The last eight years have seen veritable change in Colombia, thanks mostly to its former president Alvaro Uribe whose successful campaign against leftist guerillas created the environment for institutional confidence and a modicum of political and economic stability to return.
Uribe relinquished his post to his defence minister Juan Manuel Santos in August last year in contested but peaceful elections, providing the political continuity the country needed. Santos has vowed to hew closely to the reforms and initiatives the Uribe’s regime brought to the country.
On the right track
While he faces a plethora of problems moving the economy and addressing the widening inequality in the country, Santos enjoys the advantage of having a much improved security situation that had eluded Colombia for decades. The country’s growing confidence is reflected in its initiative towards creating a closer link with Asia and the government is pursuing a bid to join APEC that would accelerate its integration with the global economy.
The signs are everywhere that Colombia is moving in the right direction. Its capital Bogotá is a thriving metropolis snarled in traffic as new roads and flyovers are swathed across the city in a bid to relieve the congestion created by more middle and upper income families buying cars.
Boatloads of tourists are disgorged by luxury cruise ships regularly making their way to Cartagena, an old Spanish city port in the north of the country. The sight of a gaggle of overweight, baby-boomer American tourists making their way to the restored haunts in the oljavascript:void(0)d district of the city, is a spectacle that would have been unimaginable eight or ten years ago. Still, Colombia needs to attract more tourists and investment.
The country benefits from the excitement surrounding emerging markets such as Brazil and Chile, South American economies that have become economic superstars in their own right, but Colombia has not attracted the same attention as those two countries, although government officials believe that thanks to their emphasis on education and infrastructure, it won’t be long before the country achieves a similar momentum. The government’s financing plan calls for between 8 trillion and 10 trillion Colombian pesos to finance infrastructure spending in the period 2011-2014.
Woeful infrastructure
Colombia’s infrastructure has suffered from nearly two decades of neglect. As a trip to Medellín vividly illustrates, the government’s renewed emphasis on infrastructure cannot come too soon: landslides caused by torrential rains made the mountain roads leading to the airport impassable; visiting the beautiful Botero Plaza feels like stepping in a time warp with old hotels dotting a skyline which is a throwback to the architecture of the 50s and 60s.
For too long, investors shied away from investing in new buildings in this city as it became the centre of Pablo Escobar’s drug empire. Other parts of Colombia equally suffered from an underinvestment in infrastructure which was reversed only after the election of Alvaro Uribe transformed the country’s horizon.
The years of unrest and uncertainty have made it difficult for the country to attract investments and executives of companies who relocate here often express fear about their safety.
Vicky Garcia of Proexport Colombia says their job has proven to be challenging, even in times of relative stability. Her agency has been tasked to promote Colombia to the outside world. “It is a powerful agency focussed on promoting the commercial interest of the country. The agency promotes better cooperation between the government and the private sector.
Their promoting effort has been helped by a ringing endorsement from HSBC CEO Michael Geoghegan who identified Colombia as one of the more promising countries in the world and contributes the ‘C’ in the so-called Civets group that include Indonesia, Vietnam, Egypt, Turkey and South Africa. For decades the country’s major investors have been the US, UK, Spain and Mexico.
Roping in Asia
Garcia points out that the country is making an effort to attract more Asian investments especially from China, Korea and Japan. The country has offices in Japan and China to promote investment in Colombia and help penetrate those markets with its goods. In Colombia, Proexport is assisted by other investment promotion agencies across the country in helping smooth investors experience in the country. These agencies include Invest in Bogotá which promotes the attraction of the capital city and Agencia de Cooperacion e Inversion De Medellín y el Area Metropolitana, or ACI which helps facilitate investments into Medellín and the surrounding areas.
While Asian investments at present represent only a small part of the foreign direct investment (FDI) flows into Colombia, the government recognizes the need to engage Asia and is keen to encourage more investment to help its effort to rebuild and modernize infrastructure in which little was invested over the last two decades due to internal turmoil. Colombia has been astounded by Asia’s economic success and its progress in reducing absolute poverty, particularly by China, and hopes to emulate its success by following investor-friendly policies.
