VII. INVESTMENT CLIMATE OPENNESS TO FOREIGN INVESTMENT General Attitude: Currently, foreign investment policies are guided by two principles: (1) equality--by which foreign and national investments will receive the same legal and administrative treatment; and (2) openness--by which few restrictions will be applied regarding the amount of foreign investment or its destination. Law 9 of 1991, Resolutions 51, 52 and 53 of the Council of Economic and Social Policy (CONPES), and Resolution 21 of the Board of Directors of the Central Bank are the principal regulations governing foreign investment. They grant national treatment for foreign investors and permit 100 percent foreign ownership in virtually all sectors of the Colombian economy. Exceptions include national security and the disposal of hazardous waste products. Liberalization of services has occurred in some sectors since 1991, especially in telecommunications, financial services and tourism. Some changes have been made in legal services, accounting and auditing, data processing, and mining and hydrocarbons: Legal: The provision of legal services is limited to those licensed under Colombian law, and foreign firms are not permitted a commercial presence; Insurance: A commercial presence is required in order to sell policies other than for international travel or reinsurance. (Commercial presence is a registered place of business, a branch, or an agent.) While Colombia permits 100 percent foreign ownership of subsidiaries, branch offices of foreign insurance companies are not authorized; Accounting and Auditing: Some restrictions exist because the leading firms, which control 80 percent of the market, are subsidiaries of multinationals. Providers must be licensed in Colombia. However, services offered by tax and administrative consulting firms or individuals are not restricted; Mining and Hydrocarbons: Petroleum and mining companies have expressed concern about restrictions on the use of local versus foreign personnel applicable to all sectors (80% versus 20%, unless special permission granted), especially in the start-up phase; Data processing and information: Commercial presence is required to perform data processing services; Financial: Colombia opened up foreign investment in the financial sector through resolution 51 of 1991, which permits 100 percent ownership of financial institutions by foreign investors. The use of foreign personnel in the financial sector are limited to administrators, legal representatives and technicians; Advertising: For public broadcast network programming, at least 50 percent of programmed advertising must have local content. Audiovisual services: Public network programming limits foreign air time to 40 percent of the total. Investment Screening: Investment screening has been largely eliminated, and those mechanisms still in place are generally routine and non-discriminatory. Prior approval by the National Planning Department (DNP) for foreign investment is required only if the investor is: (a) providing a public service (energy, water, health, communications); or (b) investing over USD 100 million in activities related to mining, smelting/refining, transportation or distribution. Obtaining coverage by bilateral or international insurance or risk protection entities requires subsequent notification. The Ministry of Communications must approve applications in the communications sector, and the Ministry of Mines must approve all applications for foreign investment related to hydrocarbons (including natural gas). All foreign investments must be registered with the Central Bank's foreign exchange office within three months in order to assure their right to repatriate profits and remittances. All foreign investors (equivalent for the requirements on domestic investors) must obtain an operating license from the Superintendent of Companies and register with the local Chamber of Commerce. Privatization: The GOC has announced that it will privatize 76 companies. Among them are the GOC's interests in four banks, several oil/gas distribution companies and 34 vacation resorts (though most resorts would probably not interest foreign investors). The plan also includes private investment for development of infrastructure projects under concession contracts. Generally, foreign investors are allowed to participate in privatization efforts without restrictions. Discrimination Against Foreign Investors: Colombia does not impose any investment restrictions on foreign investments that it does not impose on national investors. However, some investors may find the provisions of Colombian law burdensome. For example, many investments require a commercial presence in country (defined as a registered place of business, a branch, or an agent). Government subsidized research programs: Foreign investors can participate without discrimination in government subsidized research programs. In fact, most of the GOC-sponsored research has been done in conjunction with foreign institutions. Visa/Work Requirements: The GOC does not impose unduly burdensome visa, residence or work permit requirements. However, as with most countries, regulations govern solicitation of these documents. Appropriate visas or other permits must be obtained for residents and extended business travelers. Tariff Reductions: Colombia's tariff reduction program was largely completed in 1992, lowering tariffs to a trade-weighted average of 11.57 percent, including duty free entry for roughly 40 percent of tariff items. Colombia has a five tier tariff system of 0, 5, 10, 15 and 20 percent. Most non-agricultural products are also subject to a 14 percent value added tax. Investment incentives: The government provides several investment incentives. While these are numerous, the actual benefits of these are not particularly persuasive. The following are some of the incentives available: Tax reimbursement certificate (CERT): Direct allowance to exporters of non-traditional goods as defined in the harmonized codes schedule. The CERT establishes four rates according to the type of goods (5%, 4%, 2.5% and 0%) of fob export value which reduces tax liability accordingly; Duty-free import for exports (Plan Vallejo): Remission of custom duties for imports of raw materials, inputs, equipment and spare parts used in the production of export goods. Duty-free imports of equipment are also available to providers of services to exporters; Export Controls: Access to funds provided by the foreign trade bank (Bancoldex) for working capital, discounting of loans to foreign importers of Colombian goods, equipment used in the production of exported goods or in the provision of services to exporters, and capital contributions; Proexport: Information and contact service organization (in Colombia and the U.S.); and tax and financial incentives for foreign trading companies registered with the Ministry of Economic Development. (See Appendix C for Contact information) Preferential Export/Import Policies: Preferential export/import policies exist, primarily in the agricultural sector. Colombia maintains minimum reference prices for basic agricultural commodities, which are supported by flexible tariffs on imports. This "price-band" system is intended to protect domestic farmers from foreign competition. In practice, this forces foreign exporters to raise prices to domestic support levels. As a member of the Andean Pact and the Latin America Integration Association (ALADI), Colombia provides preferential tariff rates to member countries. Colombia presently has free trade agreements (FTA's) in effect with Venezuela and Ecuador and a partial free trade agreement with Chile. A G-3 FTA with Mexico and Venezuela that will take effect on January 1, 1995 was signed on June 13, 1994. It expects to sign a trade agreement with the 13 Caricom countries in early July, 1994. Colombia also is negotiating a trade integration agreement with the Central American countries. Recently, as a result of apertura and its commitments made in the context of acceding to the GATT subsidies code, Colombia has agreed to phase out any export subsidies inconsistent with the Code. Colombia is working to convert CERTs grants to exporters to an indirect tax rebate system. CONVERSION AND TRANSFER POLICIES Restrictions on Conversion/Remittances: No restrictions apply to converting or transferring funds associated with foreign investment. The only condition is that foreign investment must be registered at the Central Bank. Exchange facilities are considered one of the main incentives for foreign investors, including: remittance of all net profits regardless of the type or amount of investment (previously it was limited to 100 percent of the registered capital); remittance of all revenues generated from the sale of or the closure of a company or business, reduction of investment, or transference of portfolio; right to reinvest non-distributed profits with remittance rights, and capitalization of those resources with remittance rights arising from investment obligations (such as payment of royalties for transfer of technology). Three types of convertible negotiable instruments can be used for remittances: exchange certificates, bonds convertible to exchange certificates, the dollar-denominated Law 55, and Decree 700 bonds. Remittances do not require government approval; they are automatically approved. The period for remitting investment returns depends on the company/investor's commercial bank. Colombian law authorizes the government to restrict remittances in the event that international reserves fall below three months' worth of imports. As of year end 1993, Colombia had USD 7.9 billion in reserves (more than one year of imports); Cusiana oil field revenues are expected to increase this amount; therefore, it is not anticipated that access to foreign exchange for the purpose of profit or capital remittances will be restricted. The law permits the government to establish special remittance requirements for the mining and petroleum sectors. Under the special regulations, these companies are not required to bring back currency earned from foreign currency sales except to cover local operating expenses. These restrictions generally are spelled out in association contracts. Estimated annual dollar value of local currency: The U.S. Embassy purchases currency at the official rate. Embassy Bogota has a variety of agencies present, not all of whom manage local currency accounts out of the Embassy. The State Department's local currency transactions in 1994 are budgeted at USD 6.6 million. The two U.S. banks in Colombia have an estimated combined total of approximately USD 2 billion dollar value of local currency. The peso has been steadily depreciating, but at a slower rate than inflation, thus resulting in an effective revaluation. It is expected that this trend will continue. EXPROPRIATION AND COMPENSATION Colombia has not expropriated property of foreign investors in the past 50 years. The 1991 Colombian Constitution permits expropriation of private property in cases of public necessity (i.e. metro system) and social interest (i.e. agrarian reform). The general expropriation procedure requires the legislature to pass a law authorizing a project and necessary expropriation. An administrative act then defines the property to be expropriated. The government and private property holder negotiate the amount of indemnification, based on the principal of adequate and reasonable compensation. If agreement is reached, the matter ends. If not, the local government must authorize expropriation and seek judicial approval. If obtained, the judicial decision also will establish the amount of compensation. Currently under debate in Congress is an exception to this general procedure for cases of public necessity involving real property when timeliness is an issue. The proposed law would require the original legislative act to declare that for reasons of timeliness, this exceptional procedure is followed. The only procedural difference occurs when the government and property owner do not agree on the amount of compensation. At that time, the government can expropriate the property and the property owner (not the government) must seek judicial redress. The Colombian Constitution also allows expropriation without indemnification. The provision (originating in the 1938 Constitution) has never been used; the one attempt in 1982 was declared unlawful by the Constitutional Court. Thus, the instances when it would apply are unclear. However, the current GOC thinking is that the provision would apply when the expropriation increases the value of the expropriated property, so additional compensation is not justified (e.g. useless farmland marketable because of a new highway). Concern over the provision was raised during Investment Treaty negotiations with Great Britain; the concern was addressed by including language which subjects the agreement to provisions of international law. Those provisions