What I learned at a Colombian country club

September 23, 2013

I was last in Cali in 2007, and since then the sweltering, tropical ‘World Capital of Salsa’ has changed a lot. New bridges and tunnels make getting around the place a lot easier while the military presence in the city has been relaxed. That said, like much of Colombia, there’s still plenty of work to be done. The lively but squalid parts of the city centre I walked through are full of character for visitors, but life’s probably not so much fun for the people who live in the makeshift houses there.

I’d come to Cali for the summit meeting of the Pacific Alliance and, unsurprisingly, the conference definitely showed the ‘other side’ of Colombia. The exclusive, landscaped country club provided a sophisticated setting for the various presidents, policymakers and businessmen that had travelled over for the annual meeting. Obviously, delegations from the four member countries of Colombia, Mexico, Chile and Peru dominated, but it was also interesting to see which other countries had made the effort. Surprisingly, the Spanish and Canadian prime ministers were heading up big delegations, with the former candidly admitting that “Spain’s situation” meant he was eager to boost trade.

The UK wasn’t heavily represented. In some ways that’s no surprise as it’s neither a Pacific nor Spanish-speaking country. But different Pacific Alliance diplomats I spoke to, off the record admittedly, told me that Foreign Office mandarins have been very active behind the scenes. Apparently the government is convinced about the bloc’s potential; it’s just trying to work out what Britain’s status would be and how it can make the Alliance work for UK companies.

Fortunately for us investors it’s much easier to take advantage of the Alliance. I’ve been writing about it for almost a year now and, as I mentioned in my last New World, so far its companies haven’t let us down. But there’s nothing more dangerous to an investor than complacency, so at the summit I was keen to get among the businessmen and find out what they thought. Grabbing unscheduled interviews wasn’t easy – believe it or not, MoneyWeek isn’t a big name in Latin America – and most delegates had come to the summit with bigger priorities. As Ronald Pantin, CEO of Colombian oil company Pacific Rubiales put it to me when I tried to arrange an interview, “I’m waiting to speak with the Mexican president, maybe I can meet you afterwards.”

Rebuilding Colombia’s railways

One of the most interesting interviews was with Juan Carlos Roncario, managing director of Ferrocarril del Pacifico, a Colombian rail firm. Regular New World readers will know that Pacific Alliance infrastructure is one of my main investment themes, so it was great to speak to someone who’s managing a large-scale project there. “For years Colombian railways were neglected and allowed to get into a terrible state”, he began. “The government tried to fix the problem by giving concessions to private-sector firms but no-one could make it work.” That’s when his firm got involved. A consortium of Israeli and Colombian investors bought the concession and started investing in the line. “Instead of trying to do everything at once we fixed it segment by segment, which means we’ve been able to earn money by serving some customers while working on the rest of the line.” The concession stretches from the port of Buenaventura on Colombia’s less-developed Pacific coast, into its agricultural heartland of coffee and sugar plantations.

Roncario’s work is far from done. So far he’s only repaired about half of the line, while he admitted to me that his trains relied on inefficient old locomotives. But an order for new engines has already been placed, and he expects to complete the line later next year. “At the moment we are already more competitive than hauling by truck, when the new engines come we’ll be even more so.” Of course, while this looks to be shaping up nicely for Roncario, it also bodes well for Colombian exporters. They’re about to have a much cheaper, quicker way to get their goods to Asia.

Teaming up with Mexicans to sell to the States

As its name suggests, selling goods to Asia is one of the big aims of the Pacific Alliance. But, thanks to Mexico’s deep economic ties to the US, it will also open up the American market for more southern members Chile, Peru and Colombia. One beneficiary of this will be Orlando Rincon, a Colombian IT entrepreneur.

Orlando wasn’t at the conference, but I was told he’d be worth seeing, so I went to his offices in Cali. Orlando’s not your typical IT executive and he was a nightmare to interview. Instead of answering my questions he’d tell me about how Colombian drug cartels were “the world’s best multinationals”, or how, as a “centre-leftist” himself, he met leaders from FARC, a left-wing guerrilla group, and tried to convince them to update their views. “I’ve never spent so much time preparing a presentation in all my life.” Apparently they didn’t take his advice, but wanted him to develop jungle GPS systems for them instead – he refused. But for all his jokes and stories, Orlando is the real deal. He grew a telecom technology provider from scratch and sold it to an American multinational for $10m. Not bad for a Colombian boy from the barrio who grew up with nothing.

