The greatest risk in this election is that we will go back to focusing solely on short-term issues, rather than determining how to close gaps and achieve the structural advances that we need.

Sergio GUZMÁN Analyst - Global Risks Analysis CONTROL RISKS

Colombia: the long view

March 15, 2017

TOGY talks to Sergio Guzmán, analyst at Control Risks, who identifies significant issues left out of electoral rhetoric in Colombia and describes the effect of the peace agreement on the country’s private sector. Founded in 1975, Control Risks is an independent risk consultancy firm with a direct presence in more than 100 countries.

Guzmán discusses the implications of the upcoming elections for possible tax reform – which ratings agencies say Colombia must implement – and the effects of the peace agreement on private sector engagement in Colombia, particularly regarding land ownership. Guzmán argues that Colombia is at a crossroads, and must decide to work toward long-term solutions and not quick fixes. Most TOGY articles are published exclusively on our business intelligence platform TOGYiN, but you can find the full viewpoint by Sergio Guzmán below.

• On post-peace deal reform: “In the more likely scenario, the government will pass the 50 laws and amendments needed to implement the peace agreement, but most likely fail to implement or comply with them.”

• On economic stability:
“If we look at all the presidential candidates, we see that the principles of the economy are not going to be changed – that is, we will not see the emergence of a new economic model.”

• On the private sector: “It is likely that as a result of declarations in the special jurisdiction for peace or the upcoming truth commission that tort claims will escalate from Colombian jurisdiction over to other countries. It will be very difficult for the private sector to face these new judicial challenges not only with courts, but also with shareholders.”

Colombia has often been described as the hardship case of South America. It has always had incredible potential which it has been unable to fulfil, due to the dichotomy which exists in our approaches to short- and long-term problems.
In the short term, we have issues of security and the implementation of justice, as well as everything involved in the demobilisation and reintegration of former fighters. This includes a new land cadastre which will be implemented with the Integral Rural Reform. The next steps taken will be interesting, because the government has always been focused on putting out these more urgent fires and leaving the long-term issues aside.

REALITY VS THE LAW: With many investors we talk about the fact that there are two types of countries: countries that have the law of the jungle, which affects conditions in the field, and countries that have laws on paper, in which conditions are expected to be a certain way. Colombia expects companies to operate according to the laws on paper until they are in the field, when it expects them to operate according to the law of the jungle. There is, therefore, always a certain duality reflected in the country’s problems.
Longer-term challenges involve closing the urban-rural breach and reducing inequalities, which are some of the worst in the world. If we cannot achieve this, we must realise that other countries in Latin America have made progress in areas in which Colombia seems to be going in the opposite direction. In addition, there is the problem of infrastructure, which has always been the biggest hurdle for Colombia. For example, it sometimes costs more to transport tilapia from Cauca to Bogotá than from Vietnam to Buenaventura.

 

TOWARD LONG-TERM PEACE: We could take these challenges as an opportunity to make the [2018 presidential] election the first in Colombia’s modern history which would not be focused on security issues, but on these pressing, long-term concerns.
Unfortunately, this will not be the case. As the candidates again draw our attention to short-term issues, they lead us away from understanding the potential that many see in the signature of the peace treaty. As Humberto de la Calle has noted, “The signature of the peace treaty should be huge news, but it barely makes the headlines.”
Abroad, the peace treaty is seen as a giant step for Colombia, but here we are concentrating on how many years of incarceration should be served by young men who have been members of FARC [Revolutionary Armed Forces of Colombia].
Meanwhile, more important issues are ignored. These include how power in rural areas that have known fighting for years should be organised after FARC is demobilised, and how the state should meet the basic needs of citizens in those areas, thus avoiding the generation of a major social problem and a vicious cycle.

POWER VACUUM: There are two scenarios, one of which is more likely, and I don’t mean to suggest that either are preferable. In the more likely scenario, the government will pass the 50 laws and amendments needed to implement the peace agreement, but most likely fail to implement or comply with them. As we saw in the concentration zones, the government’s preparation and ability to implement the laws on paper is very precarious.
If the ability of the government to enforce its laws is precarious in Bogotá, imagine its ability to do so in Guapí, Cauca, in Tumaco, in Nariño and in Norte de Santander, where in many cases the law has unfortunately been that of the armed groups. The problem isn’t the army’s capabilities, but the capacity of the state bodies.
Herein lies the biggest duality in the referendum vote: people in cities voted for less state, less military spending and bigger budgets for education and infrastructure, while people in rural areas vote for there to be a state (in principle) and a military, and for there to be roads and other infrastructure that doesn’t exist in those areas, but which we in urban areas take for granted.
So, dissidents are likely to rise. New paramilitary groups are emerging in places where groups like the EPL [Popular Liberation Army], FARC and ELN [National Liberation Army] had a very strong presence; we have seen this already in Catatumbo. How will these new groups fill in the gaps left behind? Narco-trafficking, illegal mining and extortion will continue, and if we do not take a moment to do something, it will become very difficult for the state to fill these vacuums once they become occupied by new forces, thus beginning a new cycle of violence.

