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.
Colombia ranks #1 for ease of doing business in all of Latin America and the Caribbean, according to the World Bank Group.
A $100-billion infrastructure deficit means opportunities for Canadian companies.
Colombia imports $936 million worth of merchandise each year from Canada.
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“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.
“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.
“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 are locations where new companies can receive special tax and customs treatment. If you’re in a free trade zone, you don't have to pay certain taxes.”
Can you explain permanent free trade zones, and how they work in Colombia?
These free trade zones are locations where new companies can receive special tax and customs treatment. If you’re in a free trade zone, you don't have to pay certain taxes. This can work for companies that bring products to Colombia from Canada. These zones have been selected by the government and they’re all over Colombia, totalling about 100 altogether.
What are some free trade zone benefits?
As an exporter, you can hold your products in a free trade zone and pay taxes only on the products that you take to market. This allows you to spread your tax liability throughout the year. There are big warehouses for rent at cheaper prices in these free trade zones. There is also no VAT on raw materials in these zones, so this lowers the cost of the final product. As well, the cost of transportation is cheaper if you go in through a free trade zone than if you go through channels outside the zone.
How can Canadian companies tap these benefits?
We can give Canadian companies guidance on how to work with these free trade zones, so they can benefit from the lower cost of their products. An important tip: When you export, you need to specify in advance which free trade zone you’re going to work in. You have a lot of options so we suggest calling us in advance so we can help.
“Canadian companies should implement strong anti-corruption policies and compliance programs and thoroughly vet potential business partners or third party agents to offset the risk of inadvertently dealing with terrorist organizations.”
How would you characterize the risk of corruption in your region?
The 2016 TRACE Matrix, which measures business bribery risk, ranks Colombia 58th out of 199 countries and gives an overall moderate risk score of 51.
Corruption in Colombia takes two basic forms: public corruption and corruption created by insurgent groups such as the Revolutionary Armed Forces of Colombia (FARC). Public corruption generally includes contributions to political campaigns, with the expectation of obtaining an advantage.
How do these risks affect Canadian businesses?
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 the 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 per-cent 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 a 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 anti-corruption policies and compliance programs and thoroughly vet potential business partners or third party agents to offset the risk of inadvertently dealing with terrorist organizations. Policies concerning political contributions should also be implemented.
Companies can work with TRACE Certified companies which have completed a rigorous due diligence process and anti-bribery training.
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.