provide foreign investors with recourse to international tribunals in the event of investment disputes. In addition, confiscation of property is allowed when the property is used in criminal activities or is the "fruit" of such activities. DISPUTE SETTLEMENT Legal system: The Colombian judicial system continues to be clogged and cumbersome, although its reform and streamlining are key goals of the Gaviria administration. Investment disputes involving contracts with the state oil company ECOPETROL are settled by the use of an arbitrator, as called for in the standard contract. The Colombian government has an especially good record of respecting its contracts with foreign investors in the hydrocarbons sector, and in general there is no tendency to discriminate against foreign investors. The Commercial and Civil Codes define legal rights, and the Civil Code outlines civil enforcement procedures. Enforcement mechanisms exist. Historically, the government rarely has interfered in commercial matters. This separation has been fortified by changes introduced with the 1991 constitution, which provides the judiciary with greater administrative and financial independence from the executive branch. Judgments of foreign courts are accepted in Colombia, if they follow exequatur procedures. The Civil and Commercial Codes delineate those instances when foreign judgments will not be accepted, for instance, if the decision is contrary to the Colombian constitution. Colombia has a written and consistently applied Commercial Code. Bankruptcy provisions are a part of the Commercial Code. Creditors rights are prioritized in accordance with the bankruptcy laws. In 1994, a bill was introduced in Congress which would modernize several provisions of the Commercial Code. In general, they would make more flexible current provisions. Monetary judgments can be made in either the investor's currency or local currency. Secured Interests in Property: Secured interests in property are recognized and recordable. Recording statutes have existed since 1857. Secured interests are recorded in the National Registry Office. Binding International Agreement: Although permitted, binding international arbitration generally is not used to resolve most commercial disputes. Certain provisions of Colombian law (e.g. arbitrators must be Colombian) limit the procedures' effectiveness. However, Colombia is a member of the New York convention on investment disputes, and binding international arbitration under those standards is available to resolve investment disputes. MIGA/ICSID: The government is in the process of joining the International Center for the Settlement of Investment Disputes (ICSID) and the Multilateral Investment Guarantee Agency (MIGA) Agreement. Both bills were approved by the Colombian Senate in 1993. The ICSID is now in the other House for debate. The MIGA was signed into law on July 14, 1994. PERFORMANCE REQUIREMENTS/INCENTIVES Performance requirements still exist in the automotive assembly industry in the form of local content requirements, as outlined in Decree 2642 of December 23, 1993. In general, these decrees require the following local content: cars, passenger vehicles for up to 16 persons, and cargo transport for up to 10,000 pounds--30 percent, with all others--15 percent. manufacturers/assemblers must present any export plan to the Ministry of Economic Development. In accordance with Andean Pact Decision 291, foreign investors now have the same access to Andean markets as domestic investors. Colombia has significantly opened up its economy to foreign investment through new regulations which are based on the principles of national treatment, universality and streamlining for foreign investors. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT The 1991 Colombian Constitution explicitly protects individual rights against the actions of the state and upholds the right to private property. In cases where property is expropriated by the state (for agrarian reform, urban reform, public works), owners who believe their rights have been violated may request a judicial hearing (the "tutela" provision of the Constitution). Foreign investors are permitted to participate in the privatization efforts now underway, including financial institutions (four of the five nationalized banks have already been privatized), ports, railroads, and several smaller enterprises managed by the Institute for Industrial Development (IFI). Foreign contractors may bid on public highway concessions. Foreign investment also exists in value-added telecommunications services. PROTECTION OF PROPERTY RIGHTS Legal System: Colombia continues to improve protection of intellectual property rights through the Andean Pact Decisions. Colombia remained on the USG Special 301 Watch List in 1994 due to continuing concerns over deficiencies in the patent regime and copyright enforcement efforts. Enforcement concerns arise not only at the police level, but also in the judicial system. Several private attorneys have commented on the lack of respect for preservation of evidence and frequent perjury. Patents: Decision 313 of 1991 provides patent protection for most products, including pharmaceuticals, biotechnology and plant varieties. (Only pharmaceuticals on the World Health Organization list of "essential medicines" are excluded.) In 1993, the Andean Pact adopted Decision 344, which represented a significant improvement over previous standards used for the protection of industrial property. For example, it provided for a 20 year patent protection term measured from filing date. However, the decision still falls short of U.S. goals in several respects, and is inconsistent with several provisions of the recently concluded agreement on Trade Related Aspects of Intellectual Property (TRIPs) in the Uruguay Round of negotiations on the General Agreement on Tariffs and Trade (GATT) and the Paris Convention for the Protection of Industrial Property. For example, the compulsory licensing authority is inconsistent with TRIPs and no pipeline protection exists. Colombia also adopted Andean Pact Decision 345 which provides protection to certain plant varieties. Colombia has not joined the major international conventions on patent protection. However, the government has stated its intention to sign the Paris Convention for the Protection of Industrial Property, the Patent Cooperation Treaty, and the UPOV Convention. In fact, in April 1994, the UPOV Council determined that Colombia met the