Colombia’s foreign direct investment (FDI) inflows have been steady in recent years, but to ensure that this momentum continues the country’s government has launched the ‘Commitment for Colombia’, an economic strategy focusing on the trade, industry and tourism sectors, of which FDI attraction is a pivotal component.
This plan will use investment facilitation tools and take advantage of the nearshoring trend that has been propelled by the Covid-19 pandemic, and which has helped to make Colombia a regional leader for FDI attraction in Latin America.
ProColombia, the government’s investment promotion agency, says that these measures will make doing business in Colombia easier, boost job creation and reboot the economy as it emerges from the Covid-19 pandemic. A spokesperson for the agency told Investment Monitor that the measures include the creation of “a one-stop shop for investors to centralise and speed up procedures, a red-carpet treatment strategy and the strengthening of our tax-exempt zones.”
As Covid-19 has caused significant disruption to global supply chains, many multinational companies have been rethinking their approach and looking at nearshoring as a solution. The Colombian government sees this as an opportunity for the country to shine.
We have to identify American companies that are leaving China to nearshore and capture them [in Colombia]. Martin Ibarra, Araújo Ibarra
“We seek to attract international companies that are looking into reorganising their supply chains and moving closer to their headquarters,” says the ProColombia spokesperson. “We want to promote Colombia as an ideal destination due to our strategic geographical location, availability of human talent and natural resources.”
Colombia’s path to becoming ‘investment friendly’
ProColombia reports that 2020 was a positive year for inward FDI in Colombia, as 197 projects were attracted to the country with a value of more than $9bn, which was higher than had been projected.
Local advisers and industry players highlight strong activity in sectors including business process outsourcing (BPO), data centres, e-commerce and infrastructure, and stress that the country’s 120 free zones will continue to play a pivotal role under the government’s new plans.
“Some of the most recent focuses of the government’s post-pandemic policy include the so-called mega-investment regime and a more flexible tax regime, whereby if you commit to making an investment in Colombia, future tax regime changes will not apply,” says José Mafla, a partner at Bogota-based law firm Brigard Urrutia.
He explains that the government is trying to guarantee stability of the country’s laws, which has been one of the most prominent deterrents for foreign investors into Colombia. Mafla goes on to explain that economic recovery and investment attraction policies have concentrated on strengthening the country’s long-standing free zones regime.
“Colombia has 120 free zones and the government recently cut investment requirements by a significant percentage in smaller areas, and has implemented more incentives for companies that create a minimum level of services,” he says.
Mafla also confirms ProColombia’s positive outlook for FDI in Colombia in 2020, adding that call centres, BPO and data centres have taken the lion’s share of this investment. “Foreign companies are taking advantage of Colombia’s strong technology infrastructure and human capital, as well as its cloud computing skills and capacity,” he says.
Energy and infrastructure is another sector that has continued to function well in Colombia during the Covid-19 outbreak, and this area is seen as one of the most promising for FDI attraction going forward.
“We have several ongoing FDI projects in the energy and infrastructure space,” says Martin Ibarra, president of Bogota-based law firm Araújo Ibarra. “The project for Bogota’s metro line was assigned to a consortium of Chinese companies, including China Harbour Engineering Company and Xi’an Metro Company. We also have two gas projects in Buenaventura and one US-United Arab Emirates investment in an iron plate factory that was recently inaugurated in the north of the country.”
Will elections and tax reforms shake Colombia’s FDI scene?
While 2020 was a relatively successful one for Colombia when it comes to FDI, political uncertainty still looms in the country and some are worried that the government’s ambitions to make the country more business friendly may not be met.
Overall, we are in need of a tax reform and the government needs to strike the right balance to avoid affecting foreign investment. José Mafla, Brigard Urrutia
Many agree that a tax reform will be badly needed after the glut of spending during the Covid-19 outbreak, and a national election in May 2022 makes the future political outlook somewhat uncertain.
“One of the biggest challenges ahead is that the government will need to increase tax collection, as it went significantly down during the pandemic,” says Mafla. “Overall, we are in need of a tax reform and the government needs to strike the right balance to avoid affecting foreign investment.”
While such tax reforms might be manageable under the current government, Colombia will go to the polls in early 2022, and the result is far from certain. “This is likely to be a very political year and at present we cannot foresee who will be elected next,” says Ibarra. “This will obviously affect future FDI flows.”
He adds that Colombia needs to maintain its tax competitiveness, but flags other future challenges too. “It is undeniable that the country is facing several challenges,” says Ibarra. “First of all, it is paramount that we maintain our international tax competitivity as we now face a large deficit in the budget and there is a temptation to raise taxes for corporate companies that enter the country.
“Second, we have to identify American companies that are leaving China to nearshore and capture them. There is plenty of opportunity for Colombia in high-tech, electronics, pharma products and manufacturing. Finally, coordination between government and the private sector must improve.”
Compared with other countries in Latin America, Colombia is performing well in terms of FDI attraction, but much will depend on the country’s 2022 elections and how quickly it can get back on its feet as the Covid-19 pandemic recedes.