INVESTMENT HITS NEW HIGH IN 2008, BUT 2009 OUTLOOK

1. (SBU) SUMMARY: Colombia's success in improving security
conditions and its investment climate has attracted record levels of
Foreign Direct Investment (FDI) over the last six years. According
to preliminary data, FDI reached a new high of USD 10.5 billion in
2008 based on flows spread across various sectors. The outlook for
2009 is not promising due to the global crisis. Nonetheless,
Colombia will continue to incentivize FDI through instruments such
as Free Trade Zones, bilateral investment agreements, and Legal
Stability Contracts. END SUMMARY.

You Reap What You Sow


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2. (U) Under President Uribe, the GOC has placed top priority on
attracting FDI to fuel sustained economic growth and job creation.
In the 2006 National Development Plan, the GOC set a goal of
averaging USD 4 billion per year in FDI through 2010--slightly above
the previous 10-year average of USD 3.3 billion. However, continued
improvements in security conditions, strong commodity prices and GOC
steps to foster a business-friendly environment have spurred
investment to levels consistently higher than the official target.

Companies Continue to Invest and Reinvest


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3. (SBU) Following strong FDI inflows in 2006 (USD 6.7 billion) and
2007 (USD 7.5 billion), preliminary estimates from the Colombian
Central Bank indicate 2008 inflows will approach or slightly exceed
USD 10.5 billion. This would amount to a record level, exceeding
the USD 10.25 billion received in 2005 but considered an outlier
because of the USD 7.8 billion purchase of beverage giant Bavaria by
South African conglomerate SAB Miller. Significantly, the 2008
total is not the result of a single large deal, but rather strong
investment across multiple sectors. Driven by high oil prices in
the first semester of 2008, the hydrocarbons sector captured 21
percent of all FDI, with USD 2.7 billion in inflows-a 5 percent
increase over 2007. The mining sector ranked second with USD 1.7
billion, followed by the financial, manufacturing, retail and
communications sectors, all of which registered increased flows.



4. (SBU) While 2007 ushered in a number of new international
companies to the Colombian market, much of the FDI in 2008 stemmed
from existing companies seeking to expand their current operations.
Examples include Alabama-based Drummond Coal, which announced plans
to invest USD 1.5 billion over three years to develop coal deposits
in northern Cesar Department; Spanish CEPSA, which acquired an oil
production block for USD 920 million; and Brazilian steelmaker
Gerdau which invested USD 59 million in the acquisition of a
Colombian coke company. Also noteworthy, Colombian Central Bank
figures indicate that foreign companies reinvested USD 1.2 billion
in 2008 profits in Colombia, almost double the 2002-2006 average of
USD 655 million, though lower than the record USD 1.8 billion in


2007.

New Tools for New Challenges


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5. (SBU) While rising commodity prices and the more secure and
stable business environment were the primary contributing factors
for new FDI over the last six years, many local experts fear that
deteriorating global economic conditions will bring investment gains
to a halt. According to Juan Carlos Gonzalez, Vice-President for
Foreign Investment at Colombia's export and investment promotion
agency, ProExport, the GOC is preparing to more aggressively promote
a series of on-going programs, legal mechanisms and negotiations to
offset potential reductions in foreign capital investments.



6. (SBU) The first of these tools are the modernized and one-company
Free Trade Zones (FTZs), which Minister of Commerce Luis Guillermo
Plata has characterized as "the starting point to consolidate the
rebirth of investment in the country". The FTZs offer a series of
significant tax incentives for new investors (ref A) that have
attracted USD 5.2 billion in investment commitments over the next
five years. As one recent example of the FTZs' magnetic pull for
investors, PepsiCo was granted FTZ status for its new production
facility in exchange for USD 42 million in investment and a
commitment to create approximately 200 new jobs.



7. (SBU) The two other mechanisms through which Colombia expects to
maintain FDI are the negotiation of Bilateral Investment Treaties
(BITs) and investment chapters in its pending free trade agreements
as well as the promotion of 'Legal Stability Contracts' (LSC) which
guarantee the continuation of existing investment terms for foreign
companies. In 2008 Colombia negotiated investment chapters in the
free trade agreements it signed with Canada (ref B) and the European
Free Trade Association (ref C), while signing individual BITs with
Chile, Peru, Switzerland, Spain and China. The GOC concluded a
record eight LSCs in 2008, surpassing the six total agreements
signed since the mechanism's creation in 2006.

Comment: 2009 and Beyond


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8. (SBU) According to Gonzalez, the GOC remains committed to its
goal of attracting USD 12 billion in FDI by 2012. To do so, he says
the GOC will aggressively market its FTZs, investment agreements,
and LSCs, as well as promote specific sectors, chosen from the
Ministry of Commerce's 'Productive Transformation Strategy',
including software and business Process Outsourcing, cosmetics,
'healthcare tourism', hygiene, auto parts, energy, textiles and
graphic industries. While attempting to pick "winning industries"
is often counter-productive, effective promotion of investment
incentives as part of a cohesive public strategy will be key to
limiting the drop-of in FDI amid lower commodity prices and tougher
global economic conditions.


BROWNFIELD

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