requirements for admission to the UPOV Convention and authorized it to deposit accession documents. Copyrights: In 1994, Colombia adopted Andean Pact Decision 351, which harmonizes, integrates and modernizes the laws of the five countries. It also expressly protects software. In general, however, 351 does not significantly alter copyright protection in Colombia. Colombia's copyright law is based on Law 23 of 1982, and Law 44 of 1993, which increases criminal penalties. Colombian law provides copyright protection for the life of the author plus 80 years. If the holder of the rights to the work is a "legal entity," the term of protection drops to 30 years from the date of first publication. Computer software is protected under Law 44. Colombian copyright law is unclear as to whether it must honor foreign satellite signals. Although Colombia has a modern copyright law, lack of enforcement remains a serious problem. Video cassette and satellite signal piracy continue to be widespread. Amendments to the copyright law made in 1993 have significantly increased penalties for infringement. The police administrative agencies now can seize pirated material and close an establishment open to the public, and either suspend or cancel the operating license of any establishment open to the public where copyright infringement has occurred. Nevertheless, enforcement efforts are sporadic. Colombia belongs to the Berne (1987) and the Universal (1976) Copyright Conventions, the Buenos Aires and Washington Conventions, the Rome convention on Copyrights (1976), and the Geneva convention for Phonograms (1994). It is not a member of the Brussels Convention on Satellite Signals. Trademark: Colombia's trademark protection requires registration and use of a trademark in Colombia. Trademark registrations have a ten year duration and may be renewed for successive ten year periods. Priority rights are granted to the first application for trademark in another Andean Pact country or in any country which grants reciprocal rights. Trademark owners do not have a cause of action against importation of products from other Andean Pact countries that bear their trademarks without authorization, though certain labeling requirements concerning country-of-origin apply. Enforcement remains a weak area. Colombia is a member of the Interamerican Convention for Trademark and Commercial Protection. Trade Secrets: Andean Pact Decision 344 protects industrial secrets. Protected property includes that which is secret (not generally known or easily accessible to those who usually handle such information), has an effective commercial value or a potential commercial value as a secret, when the person has taken reasonable steps to ensure the secrecy. Semiconductors: Semiconductor design layouts are not protected under Colombian law. However, the Colombian Copyright Office has expressed its willingness to discuss this issue with the U.S. government. REGULATORY SYSTEM: LAWS AND PROCEDURES Government Policy: As with most developing countries, Colombia suffers from relatively high industrial concentration in a few large conglomerates, weak enforcement or lack of effective antitrust laws, a lack of long term credit, and stock markets not yet sufficiently large to generate growth through equity financing. Law 80 of 1993, which sets the GOC standards for government procurement, seeks to eliminate corruption and to lend increased transparency to each stage of the bidding process. Success of the new law has been mixed. For example, cellular communications contracts were granted in 1994 with few complaints, while a U.S. company is currently protesting the recent procurement of a thermoelectric power contract in Barranquilla. Laws that Avoid Distortion: The labor reform of 1990 greatly improved previous hiring and firing rules and thereby made the labor pool both more flexible and more stable. It also created a new system for calculating wages and bonuses to make budget planning for calculating future labor costs easier. However, the 1991 labor code retains a ceiling on the number of foreign employees permitted in companies operating in Colombia: 20 percent maximum for specialists and 10 percent for unskilled workers. Bureaucratic Procedures: While bureaucratic requirements are continually decreasing, they do exist. Their quantity often depends on the type of business, location in the country, and other such factors. For example, foreign investors must register their investment with the Central Bank within 3 months; however, prior authorization is not required. Oil sector investments must be registered with the Ministry of Mines. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT Government Policies: Government policies facilitate the free flow of financial resources to support the flow of resources in the product and factor markets. The opening of the Colombian financial market constitutes an attractive opportunity for foreign investors. Likewise, local companies have access to foreign financing through the capital market. Portfolio Investments: The Colombian securities market is in its fourth year of reform. The government and the exchanges have introduced changes designed to transform the once-sleepy exchanges into modern capital markets. Despite high rates of growth and an influx of foreign investment, efforts at liberalization have yielded mixed results. The GOC's proposals to limit bank credits and to establish pension funds promise to increase the pool of capital. The eventual success of the reforms hinges on the willingness of entrepreneurs to tap this market. To date, their commitment is at best tentative. The three major exchanges (Bogota, Medellin and Occidente) reported a total volume of USD 13.4 billion in 1993. The Bogota exchange accounts for 62% of the market; the Occidente (Cali) and Medellin exchanges follow with 22% and 15% of the market, respectively. Total market capitalization of the listed companies is estimated by the Bogota exchange at USD 500 million. While the Colombian securities market is small, it has enjoyed high rates of growth since the 1990 reforms. Total volume in 1992 was 85% higher in nominal terms than it was in 1991. The increase in total volume in 1993 was 69% in nominal terms above the amount recorded in 1992. By law, the Colombian exchanges must promote social investment. Therefore, much of the market is devoted to government paper. Government paper transactions accounted for 64% of total operations on the Bogota exchange in 1993. The