COLOMBIAInvesting inFINANCIAL TIMES SPECIAL REPORT | Tuesday May 8 2012

In the 1990s, inhabitants ofthe capital used to wince atthe thought of Medellín.Crime rates were sky-highand Colombia’s second citywas almost written off as alost cause.

Now, when they think ofMedellín it is often withenvy. Its municipal trans-port system actually works,unlike the capital’s traffic-clogged streets. Its businesselite is often the country’scorporate face abroad. Vio-lence has diminished, andthe city is known for itsinnovative architecture.

“Frankly, Bogotá needs abit of Medellín. We don’thave anything like its civicsense,” says a Bogotá-basedbanker.

There are three reasonsfor this status.

First, a public administra-tion that works well: itspublicly owned electricitycompanies hand over $450meach year.

Second, the so-called Sin-dicato Antioqueño, threeleading companies that holdcontrolling shares in eachother and are sometimesreferred to as Colombia’skeiretsu in a reference toJapan’s series of conglomer-ates with interlocking busi-ness relationships.

Grupo Sura, the country’ssecond biggest financialgroup, Grupo Argos, theleading cement producer,and Grupo Nutresa, afood processing company,are also prime examples ofso-called “multilatinas” –dominant local companiesthat are budding multina-tionals.

They are also emblematicof Medellín’s traditionalentrepreneurialism.

Rupert Stebbings, manag-ing director of broker BTGPactual-Celfin, says: “If you

are interested in fixedincome or oil, go to Bogotá.But if you are interested inequities more generally,there is more here.

“It’s also easier to see:less traffic,” he adds.

The third reason wasSergio Fajardo, an innova-tive mayor with a PhD inmathematics, now governorof surrounding Antioquiastate who, laid the ground-work for the city’s largepublic works under a pro-gramme he calls “socialurbanism”.

He explains: “If you builda beautiful library in a poorneighbourhood, it gives peo-ple a sense of importance. Itraises their dignity andgives them access to goodssuch as education.

“It also brings visitors

from other parts of the city.That encourages social inte-gration.”

It can also inspire moregenerally.

Alfredo Gómez Cerdá, aSpanish novelist, wrote aprize-wining children’s bookafter visiting Medellín’s“Spanish library”, which inturn inspired a West SideStory-style musical, Barrode Medellín, where the castwas drawn from differentneighbourhoods.

Still, it is premature tocall Medellín fully arrived.For one, bizarre Egyptian orGreco-themed restaurantsspeak of a persistent under-lying narco-culture.

“It’s a bit like NorthernIreland,” explains Mr Steb-bing. “There is peace, butproblems remain.”

Transformedsecond cityexcites envyMedellínThe former crimecapital is a hotbedof entrepreneurs,says John PaulRathbone

In rehearsal: a musical inspired by the ‘Spanish library’

It is a sign of how far perceptionsof Colombia have changed that33 years ago Time Magazineran a cover with the scurrilous

title, “The Colombian connection: bil-lions in pot & coke” stencilled overthe psychedelic image of a cannabisleaf.

Today, South America’s third-big-gest economy is again in the publiceye, albeit for less controversial rea-sons. Last month, Time ran a full facephotograph of president Juan ManuelSantos on its cover with the title:“The Colombian comeback: fromnearly failed state to emerging globalplayer.”

In Washington and on Wall Street,the world’s second most populousSpanish speaking country (after Mex-ico, but before Spain) is even some-times referred to as “the new Brazil”.

Few would disagree with Colom-bia’s description as an emergingpower broker. During April’s Summitof the Americas in Cartagena, whichgathered more than 30 leaders fromaround the region, Mr Santos dis-played the near-frictionless but none-theless purposeful diplomatic style hehas become known for.

“It is the country that we most seeeye-to-eye with on most issues,” is acommon refrain heard among westernpolicy makers. Colombia is also theoldest democracy in the hemisphereand, unlike its Latin peers, has neverdefaulted on a loan.

Nonetheless, many hold a stereo-typical view of a country of drug lordsand unbridled violence, in the sameway England is sometimes stuck inpopular perception as a land ofdrunken lords, cups of tea and bowlerhats.

So, to get a sense of how the coun-try has changed from battle ground tobustling investor destination, you cando worse than go to Medellín. Anindustrial city of 3m people set amidrolling hills with a permanent spring-like climate, Colombia’s second citywas once known as the world’s mur-der capital. Drug cartel leaders suchas Pablo Escobar held sway, andMedellín’s traditionally can-do butfinancially conservative businessclass was hidden by a fog of violence.At its worst in 1990, there were 6,349homicides, equivalent to 380 deathsper 100,000 people.

Now, multinationals such asHewlett-Packard have made Medellíntheir regional base. Local multilatinassuch as Grupo Sura are meanwhileexpanding aggressively abroad: lastyear, the financial services groupbought Dutch insurer ING’s LatinAmerican pension assets in a $3.7bndeal.

“Medellín is living through its besttimes since the violence began,” saysCarlos Piedrahíta, president ofNutresa, a food company, which alsohas operations in Mexico, CentralAmerica and the US via its Lil’ DutchMaid brand.

As for violence, while still high, ithas dropped to a fifth of what it oncewas and Pablo Escobar’s grave – hewas shot in 1993, fleeing across a

rooftop – has become a macabre tour-ist attraction.

Much of Colombia is enjoying some-thing of a natural high. The shamemany felt about their country’sformer status as a “nearly failed”state has been replaced by pride.

With leftwing guerrilla groups onthe back foot and drug gangs nolonger a systemic security threat,there has been a step-change in thecountry’s situation, similar to thatenjoyed in Peru which similarlyquashed leftwing guerrilla groups.

Crucially, relative peace hasallowed the centrist Mr Santos toaddress development, especially long-overlooked social issues. At his inau-guration in August 2010, the 62-year-old president promised to govern “forthose who have nothing, and are tiredof waiting” – although success hasbeen mixed so far.

The country’s $370bn economy isbooming, with output growing at 6per cent a year. A free trade deal hasbeen closed with the US and foreigninvestment is rolling in, especiallyinto mining and energy. When Mari-ano Rajoy, the Spanish prime minis-ter, visited in April with a group ofleading Madrid businessmen, he wasstill smarting from Argentina’s recentnationalisation of oil company YPF.“We don’t expropriate,” Mr Santossaid pointedly, laying out Colombia’sdifference.