Rojas: As Asia is growing at a healthy clip, we have to go there
“We need to focus on attracting Asia’s attention,” acknowledges Bruce Mac Master Rojas, the vice-minister for treasury in an interview at his office. Rojas rues that his country depended so much on its neighbours for so long and that only now it is casting its eyes across a wider horizon. “As Asia is growing at a healthy clip, we cannot afford to focus only around the Americas. We have to go to Asia.” Rojas admits it took the country a long time to recognize this, which might explain Colombia’s sudden whirlwind of initiatives in Asia, concluding free trade agreements with Korea and Singapore late last year.
China eyes concessions
There is a buzz about Chinese companies exploring opportunities across Latin America as they have done in Africa. The buzz is real. Lucas Marulanda, a senior-vice president at Inverlink, the country’s largest investment bank, says his firm has noticed Chinese investors are keen on concessions in mining and infrastructure projects and would like to gain a toehold in major projects, such as Pescadero Ituango – the country’s largest hydro-electric dam, located in the state of Antioquia – and to invest in state-owned power generation company Isagen SA.
The Pescadero Ituango plant will have an installed capacity of 2.4 GW (representing 20% of Colombia’s installed capacity) and an average output of 14,000 GWh/year. Commercial operation is expected to begin in 2018. Empresas Públicas de Medellín (EPM), the largest provider of public services in the country, holds a minority stake in the project and is currently negotiating a BOOMT [build-operate-own-maintain-transfer] contract to undertake the project directly. “EPM is looking for partners and they expect most of the foreign financing to come from foreign investors, especially on the debt part.”
The country, Marulanda explains, remains highly dependent on outside money for financing despite a developed capital market where a host of corporates raise long-term financing with some bond issues having tenors of 20 to 30 years. “As investors in Colombia are reluctant to take on large-project risk, especially in infrastructure, the only option left to finance large projects is through banks or multilateral agencies.”
In coal mining, the major issue has been about securing the right infrastructure and logistics for countries such as China and Korea. “There is not much of an infrastructure you can speak of in Colombia,” Marulanda points out, “so when investors buy into mines and ports they are most likely starting from scratch, doing everything to make it work and that has proven to be daunting in attracting investors into the country.” For example, MPX, a Brazilian mining company, is planning to build a port and railroad to export coal. Drummond is thought to follow this initiative as well.
Vast natural resources
For Asian economies, Colombia’s key attraction is both the vast natural resources and the opportunities it offers infrastructure builders. In 2010, Colombia had 1.36 billion barrels of proven crude oil reserves, the fifth-largest in South America. The country produced an estimated 680,000 barrels per day of oil in 2009. About half of its oil production is exported, much to the US. The bulk of current crude oil production in the country occurs in the Andes foothills and in the Amazonian jungle located in the southern part of the country.
Colombia is rich too in deposits of gold and other precious metals. Investors from resource-hungry states such as China and India have taken an interest in the country that for long remained relatively closed to outsiders.
Marulanda: Asian investors want to buy important assets
Marulanda notes that Asian investors with whom Inverlink has had contact prefer to secure rights on valuable reserves of natural resources or gain a major stake in established concerns, in particular in telecommunications, oil, coal, power generation or transport.
“They want to buy important assets. Their ambition focusses on the highest-profile companies, including the country’s largest oil company. But what’s really only available are medium-size or small assets, or greenfield projects and that has become a major issue,” he confides to The Asset when we meet him at Inverlink’s office in Bogotá.
For the most part, remarks Marulanda, the government’s strategy has latched on to granting concessions to major investor groups to raise the required investments. This policy is expected to create multiple toll roads, ports, railroads and airports in the following years.
“We will need to attract more infrastructure funds, but if you are looking at a 25% or 30% yearly return from large-scale projects, then Colombia might not be the place to come.”
Economic challenges
Colombia, with a population of 43 million, is the third largest economy in Latin America. The new government faces the task of revving up an economic engine that has slowed in a vastly changed global economic environment.
To begin with, much of the demand for its goods in major markets such as the US and Europe have dried up as a result of the global financial crisis. Spain, one of its largest investors and markets, is suffering from an unprecedented financial and economic crisis that at the end of 2010 pushed up the unemployment rate to a 13-year record above 20%. The impact of the global slowdown has been mitigated by the economic pump priming of the Colombian government – especially directed to infrastructure and education.
The increased strength of the Colombian peso combined with competition from Asia’s low-cost exporters such as Vietnam and China has made it difficult to sell Colombian goods, such as textile, leather goods and cosmetics, in global markets. In the city of Medellín, factories have closed because they cannot compete with the goods and produce coming from China.
