets have an important role to play in bringing such initiatives to fruition.

These types of projects pose some major opportunities for reinsurers and developers, yet the nature of these schemes also means that the losses can be huge, with multiple stakeholders and complex issues around quantum, liability, schedule and remediation. 

For the insurance industry, such losses serve as a reminder of the importance of evaluating who is building the project, its budget, schedule and exposure to natural events, alongside aspects such as loss control visits and project management systems, all of which play a crucial role in identifying and mitigating such risks.

Leonardo Garzon is managing director, Latin America at McLarens