Inflation, at 3.4 per cent, remainswithin the central bank’s target. Withinterest rates at 5.25 per cent, the pesohas appreciated significantly, partlydue to “quantitative easing” in theUS. Yet, in contrast to Brazil, there islittle talk of “currency wars”.

“Yes, US monetary policy makes lifedifficult for us, but I’d be more con-cerned if the US was pursuing con-tractionary policies,” says DarioUribe, head of the traditionally ortho-dox central bank.

Rapid consumer credit growth in acountry with historically little finan-cial depth has raised concerns about acredit bubble and over-leverageamong the fast growing middle class.But although there is some deteriora-tion of loan portfolios, analysts saythere is little chance of blow-up.

“Provisions are very high, banks arewell capitalised, and overdue debt isless than in other Latin Americancountries,” says José FernandoRestrepo, head of research at Inter-bolsa, a local brokerage.

Mr Santos has also launched aseries of modernising initiatives.These include a $100bn infrastructureprogramme, an ambitious restitutionlaw that seeks to return land confis-cated by guerrillas or paramilitarygroups, and other reforms designed toimprove the tax code, the educationsystem, the judiciary and morebesides.

It is a full agenda, which, to someobservers, recalls the old saying thatthe one way to change nothing is totry to change everything.

Indeed, while his government iswidely praised for its technocraticprofessionalism and energy, criticssay Mr Santos, who comes from awealthy newspaper publishing family,has spent the past two years govern-ing “via headlines rather than withthe articles”.

“Such criticisms are all about imple-mentation,” says Mr Santos, who sayshe remains intensely focused on gov-ernance and contests the view thathis government lacks follow-through.

One sign of that grip is a near 50 percent rise in tax revenues over the pasttwo years. But such nitty-grittyhardly gets the average Colombian’spulse racing. A midterm drop in thepolls points to three main difficultiesMr Santos faces before presidentialelections in 2014.

The first is security. There is awidespread perception it is deteriorat-ing, as guerrillas and disbanded para-militaries morph into smaller butharder-to-hit criminal gangs thatengage not just in drug-running butalso extortion and other rackets.

“The old vertical structures are bro-ken,” says Jeremy McDermott ofInsight Crime, a Medellín-based con-sultancy. “Crime has become moredemocratised. It has also becomemore clandestine and underground.”

The second is execution. AlthoughMr Santos’s coalition has virtual con-trol of Congress, initiatives often getbogged down in highly legalistic proc-esses.

The third issue is to ensure in oneof the world’s most unequal countriesthat the poor enjoy the fruits of rapideconomic growth. To that end, MrSantos recently announced fully-funded plans to build 200,000 housesfor those most in need. To criticismsit was a populist move, the well-bredMr Santos shot back: “If helping thepoor means being a populist or a trai-tor to my class, then I am both.”

Colombia may well be an “emergingpower”, but it will remain a complexcountry of contradictions and sur-prises for a good while yet.

Nation shakes off ‘nearly failed’ statusJohn Paul Rathbonereports on an emergingpower that has come along way but remainsfull of contradictions

Inside this issueEconomyJosé AntonioOcampo on themixed blessing ofhigh energy andmining pricesPage 2

BankingNew entrants are queueing upto capture returns in one ofLatin America’s most vibranteconomies Page 2

Infrastructure The rules havebeen redrawn in the wake of aconstruction sector scandal Page 3

Legislation Hunter T. Carter looksat two bills – a new regime toreplace a creaky bidding process andanti-corruption measures aimed atpublic officials Page 3

The view from CaracasThe dismal investment climate inVenezuela has driven wealthy peopleacross the border Page 4

Oil The industry is close to hittingits 1m barrel-a-daytarget, in spite ofdisruption Page 4

Mining Pent-upinvestor demand isabout to have anoutlet Page 4

Power broker: US President Barack Obama greets Colombia’s President Juan Manuel Santos at the Summit of the Americas in Cartagena Getty

InsideA realignment of criminal andterrorist groups iscreating a newdynamic. Thegovernmenthas struckback, writesNaomiMapstonePage 3

www.ft.com/colombia-2012 | twitter.com/ftreports

2 ★ FINANCIAL TIMES TUESDAY MAY 8 2012

Investing in Colombia

Rapid economic growthreturned to Colombia in 2004,accompanied by low inflationand high investment. At 27 percent of gross domestic productthe investment rate is amongLatin America’s highest.Foreign direct investment hasalso soared.

The average annual growthrate since 2004 has been 4.7 percent. Growth slowed during theglobal financial crisis of 2008/9but there was no recession.This is in sharp contrast to theAsian and Russian crises in thelate 1990s when Colombiaexperienced its worst recessionof the 20th century. Theimprovement was in partthanks to the country’s abilityto adopt a counter-cyclicalmonetary policy, a big advanceover the policies adopted inprevious crises.

A better securityenvironment is part of thestory; so too is the high priceof commodities. Together theyhave encouraged a resourcesboom, particularly in oil, coaland gold.

Mining and oil exports havegrown sevenfold since 2003. At$37bn in 2011, they accountedfor two-thirds of exports.Traditional exports, such asagriculture and manufacturing,have also grown – but only bythree times. Coffee, thetraditional staple, representsonly about 5 per cent ofexports.

High energy and miningprices are a mixed blessing,however, as they threaten toundermine diversification ofthe economy, traditionally oneof its strongest characteristics.As a capital-intensive activity,mining also generates limitedemployment, a big concern in acountry that, despite significantimprovements, has struggled toshrink unemployment. At anaverage rate of 10.8 per cent in2011, it remains one of LatinAmerica’s highest.

The administration ofPresident Juan Manuel Santoshas put a strong emphasis on

competitiveness that is crucialif the country is to benefitfrom opportunities created bythe new US trade agreementand manage its potentiallyadverse effects on the lesscompetitive agricultural andmanufacturing sectors

Follow through is essentialas similar competitivenesspolicies were abandoned duringthe first administration offormer president Alvaro Uribe.Technology policies put inplace by the Samperadministration (1994-1998) werealso abandoned during thecrisis of the late 1990s.Improving physicalinfrastructure remains anoverriding concern.

