U.S. companies looking to do business in Colombia's $250-300 million environmental technologies market must consider several important factors, including special government contracting laws, Colombia's legal representation processes, its contracting agencies, and the local business climate. Several considerations that are more specific to Colombia must also be faced: Corruption is high, economic crime is rampant, and the ever-present problem of narcotrafficking can complicate business (and life) in Colombia.
Colombia is beginning several major infrastructure projects, and many include environmental components. U.S. firms wishing to participate in these projects should initiate contacts with government representatives and potential Colombian partners as early as possible. Once a project has gone to tender, it is usually too late to be competitive. Personal contact is very important in Colombian business and should be established early - even in cases where no final decision to proceed has been made.
The Business Climate
Colombia gets a great deal of negative press, largely because of the drug problem and political violence. However, visitors to Colombia generally take home a positive impression. The country is quite highly developed and culturally unique. As a rule, Colombian business people are professional, well educated, and ethical. Business is generally straightforward and honest. Business customs are similar to those in the United States, and in fact, most Colombian business people scientists, and government officials are well acquainted with the United States through travel, professional contacts, or even educational experiences in the United States.
An important key to achieving success in business in Colombia is to establish a local presence, either directly or through a local representative. This presence allows direct observation of the market as well as contact with potential clients in an economy where personal contact is essential. The need for a personal presence is made even more critical by the fact that corruption is rampant in Colombia. In fact, in many private and public dealings, the contracting company's officials expect a kickback totaling 10 percent of the total contract amount.
The former Minister of Interior, Fernando Cepeda, and the former National Comptroller have both conceded that it is virtually standard practice for government agencies to charge a 10 percent "commission" when granting a contract. The commission percentage may be even higher in some areas of the country, particularly in departments located along the Atlantic or Pacific Coasts.
Although no official complaints were filed in 1997, U.S. industry has complained frequently of illicit payments or lack of market access in government bids for high-tech equipment and services and infrastructure projects. Needless to say, U.S. firms must be scrupulously careful not to contravene U.S. law in such matters.
Frequent visits to prospective Colombian buyers are important, not only to acquaint them with the environmental products their municipalities or organizations might need, but also to build personal relationships.
In negotiating agreements and contracts, attention should be paid to formality, personal relationships, and the building of trust. Colombians want to know their supplier or partner personally before deciding whether he or she is trustworthy.
U.S. businesspeople should gather as much information as possible on their prospective Colombian customers. They should look into the potential customer's background, reputation, purchasing power, and financial, credit, and trade records. Obtaining a credit report and bank reference on prospective representatives, associates, and important customers is recommended.
In most cases, unsubsidized foreign environmental equipment and services are not price-competitive in the Colombian market. Import tariffs on finished equipment are still higher than tariffs on parts. Local assembly and distribution operations can lower production and transportation costs and help U.S. companies stay cost-competitive vis-ŕ-vis local, European, or Japanese companies.
Apertura has facilitated the importation of most products, including capital equipment, raw materials, and consumer goods. However, the cost of imported items is increased by duties, a 16 percent value-added tax, and surcharges. It is common to market imported items (particularly capital equipment that will require after-sales support and parts) through local representatives or distributors.
Traditionally, large Colombian manufacturing firms have had their own import divisions to handle the importation of necessary equipment and raw materials.
However, as the costs of duties and additional taxes have changed, distribution channels and sales strategies for intermediate and consumer goods have also changed. Many end-users now buy directly from manufacturers or suppliers abroad. End-users are increasingly establishing direct contacts at sources of new products and services, thus avoiding intermediaries in Colombia. Major Colombian end-users, distributors, and wholesalers have opened purchasing offices and warehouses in the United
States - particularly in Florida - for all types of products.
Open and technical contraband is a serious problem, especially in the case of consumer goods. According to the U.S. State Department, more than $5 billion in imports enter Colombia illegally every year. One of the reasons for this is that most consumer goods and consumer electronics are subject to a 20 percent cost, insurance, and freight (CIF) import duty and a 16 percent value-added tax (VAT). Obviously, a 50 to 60 percent margin over basic (legal) free on board (FOB) encourages contraband.
