Transcript Recommending a Strategy

Colombia’s Dual Power
Environment:
How is business conducted ?
Carlos Vigil Cruz, Sarah Kearns, Wendy
Loveland, Armondo Tautiva
Agenda
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Colombia - a backgrounder
The other power: guerrilla legacy and
paramilitary power
The US/Colombian political story
Business in Colombia
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Cocaine, heroin & supply and demand
Non-drug related attempts at growth
Case studies: Consumer products & Oil
Colombia at-a-glance
Area: 439,700 sq miles
Capital city: Bogota
Population: 36.2 million
Mestizo
(58%) European (20%)
Mulatto
(14%) African (4%)
Afro-Indian (3%) Indian (1%)
Government: Democracy
President: Andres Pastrana Arango
GDP: US$ 172 billion
GDP per capita: US$ 4,850
Major industries:
-Agriculture: coffee, bananas, sugar cane
-Minerals: Oil, iron, coal, gold, emeralds
-Manufacturing: food, textiles, chemicals
- Drugs: coca and cannabis
Colombia at-a-glance
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Colombia is the most troubled country in the
West Hemisphere
“colombianization”= failing state
Reasons based on economical resources: oil,
cocaine, land
Drug criminals, guerrillas, and paramilitary
groups are feeding a spiral of violence
Colombia supplies 80% of the world’s
cocaine and the majority of heroin
Violence
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Violence displaced 750,000 from 1995 to
1998, 300,000 in 1999 alone
Violence between Government forces,
Paramilitaries, and Guerrillas resulted in
3,000 deaths for 1999
Shift in values; illegal activity is more
acceptable - a way of life
Recession
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Deepest recession in 70 years
20% unemployment rate
Recession seen as caused by reduced
exports, low oil prices, and diminished
investment flow
Dependence on foreign capital (U.S.) to
fund war with insurgents
Only way to make money is to participate in
drug trade
The Other Power
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The rise of various insurgent groups has
been facilitated with profits from the illicit
drug trade
These groups rival the government in
resources and power
The economy has been drained by the efforts
to fight these groups
FARC – EP
ELN
EPL
• Born in 1964
• Formed in 1965
• Rural based guerrilla
• Rural based, pro-Soviet guerrilla
• Pro – Cuban, anti U.S. Group
• Size of Force approx. 500
• Size of Force approx. 15,000
• Size of Force approx. 5,000
Activities
Activities
•Armed attacks
•Pipelines bombing
•Kidnappings for profit
•Inflicted massive oil spills
•Ties to narco traffickers
•Extortion and bombing U.S. and
other foreign businesses
•Bombing oil pipelines
•Killing Colombian and foreign
citizens, and U’wa indigenous
Demands
•Agrarian Reform
•Increased social spending
•Reform the armed forces
•Natural Resources sovereignty
•Kidnapping for profit
•Force opium and coca cultivators
pay for protection
Demands
•Demilitarize municipalities
•Natural Resources sovereignty
•Social and Political Reform
Paramilitary Groups
United Self Defense Groups of Colombia (AUC)
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Illegal armed groups of extreme right
Fight against guerrilla groups or civilian population
perceived as guerrillas “social base”
Formed by military in the early 80’s
Originally based on farmers, settlers and “campesinos”
Declared illegal in 1989 due to their excesses
Supported by landowners, businessmen, drug dealers and
occasionally by military personnel
Paramilitary Groups
Activities
• Responsible for about 70% politically motivated killings
• Responsible for the forced displacement in Colombia
- 1 every 4 Colombians has been forced to leave his/her home town
- Today all this land left is out of production
- This situation led to a high economic and social cost
Demands
• Political and Democratic Reform
• Agrarian and Urban Reform
• Petroleum and Energy Policy
• Environmentally Sustainable Development
• Narcotraffic
Effect on Colombia
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Colombian president
Pastrana forced to
negotiate with FARC
guerrilla leader Marulanda
Colombian Government
spends over $1billion on
fight
Military involvement with
paramilitary groups; police
disempowered
Destroyed judicial system
US Involvement
U.S. heavily involved in every aspect of
Colombia’s antinarcotics operations.
• U.S. contributes $300 million annually in aid
(mostly toward antinarcotics efforts).
WHY?