Competitiveness isparticularly important today asColombia – sometimes referredto on Wall Street as “the newBrazil” – shares one of theBrazilian economy’s moreunfortunate features: rapid

exchange rate appreciation.Colombia’s trade-weighted realexchange rate is 39 per centstronger than its 20-yearaverage.

Brazil, however, has triedhard to limit exchange rateovervaluation. Its central bankhas been active in the foreignexchange market and myriadregulations on capital inflowshave been adopted. Colombiahas used similar policies in thepast but recent action has beenlimited.

Taxation of mining rents andprofits are another source ofconcern. In oil, the tax andcontracting regime allows thestate to appropriate a largeshare of rents from productivefields and high internationalprices. Yet nothing similar isin place in other miningactivities. As a result the statecaptures only a smallproportion of boominginternational mining revenues.

Adapting the oil regime to themining sector should be apriority.

Still, there have been someimprovements. Tax subsidiesdesigned to encourage foreignmining investment have beeneliminated. Following a 2011law, mining royalties also havethe potential to be betterdeployed by the centralgovernment into regionaldevelopment projects, and forgeneral research anddevelopment.

Further reform of the taxregime remains a priority,especially those benefitsgranted to specific sectors oractivities without clear criteriaduring the two previousadministrations of Mr Uribe.Many of these subsidies areprotected by tax stabilityguarantees and were designedto reassure and encourageforeign companies to invest inthe country in the early 2000s.Nonetheless, the tax regimehad previously enjoyed a long-term process of simplification,with tax loopholesprogressively closed since 1974.Mr Uribe broke that trend.Simplifying the tax regime andclosing loopholes are critical.

In doing so, the redistributivepossibilities of fiscal policy alsoneed to be enhanced. This isparticularly important in acountry that, over the pastdecade, has largely missed theimprovements in incomedistribution enjoyed by the restof Latin America. Colombianow has one of the worstincome distributions in aregion famed for its inequality.At 0.578 the Gini coefficient isLatin America’s worst afterGuatemala. Bettering that isessential to sustained andprolonged growth.

José Antonio Ocampo is aprofessor at ColumbiaUniversity in New York. He is aformer Colombian financeminister, former executivesecretary of the UN EconomicCommission for Latin Americaand the Caribbean, and formerunder-secretary-general of theUN Department for Economicand Social Affairs

Boom times a threat totraditional diversificationGuest ColumnJOSÉ ANTONIO OCAMPO

José AntonioOcampo:‘Furtherreform of thetax regimeremains apriority’

Expatriates return Life starts to look better back home for Colombians on Wall Street

After 15 years on Wall Street,Gustavo Serpa decided lastsummer that it was time to gohome to Colombia.It was not an easy decision.

Having arrived in New York in1996 as a 29-year-old to pursuea MA at Columbia University, MrSerpa has built a comfortable lifefor himself in the US.First, he was a banker at

Merrill Lynch’s private wealthmanagement business, then amanaging director at Pali Capital,a boutique firm specialising inderivatives and fixed-income trading that went under.Later, he was a managingdirector at Forefront Advisory, anasset management group.Along the way, he also got

married and had two children.“The global financial crisis

changed everything,” he says.“When I first left to go abroad,things in Colombia were verycomplicated. It was the peak ofthe violence. The feeling was thatthe guerrillas were close totaking over the country.“But today, it is in much better

shape, while Wall Street isstruggling.“I realised that with my

experience on Wall Street andmy network of contacts inColombia, there were moreattractive opportunities for meback home.”Mr Serpa, who now heads the

Colombia operations of AmberCapital, the private equity group,is not alone in feeling this way.Across Wall Street, anecdotal

evidence suggests that anincreasing number of Colombians

are upping sticks and headinghome.The country attracted close to

$15bn in foreign directinvestment last year.Growth in gross domestic

product in 2011 is likely to havebeen above 5.5 per cent,according to the central bank,and the forecast for this year isa 5 to 6 per cent expansion.Andres Garcia-Amaya, global

market strategist at JPMorgan’sasset management division and aColombian native, says several ofhis friends, tired perhaps of thesluggish deal making climate onWall Street, have gone home towork in private equity groups.Opportunities for deals abound,

in mining, energy, consumer,infrastructure and financials.“I am definitely coming across

a lot of returnees,” comments MrSerpa.His partner at Amber Capital

Colombia for example, movedback after 16 years in Londonand he says he knows at least10 other people – mostly ex-WallStreet/City of London types –who have recently moved backafter a stint abroad.Life in Bogotá is not without

its difficulties, however. Traffic isan issue and the capital, whilenot quite on a par with NewYork, is nonetheless becoming anexpensive place to live, says MrSerpa.Still he feels he has made the

right move. “Our quality of life ismuch better here than in NewYork,” he says. “And it’s good tobe back home.”

Pan Kwan Yuk

Jammed: life in Bogotá is not without its difficulties, The traffic is terrible and the cost of living is rising Getty

Bogotá’s hotels are filledwith visiting bankers. Theeconomy is taking off,credit is growing at 20 percent, and new entrantswant to capture the returnsin one of Latin America’smost vibrant economies.

Brazilian giant Itaú is set-ting up shop, Canada’s Scot-iabank just bought a localpresence in a $1bn deal, ashas Chile’s Corpbanca. Oth-ers are moving in as well.

Above all the excitementstands the measured confi-dence of Grupa Aval,Colombia’s largest financialservices group, and LuisCarlos Sarmiento Jnr, itsstraight-talking chief execu-tive.

“We welcome the compe-tition,” says the son of self-made billionaire Luis CarloSarmiento Snr, who turneda 10,000 peso bonus 50 years

ago into a fortune thatForbes estimates todaystands at $12.4bn, the 64thlargest in the world.

Mr Sarmiento Snr hasjust crowned his careerwith the purchase of Colom-bia’s most venerable news-paper, El Tiempo.

But media is not part ofMr Sarmineto Jnr’s remit.Instead he manages thegroup’s largest part, bank-ing, including the $2bn pur-chase of central Americancredit card issuer BAC-Cre-domatic in 2010, one of aflurry of overseas Colom-bian banking deals.

“We generate so muchliquidity at home, we haveto use it somehow,” hesays.

Credomatic last yearearned $200m in profit, giv-ing the deal a respectable –if not stellar – 10 per centreturn on investment, ver-sus the 20 per cent plusreturn on equity GrupoAval enjoys at home.