corresponding figures for Occidente and Medellin were 47% and 59%, respectively. Stocks make up a small percentage of the securities market. In 1993, 8.7% of total volume involved equities and 10.6% involved public and private bonds of the total securities market. Other government paper, including money market instruments intended for economic development projects, absorbed the balance of the public investment market. The government has encouraged the creation of "Colombia Funds", essentially mutual funds devoted exclusively to foreign investment. The funds, which have attracted primarily Venezuelan and U.S. capital, are managed by foreign and Colombian brokers and trust companies. There were 74 such funds as of early 1994. Total investment amounts to USD 365 million, only 16 percent of the authorized total. Most of the stocks bought by the managers of these funds goes into Colombian blue chip stocks, primarily in the construction, finance and manufacturing sectors. The government hopes to use these funds to attract capital for additional industrialization. Market Regulation: The market is regulated by the Superintendency of Securities (Supervalores), itself answerable to the Ministry of Finance. Supervalores oversees rules pertaining to the exchanges, notably the regulation of market intermediaries, brokers' fees and the financial disclosures of listed companies. The Superintendency of Banks assumes some of the functions of Supervalores in relation to the bank and pension fund trading. Supervalores has promulgated regulations aimed at ensuring transparency and honesty in the marketplace. These rules address registration of shares, processing of orders and the broker-client relationship. Most notable are the recent requirements for a standardized prospectus, financial reports, and accounting procedures. Listed companies must present quarterly financial disclosures and annual, externally audited financial statements. The exchanges are self-regulating within the guidelines set by Supervalores. They set admission policies, monitor transactions, conduct audits of brokerage activities and enforce rules through their disciplinary bodies. Typically, complaints involve routine matters like a failure to settle a transaction within a fixed period. Nevertheless, enforcement is less diligent than in the United States. Insider trading is prohibited. However, there is little outcry against the practice. Sanctions have been rare, and features like the "Chinese Wall" -- certain legal prohibitions on sharing certain information within a single entity -- are non-existent. Still, more flagrant violations have been addressed. Other institutions that police the exchanges include the National Registry of Stocks, the Central Depository of Stocks and the Centralized Depository of Stocks of Colombia (Deceval). The National Registry is maintained by the Supervalores to inscribe market intermediaries and listed companies. The Central Depository and Deceval ensure smooth transactions by providing a central holding place for stocks. There are no unique restrictions on foreign investment. However, if any buyer, foreign or Colombian, buys more than 10% of a company, the authorities may disapprove the sale. This regulation is intended to detect and eliminate the flow of narcodollars into the market. There is no capital gains tax. The government has eliminated double taxation on dividends. With all taxes paid by the corporations, dividends are free and clear. The tax on patrimony was eliminated, encouraging stock investments. The exchanges reformed their administration and introduced computer trading systems. Other policies encourage investment in the market. First, in March 1993 the government limited the growth of domestic credit to 2.2% per month for a four-month period. This limit on bank lending has reduced the attractiveness of the banks to savers. Second, social security reforms will establish mandatory IRA-like accounts for employees. This captive capital will likely look towards the exchanges for investment and, judging from the experience of other nations, will result in a stronger capital market. Foreign investors experience no discrimination in access to local credit. While the Colombian government still directs credit to some areas, notably agriculture, credit is for the most part allocated by the private financial market. Credit subsidies were phased out with the establishment of FINAGRO, an state-owned agricultural credit intermediary. Bank Assets: In 1993, the combined assets of the five largest banks was approximately USD 9.7 billion. The banking system is sound. Banking System: The legal and regulatory framework of the Colombian financial system is based on the principle of specialized and legally distinct financial subsectors. The financial subsector categorized as "intermediaries" includes commercial banks, savings and housing corporations, investment banks (corporaciones financieras) and commercial finance companies. Other financial entities are warehouse companies, leasing companies, fiduciaries, insurance companies, reinsurance companies, and capitalization companies. Several large conglomerates control most of the financial system. Total assets of the 174 financial entities operating in Colombia at the end of 1993 amounted to 25.922 trillion Colombian pesos (USD 33 billion at the average 1993 exchange rate of 786.73 pesos to the dollar). The financial market is dominated by commercial banks which generally lend short-term (2/3 of commercial bank loans are for periods of 6 months or less). The 29 commercial banks operating in Colombia at the end of 1993 accounted for 57% of total financial system assets and they operated more than 3,100 offices throughout the country. Regulatory Authorities: Decree 1730 of July 1991, as amended by Decree 663 of April 1993, contains the regulatory legislation corresponding to the Colombian financial sector. The Colombian Superintendency of Banks and the Board of Directors of the Central Bank are charged with implementing and enforcing Decree 663. The Central Bank prints money, controls currency circulation, monitors credit and exchange rates and oversees international reserves. It also is the lender of last resort to Colombian financial institutions. The Central Bank, aside from being the regulatory authority for monetary, currency exchange and credit policies of the central government, also acts as the fiscal agent for Colombian government. It also has the authority to set maximum limits