• U.S. exports to Colombia = $5.2 billion
• U.S. imports from Colombia = $4.7 billion
• U.S. also the largest foreign investor (38% of
foreign direct investment)
• Colombian drugs affect US social system/budget
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The Drug Economy:
Schools of Thought
Stem Supply
poison the coca fields
blow up drug labs
punish offenders
patrol borders
use US resources to
eradicate the source of
drugs
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Decrease Demand
institute more drug
treatment programs
increase follow-up
treatment time for detox
patients
use US resources to reduce
demand for drugs
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Ineffective US Policy?
US Policy = stem supply
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Dramatic increase in funding
(from $13B to $19.2B in past
four years)
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violence disrupts country, not
just drug community
drug labor and production is
extremely mobile
increasing US involvement
stokes anti-US sentiment
volatility = capital flight
drug production has tripled in the
past decade
Past policy= reduce demand
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1971: Nixon allocated 2/3
funding into treatment and
prevention
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national crime rates dropped
drug-related arrests fell
# federal inmates decreased
highest number of addicts sought
help
Supply & Demand
in a Drug Economy
P
S
D
Q
Other Options for Growth
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Debt issuing
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Colombia issued $500M for 20 yr. global bond, 550bp over US
Treasuries
There is some faith in Colombian risk despite BB+ ratings
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Private sector loans
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12.08% yield for Colombia vs. 11.7%, 12.9% in Argentina and Brazil
respectively
Coffee sector developed consortium, received $83M, 5-yr. syndicated
loan; securitized future export receivables on its coffee crops
Oil companies also securing loans on future receivables
Moving toward free market policies
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assumes privatizing will be more efficient, and will attract outside
investors
Examples of Dual Power
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Guerrillas met with Clinton
Guerrillas do European Tour
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6 FARC rebels met with Italian business and political leaders in
February, 2000
Delegation visited Spain, Switzerland, etc.
Wearing “crisp business suits and ties”
Founder of AOL (Kimsley) met with Guerrillas
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Held 3 hours of talks with Guerrilla leader Marulada
Told Guerrilla leaders of enormous potential investment in
Colombia
Discussed ways to accelerate the peace talks
President Pastrana also played host to Mr. Kimsley at an investment
seminar in Colombia in January (Pastrana proposed he meet with
the FARC)
Examples of Dual Power
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President of NYSE met with FARC leadership
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Mr. Grasso visited FARC held region in June 1999 to meet Paul
Reyes, senior rebel commander
Reyes rallied against the foreign “intervention” represented by the
$1.6 package currently being considered…it is a “declaration of war”
American aid = “barbarian intervention”
President Pastrana on the Guerrilla's meeting with Clinton in
1998: “I promoted it (the meeting). I said to the FARC, “You
tell me you want to eradicate drugs. If so, tell the U.S.
directly.” And they said, “We need money to invest in
alternative development”.
In 1998 Pastrana launched peace talks with the Guerrillas
Doing Business in Colombia:
The Reality
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Guerrillas: danger, violence, kidnapping
Legal importing is discouraged
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Legal importation takes twice as long as illegal
– Consumer goods are subject to a 20% CIF and 16% VAT
• Equates to a 50 - 60% Margin over basic FOB price of a legally imported good and
encourages contraband
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Bureaucracy
• Unreal amounts of paperwork
• Example of shipment two years ago: stuck for 4 months b/c of a phrase on the import
license. Shoes could not go back to the Free Zone in Panama, nor into the country. In
the end, customer won suit, but it was too late.
• Estimate: Over US $5 billion in imports enters country illegally every year
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Expectation from customs that you won’t follow the rules
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If you follow the written rules, customs officials won’t receive their “salary” from
“tips”
Doing Business in Colombia:
The Reality
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SDNT’s: Specially Designated Narcotics Traffickers
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Brings new meaning to finding a good partner!
– The Government has a list of companies & individuals on the list with
whom business cannot be legally conducted
• This list is readily available in Washington, D.C.
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Importing of old or used clothing, closeouts, irregulars, off-season
merch is prohibited by law (but, distributor’s can find a way…)
Transparency: Colombia is not a signatory to WTO and thus complains
about non-transparency in the bidding on major gov’t contracts is an
issue
Counterfeits are plentiful:
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New Star
– Counterfeits can be seen in country before the real product arrives!