“Once you take intoaccount leverage, though,the return is more like 18per cent,” says MrSarmiento.

Still, the difference illus-

trates just what a temptingmarket Grupo Aval sits on.

Indeed, in midtownBogotá, Itaú, Latin Amer-ica’s biggest bank by assets,has just opened a gleamingcorporate and investmentbanking office.

“Colombia offers all theright financial conditions,”says Ramiro González-Prandi, country manager.

“Moreover, a lot of ourclients are coming here,and we can helpColombian com-panies goabroad. It’sall part ofLatin Amer-ica’s grow-ing interna-t i o n a l i s a -tion.”

Mr Sar-m i e n t oappears unruf-fled at theprospect ofentrants

competing away hisreturns.

“That kind of talk hasoften been heard before:when American banks camehere, and then Spaniards,”he says. “But with Colom-bian banks selling for threetimes book value, the newentrants will want to earntheir money back.”

Such talk might soundcomplacent were it not forthe long-held conservatismof Colombian bankers, plus

the Sarmiento family’srecord.

“As my father says:aim for the sky butalways prepare forwhat the worst out-come might be.That is the secretof his Midastouch.”

Liquidity generated locallydrives f lurry of overseas dealsBankingNew entrants areout to capture bigreturns, says JohnPaul Rathbone

A Bolivian-born, Brazilian business-man might seem an unlikely personto own one of Colombia’s trademarkcompanies, but German Efromovich isnot one to worry about such things.

Mr Efromovich, who has a back-ground in oil and telecommunica-tions, bought Avianca, Colombia’snational airline, for $64m plus theassumption of $220m in debt and leas-ing liabilities in 2004.

Avianca was then in Chapter 11administration, but he was bettingthat the company’s proud history – itclaims to be the world’s second-oldestairline – would help him turn itround. It worked. “The demand isthere – people love this airline in thecountry,” Mr Efromovich says.

Avianca hit trouble in the early2000s after a series of regional crisesundermined commodity prices andLatin American currencies. The air-line was then owned by Valorem, aholding company controlled by thefamily of Julio Mario Santo Domingo,the late billionaire Colombian busi-nessman. Valorem was bleedingmoney and half of its debt belonged toAvianca, so it decided to put the air-line into Chapter 11.

“I went to Colombia and somebodysaid: ‘Why don’t you buy Avianca,nobody wants it’,” says Mr Eframov-ich. He jokes that, to stop people ask-ing him to buy the airline, he made anoffer he thought the creditors wouldrefuse. To his surprise, they acceptedit.

By 2005, he had doubled the fleet to70 aircraft and the same year receivedcitizenship from Colombia’s then pres-ident, Álvaro Uribe, for his invest-ment in the airline industry and inoil.

Today, the airline has a fleet ofmore than 100 larger aircraft. Theholding company, Avianca-Taca,

made a profit last year of 202bn pesos($114m), up 221 per cent on the previ-ous year.

It also has operations in Brazil, Peruand Ecuador. Its Brazil division isplanning to buy 50 aircraft for use inLatin America’s largest economy at areported cost of $4.1bn.

There has been some turbulencealong the way. Avianca-Taca listed onthe Bogotá stock market a year ago,raising $260m.

But its shares suffered when inves-tors turned bearish on the overallmarket and an arbitration claim fromformer owner Valorem weighed onthe stock.

Helped by Latin America’s strongeconomies, the airline is expanding. Ittransported nearly 21m passengers in2011, 18 per cent up on 2010.

With a free-trade agreementbetween the US and Colombia due totake effect this year, Bogotá’s ElDorado airport is doubling its cargocapacity. Avianca is matching it, beef-ing up its cargo operations throughthe purchase of four Airbus SASfreighters last year.

Unlikely owner saves national airlineProfileGerman EfromovichJoe Leahy talks to the manwho pitched for Avianca asa joke and was accepted

Luis Carlo SarmientoJnr: straight-talker

FINANCIAL TIMES TUESDAY MAY 8 2012 ★ 3

Investing in Colombia

You understand a lot about theinvestment climate in Colombia onceyou get out on the road.

Bounce over Bogotá’s rutted ElDorado Avenue, for years a series ofconstruction sites that eventually ledfrom the city to the airport.Experience the rugged and oftensingle-lane switchbacks south ofMedellín. Creep slowly for more than100km from the Pacific cargo port ofBuenaventura to Cali, a regionalcapital, behind container trucksstruggling with washed-out roads.

It is only then that you realisefully that none of the naturalresources, consumer products ormanufactured goods that entice somany investors will get to marketquickly without better transportinfrastructure.

At the same time, however,potential infrastructure investors seemore than rugged terrain when theycontemplate the $100bn ofimprovements the government saysit expects over the next 10 years.

They see bidding processes thathave often been mired inbureaucratic delays, projects tied upfor years in bidding challenges andplanning delays. They also knowabout public corruption.

Investors – and Colombiansgenerally – are understandablydiscouraged by scandals, one of theworst of which involved the Nulebrothers, whose Grupo Nulecontrolled the road works on ElDorado Avenue and more than 50other public projects in Bogotá.

The Nule brothers recently went tojail for seven years for corruption ina bribes-and-kickback scheme thatalso resulted in the expulsion ofSamuel Moreno, Bogotá’s previousmayor, his imprisonment on criminalcharges, and the disappearance of

more than $400m of public money.The government has responded

with two bills. The first is a public-private partnership regime that willreplace a creaky public concessionsbidding process. The second is ananti-corruption bill aimed at publicofficials in particular.

It will take more than newlegislation and a handful ofconvictions to end cronyism, tamebureaucracies and expose corruption.But both bills could help expedite abulging pipeline of projects.

The public-private partnershipslegislation is designed to rescue abidding process that has often beensunk in technicalities andbureaucracy. It replaces old-styleconcession bidding with public

private partnerships and applies toall projects worth more than about$2.1m.

One of its features is that financialstrength, not just constructionexperience, is used to rank bidders.Another is that bidders get pre-qualified. This is designed to preventpost-award litigation by disappointedcontenders.

It also allows private-sectoroperators to make their own projectproposals. These can be submittedwithout solicitation, and must thenbe evaluated for approval within 90days. This leads to a public tender ifthe project requires public funds.Otherwise, there is a public postingof the proposed contract for up to sixmonths, giving time for third partiesto register their interest.