on the interest rates that commercial banks and other financial institutions charge on loans. The Superintendency of Banks supervises and regulates entities classified in Decree 663 as financial institutions. Financial institutions (including commercial banks, private finance companies, savings and housing institutions, commercial finance companies, financial services companies and insurance companies) must obtain the authorization of the Superintendency of Banking before they open their doors for business. The Superintendency of Banks is authorized to impose administrative sanctions on violators of the provisions of Decree 663. The Superintendency can also impose fines on financial institutions and their directors and officers if they violate Colombian laws, regulations or financial institution bylaws. The Superintendency, with approval of the Ministry of Finance, may intervene in the operations and management of a bank. This includes liquidation of assets if the bank suspends payment of its debts, refuses to allow the Superintendency to audit its books, repeatedly fails to follow Superintendency instructions, repeatedly violates laws or its own bylaws, repeatedly mismanages its operations, or if the bank's stockholder equity falls below 50% of its outstanding capital stock. Three other entities also regulate the Colombian financial system: the Ministry of Finance, which with the Central Bank set fiscal and monetary policy; the National Council for Economic and Social Policy (CONPES), the highest level advisory body dealing with social and economic policy; and the Financial Institution Guarantee Fund (Fogafin), which insures the deposits of commercial banks and other financial institutions. Capital Requirements: Adopting a framework similar to that established by the Basel Committee on Banking Regulations and Supervisory Practices of the Bank for International Settlements, Colombia's Central Bank, in 1989, set forth revised capitalization requirements for credit institutions. The regulations established five asset categories, each having its own risk rating. The Central Bank required that, effective July 1, 1990, risk-weighted assets not exceed an amount equal to twelve times an institution's technical capital. Technical capital consists of primary and secondary capital. Reserve and Foreign Currency Requirements: Decree 663 stipulates that commercial banks (as well as all other limited liability stock corporations) maintain certain minimum legal reserves. Each limited liability stock corporation is required to allocate 10% of its net income to its legal reserve annually until its legal reserve equals 50% of its outstanding capital stock. Subsequent increases in outstanding capital stock require corresponding increases in legal reserves. The Central Bank requires that commercial banks maintain a minimum foreign currency position through the purchase of dollars equivalent to a percentage of their foreign currency denominated liabilities. The percentage in June 1993 was 40%. Commercial banks must buy foreign currency if they fall short of the legal requirement. They must inform the Central Bank within three working days if their foreign currency position is below the minimal legal requirement. Lending Regulations: The Central Bank establishes maximum amounts that individual financial institutions may lend to a single borrower. The maximum amount may not exceed 10% of a commercial bank's technical capital. The limit may be raised to 30% when any amounts lent above 10% are secured in accordance with Central Bank's regulatory requirements. Related Party Transactions: Decree 663 stipulates that loans to a holder of 5% or more of a financial institution's shares, a director, certain principal officers, or relatives of any such person must be approved unanimously by the company's board of directors. Loans to related parties (except those made to employees as part of health, housing, education or similar programs) must not be offered at terms more attractive than those offered to non-related parties. Financial institutions are prohibited from making loans to broker-dealer, fiduciary and pension fund management subsidiaries. Ownership Limitations: Colombia's Commercial Code requires that corporations have at least five stockholders at all times. However, a bill now before the Congress would authorize single shareholder corporations. Furthermore, the Commercial Code dictates that no single stockholder may own 95% or more of a corporation's subscribed capital stock. Decree 663 stipulates that any transaction resulting in an individual or corporation holding 10% or more of a financial institution's capital stock must obtain prior authorization from the Superintendency of Banks. The Superintendency bases its approval decision on the candidate's professional experience and education, financial solvency, character and the likely effect the proposed transaction is likely to have on the general welfare of the nation. Foreign investors receive the same treatment as Colombian nationals and are subject to the ownership limitations. Share-Holding Agreements: "Cross-shareholding" and "stable shareholder" agreements are not used by private firms to restrict foreign investment through mergers and acquisitions. Likewise, no laws or regulations specifically authorize private firms to adopt articles of incorporation/association which limit or prohibit foreign investment, participation or control. Standard-Setting Activities: No private sector and/or government efforts exist to restrict foreign participation in industry or standards-setting consortia or other organizations. Other Restrictions: There are no other practices by private firms to restrict foreign investment, participation, or control in/of domestic enterprises. However, it is worth noting that several large domestic economic groups control many of the country's major industries. Foreign participation in these economic groups' activities may be limited. POLITICAL VIOLENCE Colombia has a number of insurgent groups, the largest being the Revolutionary Armed Forces of Colombia (FARC) and the National Liberation Army (ELN), which have been active for more than 20 years. These groups still pose varying degrees of threat to Colombia's economic interests, but a determined anti-guerrilla campaign, as well as the political hard line taken by the Gaviria administration since 1991, have reduced the ability of the guerrillas to significantly impact the country's economic infrastructure. The