Profit Machines: Exploring the Financing of Colombian SEZs
Colombia is home to 120 different SEZs. These zones play a key role in the industrial development strategy and economy of Colombia. For this reason, exploring the world of Colombian SEZ financing opens a window into the rest of the Colombian economy.
Colombia is home to 120 different Special Economic Zones (SEZs). These zones play a key role in the industrial development strategy and economy of Colombia.
Colombia is home to a quarter of all business park economic zones in South America, and offers a unique window to SEZ financing throughout the continent. Because all SEZs covered in this article are 100% privately financed, exploring SEZ financing opens a window into the rest of the South American economy.
Colombian SEZs, known as Zonas Francas in Spanish, are specially designated business parks where tenants enjoy various tax and regulatory incentives.
In this article, we will explore financial data from four different SEZs. For each zone, we will explore the groups that operate them, give a brief introduction overview of their history, explain their business model, and look at other important details such as their infrastructure.
Legal Incentives in Colombian SEZs
Demand for space in Colombian SEZs is primarily driven by the Colombian government’s incentives for companies doing business in the zone.
Under Colombian law, establishing a business in a SEZ comes with significant tax, regulatory, and customs related benefits. According to ProColombia, a government agency that helps attract FDI, SEZ tenants get the following benefits:
-Reduced Income Tax - 20% in SEZs, 34% in Colombia at large
-No VAT or tariffs on goods entering SEZs
-No VAT on raw materials sold from anywhere in the country to SEZ tenants
-Companies in the SEZs are exempt from customs declarations
-Goods produced but sold in any part of the country only accrue VAT on the inputs that were imported
Understanding SEZ Operators
SEZs are managed by companies known as operators. Operators can be dedicated companies established for the purpose of managing the zone or can be a subdivision of a large company engaged in other activities.
For example, if a generic manufacturing company ACME Industries wants to do business in a zone, there are several different possible ways that the zone could find an operator. If ACME owns the land around a factory, and successfully applies and receives SEZ status, then ACME will be the operator. Alternatively, ACME could hire a dedicated operator company to outsource zone management. Finally, if ACME could instead establish themselves in an existing business-park style zone. If ACME chooses the later, then the owners of the business park would be the operators.
Any company, foreign or domestic, can apply for SEZ status. To receive SEZ status, then the company must meet several requirements such as owning enough contiguous land, having enough capital to invest, and passing through various checks and balances designed to prevent corruption.
Zona Franca de Bogotá
Zona Franca Bogota (ZFB) is one of the largest and most well known SEZs in Colombia.
Zona Franca Bogotá generates 30,000 direct jobs and 50,000 indirect jobs (0.8% of all jobs in Colombia, and 1.26% of all jobs in Bogota). In 2019, it attracted 10.3 billion USD worth of Foreign Direct Investment (FDI). ZFB contributes about 15% of the country's customs collection, and 35% of all customs in Bogotá.
Construction for Zona Franca Bogota, Grupo ZFB’s first zone, started on 100 hectares outside of Bogota, the capital of Colombia. Pre-sales for plots began in 1994, and the business park finally opened its doors in 1997.
Zona Franca Bogota was immediately successful, and has slowly expanded over the years.
The service sector has come to play a major role in Zona Franca Bogota. In 2009, the Zona Franca Bogota opened its business center building. Unlike previous tenants, which had primarily focused on manufacturing, the business center focused on industries such as call centers, BPO, and customer support. All available room in the business center was quickly used up, leading to the creation of other service-oriented facilities within the free zone.
Unlike other zones whose incentives expire relatively quickly, the success of this zone has caused the Ministry of Commerce, Industry and Tourism to grant it full concessions until the year 2053.
Zona Franca Bogota is operated by Grupo ZFB.
Over time the success of the Bogota free zone enabled Grupo ZFB to open and operate more than 40 other SEZs elsewhere throughout the country. Grupo ZFB now accounts for 64% of all SEZ investment in Colombia. These include multi-tenant business parks like Zona Franca Bogota as well as single-tenant free zones such as Zona Franca PepsiCo or the Femsa Coca Cola plant.
These zones are home to 550 companies that generate 116,000 jobs. This implies that of the 115 free zones that operate in the country, 35% are operated by the ZFB Group. Grupo ZFB’s zones generate $21 million USD worth of FDI per year.
As of 2015, the ZFB Group's revenues exceeded $26 million USD. Its profits reached $ 5 million USD.
Grupo ZFB divides its internal functions into two categories: the operation of free zones, and the development of logistics parks.
Zona Franca de Barranquilla
The oldest free zone in Colombia is the Zone Franca de Barranquilla. Zone Franca de Barranquilla was founded in 1959 and began operations on October 5 1964.