The new law comes on the heels ofa big rewrite of the anti-corruptionlaw that bans for 20 years anyonefrom participating in public contracts(and public private partnerships)who has been sentenced to jail “forcommitting offences against publicadministration”; or who has been“convicted of offences relating tomembership, promotion and fundingof illegal groups, crimes againsthumanity, drug trafficking inColombia or abroad, or bribery”.

In a country wrestling with thevestiges of paramilitaries andleftwing guerrillas, this provisionwill doubtless see a lot of action,especially since the law includes“companies in which such personsare partners, its parent and itssubsidiaries, except for publicly-heldcorporations”.

Notably, the provision does notinclude close family members.

It also attempts to limit corruptinfluence on elected officials. Largecampaign donors are prohibited fromcontracting with governments led bythe officials they supported.

“Revolving door” rules meanwhileprohibit former public servants fromproviding “support services,representation or advice” for twoyears after leaving office, and foreveron specific matters handled while inoffice.

The Santos administration hasspent the best part of two yearsdesigning a better framework forinfrastructure works. The delay hasproduced frustrations. Still, lastmonth, two road projects weresuccessfully tendered. Colombia’sinfrastructure train may at last beleaving the station, even if slowly.

Hunter Carter is a partner at NewYork based law firm, Arent Fox,co-chairs its Colombia working group,and blogs on Colombian issues atwww.colombialawbiz.com and tweets@ColombiaLawBiz

Train leaves the station, slowlyGuest ColumnHUNTER T. CARTER

Hunter Carter:rules prohibitformer officialsfrom providingsupport services,representationor advice fortwo years

When Colombia’s armed forceskilled organised crime don Juande Dios Uzuga this year, retribu-tion was swift. The dead man’sgang, the Urabeños, called a“strike” in the north-west of thecountry, threatening businessesthat refused to comply, andputting a $1,000 bounty on theheads of police officers.

Oscar Naranjo, Colombia’spolice chief, had already warnedthat organised crime gangs –known as Bacrim, the Spanishacronym – presented a greater

threat to security than theMarxist Revolutionary ArmedForces of Colombia (Farc),which has waged a 48-year waragainst the state. But the emptystreets of the coastal city ofSanta Marta and the burnt-outshells of 11 vehicles that failedto observe the gang’s strike pro-vided stark evidence of a re-alignment of criminal and ter-rorist groups in the country.

Juan Carlos Pinzon, thedefence minister, says: “Thesuccess of the past eight yearshas created a new dynamicbetween all of the criminalorganisations – Farc, ELN[National Liberation Army],criminal bands. They are notfighting among themselves anymore – they are partners inbusiness, whether that’s drugtrafficking or illegal mining orother activities.”

The rise of the Urabeños gang,which controls much of thedrug trafficking on the northCaribbean coast in conjunctionwith Mexico’s Sinaloa cartel andFamilia Michoacana, came afterthe 2006 demobilisation of right-wing paramilitaries. A rivalgang, the Rastrojos, now domi-nates the drugs trade along theborder with Venezuela, a tradi-tional stronghold for both theFarc and the ELN, according toNuevo Arco Iris, a Bogotá-basednon-government organisation.

Other gangs, such as theBlack Eagles, the Paisas and theRevolutionary Anti-SubversivePeople’s Army of Colombia,have also staked out lucrativeterritories, even as the Farc hasincreased its attacks on securityforces and infrastructure.

In February, after an exten-sive review of security strategy,

the government struck backwith “Sword of Honour”, a pol-icy whose hallmark is muchcloser co-operation between mil-itary and police forces. In twobig offensives, the army cap-tured several mid-ranking Farc

leaders and killed 69 guerrillas.Mr Pinzon says the number of

arrests of Bacrim and Farc lead-ers is up 44 per cent in the yearto April. “More and more theFarc, ELN and criminal gangsare not always presenting them-selves as militarily organisedstructures. Instead, they are

merging as civilians into thepopulation and trying to createsocial control,” he says. “This iswhy the strategy includes notonly offensive task forces buthaving policing capabilitiesmerged with the military.”

Military and police forces arefocusing on 10 hot zones, bring-ing in local prosecutors to speedthe granting of search andarrest warrants. In the next twoyears, the police will add 20,000recruits and the army 5,000.

Like his predecessor, ÁlvaroUribe, President Juan ManuelSantos is travelling the countrywidely, but Mr Pinzon says thepresident’s visits to the hotzones are geared towards hold-ing cabinet ministers responsi-ble for responding to infrastruc-ture, security or other needs.“For the first time it’s not just apresidential speech,” he says.

While previously, the militaryhad focused – with great success– on eliminating the top leader-ship of the Farc, “Sword of Hon-our” has widened the focus todismantling entire fronts of theFarc, systematically attackingtheir financial interests.

Mr Santos’s landmark victimcompensation and restitution ofland legislation, which seeks toredress decades of land seizuresby guerrillas and criminalgroups, is an important factor insecurity strategy.

The Farc and Bacrim areheavily invested in illegal min-ing and logging, dairy cattle,agriculture and coca cultivation,and army troops have reclaimedseveral ranches this year withthe aim of turning them over tothe original owners.

Last month, the Farc relin-quished its last military and

police hostages – 10 men heldfor up to 14 years – as an over-ture for peace talks.

But peace talks are “veryunlikely” in the short term, saysJames Lockhart-Smith, LatinAmerica analyst at Maplecroft,despite the tabling of a bill bythe Santos administration toprovide the framework for tran-sitional justice legislation.

“Since the peak of its capabili-ties between 1995 and 2001, theFarc has lost more than half itsoperatives, who currentlynumber about 8,000,” a Maple-croft report says. “It can nolonger successfully take andhold territory through large-scale assaults on fixed govern-ment positions … neverthelessthe group has not yet been suffi-ciently weakened so as to acqui-esce to government demands fornegotiation on official terms.”

Gang rivals reinvent themselves as partners in crimeSecurityNaomi Mapstone ona new dynamicbetween criminalsand insurgents

Juan CarlosPinzon: criminalgangs ‘are notfighting amongthemselves anymore – they’rein business’

G ustavo Petro hasbig plans forBogotá. The newmayor of Colom-

bia’s capital city waselected in the wake of aconstruction sector scandalthat sent both the previousmayor Samuel Moreno andhis bagman brother Iván, asenator, to jail.