threat of narcotics-related violence and terrorism has also been substantially reduced with the December 2, 1993, death of Medellin cartel kingpin Pablo Escobar, and the deaths and incarceration of virtually all of the key members of his organization. In the past few years, guerrilla attacks have focused heavily on Colombia's vulnerable oil pipeline and facilities associated with the new Cusiana oil fields in northeastern Colombia. Mining camps in Colombia's remote Amazon region, as well as near its border with Panama, have also been favorite targets of the guerrillas because these regions are almost inaccessible to Colombia's security services. Since January 1994, with the onset of the congressional and presidential election season, both the FARC and the ELN announced their intentions to attack U.S. interests. A series of small bombings, including attacks on several Coca-Cola facilities, American Express offices and U.S. and European banking affiliates, were carried out, with minimal damage to building structures and no loss of life. As of May 1, 1994, these bomb attacks seem to have tapered off. The insurgents probably retain the capability to carry out such attacks, but their primary targets will most likely continue to be the pipeline and local politicians. The guerrillas have been active in kidnapping for ransom and political attention. Several U.S. missionaries have been kidnapped. Although U.S. businesspersons have not been kidnapped recently, it has occurred in the past. Successful U.S. (and other) businesspersons resident in Colombia consider themselves at risk for kidnapping and take substantial precautions. Violence and petty crime also are common. BILATERAL INVESTMENT AGREEMENTS Colombia has indicated a willingness to discuss a bilateral investment treaty with the United States and preliminary discussions were held in June 1994. Colombia concluded such an agreement with Great Britain in 1994. An agreement with Peru is pending signature. Germany, Israel, Canada and Italy have expressed interest in similar agreements, though these discussions are still preliminary. OPIC AND OTHER INVESTMENT PROGRAMS OPIC has an active political risk insurance program in Colombia which has been in effect since 1985. Ratification of Colombia's membership in the Multilateral Investment Guarantee Agency (MIGA) Agreement is in process. LABOR The Colombian labor force totals approximately 12.8 million workers, of which less than 8 percent are organized into 2,435 unions. High unemployment and weak union organization have limited workers' bargaining power in the private sector, though unions have been more successful in larger firms and in public services. Unemployment in 1993 dropped to 7.9 percent, down from the previous year's 9.8 percent. The standard work week is 6 days/48 hours week, and the legal minimum wage in 1994 is about USD 123/month, plus substantial benefits. The constitution prescribes equal rights for women workers, the right to organize and to strike for non-essential public employees, the right of workers to organize and engage in collective bargaining, workers' participation in management, universal education, expanded social insurance coverage, and the incorporation of ratified international labor conventions into the Labor Code. Two International Labor Organization (ILO) supervisory bodies criticized 10 provisions of Colombian law in 1993, including: the supervision of the internal management and meetings of unions by government officials; the presence of officials at assemblies convened to vote on a strike call; the suspension of union officers who dissolve their unions; the requirement that contenders for trade union office must belong to the occupation in question; the prohibition of strikes in a wide range of public services which are not necessarily essential; various restrictions on the right to strike and the power of the Minister of Labor and the President to intervene in disputes through compulsory arbitration; and the power to dismiss trade union officers involved in an unlawful strike. Organized labor has suffered and continues to suffer from a disporportion of high rate of violence from a variety of sources, including guerrillas, illegal paramilitary groups, and common criminals, as well as a result of internal union struggles. A 1990 labor code reform makes it easier to contract and fire workers, which has led to a more stable job market, but has created opposition among labor. Colombian employers previously attempted to avoid high costs associated with workers who receive generous severance and pension benefits after achieving tenure (10 years' service) by turning over their work force before that date; as a result, approximately one-third of Colombia's workers were rotated yearly. The new law benefits employers by clarifying severance pay provisions and benefits and bonuses requirements. Congress passed a law reforming the Colombian Social Security System in December, 1993. Sections of the law dealing with pension reform took effect April 1, 1994, and the sections addressing health care reform take effect January 1, 1995. The primary goal of these reforms is to provide wider health care coverage and to promote competition between public and private pension and health care plans, improving both market efficiency and social security coverage for contract workers. Employers must pay an increased proportion of employee premiums under the new law. For example, pension payments are set at 11.5 percent of a worker's total salary for 1994, 12.5 percent for 1995, and 13.5 percent for 1996. (Those earning more than USD 490/month must pay one percentage point more.) Employers cover 75 percent of these payments. Health care premiums will be 12 percent of an employee's salary and employers must cover 8 percent of this total. FREE TRADE ZONES Law 7 of 1991 opened the way to private administration of free trade zones and the selling off state-owned free trade zones. Public free trade zones (FTZs) in Colombia provide for equal treatment of foreign investors in these zones. They are located in Barranquilla, Cali, Buenaventura, Cucuta, Cartagena, and Santa Marta. Privatization of these zones is scheduled to be completed by June 30, 1994. However, lack of interest has put this timetable in doubt. Law 7 of 1991 authorizes the creation of new free trade zones close to seaports and international airports. The law permits zones to be mixed public/private or wholly privately owned. Development of these zones