TAX REFORM:
On top of this, there is the unstable fiscal situation in which we live. When we discussed the country with ratings agencies in October, they told us that if Colombia does not pass an aggressive tax reform, it will lead to an immediate downgrade of the credit rating.
After the referendum, President [Juan Manuel] Santos could not, for popularity reasons, pass a tax reform with the aggression required, which would have meant enlarging the tax base, pursuing tax evasion and ensuring that high earners pay more. Instead, he concentrated on easy gains that will raise the value added tax by three percentage points and in doing so, the government was able to address the current fiscal gap, but the reform was far from the comprehensive and structural reform that was promised by the government in early 2016.
This means that in the next two years, after the expiration of the wealth tax and tax surcharges amounting to 1.5% GDP, there must be another tax reform on a much grander scale.
Of course, the opposition says that these taxes are clearly regressive and target the middle class, but do not forget that during President Álvaro Uribe’s term (2002-2010) value added taxes increased from 8% to 16%. Saying that taxation will rise is always going to be unpopular and raise anti-incumbent sentiments amongst the electorate, but the orthodox economic model of Colombia will most likely be maintained regardless of the outcome of the 2018 presidential election. If we look at all the presidential candidates, we see that the principles of the economy are not going to be changed – that is, we will not see the emergence of a new economic model. That is perhaps the only good news.
The greatest risk in this election is that we will go back to focusing solely on short-term issues, rather than determining how to close gaps and achieve the structural advances that we need.

COMPANIES AND COMMUNITIES: I still haven’t addressed what this will mean for the private sector. When the private sector goes with [incumbent president] Juan Manuel Santos to London or Toronto to “sell” the country and talk about its wonderful potential, but when the companies arrive in Colombia they soon realise they are on their own, and they need to deal with communities and make arrangements without as much government hand-holding as they may have been promised in the past.
The peace agreement enshrines the right of rural communities to have a strong say in what happens on their territories, but there could be great confusion concerning the extent to which these communities are able to impose a social veto on the economic model. Because there are special jurisdictions and electoral constituencies, many of these communities may be led to believe that they are becoming mini-republics, or that they are starting to get enough power to make related demands.
One aim of the peace agreement was to increase and improve the representation of these regions at the national level, which has been very low and a legitimate cause of complaint. However, there must be clarity on the limits as to what these special electoral districts can and cannot do for the private sector to know there are clear rules.
The government has said hundreds of times that there will be tax benefits for companies entering conflict zones, but I have never heard anyone give figures or details of this alternative tax regime, and anyone involved in business knows that without figures decision making is extremely hard. So I don’t think the government is ready to determine the investment rates required.

THE LAND QUESTION: Companies are going to find themselves in a very isolated situation in the field. They will have to face growing challenges, without the government giving any clear directives. One circumstantial challenge that companies will face concerns land ownership.
We see that the special jurisdiction for peace will begin investigating the issue of land acquisition, we have seen cases where companies are forced to return land they purchased because its past ownership has been contested by communities or individuals who claim they were subject to forced displacement. The issues of landownership will take a long time to be addressed, which is likely to generate judicial instability for companies who invest in land, particularly those engaged in agribusiness.
What we see is that most companies are not ready to tackle such prospects. They will have to eventually deal with issues of this nature, which is likely to happen as more of them make headlines, but as of today not many companies are recounting their properties or tracking their potential conflict footprint. Maybe the issue will be dismissed and will not become so commonplace, because it is clear that many companies, especially those working in conflict areas, have somehow been involved with armed groups, either as victims of extortion and kidnapping, or by paying bribes or fees to operate in particular areas. Some companies have also been accused of colluding with armed groups for specific purposes. It is yet to be determined how the transitional justice scheme will deal with these issues.
However, things are not the same in Toronto or London, because such behaviour would constitute a violation of the Foreign Corrupt Practices Act or the UK Bribery Act. It is likely that as a result of declarations in the special jurisdiction for peace or the upcoming truth commission that tort claims will escalate from Colombian jurisdiction over to other countries. It will be very difficult for the private sector to face these new judicial challenges not only with courts, but also with shareholders.

A CROSSROADS IN THE JUNGLE: The big question is: Will we have a coalition or a single party for the presidency in 2018? At this point, all the parties are saying, “I’m going alone, I have a distinct platform.” This doesn’t change the fact that here in Colombia, elections are greatly determined by the power each party has in the regions, determined by their strength in congressional votes which take place a couple of months before the presidential election and how they sway local power structures with promises of pork-barrel spending or jobs for their constituents. In some parts of the country these promises become more important to voters than ideology or policy initiatives from the different parties.
We have the opportunity to say which country we wish to live in: One that is always trying to put out fires, or a country of solutions to structural problems. I would like for us to have a country of solutions, but everything indicates that we will not.

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