Bogotános are not happywith the tangle of brokenstreets the Moreno brothersleft behind, nor with long-unfulfilled promises of ametro system or that mythi-cal beast, an “integratedmass public transport sys-tem”.

“Bogotá is far behindwhat a city of its sizeshould have for its infra-structure,” says DanielGarcía Penã, Mr Petro’sdirector of internationalrelations. He says the Petroadministration is commit-ted to several transport ini-tiatives in the next fouryears.

The first is an electrictrain to run down the Sep-tima, the main road con-necting Bogotá’s presiden-tial palace and governmentbuildings in the old centreto the business district withaffluent suburbs in thenorth.

The second is finishingextensions to the existingTransMilenio rapid transitbus system and convertingit from diesel to cleaner

energy, such as electricity.The TransMilenio modelhas been widely copiedacross Latin America andbeyond but, after 12 years,it is running at capacity.“The ruling class tends toexaggerate the value of theTransMilenio. They see it asa magic solution and not aspart of what modern citiesthroughout the world dis-covered decades ago – theneed to integrate differenttypes of transport in onesystem,” says Mr GarcíaPenã.

To that end, Mayor Petroalso wants to get the firsttwo above-ground tranchesof a metro system underway and build a light raillink near the Bogotá Riverto form an outer loop roundthe city. Two cable cars upthe mountains that serve asa backdrop to the city cen-

tre would round out themayor’s transport commit-ments, says Mr GarcíaPenã.

It is an ambitious agendafor Mr Petro, a former left-ist guerrilla with the M-19movement and an anti-corruption campaigner.

Bogotá is not alone in thescale of its transport ambi-tions or woes. All acrossColombia, poor linksbetween regional centressuch as Cali, Medellín, Bar-

ranquilla and the port ofBuenaventura are drivingup the cost of doing busi-ness and adding hours totransport times.

“There’s plenty of oppor-tunity in terms of invest-ment,” says Bernardo Gam-boa, president of Conciviles,one of Colombia’s oldestconstruction companies.“We have more than sevencities with 1m-plus inhabit-ants and connectivity is oneof the main issues.”

The catch for investors isthat new road concessionshave been on hold sincePresident Juan Manuel San-tos, who came to power inAugust 2010, ordered arestructuring of the biddingprocess and regulatoryauthority to correct a sys-tem that had become a tan-gle of political patronage,corruption, weak engineer-ing design and poor over-sight.

“Things really got out ofhand in the past 10 years,”says one investor. “The newadministration found thatmost of the major conces-sionary works were alreadyawarded for the next fewyears and all of them hadproblems – very fewrequirements for builders,contracts that opened thedoor to successive renegoti-ations, increases in pricesand delays in construction.”

The revamp will eventu-ally lead to “a much betterand cleaner way of doingbusiness”, he adds.

Mr Gamboa agrees therestructuring has been nec-essary, but emphasises theclock is ticking. “If we don’tdo this [restructure] well,countries in Europe and

elsewhere will start torecover and the investmentfocus will have moved to abetter place.”

The man charged withheading the new NationalInfrastructure Agency(ANI) is Luis FernandoAndrade, the respectedformer head of McKinsey inColombia.

Mr Andrade will overseea tripling in transport infra-structure investment by2014 via public private part-nerships for big roads, suchas a $700m section of theroute from Bogotá to theport of Buenaventura.

Big road concessions areexpected to flow again inthe second quarter of 2013.

Mr Andrade has alsofloated the possibility ofissuing up to $22.7bn in 25-year investment-gradebonds from mid-2013 tobuild new roads, increaselane capacity and improveexisting routes. Most of thenew concessions would bepublic private partnershipswith 20-year contracts.

This would help addressanother obstacle for Colom-bian construction compa-nies which still look tobanks as the best form offinancing.

“Unfortunately for us, the

primary source of finance isgoing to be standard corpo-rate loans or project financewith a financial entity,” MrGamboa explains. That’sreally the only option forColombian companies at

present.” Conciviles hasrecently structured somealternative funding via pri-vate equity for several bids,he says, but private equityis still in its infancy inColombia.

Pressing need forbetter transportInfrastructureNaomi Mapstoneon re-engineeringthe bidding process

Bus stop: the TransMilenio model has been widely copied but, after 12 years, it is running at capacity Getty

Bogotános are nothappy with thetangle of brokenstreets, nor withunfulfilled promises

ContributorsJohn Paul RathboneLatin America Editor

Naomi MapstoneAndes Correspondent

Pan Kwan YukEmerging MarketsReporter

Joe LeahyBrazil Bureau Chief

Benedict ManderCaracas Correspondent

Stephanie GrayCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For commercialinformation regarding LatinAmerica, contact:John Moncure on: +1 212642 6362; emailjohn.moncure@ft.com orAlejandra Mejia on: +1212 641 2466; emailalejandra.mejia@ft.com

All FT Reports areavailable on FT.com.www.ft.com/reports

4 ★ FINANCIAL TIMES TUESDAY MAY 8 2012

Investing in Colombia

Mining Security gains against rebels open up vast areas for prospecting

Colombia is about to fire the startingpistol in a race to develop its mineralresources after a year-long freeze onnew concessions and therearrangement of its regulatory agency.Already the world’s fourth biggest

exporter of coal, the country is keen toexploit its gold and copper sectors nowthat security gains against theRevolutionary Armed Forces ofColombia (Farc) have freed up vastareas for exploration.“Colombia has become a very

attractive country for mining capital.It’s clear,” says Mauricio Cárdenas,mining minister. “There’s a constantflow of companies and people comingto this office to talk about their plans.I travel very little now. Everybody’scoming here.”Pent-up investor demand will finally

have an outlet this month whenColombia opens the National MiningAgency, which will oversee thepromotion and granting of explorationand mining concessions and regulatethe industry. The move follows alengthy review brought on by a spateof corruption and safety scandals.More than 300 miners died in