Now Orlando has a new firm, Parquesoft. It’s a network of hybrid business parks that host small Colombian IT firms, package their skills together and bid for big contracts. For example, a consortium of Parquesoft firms recently beat off US competition to sell a flight simulator to the Colombian Air Force. Anyway, when Orlando found out I’d been to the summit he soon gave me his opinion. I haven’t got time for it all – the meeting was two hours long – but one thing that stood out was how he plans to benefit. “The Pacific Alliance is our way into the US. Right now, Mexico sells a lot of IT to the Americans. If I can package our products up with a Mexican firm we’ll get straight into the US market without having to spend money on front-end sales offices.”

Funnily enough, it chimed with what Mexican President Enrique Peña Nieto had said – albeit less loquaciously – a day earlier at the conference. “Mexican exports are successful, but right now US components account for 40 cents in every dollar of Mexican exports. In China that figure is only four cents. I want to get Mexico to that position. And to do that Pacific Alliance companies need to integrate their supply chains and start working together.”

So, with that regional supply chain integration in mind, the presidents renewed their commitment to keep cutting trade barriers – financial or otherwise – and open up visas between member countries. To be fair they’ve already made significant progress on this front. In the one year since its formal inception, trade tariffs on 90% of goods have already been cut, and visa-free temporary travel established between most member countries.

The Pacific Alliance’s rising corporate giants

These steps will make it easier for regional companies to gain scale and create new local giants for us to invest in. I’ve written before about how a new generation of ‘multilatinas’are starting to snap up Latin American assets from beleaguered Western firms. And the Alliance’s initiatives will only aid this process. I’m not naive enough to think that a load of politicians making grand statements at a conference will suddenly make firms profitable. Rather, they will help a process that’s already well underway.

I spoke to Harold Eder, president of Grupo Manuelita, one of Colombia’s largest agribusinesses. As he said to me, “we already have bases in Colombia, Peru and Chile so we were a Pacific Alliance company before they even came up with the idea! Of course this is going to help us.” And, when I finally managed to interview him, Ronald Pantin of Pacific Rubiales, said much the same thing. “We have production in Peru and Colombia. The more integration the better.” I also asked Pantin why his firm has underperformed since I mentioned it in a Money Morning back in October 2012. He was, I joked, making me look bad with my readers. I don’t think he appreciated the joke but he told me to keep faith with the stock and told me that he’s optimistic about the company’s new projects.

Trading these stocks could be about to get easier

The final theme I wanted to investigate was capital markets in the Pacific Alliance countries. Last year Peru, Colombia and Chile merged their stock markets in a bid to improve their ability to raise capital locally and to attract foreign investors. The integration is called Mercado Integrado Latinoamericano (Mila). But so far it has not been a roaring success, with trading volumes below expectations. Meanwhile, Mexico, whose participation is essential if the market is going to make a serious impact globally, has still not signed up. So when I heard that Juan Pablo Cordoba, president of Colombia’s stock exchange, had turned up to the conference unannounced, I sought him out to get some answers.

Perhaps unsurprisingly, he didn’t agree with my assessment that Mila hadn’t been a success. “The fact that it’s up and running, when many thought it would fail, is an achievement,” he said. As for Mexico, he agreed that its entry would be a tipping point, but said that “we have to respect the will of the Mexican people and let them take their time”. One of the most interesting things was at the end of the interview when, as an aside, I lamented the difficulty I have finding stocks for readers. It was, I said, a pity that my readers in Britain couldn’t trade Mila like they can the NYSE for example. “That will change”, he told me enigmatically, “and a lot quicker than you think.” I couldn’t get any more out of him on the subject, but if the Pacific Alliance does one day open up its markets to the likes of me and you, it would create a lot of exciting investment opportunities.

This article is taken from The New World, MoneyWeek’s FREE regular email of investment ideas and news from Asia and Latin America. For more information go to www.moneyweek.com