Market Entry Advisors – Colombia

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Colombia

Economic growth and advanced social policies over the past decade have propelled Colombia to the forefront of global trade, with top-tier trading partners that include the United States, Germany, China and Canada.

For Canadian businesses, Colombia is a frontier worth exploring.

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Colombia ranks #1 for ease of doing business in all of Latin America and the Caribbean, according to the World Bank Group.

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A $100-billion infrastructure deficit means opportunities for Canadian companies.

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Colombia imports $936 million worth of merchandise each year from Canada.

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Opportunities

Gustavo Galvis

Chief Representative,
Andean Region & Central America

“Right now Colombia is welcoming investment and supply in areas that match up perfectly with Canadian expertise, most notably oil and gas as well as infrastructure development.”

Which sectors offer significant potential for Canadian businesses?

Colombia is opening up its oil and gas sector very aggressively. The government has also launched one of the most ambitious infrastructure programs in the region to address a significant deficit of infrastructure in Colombia, estimated at about $100 billion. Many of these projects will be built on a Public-Private Partnership basis, a sector in which Canada is a global leader. Colombia is also home to some of the largest “Multilatinas”, companies that have expanded their operations beyond Colombia’s borders and have an important presence in the region in sectors such as power, water and renewables. Because of political violence in the past, there were huge tracts of land left fallow for many years. We expect great opportunities in agriculture, for both investors and equipment suppliers.

What challenges and barriers do Canadian companies face in Colombia?

Barriers to entry in this market are relatively low. The challenges tend to be the ones that all exporters face, such as how to do business in a different culture and different language, how to think globally and act locally, and how to compete against strong local companies or international companies that are acting locally. It’s equally important to set the right expectations and be prepared to invest the time and resources required to develop opportunities.

How strong is the Canadian presence in Colombia?

Canadian businesses have a very strong presence here, Canada is the largest investor in the O&G sector and also has an important presence in other sectors such as power, financial services and engineering. Canada was the first OECD country to sign a free trade agreement with Colombia, so we were the original stamp of approval as Colombia entered with force into the global market.

Business Climate

Brenda Wills

Senior Trade Commissioner,
Colombia

“Opportunities are abundant here, including for SMEs. Given the need to invest significant time, money and energy to develop and penetrate the market, SMEs must ensure that they have the necessary capability.”

How would you describe the business environment for foreign companies in Colombia?

Colombia is open to foreign business and investment. That said, companies need to take a long-term approach. Relationship-building is very important and takes time. Companies should ensure they have Spanish language abilities and should be prepared to invest in travel to Colombia to pursue their business objectives in-person, particularly when first entering the market. In general, Colombians prefer to do business with foreign companies that have local representatives, so companies should consider this model if interested in maintaining and growing their client base and/or presence in the country. Manoeuvring through the legal and regulatory framework for large investment projects can be challenging, so companies need to familiarize themselves well with the processes and policies to identify and mitigate the associated risks.

Are there best practices when it comes to finding the right partner?

The Trade Commissioner Service is a great resource for providing information and advice about the market and local contacts. To select a suitable partner, companies need to have a clear idea of their objectives in the market, as well as the expertise and experience they require in a partner. It is important to carefully select a partner and ensure that there is a formal agreement in place that clearly outlines the two parties’ roles, responsibilities and expectations, as well as other conditions, which could include an exclusivity clause. In some instances, a distributor or agent will be the appropriate avenue; in others, a joint venture partnership may be the ideal choice. Selecting partners who have previously worked with foreign companies is often a good approach.

Is the business environment in Colombia also welcoming to small and medium-sized enterprises?

Opportunities are abundant here, including for SMEs. Given the need to invest significant time, money and energy to develop and penetrate the market, SMEs must ensure that they have the necessary capability. Tapping into the global value chains of larger companies that are already active in Colombia could help facilitate SMEs’ entry into the market.

Legal

Alessia Abello

Lawyer and Partner,
Posse Herrera Ruiz

“Understand the pros and cons of the opportunity, especially with regard to regulation.”

What legal and regulatory issues do Canadian companies need to pay attention to?

Today it is possible to find important Canadian companies in oil, gas, mining and other natural resource industries. In these sectors the local barriers are a lack of certainty regarding some legal procedures, especially the ones that involve communities and environmental licenses; the timing to obtain legal authorizations; and the political environment in some regions, where it’s difficult to keep a fluid dialogue with the communities.

Are there key issues in other industries?

In other industries the barriers for Canadian companies wanting to do business in Colombia include the judicial and legal uncertainty with respect to standards and procedures, such as tax rule changes, environmental and community license requirements, and opportunities to finance projects.

So what can be done to address these issues?

The most important thing is to obtain detailed due diligence of the project and the sector. Understand the pros and cons of the opportunity, especially with regard to regulation. Be aware of the tools created by the government for the development of business in Colombia, including the ones in the free trade agreement and the provisions of the National Development Plan for some industries.

Free trade zones

Andres Trivino

President,
Canada Colombia Chamber of Investment and Trade

“Canadian companies should look for local legal and tax advice to guide them in the process of finding and working in a free trade zone.”

Can you explain permanent free trade zones, and how they work in Colombia?

Free trade zones are designated areas within the Colombian territory where companies may undertake industrial or commercial activities under a special tax, customs and foreign trade regulatory framework.  Companies can import materials, manufacture goods, export products, provide services, but, they must meet certain investment and job creation requirements.  Currently, in Colombia there are more than 100 free-trade-zones. It is important to understand the most important concept about these vehicles — goods that enter Colombia but remain in these zones, are considered outside Colombia’s territory for the purposes of taxes, imports and exports duties. Obviously, this changes the moment the products leave the free trade zone but even then, there is preferential treatment.