Because of the government's current fiscal problems, full financing packages can be attractive for national, regional, or municipal government agencies. During the past few years, sales of such packages to industry have included environmental improvement programs and the design and construction of treatment plants.
Since 1993 the government has sometimes used public works concessions as an alternative approach to funding. The implementation of this system in Colombia gives the private sector a great potential to attract private investment. Concessionary contracts have included building, operation, and transfer projects. A typical concession project is the construction and operation of the wastewater treatment plant of the city of Bogotá. The treatment plant will be built with a 20-year concession granted by the city to a consortium of French companies headed by Degremont.
With regard to supplying the private sector, Colombia imposes no legal requirement for a foreign firm to have a local agent or representative. However, Law 80 of 1993, which covers contracts originating in official entities or their dependencies, gives preference to Colombian bidders. For government contracts, it requires foreign bidders to establish legal representation in Colombia or to associate themselves with a Colombian entity. This can be accomplished by jointly filing bids or by subcontracting with local companies or individuals. Foreign bidders are also required to register with a Colombian chamber of commerce and to be preclassified and prequalified by that chamber. In some cases these requirements are extended to the contracting agency as well.
In any event, despite apertura, the most successful entrees into the Colombian environmental technologies market have been based on strategic alliances with Colombian firms - often consulting or construction companies. Many European companies have formed such alliances to mutual benefit, which is key to their success.
In fact, most foreign companies currently active in Colombia work through local distributors or representatives. For the majority of international bids, foreign companies have formed consortiums or form temporary links with Colombian companies.
The Commercial Service at the U.S. Embassy in Bogotá recommends that U.S. companies seeking agents, distributors, or representatives in Colombia avail themselves of the Agent Distributor Service or the Gold Key Service.
Despite efforts made in 1993 and 1994, Colombia does not provide adequate and effective protection of intellectual rights. In fact, Colombia has been on the Watch List under the Special 301 provision of the 1988 Trade Act every year since 1991. Colombia has ratified, but not yet fully implemented, the provisions of the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights.
According to Law 80 of 1993, government contracting agencies must usually select contractors through a public competitive-bidding process. U.S. businesses involved in environmental work should note, however, that this requirement may be suspended in work involving scientific or technical services, or in the event of an environmental emergency.
Colombia has not signed the WTO’s government procurement code, and there are reports of nontransparency in the letting of major government contracts.
Law 80 gives preference to Colombian firms, but when only foreign firms are competing, preference is given to proposals that include a greater number of domestic workers in the work force, higher domestic content, or better conditions for technology transfer.
Law 80 does not apply to contracts for the exploration and exploitation of renewable or nonrenewable natural resources, their commercialization, and activities performed by state companies involved in these sectors.
Import Requirements, Duties, and Taxes
Apertura eliminated most import licensing requirements, simplified import and export procedures, established a free-market exchange-rate regime (with very few conditions), created transparent and more liberal foreign investment rules, and opened up nearly all sectors of the economy for foreign investment.
However, Colombia has signed a large number of integration agreements, so it has a complex schedule of tariffs: as many as 10 different duties might apply to a product depending on its origin. As a result of the Uruguay Round negotiations, Colombia bound most of its tariff rates at 35 to 40 percent. Overall, the weighted average of Colombian tariffs fluctuates between 11 and 13.5 percent. The Colombian tariff book delineates all possible tariffs, but as a rule, products fall into one of four categories as follows:
5 percent for raw materials, intermediate, and capital goods not produced in Colombia;
10 to 15 percent for goods in the above categories but with domestic production registered in Colombia;
20 percent for finished consumer goods; and
other, such as import duties for automobiles that remain at the level of 35 to 40 percent and some agricultural products that fall under a variable import duty system (price band).
These tariffs are in line with the Andean Community Common Export Tariffs. It is important to remember, however, that Colombia temporarily raised its tariffs between 2 and 5 percent for a 90-day period in 1997 to help address a fiscal shortfall.
Most imports are covered by a 16 percent VAT that is assessed on CIF value plus duties, and all imports must be registered with the Colombian Foreign Trade Institute (Instituto Colombiano de Comercio Exterior, INCOMEX) in the form of a specific application known as a Registro de Importacion.