There are the long-standing complications arising from its military and political dispute with neighbouring Venezuela, which could dislocate exporters who have learned to rely on that market for years. Government officials tend to underplay the conflict, while some argue that the problems have, in fact, helped exporters by pushing them to be more resourceful in growing markets elsewhere in preparation of a contingency when the Venezuelan market would become too difficult to access.
And most recently, Colombia has been on the receiving end of its worst rainy season in history, which has hurt its poorest and most vulnerable people. The heavy rains, high levels of poverty, internal displacement and inadequate infrastructure have turned the floods into a major humanitarian disaster.
Fiscal prudence
Rojas is hopeful. Colombia is at an important juncture, he argues, in its search for greater stability and more equity for the Colombian people. “While countries in the developed world are suffering from economic contraction, the country is enjoying strong economic growth and a huge fiscal surplus that will help propel the economy to a new level in the coming years.” (Rojas is one of the bright lights who joined the new administration of Santos. Before becoming a bureaucrat, Rojas enjoyed a 20-year career as Colombia’s most successful investment banker, founding the country largest investment bank, Inverlink, which has initiated a string of successful deals in Colombia and across the region.)
A key challenge for the government, comments Rojas, is how to spend the fiscal surpluses it is accumulating on the back of the out-performance of the country’s oil and mining sector. “We have pursued a prudent fiscal policy for so many years and we are now reaping the benefits of those reforms. The country has had its share of good news too, such as the recent discovery of offshore oil reserves by giant oil exploration company Ecopetrol. We need to spend the money wisely, making sure that they are allocated to sectors that need them the most. Those sectors include education and infrastructure.”
In early 2011 the country’s finance minister Juan Carlos Echeverry sought to assuage concerns that the country is about to embark on a spending binge after the devastating torrential rains of late 2010. Instead of going over the budget or borrowing aggressively, the government plans to use tax collection, budget spending and a partial sale of state oil company Ecopetrol to finance its reconstruction efforts. Reports say the government’s tax intake is set to increase after President Juan Manuel Santos decreed that a financial transactions tax will remain in place until 2014.
In addition, the government’s tax collection is set to increase by the lowering of the threshold on a wealth tax. The expanded tax intake could allow the government to set up a 6.3 trillion Colombian pesos (US$3.38 billion) “calamity fund” for spending between 2011 and 2014. The government had previously secured approval to sell as much as 10% of Ecopetrol, but Echeverry suggested that the government could instead sell gradually between 5% and 6%.
The new government has remained cautious in the first six months, keen to gain an upgrade of the country’s sovereign credit rating. When visited in late 2010, Rojas described such upgrade as most welcomed as it would make borrowing abroad cheaper.
With the return of political stability across the country and the push of global capital towards emerging markets, Rojas believes this Andean nation stands a real chance of doing well.
Next station: Colombia
Its Nobel Prize-winning writer Gabriel García Márquez would be pleased. Colombia created a stir when it announced in mid-February the plan to build, with assistance from China, a railway to connect its interiors to the Pacific and Atlantic Ocean.
Bogotá was imaginative enough to describe the proposed railway as a possible alternative to the Panama Canal that for nearly a century has served as the transit route for cargo ships travelling from Asia to the US east coast.
The planned 220-kilometre long railway will run from the port of Cupica on the Pacific coast to the Gulf of Uraba on the Atlantic coast. From Uraba, the railway will extend to a new city near Cartagena on the northern Atlantic coast of Colombia.
If the railway is indeed constructed, the Colombian government will have pulled off a monumental engineering feat through rugged terrain and dense jungle.
It was Colombian president Juan Manuel Santos himself who announced the ongoing talks with China, claiming the railway proposal was at an advanced stage and had been shown to be feasible by Chinese studies.
Rich coal reserves
A senior investment banker in Colombia tells The Asset that the main driver for China’s interest in building the railway is to secure access to the rich reserves of thermo and metallurgical coal in the country, needed to fuel its fast-growing economy. The coal will reportedly be transported through the railway from the mines on the Atlantic coast to the port of Cupica, where it will then be shipped by sea across the Pacific Ocean to China.
Colombia is the world’s fifth largest coal producer. Its coal industry is dominated by global mining firms that include MPX, Glencore, Drummond, Anglo America, Xtrata and Cerrejon (a company owned by BHP Billiton).