Using Distributors to Reduce Risk
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Real risk of violence & kidnapping - avoid it by not being
there
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Not only kidnapping, plenty of street crime as well
Idiosyncrasies of doing business in Colombia -- can foreign
business people really figure it out? Not usually….need
local partner
Foreign exchange risk is minimized: royalties are paid
based on factory prices in US dollars
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In Colombia, the exchange bands were just widened, meaning the
C. Bank is not going to intervene in the same way, the currency can
fluctuate more
This is a cash business which is inherently risky: Consumers buy in
pesos, no installment payment. Credit cards are available, but high
rates, 20%, make them impractical for many
Using Distributors to Reduce Risk
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Tax Issues: Distributor’s can get around the rules
If you paid all required taxes, you’d be bankrupt in six months
– Import duties: you can’t compete if you do business legally
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Distributors can manage counterfeit issues on a local level
more quickly.
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Can give them limited power of attorney
Personal relationships
They can work the system in a way US companies can’t
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Selling to wholesaler: you invoice the vendor at $10, when you really
charge $20 (to avoid tax), so vendor pays $10 by check, but has to find the
other $10 in cash in the black market so that it can’t be traced
– Where is the black market, who do you call?
• Operates like a bank: call and get exchange rate
Consumer Goods:
Converse Case
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Licensee purchases factory direct, pays FOB
Royalties are paid to Converse
Same partner for 25 years
Distributor sells both direct to retail chain, and to subdistributor
Footwear market is half formal and half informal
Informal markets have better pricing, 20% cheaper, but
riskier
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20% gets you a mall with security & parking
Not uncommon for wealthy people to send chauffeurs in to make
purchases
Like a flea market, but more organized
Risks Associated with Distributors
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Lack of Control over Brand Image
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Difficult to get payments in tough times
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Not all distributors can handle informal and formal markets…some have
contacts in one but not the other
Easy to get credit, but if things get tight…banks hold back on credit
• For consumers and for the Distributor
Contracts don’t mean much: contractual obligations to invest $ can be
ignored
If distributors engage in illegal activity: can tarnish reputation of
company
Communication and reporting is sporadic and unreliable
Totally unsupervised environment
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Ex: Converse shoes in Macy’s and K-Mart in the same city
Guerrillas and the Oil Business
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Colombia is facing the possibility of being a net importer of
oil for the first time since 1985
July 1999, then-president of Ecopetrol, Carlos Rodado went
on an international road show to promote improved
contractual terms to foreign oil companies.
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Trying to test if lower royalties, reduced state share, better contractual
terms could outweigh the security risks
The tour concluded with scheduled start of Peace talks w/FARC (which
were postponed, again)
BP Amoco scaled back investment plans because of
security issues
Other foreign oil companies are reluctant to enter Colombia
due to risk
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Costs of private security are extremely high
Guerrillas and the Oil Business
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ELN denounced Ecopetrol’s new terms as sell out to multi-nationals
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Will increase their sabotage campaign (in March 99, 18 tractor trailers transporting
drilling equip. owned by Ecopetrol were burned up)
Attacks on the pipeline are commonplace
The pipelines have been declared a military objective by ELN and FARC
Guerrilla tactics at different stages of oil project development
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Facilitate operational support…claiming they are helping since the project
offers economic & social benefit to the region
Then, at the exploration & drilling stages, they begin to pressure the oil
companies
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Request medical supplies, social projects, etc.
Extortion: demanding financial contributions to their armed struggle
Low level terrorist attacks, as the operation grows, so do the demands
Infiltrate the foreign owned company: form unions, etc.
Why do companies stay?
Profitability
• Prospects for future growth
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Scary Thoughts...
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Without the Guerrillas…
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Many US jobs would be gone….DEA, etc.
A CT based company making Black Hawk helicopters could miss out on a lucrative
contract
Less roads and schools might exist in Colombia (in very rural areas)
Some farmers incomes would drop significantly
The Guerrillas have their own R&R resorts in Panama
The Guerrillas are not producing drugs…only taxing and protecting
FARC members often are better paid and equipped than the military
FARC issued press release: list of journalists targeting for assassination
The president himself was kidnapped by a drug cartel in 1988
Pastrana: elected by largest majority in Colombian history, and must negotiate
“outside the law”
Cocaine cultivation up 140% in 1 year: Can we learn something about production?