What are some free trade zone benefits?

There are many benefits of locating your company in a Free Trade Zone. First of all, it reduces your income taxes and you not pay sales taxes on materials and equipment. Furthermore, you can defer and reduce the relevant duties once you take the products out. In addition, you can have a duty exemption on re-exports, this way you can bring products to the Free Trade Zone, transformed them in Colombia and re-export them to a country where Colombia has free trade agreements, with no customs entry filed and no duty paid on this merchandise. These are just a few of the benefits. 

How can Canadian companies tap these benefits?

Canadian companies should look for local legal and tax advice to guide them in the process of finding and working in a free trade zone. We can certainly help finding the local expertise to facilitate this process. Also, both the Colombian and the Canadian governments provide information and direction, empowering the companies to make an informed decision and find the right associates. 

Anti-corruption

Ingrid Kuan Marquez

Due Diligence Manager,
TRACE International

“Canadian companies should implement strong compliance and anti-corruption policies to thoroughly vet potential business partners and third parties, thereby reducing the risk of inadvertently participating in corruption, bribery and money laundering schemes.”

How would you characterize the risk of corruption in your region?

The 2017 TRACE Bribery Risk Matrix, which measures business bribery risk in the public sector, ranks Colombia 53rd out of 200 countries and gives an overall moderate risk score of 38 points. Along with Chile and Uruguay, Colombia is among the countries with the lowest overall risk scores in South America. Its moderate-to-low risk scores are largely due to the recent enactment of laws aimed at combatting bribery and the implementation of mechanisms to increase transparency in tenders and administrative proceedings.

Colombia’s corruption issues cannot be separated from its internal political strifes. Although the government signed a formal peace agreement in 2016 with the Revolutionary Armed Forces of Colombia (FARC) to end a 50-year conflict, its implementation remains a challenge. A report published in 2017 by the US Department of State still considers FARC to be Colombia’s largest drug-trafficking organization. With an ongoing need to launder illicit proceeds, FARC has run mining, money exchange, real estate, securities and transportation businesses, among others, by infiltrating legally established entities. In addition, FARC has been linked to the financing of political campaigns and paying of bribes in order to maintain its lucrative operations. A study by the Colombian government concluded that FARC held assets worth USD $10.5 billion in 2012.

Public corruption also remains an area of concern. The Colombian judiciary is facing an unprecedented corruption scandal that has included the arrest of a former Supreme Court Chief. The scandal stemmed from an investigation carried out by the US Drug Enforcement Administration (DEA) into a bribery scheme involving the National Director and Prosecutor of Colombia’s Anti-Corruption Office, who has been charged with conspiracy to launder money with the intention to promote foreign bribery. The DEA investigation unveiled the alleged participation of at least four former Supreme Court justices in a network established to favor corrupt politicians in exchange for bribes.

Colombia has also struggled with allegations of corruption in the health, education, extractive industries and infrastructure sectors. The Odebrecht case in Colombia reached the highest levels of the government—including the president, who was compelled to testify regarding the financing of his 2014 presidential campaign. Odebrecht’s operations in Colombia, as in other countries, were fueled by illegal payments to public officials. The U.S. Department of Justice concluded that Odebrecht paid roughly USD $11 million in bribes to secure the awarding of construction projects in Colombia. The Colombian Attorney General places that figure even higher, at more than USD $27 million.

How do these risks affect Canadian businesses?

Although the peace deal with FARC is expected to boost Colombia’s economy and attract foreign investment, Canadian businesses should be aware of the presence of other criminal groups who often demand illegal payments from investors. It should be noted that FARC remains a designated foreign terrorist organization despite the peace accords.

Businesses that contract directly with the government are more vulnerable to corruption. Colombia plans to spend USD $100 billion on infrastructure from 2014 to 2022 and to invest USD $1.5 billion in defense and security between 2015 and 2018. The potentially large contracts available through these initiatives create risks for bid-rigging, kickbacks and bribes. In a World Bank survey, approximately 43 percent of business managers and owners in Colombia said companies were expected to give a gift to secure a government contract.

A 2015 survey by Externado University and Transparencia por Colombia noted that 91 percent of private companies viewed bribery as a common practice and companies reported paying an average of 17.3 percent of the total value of a contract to secure its award. According to the World Bank survey of business managers and owners in Colombia, 53 percent of companies see corruption as a major constraint to doing business.

How can Canadian businesses guard against these corruptive practices?

Canadian companies should implement strong compliance and anti-corruption policies to thoroughly vet potential business partners and third parties, thereby reducing the risk of inadvertently participating in corruption, bribery and money laundering schemes. Policies concerning political contributions should also be implemented.

Companies can work with TRACE Certified entities which have completed a rigorous due diligence process based on internationally accepted standards. Companies may wish to refer to TRACEpublic, the first global register of beneficial ownership information, which allows companies to share and search for beneficial ownership information at no cost. The database supports the efforts of companies seeking to conduct business ethically.

In addition, the Canadian Trade Commissioner Service in Colombia offers assistance to Canadian companies operating there.

Export Development Canada does not endorse or favour any organizations listed above and is not responsible for the actions of those parties.

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Market Entry Advisors – Colombia was last modified: February 7th, 2018 by Export Development Canada.
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