has begun in Bogota, Cali, Cartagena, and Rionegro (Medellin). As of early 1994, the properties were being sold. Initial reaction and sales have been positive. Tourism free zones are authorized. Thus far, such zones have been established in Baru (2), Eurocaribe (outside Cartagena), and Pozos Colorados, on Colombia's Caribbean coast. Investors are afforded tax and duty incentives to encourage tourism-related investment in these areas. CAPITAL OUTFLOW POLICY Reforms to investment and foreign exchange regimes at the beginning of 1991 liberalized these markets, not only for foreign investors bringing capital to Colombia, but also for Colombians investing abroad. Bank accounts abroad, long held by Colombians but almost always illegal under the previous exchange regime, are now permitted, although transaction over USD 20,000/day must still be registered at the Central Bank. Colombians are now permitted to invest legally in either direct or portfolio investments abroad. Capital inflows increased sharply in 1993 due to a number of factors. Some illiquidity in the banking sector because of a reserve requirement and other monetary measures to reduce the money supply and control inflation made local access to credit difficult and expensive, forcing many Colombian businessmen to use funds from their accounts abroad. Also, real revaluation of the peso and falling interest rates in the U.S. compared to high interest rates in Colombia resulting from the restrictive monetary measures encouraged investment in Colombian peso time deposits and bonds. The Central Bank has attempted to dissuade the return of speculative capital flows by increasing the commission charged to convert dollars to pesos. MAJOR FOREIGN INVESTORS IN COLOMBIA Company Foreign Investor Sector CANADA Sandoz Colombia Montreal Investment Pharmaceutical ICO Pinturas S.A Swisinvess Ltd Paint Roche Sapac Corp Ltd Pharmaceutical DENMARK Compania Metalurgica Bera Plumrose A.S. Metal FRANCE Banco Sudameris B.Sudameris-Streubel Hans Banking Colombit S.A. Saint Gobiain Mineral Specia de Colombia Specia Pharmaceutical GREAT BRITAIN Banco Anglo Colombiano Lloyds Bank Ltd Banking Cia. de Seguros Antorcha de Colombia Various Insurance Companies Insurance Yardley Colombiana Yardley International Co Manufacturing Cerromatoso S.A. Billinton Overseas Ltd. Mining Shell Colombia S.A. Shell Petroleum Co Ltd. Oil Veedol International Inc. Veedol International Ltd. Oil/Coal Glaxo de Colombia Glaxo Group Ltd Pharamaceutical GERMANY BASF Quimica Colombiana BASF A.G Chemical Siemens S.A. Siemens A.G. Communications H.B. Estructuras Metalicas Krupp Industrietechnick Metal Bayer de Colombia Bayer Pharmaceutical Hoechst Colombiana Hoechst A.G. Pharmaceutical Knoll Colombiana Twyord Pharma Pharmaceutical Quimica Schering Colombiana S.A. Schering Kahlboue GMBH Pharmaceutical BDF Colombia Beiersdorf AG Chemicals HOLLAND Cogra Lever Verenidge Zepfabrieken Food Enka de Colombia S.A. Industriel Bezit Enk B.V. Manufacturing ITALY Granadina de Seguros Assucurazioni Generali Insurance Cinzano de Colombia S.A. Cinzano International Food Olivetti Colombiana S.A. Olivetti International Manufacturing JAPAN Compa ia Colombiana Automotriz S.A. Sumitomo Corp/Mazda Corp Auto Industry Melco de Colombia Ltda. Mitsubishi Corp Machinery Distral S.A. Mitsubishi Corp Metal products Mitsubishi Colombia S.A. Mitsubishi Corp Wholesale LUXEMBOURG Banco de Credito y Comercio BCCI Holding Banking PANAMA Alpina Productos Alimenticios S.A. Latin American Trading Food CEAT General de Colombia S.A. Horizon Ltd. Machinery Tapon Corona de Colombia S.A. CAS Investment Inc. Metal Salvat Editores Colombiana S.A. Difedi S.A. Printing Compa ia Textile Colombiana S.A. Elvara Ltd. Textiles Antioquena de Inversiones S.A. Panamerican Investment Beverages Industrias Metalicas Sudamericanas S.A. Associated Manufacura Inter. Metal SWEDEN Fabrica Nacional de Oxigeno-Aga Fano Aktieebolag Held Chemical Compa ia Fosforera Colombiana S.A. Svedish Mach A.B. Chemical Switzerland Merck Colombia Merck Ag Pharmaceutical La Rosa Comestibles La Rosa Interfranck Holding S.A. Food Nestle de Colombia S.A. Nestle S.A. Food T Vapan 500 S.A. Extenaco A.G. Food Braun de Colombia Intermedicat GMBH Machinery Alcon de Colombia Alcon Universal Pharmaceutical Ciba Geigy Colombiana Ciba Geigy Intnl. Ltd Pharmaceutical Belonda Colombiana S.A. Wella & Merveille AG Wholesale Cementos Boyaca Holderbank Financiere Glaris Cement UNITED STATES OF AMERICA Colmotores General Motors Auto Industry Industria de Ejes y Transmisiones Dana Corp Auto Parts Industry Banco Colombo-Americano Bank of America Banking Banco International Citibank N.A. Banking Dow Quimica Dow Chemical Chemical DuPont de Colombia EI DuPont de Nemours Chemical Home Products Home Products Inc Chemical Sabores y Fragancias Flavors & Fragrances Chemical 3M Colombia 3M Interamerica Inc Communications Cabot Colombiana Cabot Corp. Communications Discos CBS CBS Communications IBM de Colombia IBM World Trade Communications Unisys de Col Unisys Communications Xerox de Col Xerox Communications Chicles Adams Tabor Corp. Food Cicolac Borden Intl. Inc. Food Coca Cola Coca Cola Export Food Fleishmann Fleishmann Food Maizena CPC Intl. Inc. Food Productos Quaker The Quaker Oats Co Food Johnson & Higgins Wilcox Peck & Hughes Insurance Victor Gaskets Dana Corp. Machinery Berol Berol Pen Co. Manufacturing Colgate Palmolive Colgate Palmolive Manufacturing Croydon Uranis Worldwide Manufacturing Empaques Bates Cust Co. Manufacturing Eveready Ralston Purina Over Manufacturing Gillette Gillette Co. Manufacturing Industria Colombiana de Lapices Eberhard Faber Inc. Manufacturing Johnson & Johnson Johnson & Johnson Manufacturing Peldar Cusormers Co Manufacturing Polimeros Polymer Intl. Corp. Manufacturing ARMCO Colombia ARMCO Inc. Metal Crown Litometal Crown Cork & Seals Metal Codimobil Mobil Oil Products SC Johnson & Son SC Johnson & Son Paint Carton de Colombia Container Corp. Paper Colpapel Kimberly Clark Corp. Paper Propal Intern'l Paper Co. Paper Abbott de Colombia Abbott Laboratories Pharmaceutical Cyanamid de Colommbia Cyanamid Pharmaceutical Warner Lambert Warner Lambert Pharmaceutical Goodyear de Colombia Goodyear Tire Rubber Tires Boehringer Ingelheim Boehringer Ingleheim Pharmaceutical Derivados Del Maiz Cali Investment Corp. Food Fruco Amalgamatec Beverage Food VENEZUELA Monomeros Petroquimica De Venezuela Manufacturing Banco Tequendama CA Desarollos Cavend Banking OTHER BERMUDA Manisol Northern Investment Footwear