Colombia – The Perils of Peace

June 24, 2017

Colombia is beginning a new stage in its history. As a result of the peace agreement signed in late 2016 between the government and the leftist Revolutionary Armed Forces of Colombia (FARC) guerilla group, Colombia could address some of its most pressing structural problems, such as poverty, inequality and development. But progress will not be quick. According to government sources, full implementation of the agreement will take 15 years, followed by a ten-year period of consolidation.

The implementation of the peace deal has been beset by delays and controversy. There have been breaches of the ceasefire on both sides, the deadline for FARC disarmament was pushed back, while Colombia’s Constitutional Court ruled against some elements of the government’s plan to fast-track peace deal-related legislation. However, there has been some progress. One the 13th of June the UN confirmed that it has now decommissioned 60% of the Farc’s weapons stockpile with the task expected to be completed by next week.

No such thing as a free peace

A survey of Control Risks’ clients in Colombia found that companies are aware that the post-agreement period will bring about uncertainty, but that firms may be ill prepared to face the challenges ahead. We can expect heightened social unrest in rural areas, integrity risks resulting from lack of state presence, and security challenges. Companies operating in rural areas must prepare plans in anticipation of the eventual dissolution of the FARC and will have to deal with a number of complex circumstances including the legal and social risks associated with land reform, illegal mining and the existence of landmines throughout the country. An extra cost will come in the form of the requirement to provide jobs for ex-combatants in vulnerable communities and increased taxes. There will also be scrutiny into allegations involving private companies financing crimes committed in the context of the war. Dealing with these last two issues will be crucial for companies that want to thrive in the post-conflict era.

We can expect heightened social unrest in rural areas, integrity risks resulting from lack of state presence, and security challenges…

Tax risks are poised to increase as the government seeks additional revenue to plug the country’s considerable fiscal deficit. The passage of the FARC deal and the impending expansion of laws and expenditures to sustain implementation will cause further strain on government finances. The National Planning Department (DNP by its Spanish acronym) expects public expenditure to grow by 4% of GDP to fund post-conflict initiatives. Meanwhile, slowing economic growth due to commodity price decline has weakened the Colombian peso. According to Oxford Economics, since 2014 the Colombian peso tracks oil prices in a correlation above 80%.

Moreover, the wealth tax introduced in 2015 and the income tax surcharge for private companies both expire in 2018, meaning that the government will have to find additional revenues to cover the 1.5% of GDP gap those disappearing taxes will leave, and the government must also respect pre-established limits to budget deficits. These trends have worried international investors and put downward pressure on credit ratings, which are expected to take a hit should the government not obtain as much revenue as it expects from the watered-down tax reform it enacted at the end of 2016. Indeed 2017 looks set to be a complicated year. Not only because of the vast number of laws that must be introduced or amended to implement the peace agreement, but also because the start of the 2018 electoral cycle is likely to slow down the start of the much awaited post-conflict period.

Reputational risk                  

Many experts agree that the business environment will likely improve as a result of the peace agreement. However, Colombia still has quite a bit of history to confront before the country turns the page on its violent past. The rise of other risks such as integrity risk will mean the agreement is, for now, a bittersweet deal for the private sector. The modified peace agreement contains a component of truth-seeking efforts, and there will be a growing sense of scrutiny to understand the private sector’s role in the conflict. There are already a number of cases against large agricultural conglomerates for indirectly participating in the displacement of small farmers from their territories. All companies will be affected, but those operating in rural areas will be especially impacted.

The rise of other risks will mean the agreement is, for now, a bittersweet deal for the private sector…

These issues, combined with the chronic statelessness of rural areas and the vacuums of power that will be left by the FARC’s absence, a growing threat from organized armed groups and the continued presence of the National Liberation Army (ELN) in specific parts of the country, will leave companies operating in rural areas particularly vulnerable to reputational and integrity risks associated with the conflict.

Companies must meet all the minimum legal requirements (i.e. legal and tax compliance) to operate; however, this will not be enough to ensure long-term sustainability and take advantage of the historic moment at hand. In that sense, reducing risk management to strict legal compliance is likely to end up more costly, or at least less beneficial, than going a step further and including the early identification, analysis and mitigation of risks in strategic planning. Indeed firms that wish to take full advantage of the considerable economic and reputational benefits should go even further and proactively contribute to building and sustaining peace. If done correctly, this not only serves as good public relations; it can help reduce risk and turn challenges into opportunities. It also delivers tangible benefits for both companies and the country in which they operate.