Unlike modern zones which are built and administered by private companies, Zone Franca de Barranquilla was initially built and administered by the Colombian government. It was later privatized in 1993 when the legal framework allowing for the creation of private SEZs was passed.
In part thanks to its age, Zona Franca de Barranquilla’s location is unique among Colombian SEZs. Notably, the zone is only two and a half hours from the United States and one hour from Panama by air. It is also less than 100 kilometers from the ports of Cartagena and Santa Marta. Another key advantage is it is the only SEZ in Colombia with a built in port.
Zona Franca de Barranquilla is now operated by its own privately owned management company: Zone Franca de Barranquilla S.A.
The operating company earns its income from charging rent to tenants. Its annual revenue is roughly $3.8 million USD.
In addition to earning revenue from rent, the zone also has its own consulting company called ZOFIA (International Free Trade Zone of the Atlantic). ZOFIA specializes in providing services for international logistics tailored to the needs of foreign trade companies.
Zona Franca de Rionegro
Like many other SEZs in Colombia, Zona Franca de Rionegro was announced in 1993 immediately after passage of the legislation which made private zones possible.
There are currently 87 companies doing business in Zona Franca de Rionegro, employing hundreds of local residents.
Since its inception, the Zona Franca de Rionegro has been operated by its own in-house management company: Zona Franca De Rionegro S.A.
Construction was financially supported by Colombian companies who hoped to relocate their business operations was the zone was operational. These early partners included the insurance company Suramericana de Seguros, the multi-industry conglomerate Grupo Argos, construction company ConConcreto, and three textile companies (Fabricato, Coltejer, and Leonisa).
Zona Franca Palmaseca
Zona Franca Palmaseca was created in July 1994, shortly after the laws changed to allow private SEZs.
The Palmaseca Free Zone, is a permanent Free Zone, which means that the incentives it enjoys will never expire. It is managed and operated by its own internal management company (Zona Franca Palmaseca S.A.).
Currently, Zona Franca Palmaseca has more than 50 companies as tenants across a wide variety of industries. Its tenants are in the chemical manufacturing, packaging, food, automotive, and logistics industries.
Like most SEZs, location is key. Zona Franca Palmaseca is only 140 km from Buenaventura, Colombia's only port on the Pacific Ocean, giving it direct access to 53% of the country's foreign trade. It is located just 15 km from Cali, capital of the region. It is also located 10 km from Yumbo, the industrial capital of Colombia, and 10 km from Palmira, the agricultural capital of Colombia. Importantly, it is located less than one kilometer away from the Alfonso Bonilla Aragón International Airport.
Like other SEZs in Colombia, the success of Zona Franca Palmaseca has led it to operate 5 other SEZs elsewhere in Colombia. 4 of these zones are located in the department of Valle (Riopaila Distillery Special Permanent Free Zone, Special Permanent Free Zone Proterra Foods, Special Permanent Free Trade Zone Sociedad Puerto Industrial Aguadulce) and two in the north of the department of Cauca (Permanent Free Zone Industrial Complex South Park, Permanent Free Trade Zone Special Papeles del Cauca). These free zones generate around 2,800 direct jobs and 3,200 indirect jobs.
In the free zones operated by Palmaseca, investments grew between 2016 and 2017 by 9% ($43 million USD). The accumulated value of investments in these 6 zones as of December 2017 is around US $480 million USD.
Colombia’s private SEZs are wildly successful.
For their tenants, they are basitions of good governance and functional infrastructure. They play a critical role in the business operations of Colombia’s largest companies.
For the people living near and working in zones, they have become fixtures of the local community. Tens of thousands of Colombians work, live, and plan their lives around their local SEZs. Many more thousands of Colombians indirectly are attracted to the zones, setting up restaurants and hotels to cater to their local SEZs.
For the Colombian government, zones are a vital part of the nation’s industrial strategy. SEZs play a fundamental role in attracting FDI, generating tax revenue, and bolstering the economy.
Finally, for the operators of the zones, SEZs have become an indestructible and unstoppable profit machine. Colombian SEZs are incredibly profitable, and generate billions of dollars per year for their operators and their investors.
Colombia’s international reputation was unfairly tainted in the 1980s by the legacy of the drugs trade. In the late 20th century, Colombia became known as a place of lawlessness, poverty, and crime. These stereotypes were perpetuated by foreign media even though the drugs trade always was, at most, a minor component of the Colombian economy.
Times have changed.
Colombia is no longer viewed as a drug producer. Slowly, the country is overcoming is out-dated reputational challenges and is becoming an internationally recognized industrial powerhouse. Economists and financiers now realize that Colombia has the potential to become one of the world’s leading business hubs. These changes, in part, have been driven by the successful use of SEZs to revolutionize the Colombian economy.
Colombia now stands as a model for other countries hoping to use SEZs to revolutionize the economy and transform the lives of their citizens.