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Colombia in Latin America

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Colombia Overview

After several years of negotiations, an agreement was reached in 2017 by the Government of President Santos and FARC. Main points of the agreement relate to agricultural development policy; political participation; solution to the problem of illicit crops; victims of the conflict; end of the armed conflict; and implementation, verification and endorsement of the peace treaty. The agreement is expected to gradually increase political stability and economic growth, improving the climate for business, investment and social development.

From a business standpoint, issues such as extensive land ownership and prior consultation with indigenous and local communities for the development of projects will be subject to new regulations. On the other hand, social infrastructure development is expected to be one of the many opportunities derived from the peace treaty, as formerly unattended areas of the country will be the target for new and improved schools, museums, hospitals, prisons, and water supply and sewage systems. Economic and legal instruments to achieve this have already been put in place.

Going forward, the country will be facing a general election year with strong political polarisation, while continuing to accommodate changes in commodity prices, the 2017 tax reform, controlling inflation, the devaluation of the peso and encouraging greater levels of growth.

The tax reform addressed most of the short-term critical concerns which will allow the Government to operate steadily at least until the end of its term. The reform brought little structural improvements to the tax code, and the Government was unable to introduce the desired corporate tax rate as it wanted, as such it will be 40% in 2017, and 37% in 2018; still high when compared to other economies in the region. The tax reform effects, (including taxes on dividends), combined with full implementation by now of IFRS for all businesses, may lead certain conglomerates to reorganise internally to seek tax efficiencies.

Embracing international standards of compliance will certainly be on the agenda. The Superintendence of Corporations, a governmental authority that has been consistently ranked amongst the more transparent of Colombian agencies, will be in charge of enforcing recently enacted cross-border anti-corruption regulation, which will bring a unique opportunity for testing such regulation and a challenge for companies to adapt to international anti-corruption standards, even in sectors where the implementation of anti-corruption protocols and controls was uncommon.

Legal precedent pursuant to which municipalities are allegedly vested with sufficient power as to decide whether fully licensed and authorised projects to exploit natural resources may or may not continue operations in their jurisdictions, upon the vote of the municipality's inhabitants, creates a challenge which companies will have to deal with.

Non-traditional businesses and the so called "orange economy" are becoming more dynamic. Domestic start-ups have reached expansion stages and internationally recognised e-commerce companies have opened offices in Colombia.

In general, Colombia is committed to improving infrastructure in order to reach international standards (OECD - Organisation for Economic Co-operation and Development) and increase the competitiveness of the country, a complement required to match the demands of free trade agreements entered into with other countries. In addition to the 4G toll roads programme, the pipeline comprises railways, ports and airports with investments representing an unprecedented increase in the GDP. Current 4G projects have been awarded to joint ventures including Colombian construction companies and international engineering companies from Israel, China, Portugal and Spain. Some of the sponsors are in the process of financing projects with local and foreign banks, institutional investors and multilateral organisations.

Performance over the first wave of 4G projects – which amounts to COP14.9 trillion - has started, with six of the nine projects having reached financial closure. The Government estimates USD2 billion was invested in 2016 and forecasts this figure to rise to USD3 billion in 2017, making construction the fastest growing sector in 2017. With projects already in construction and operation stages, appetite for participating is expected to increase, particularly for institutional investors, funds and other local and international players, while at the same time sponsors already invested may have incentives to concentrate efforts in key projects, thus creating a dynamic market.

On the urban and housing construction side, a first generation of master urban plans (Planes de Ordenamiento Territorial) has expired for most Colombian cities; therefore a new set of plans must be issued by the municipalities. The new generation of urban plans will determine, among others, the future zones where the cities should expand, which will be essential to cover the increasing demand for housing in many cities. This new wave of plans shall also identify significant infrastructure projects that should be developed in the coming years.

The plan that creates most expectation is the one for Bogotá, which has already completed the first stage of the process. A new urban plan for Bogotá should be issued by the start of 2018.

Among other challenges, the new plan shall include a set of instruments to develop the envisaged metro system that is being designed by the city and shall establish over one million housing solutions that are expected to be required during the following decades (through major urban development and renovation projects). In fact, some key projects have already been approved (to be subsequently incorporated in the master plan), and thus the development of huge areas of the cities that had been restricted for years are now available to be urbanised, which has created great interest among developers and investors.

Worthy of note is the increased interest by potential investors in renewable energy projects (mainly, but not exclusively, wind and solar) following the long awaited regulation of certain tax incentives for renewables created by Law 1715 of 2014, and the formal announcement by the Government that it is considering the adoption of other incentives to facilitate the incorporation of renewable energies to the wholesale power market, which may include long term power purchase agreements.