U.S. firms should check with the Bureau of Export Administration, Bureau of Export Administration (BXA) Tel: (202) 482-4811; fax: (202) 482-3617 Department of Commerce, to verify that any applicable licenses have been granted for the export of controlled products or technology transfers. In particular, any products or chemicals that might be obtained and used by narcotraffickers are closely controlled.
Under Decree 300 of 1995, a certificate of conformity with any applicable Colombian standards is required prior to the importation. This certificate can be obtained by providing notarized documents from certifying organizations that have been approved or recognized by the country of production or export. Certifications from most U.S. product-quality organizations are accepted in Colombia. ICONTEC, the National Institute for Standards and Certification, is responsible for technical standards development.
Special Considerations: Safety, Narcotics, and Crime
According to the U.S. Department of State, Colombia is one of the most dangerous countries on earth. It has murder rate eight times that of the United States. While narcotics and guerrilla-related violence account for part of this, common criminals are responsible for an estimated 75 percent of the reported murders. Kidnapping and extortion are alarmingly common.
The current State Department Travel Advisory states:
"The Department of State warns U.S. citizens against unnecessary travel to Colombia. Violence by narcotraffickers, guerrillas, paramilitary groups and other criminal elements continues to affect all parts of the country. U.S. citizens have been the victims of recent threats, kidnappings and murders. U.S. citizens in Colombia are currently the targets of kidnapping efforts by guerrilla rebels. Since it is U.S. policy not to pay ransom or make other concessions to terrorists, the U.S. Government's ability to assist kidnapped American citizens is limited. U.S. citizens of all age groups and occupations have been kidnapped, and kidnappings have occurred in all major regions of Colombia."
Organizations or individuals contemplating travel to Colombia are urged to consult the Department of State's Travel Warnings and Consular Information Sheets for updated information.
According to the U.S. Embassy in Bogotá, in 1997 the number of homicides fell slightly (by 2.6 percent in absolute terms from 1994), but there has been an increase in every other category of crime and terrorism: stolen automobiles, hijacking, theft, kidnapping, attacks on oil pipelines, and so on. The number of armed guerrillas and points of conflict has increased by an estimated 13 percent since 1994; 17 percent more municipalities report a guerrilla presence. As for the war on drugs, growth of coca as measured by acreage increased almost 80 percent from 1994 to 1997, while cocaine seized by authorities in the same period increased only 27 percent. The majority of the increased coca production has occurred in southern Colombia, which has just recently begun to be subject to eradication - 40,000 hectares in the first four months of 1998.
Colombian ventures are the world's largest suppliers of refined cocaine and are rapidly branching into heroin traffic as well. Colombia is also home to the second largest area of coca “agriculture” in the world. Despite the death of Medellín cartel drug lord Pablo Escobar in 1993 and the arrests of major Cali Cartel kingpins in 1995 and 1996, the drug cartels remain among the most sophisticated criminal organizations in the world. They control cocaine processing, international wholesale distribution chains, and markets. The United States is a major market for them.
In recent years, Colombia has witnessed a rampant rise in economic crimes, including truck hijackings, contraband, counterfeit products, kidnapping for ransom, and sabotage. The increased cost and risk of doing business have caused some multinational companies to discontinue or cut back on their Colombian operations. The Colombian Government claims it is providing ample security through both the army and police forces, and although President - Elect Pastrana has not addressed the question, he is perceived as being probusiness, and his administration is likely to take these matters seriously.
In some areas of Colombia, particularly Putumayo, Arauca, Casanare, and the North of Santander, groups such as the National Liberation Army (NLA) or the Colombian Revolutionary Armed Forces (FARC) demand the payment of fees (colloquially termed “vacunas” in Colombia) in exchange for which they "permit" private organizations to operate. It is important for foreign companies involved in environmental protection projects to learn how to interact with these communities in order to avoid kidnapping or murder.
In 1995, President Clinton signed Executive Order 12978, Blocking Assets and Prohibiting Transactions with Significant Narcotics Traffickers. This order blocks all property under U.S. jurisdiction in which there is any interest of four principal members of the Cali drug cartel. In addition, it blocks the property and interest in property of persons determined to play a significant role in international narcotrafficking centered in Colombia or determined to materially assist in or provide financial or technological support for, or goods or services in support of, the narcotrafficking activities of persons designated in the order.