Colombia between 2010 and 2012 andMr Cárdenas’s predecessor hasdescribed the mining registry as a“catastrophe”. Speculation in miningpermits was rife, the former ministersays, allowing the stagnation ofconcessions and the issuing of somepermits in protected nature reserves.Mr Cárdenas, formerly a senior

fellow at the Washington-basedBrookings Institution, says an“explosion” in the number of titlesunder the old system led to stagnationin both exploration and mining.“We have about 9,000 titles that

have been granted and, of those, only60 per cent pay royalties. That showsthere are a large number of titles thatare remaining idle or that wereacquired by individuals with onlyspeculative purposes,” he says. A newmining code to be put to Congress inJuly will contain measures to rescindclearly inactive titles, he adds.Aside from gold, copper and coal,

the government is prioritisingexploration for phosphate, potassiumand magnesium ores, platinum,uranium, iron and coltan. Juan ManuelSantos, the president, has set aside2.9m hectares of land for mining.The government is under enormous

pressure to get the restructuring rightat a time of surging investor interestand an increase in community andenvironment-based opposition toextractive projects.The Fraser Institute 2011 mining

survey, an important indicator ofinvestment climates, saw Colombia slipdown the rankings after makingsignificant gains between 2006 and2010. “We are very open, very friendlyto foreign investment. But we alsowant to make sure that this engine ofeconomic growth is sustainable, andfor that it needs to be structured in away that the population sees thebenefits,” Mr Cárdenas says.Both Mr Cárdenas and Mr Santos

have opposed raising mining royalties,as some lawmakers have proposed,although they are open to a debatebased on facts. “We in the governmentare committed to stability in the rulesof the game,” says Mr Cárdenas.Mining juniors are driving interest in

gold, often targeting areas in whichinformal miners are already present. Inthese cases, Mr Cárdenas says, thecompanies will be asked to restoredamaged areas beforeproceeding with their ownoperations.“The first step for them

should be restoration of theenvironmental damage thatwas causedbefore,” hesays. “Thiswill allowthem tobuildcredibility,tell thepopulationand the

government that they’re really seriousabout high standards in terms ofenvironmental and social impact.”Formalising “traditional” miners

should also be a part of investors’plans, he says. About a third of goldproduction comes out of the informalsector, Mr Cárdenas says, but hedraws a distinction between“traditionals” and criminal groups, suchas the Farc, which pose serioussecurity risks. The new mining codewould introduce greater technical aidto “traditional” miners and shore upthe powers of the security forces todestroy equipment used by criminalgroups.Daniel Linsker, Latin American

analyst at consultant Control Risks,says the test for the mining agencyand the regulatory code will be in thefield, “far from the words and actionsof a national government not too keenon antagonising both activists and localpoliticians in defence of mining”.“Debates over the new mining code

and the creation of a new nationalmining agency are just the openingsalvos in a battle to decide whetherColombia turns into a mining countryor it remains a country with mining,”he says. “The battle will certainly belong as the stakes are very high:royalties . . .Environmental andcommunity issues, social unrest andprior consultation, local politics – andartisanal and illegal mining – are allfronts on which the governmentwill face opposition and will haveto concentrate serious energy if itreally is committed to developingthe mining sector to be one of the

five engines ofeconomic growth.”

NaomiMapstone

MauricioCárdenas,mines minister

When Juan Manuel Santos,Colombia’s president, travelledto Cuba in March, it was osten-sibly to visit Raúl Castro todiscuss the Caribbean island’sparticipation in the Summit ofthe Americas, which he was tohost the following month.

But his simultaneous visit toHugo Chávez, who was recover-ing from surgery in a Havanahospital after a recurrence ofcancer first diagnosed in June2011, betrayed a keen interest inthe health of the Venezuelanleader, which is potentially of

greater importance to neigh-bouring Colombia.

Although he is leading in thepolls ahead of presidential elec-tions due in October, some fearthat a collapse in Mr Chávez’shealth might not only triggerchaos in Venezuela, it could alsodisturb the broader region.

Mr Santos, once a bitterenemy of Mr Chávez, recentlydescribed him as a “factor ofstability” for the region.

The Venezuelan leader’s crit-ics at home see things differ-ently. “Any president with theslightest idea about the impor-tance of Venezuela’s relationswith Colombia would be a hun-dred times better than Chávez,”says Beatriz de Majo, an opposi-tion columnist and specialist onrelations with Colombia.

The business community inColombia seems to agree. In atypical comment, one business-

man says: “Of course, there willbe instability for a while [shouldChávez die], but when it settlesdown, whatever comes will bebetter than Chávez.”

As it is, given the dismalinvestment climate in Vene-zuela thanks to the socialistpresident’s hostility towards theprivate sector and pervasivestate intervention in the econ-omy, there is a steady andincreasing flow of wealthy Ven-ezuelans to Colombia.

The 22,000-odd Venezuelansestimated to be living in Bogotáhave pushed up prices at thehigh end of the capital’s prop-erty market, as well as leavingfewer places for Colombians atits best schools. Still, there is acommon refrain, “Chávez is thebest president Colombia hasever had”, which reflects thefact that, to a large degree,Colombians have Venezuelans

to thank for the extraordinarygrowth of their oil sector inrecent years after thousands ofhighly trained oil men werefired in 2003 from Venezuela’sstate oil company, PDVSA.

Many ended up in Colombiaand are behind the success ofthree of the country’s most pros-perous oil companies, PacificRubiales, Alange and Vectra,which between them accountfor a big chunk of the almost 1mbarrels a day the industry isproducing, nearly double pro-duction just six years ago.

But it is not just Venezuela’soil expertise: many Venezuelanbusinesses are migrating toColombia and the situation hasreached such extremes thatPolar, Venezuela’s biggest pri-vately owned company, nowexports its food and drinks pro-duce from the neighbouringcountry.

Businesses on both sides ofthe border received a seriousblow when Mr Chávez froze dip-lomatic and commercial rela-tions with Colombia after a planby Mr Santos’ predecessor,Álvaro Uribe, to allow the US toexpand its military presence inColombia in 2009. After bilateraltrade peaked in 2008 at almost$7.3bn, of which more than $6bnwas accounted for by Colombianexports to Venezuela, it droppedto $1.7bn in 2010.

Last year, bilateral traderecovered to $2.3bn, and Fern-ando Gerbasi, a former Venezue-lan ambassador in Bogotá, reck-ons it could top $3bn this year.“But that doesn’t take intoaccount the informal cross-bor-der trade,” he says, guessingthat its value could be evengreater.