The majority of its coal is currently exported via Atlantic ports. “Thermo coal production in the country is currently focussed on the Caribbean coast, although vast reserves can be found in the central part of the country where production levels remain low on account of the high transportation costs,” explains Lucas Marulanda.
Most of the thermo coal that is mined is transported by truck to local consumers, adds the senior vice-president at Inverlink, Colombia’s largest investment bank, while the metallurgical coal, which is used for steel making, ends up overseas. “If you ask me what railway project makes sense, I’d say that it has to be a connection between the central and coastal regions,” says Marulanda.
A lesson in geography
Marulanda notes that there is already an initiative by Ferrocarril del Carare to connect the central region to Fenoco, which is a railway concession that goes from the main production sites in the Caribbean to the port in Santa Marta. “It would make sense, in my opinion, to connect the central region to the Pacific coast in the port of Buenaventura if the intention is to export coal to Asia. So far, there is little interest on such project but I wouldn’t discard it.
Marulanda points to considerable challenges in making the project viable – given that the Panama Canal provides the most competitive way of shipping coal – and he is sceptical about the viability of building a railway connection to bypass the Panama channel.
“I would discard this option right away because it is a highly sensitive area in terms of biodiversity and the presence of indigenous reservoirs and second, the area is called “Tapón del Darien”, a very difficult geography for civil works and that explains why there is no road connecting Panama to Colombia and why the electric grid between countries ended up being submarine.”
This option would require the need to construct a port on the Caribbean side (Tarena) and the Pacific side (Tribuga), and build connecting roads to the central region, all of which will increase the capital outlay for such a project.
A second option which would make much more sense in his opinion, is building a railway connecting Cartagena, Medellín and Buenaventura.
“Coal coming from the Caribbean shore and from new mines in the central region could be shipped through the Buenaventura port to Asian markets.” Nonetheless, he concedes that the capital needed for a project of this magnitude must be huge. An additional railway would be needed to connect the project to Bogotá and the coal reserves placed in Boyaca, Cundinamarca and Santander around the surrounding areas.
“A smaller project connecting Bogotá to Buenaventura would be more attractive since it is Bogotá that consumes most in the area,” maintains Marulanda. At present, most of the country’s imports are transported by truck from Buenaventura to Bogotá. “One could have imports coming by railway thus saving a lot of money in transportation costs and coal going to Buenaventura from the central region.”
Panama not worried
The administrator of the Panama Canal dismisses suggestions that the new rail link across northern Colombia could pose a threat to its canal through which about five percent of the world global trade now passes.
Alberto Aleman Zubieta, the head of the Panama Canal Authority, says that the Panama Canal remains a crucial freight shipment hub, and that shipping by sea remains the most efficient method to transport good between South America and Asia. Marulanda seems to agree: “Moving around a container through two ports and a railway would cost US$400 to US$500 compared to the cost of using the Panama channel at US$100.”
Marulanda says the planned railway is targeted to have a 40 million-tonne per year capacity versus the 500 million-tonne capacity of the Panama Channel once the expansion is finished. “I’m assuming therefore that there will be idle capacity.”
The China connection
The Chinese Development Bank would help finance the US$7.6 billion cost of the railway project. There has been a growing buzz over Beijing’s intentions in the wake of aggressive forays by Chinese state-owned enterprises across the developing world to gain more efficient access to raw material. The announcement that such a project was brewing between the Chinese and the Colombians came as a surprise. Bankers in Bogotá were keen to point out that neither the Ministry of Transportation nor the Colombian Chamber of Infrastructure showed any knowledge about such possibility. “That is definitely a bad sign,” remarks Marulanda of Inverlink.
The growing cooperation between China and Colombia comes amid growing disenchantment in Colombia with the US, its leading trade partner, for failing to ratify a free trade agreement that will gain unhampered access for Colombian goods in the US. Colombians have given up hope that such a treaty will be ratified at all in the near future in light of the unemployment problems facing the US.
“It [the free-trade agreement] is a non-starter,” says the banker. The problems facing the US and the rest of the developed world, however, leave Colombia with very little choice but to explore relationships with far-flung markets, particularly China, where its trade has grown from a low US$10 million ten years ago to a robust US$5 billion last year.
This was published in the February 2011 issue of The Asset.
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