It is illegal for U.S. persons to buy, sell, trade, give away, or otherwise engage in transactions involving persons and companies designated pursuant to the executive order, who are referred to as SDNTs (specially designated narcotics traffickers). A list of the names of such persons and companies is available from the Office of Foreign Assets Control (OFAC) at the Department of the Treasury, Washington, DC 27220; tel: (202) 622 2520, www.ustreas.gov/treasury/services/fac/fac.html. or from the Political/Economic Section of the American Embassy in Bogotá. Tel (571) 315 2129.
The order is an attempt to curtail the money-laundering operations of the Colombian drug cartels. SDNTs include entities or individuals directly involved in the drug trade, companies or front companies owned by them, and companies or individuals that supply or do business with any of the preceding. U.S. companies found to be doing business with SDNTs will be notified by U.S. Treasury Department, Office of Foreign Assets Control to cease and desist. Failure to do so can result in financial penalties or criminal prosecution or both.
Although most established businesses in Colombia are not involved in the drug trade, U.S. companies should, in addition to doing financial background checks on new business partners, also contact OFAC or the U.S. Embassy in Bogotá to obtain the most current listing of SDNTs to ensure that their new business partner is not on the list.
Pilferage in Customs warehouses and robberies of trucks on the roads are frequent, and some shipments have been detained indefinitely by Colombian Customs because of improper tariff schedule classification, the use of an improper address, or even typing mistakes. When these mistakes are made by the exporter/importer, Customs presumes they were done in bad faith. There are no clear procedures to correct such problems. Goods may be refused entry into Colombia and be returned to the exporter or importer at considerable expense.
The starting point for gathering further information should be U.S. Government documents. The Department of Commerce has a number of programs aimed at assisting U.S. firms doing business outside the United States. The first point of contact should be with the office of Environmental Technologies Exports, http://infoserv2.ita.doc.gov/ete/ which was established in 1993 to help promote the export of U.S. environmental technologies. This office offers a number of information resources on prospective markets in emerging countries, leads environmental trade missions to create linkages for U.S. businesses, and can provide insight on getting established in this market.
The Trade Information Center, part of the International Trade Administration at the Department of Commerce, can provide information and assistance in matters relating to exporting. The Trade Information Center, International Trade Administration, U.S. Department of Commerce, Washington, DC 20230. Tel: 1 800 USA TRAD(E). In particular, its database on Latin America and the Caribbean contains useful information about Colombia.
The Department of Commerce also maintains the National Trade Data Bank (NTDB), which contains a wealth of trade and business documents. NTDB can be accessed at www.stat-usa.gov and is also available on CD-ROM and at most libraries.
The U.S. and Foreign Commercial Service maintains an office at the U.S. Embassy in Bogotá. This office can conduct customized market research, provide information on trade leads, and help make contacts between U.S. companies and potential local partners. The Embassy (and Commercial Service) can be accessed at www.usia.gov/abtusia/ posts/CO1/wwwhmain.html.
Important information is provided by the Department of State, U.S. and Foreign Commercial Service, and other government agencies in the “Country Commercial Guide” series. The guides are updated yearly and published by the National Technical Information Service of the Department of Commerce. The Colombia volume for fiscal year 1998 is thorough and up-to-date. The State Department's Background Notes: Colombia, produced by the Bureau of Inter-American Affairs, gives a quick overview of Colombian affairs. Consular information sheets, travel warnings, and related information can be found through the State Department's website, www.state.gov.
Another source of trade-lead information is the Global Technology Network for the Americas, which is supported by the U.S. Agency for International Development (USAID). This program maintains a network of local partners that identify possible trade leads for U.S. companies in Latin America.
The Inter-American Development Bank is a good source for current financial and economic data about Colombia, although at present this information is available only in Spanish. The website is www.iadb.org/exr/sep/co981.htm
The Trade Bureau site has links to other official sites, such as the Central Bank.
The U.S. Department of Commerce fax retrieval system's, Latin America Documents #2102 (“Business Fact Sheet for Colombia”) and #2107 (“Top U.S. Import/Exports”) contain many frequently requested statistics on Colombia.
Finally, the Colombian-American Chamber of Commerce can be a useful source of information.