According to José Rozo, presi-dent of the chamber of com-

merce of Venezuela’s borderstate Táchira, 10m gallons ofpetrol are smuggled to Colombiaeach month from his statealone.

There are many other goodstoo, such as food and medicine,whose prices are regulated bythe Venezuelan government, butwhich can be sold for muchmore after they have beensmuggled across the border. “Ifyou can’t find foods in govern-ment subsidised stores here, youcan find them in massive quan-tities in Colombia,” says MrRozo.

Nevertheless, the recovery informal cross-border trade, albeitslow, is thanks to the conserva-tive pragmatic attitude of MrSantos to Venezuela’s controver-sial leader, who he called his“new best friend” after beingelected.

Mr Gerbasi explains that the

Colombian leader has gainedsignificantly after a radicalchange in strategy from hispredecessor, Mr Uribe, whoaccused Mr Chávez of turning ablind eye to the presence inVenezuela of Colombian insur-gents. Not only are trade rela-tions improving, but the twocountries are co-operating moreeffectively in their attempt toprevent narcotics trafficking.

While many are scepticalabout Mr Chávez’s commitmentto addressing the problem ofcocaine smuggling and the pres-ence of Colombian rebels inVenezuela, María TeresaRomero, a Caracas-based ana-lyst in international relations,says both sides have gained.

“Not much, but nor have theylost that much. It’s a relation-ship of convenience more thanof commitment or solidarity,”she says.

Trouble in Venezuela brings benefits to its neighbourView from CaracasBenedict Manderfinds an increasingflow of rich peoplecrossing the border

Colombia, LatinAmerica’s fourthbiggest oil exporter,is tantalisingly

close to hitting its 1mbarrel-a-day target afteralmost doubling productionsince 2006.

In spite of a rash oflabour disputes and a risein guerrilla attacks on pipe-lines and oil workers, pro-duction averaged 930,000b/d up to March.

For Ronald Pantin, chiefexecutive of Canada’sPacific Rubiales, the biggestprivate producer, the oil

sector will continue toboom.

“Five years ago, it wasvery hard to sell the Colom-bian story because of theproblems with guerrillasand drug dealers and all ofthat. There was a stereo-type in investors’ minds,”he says. “Now it’s totallydifferent – people see theopportunities here and justask, Where do I sign?”

Almost 40 per cent($5.08bn) of all foreigndirect investment last yearflowed to the oil sector. MrPantin and a managementteam comprised largely offellow Venezuelan expatri-ates who used to work atVenezuela’s state oil com-pany PDVSA have takenPacific Rubiales from 14,000b/d 250,000 b/d in five years.

Both Pacific Rubiales andEcopetrol, the partially pri-vatised state oil company

that produces 60 per cent oftotal output, have beenaggressive in both explora-tion and acquisition in pur-suit of their own 1m b/dgoals.

Ecopetrol aims to produce1m b/d by 2015 and 1.3m b/din 2020. It has blocs –mostly exploration – in Bra-zil, Peru and the US and itis developing a joint ven-ture with PDVSA to drill inthe ageing reserves of LakeMaracaibo in western Vene-zuela.

Javier Gutierrez, Ecopet-rol’s chief executive, saidrecently that Colombia’sbiggest company would notneed to exercise its right tosell an 8.5 per cent stake initself to finance $8.47bn ofinvestments this year.

Meanwhile, Pacific Rubi-ales is shooting for 500,000b/d in the next three years,and 1m b/d within a decade.

Mr Pantin says it has fourblocs in Peru, two in Guate-mala and is on the verge ofannouncing further acquisi-tions. Although focused onLatin America, it is lookingas far afield as Asia andAfrica.

It is also among severalminority partners, includ-ing Petrominerales of Can-ada and Hocol of Colombia,in Ecopetrol’s $4.2bn Bicen-tennial pipeline project, thefirst stage of which is dueto be completed in the thirdquarter of this year. The450,000 b/d pipeline will bethe longest in the country,running from Casanare inthe east to Coveñas port.

“If you don’t have a goodmarriage, you won’t be ableto do what we have donetogether,” Mr Pantin says ofPacific Rubiales’ relation-ship with Ecopetrol.

“For sure, in any mar-

riage you have problems,domestic problems, butnothing special.”

The kidnapping of Chi-nese workers employed byEmerald Energy of the UKlast year served as areminder of the risks oilcompanies still face in partsof Colombia, however.

Guerrillas from the Revo-lutionary Armed Forces ofColombia (Farc) and theNational Liberation Army(ELN) also stepped upattacks on pipelines at thestart of the year, and ascompanies encroach onguerrilla territories such asCaquetá and Putumayo inthe south near the borderwith Ecuador, or along theVenezuelan border to thenorth, the risks increase.

Mr Pantin acknowledgesthe risks but remains opti-mistic: “It’s very hard tofind virgin areas nowadaysin the world, and in areasthat are not very tough geo-logically. This is not theCongo. This is kind of easy.

“With all the securityproblems Colombia had,you couldn’t be here 10years ago. And now it’s anopen space for exploration.”

Daniel Linsker, LatinAmerica analyst at ControlRisks, agrees that whilesecurity is still significant,it is not the biggest risk oilcompanies face in Colom-bia. “It’s actually geologi-cal. While exploration hasramped up considerably,finds of a significant sizehave been rare, and most ofthe production has comefrom greater recovery ratesin existing fields.”

Mr Pantin says thatimproving recovery rates

even further is the simplestand fastest answer toColombia’s main challenge– boosting its reserves.

At present, the countryhas about 2bn barrels, or2,000 days worth of produc-tion, when 20 years, or 10bn

barrels would be a morecomfortable margin.

Exploration will continueto be crucial to the indus-try, he says, but PacificRubiales alone could doublereserves just by adoptingtechnology that had been in

use across the border inVenezuela since the 1960s.

“We have 4.6bn barrels ofoil in place, but the recov-ery factor is only 15 percent. We can increase thatto 50 per cent, or 2.3bn bar-rels,” says Mr Pantin.

Risks worth investment inexploration of virgin territoryOil industryNaomi Mapstoneconsiders theprospects for abooming sector

In the pipeline: first phase of $4.2bn Ecopetrol project is to be completed soon Bloomberg