The mining sector has become an increasingly attractive investment target for various reasons. Foremost is the fact that Colombia possesses a diverse geology that is home to an assortment of precious minerals and metals. With access to both the Pacific and Atlantic Oceans, it also provides a strategic location from which to export. Due to decades of political and social unrest, Colombia remains a relatively unexplored and untapped mining resource, and security improvements over the past decade have allowed mining firms to penetrate areas previously controlled by the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia, FARC) and other groups. Lastly, a stable political environment coupled with a strong investor protection framework has made Colombia a relatively secure destination in a regulatory sense.
Despite the recent improvements, numerous obstacles remain that could limit growth in the long term if not remedied. One of the issues for the economy, and one which particularly harms the mining industry, is the lack of a developed infrastructure network. And while security issues have been vastly improved, attacks persist on mining-related infrastructure.
THE NUMBERS: From 2001 to 2005 foreign direct investment (FDI) in mining totalled $5.02bn, averaging over $1bn per year, according to the National System for Mining Information (Sistema de Información Minero Colombiano, SIMCO). Amid an improving security environment, from 2006 to 2010 FDI nearly doubled, averaging $1.95bn per year, and reaching a total of $9.77bn, according to the Ministry of Mines and Energy, giving it a 24% share of total investments and making it the second-highest sector for FDI inflows behind oil and gas. Much of the investment has, however, been focused on coal extraction and exportation. From 2001 to 2010 SIMCO data shows that $12.48bn of total FDI inflows of $14.79bn, or 84%, was directed to coal operations. Investment in metallic minerals has risen recently, posting three consecutive years of attracting more than $100m and nearly doubling each year from 2009 to 2011, when metallic mineral projects brought in $128m, $205m and $445m, respectively. Through the first quarter of 2012 metallic minerals received an additional $143m. In 2011 FDI increased to $2.54bn according to the SIMCO, while the initial figures from the National Statistics Agency indicate that through 2012 FDI registered $2.26bn, a decrease of 7.8% from the previous year. In 2012 FDI inflows represented 14.2% of the national total. Over the next five years the sector expects to attract a total of $50bn worth of investments, according to local mining firm Ashmont.
SUPPORT: The investment framework is sturdy and provides numerous fiscal and tax incentives and protective assurances to attract investment. Law 605 of 2001 granted the same rights to foreign investors as domestic ones. There is also a network of free zones that offers incentives such as a lower 15% income tax rate, duty-free importation of machinery and equipment, and the ability to establish single-entity free zones anywhere in the country. In addition, the government offers tax stability agreements ranging from three to 20 years.
RANKINGS: The improved investment environment has been affirmed by various rankings, the most telling being the World Economic Forum’s (WEF) “Global Competitiveness Report 2012-13” and consultancy Behre Dolbear’s “2012 Ranking of Countries for Mining Investment”. Behre Dolbear found Colombia to be the seventh-most-attractive country for mining investment in its survey of 25 nations, outperforming mining peers such as Peru (9), Argentina (14) and South Africa (20).
The WEF’s survey of 144 economies found Colombia has numerous areas to improve upon, but investor protection is not one of them: it ranked Colombia’s institutional framework for investor protection as the fifth-strongest in the world, an impressive feat given the overall ranking of 110th in the wider category of government regulation. Not all rankings paint an optimistic picture, however. Canada’s Fraser Institute recently published its “2012-13 Survey of Mining Companies”.
Based on responses from 742 firms in 96 jurisdictions worldwide, it found that Colombia’s policy potential index has worsened in the past two years, dropping from 40th of 79 states in 2010-11 to 66th of 96 in 2012-13.
One of the reasons for the perceived turnaround in state support has been a major bureaucratic backlog. After strong policy support under former President Álvaro Uribe, the incumbent administration has also identified mining as one of the five primary growth drivers of the future. As such, one would expect the bureaucratic processes to be further streamlined, not bogged down as they were under the previous inefficient and opaque licensing structure. In 2011 a moratorium was placed on the application of new mining licences until all unresolved cases had been cleared.
ANM: To ensure the long-term competence of the system, steps have been taken to improve oversight of the sector through the creation of the National Mining Agency (Agencia Nacional de Minería, ANM). The ANM was established in 2011 by Decree 4134, providing it with control over the country’s mineral resources. It has the ultimate goal of centralising licensing procedures and making them more transparent. The ANM was also designed to increase the efficiency of the process of prior consultation – the negotiations between mining firms, regional environmental authorities and communities that should take place prior to the commencement of any exploratory project.
So far the agency has been working to clear the current backlog of 19,629 licensing and concession requests. In July 2013 an estimated 88% (17,343) of all requests had been cleared, though only 8% were approved. After completing the clear-out, the ANM is also planning to hold its first rounds of bidding on new mining concessions in 2014 and is expected to offer exploration and exploitation licences on around 20.5m ha of land throughout the year.
SECURITY: Much of the recent influx in investment is in part a result of the improvement in security in the past decade. As Raúl Buitrago Arias, the economic director of the Large-Scale Mining Association, told OBG, “The government has drastically improved the security situation.” The increased communication between the Ministry of Defence and the private sector has helped to coordinate security, although the vast uninhabited and largely inaccessible areas make complete control of some regions difficult.
The rail line of the largest coal mine, Cerrejón, has been the target of numerous attacks. In March 2013 a FARC attack derailed 19 rail cars loaded with coal headed for export, forcing the firm to briefly shut down transportation operations and resulting in significant damage and lost revenue.
INFRASTRUCTURE: Attacks on transportation infrastructure are magnified by the fact that the country possesses little road and rail infrastructure. This deficit causes problems across various sectors, and in mining it can be the difference between an economically viable project and an unviable one, as companies must plan operating costs to include the construction, maintenance and operation of proprietary infrastructure networks or brave the long and windy rural road network.