Foreign Direct Investment In Cannabis Projects In Colombia. Is The Investment Safe There?
Relevance of the market opportunity Colombia represents for cannabis projects
The United Nations’ Single Convention on Narcotic Drugs of 1961 (amended by the 1972 Protocol), the Convention on Psychotropic Substances of 1971, and the Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988 have set up the legal framework for the development of cannabis projects, both psychoactive, and non-psychoactive.
Such conventions and regulations have established the export quota which each of the signatory countries can benefit from. Colombia, by all means turns out to be the most favored country of all, with a big 44% of the total export quota. On the other hand, the cost of growing cannabis plants and the cost of labor for harvesting and manufacturing cannabis products can be a third of what it is in countries affected by marked seasons, such as Canada or the United States.
Considering that the current market for legal cannabis products is estimated in $31.4 billion dollars, according to Forbes Magazine, and that big European markets are just about to open, like Germany, Denmark and Portugal, it seems like Colombia is the place to invest for cannabis projects.
Possible concerns of investors
Although the numbers seem attractive, a foreign investor with experience would immediately examine main concerns such as, is the country an investment friendly jurisdiction? Is there a stable legal framework and respect for the rule of law? is the country part of an investment agreement with the country where the capital comes from? Is there a stable court system? Is there a guarantee that an expropriation process will be regulated by generally acceptable due process principles? Are there currency controls in place? Is there a stable and robust cannabis legislation? this article intends to provide answers to those concerns.
Colombia’s FDI and FTA framework
Colombia used to be vastly isolated from the world commerce, until some 50 years ago, when it began a path of liberalization. Although the intentions were correct, the internal war going on at the time did not help, and foreign investment was very limited and confined to the big traditional industries, mainly extractive ones. Some 15 years ago with a much safer public order situation, Colombia started to build much more solid relationships with the world, and specifically commenced a race to negotiate and conclude free trade agreements with most of the main economies of the planet. 15 years later, Colombia has agreements in place with at least 50 countries, most of which contemplate chapters for the protection of foreign investments and investors.
Having chapters to protect foreign investment means, among other things, that Colombia has accepted to be bound by the jurisdiction of international arbitration tribunals, if sued by the foreign investor in case of breach of certain protection standards. The most common protection standards are national treatment (non-discrimination), most favored nation, protection against illegal expropriations, protection against currency restrictions, warranty of security (physical), among others. The good thing is, those standards would be examined not against Colombian law standards, but against international principles of foreign investment.
Colombia’s cannabis regulation
Colombia has adopted the UN’s international Single Convention on Narcotic Drugs of 1961. In consequence of its adoption and incorporation into domestic law, a set of legislation was adopted in 1986. Not much happened with that legislation, as the public order at the time the law was enacted, and international politics, did not provide favorable conditions. The world and the domestic conditions changed substantially, and in 2015, new legislation was adopted, this time with a clear intention from the government that real projects would happen. The new set of legislation however, showed to be obscure, difficult to interpret, and in many cases too burdensome for small growers, which could lead to actual discrimination in favor of big international companies.
The peace process formalized in 2016 has a big social component to it, and agroindustry projects were conceived as a main tool to reinsert illegal farmers and ex armed population, into the legal economy. Therefore, there was a clamor to have simpler, easier to follow and understand legislation, that would allow big and small parties to share the cannabis industry.
Consequently, the last set of legislation was issued in 2017, which is in force currently, and regulates the cannabis licensing and government control. A caveat though is that the new legislation did not derogate, but instead it superseded the prior legislation. That means that the new legislation does not necessarily take the place of the old one, but that the new one complements the old one, and replaces only those parts of it that are contrary to, or create conflict with the new regulation. This could create a degree of uncertainty, and very likely it will take some time before the legislation becomes mature and there is complete clarity as to the standards applicable to every step in the cannabis business. Although that could be a transitory problem, the good aspect is that it is not likely, there will be new legislation in the subject any time soon.
Currently, Colombian regulation requires license to grow psychoactive and non-psychoactive cannabis plants, to manufacture psychoactive and non-psychoactive cannabis products to be sold nationally and internationally, and to use the seeds to cultivate. The license is granted by the ministry of health, and once licensed, the title holder is allowed to apply for its quota. Some activities are not subject to license from the ministry of health, such as the manufacturing of non-psychoactive cannabis projects or grow non-psychoactive cannabis plants. Those permits are granted by the National Council of Narcotic Drugs. In a separate article, we will provide more detailed information about the licensing process for cannabis projects.
Of course, besides complying with cannabis regulations, a cannabis project needs to comply with all other laws that somewhat touch on the project, such as sanitary, corporate, tax and the like.
As a highlight and perhaps oversimplifying, Colombian laws will require that a foreign company that does permanent business in Colombia, must set up either a branch of its foreign company, or an independent Colombian entity. Taxation for both types of vehicles will operate similarly, and if the foreign and the domestic vehicles do transactions inter se, depending on the thresholds, the Colombian vehicle would have to meet transfer pricing regulations.
Cannabis business in practice
Although the Colombian government has given top priority to the cannabis legislation, we are yet to see big cannabis projects materializing, and complying with the law. On the other hand, although the Colombian society has had to coexist with cannabis plantations in the past, this is the first time we will see legal “over the table” projects, and we still don’t know what the reaction of the different communities will be on that.
A main thing to take into account is, our legislation has a resource available to communities called “consulta popular”, which could be translated (although both institutions are not the same), as a public referendum (PR). A PR is a mechanism through which a community could request national or local authorities to block a certain project, because it violates a collective right or interest regarding the public security or healthiness, the national heritage, the public space, the morality of public administration, the environmental pollution, the development of a free market, among others with similar purposes.
Given all these legal tools are available, and that our authorities are rather inexperienced in granting cannabis licenses and overseeing cannabis projects, we think it is very important to first, make very sure which licenses are needed for the type of project. Second, examining the right geographic conditions for potential developments, along with a sociological study of the communities surrounding the area. Finally, a comprehensive study of all areas of the regulation that will potentially intersect with the project, would help avoid last minute surprises.
The way forward
Cannabis, thanks to the production capacity allotted to Colombia by international regulations, is thought to be one of the big drivers of Colombia’s agricultural/pharmaceutical economy. There is a certain amount of legal uncertainty as the field is new, but on the other hand, Colombia has proven to be a country that is respectful of international regulations and of its commitments derived from investment treaties. One would expect that this jurisdiction would be a very attractive one, not only for all its geographical and market advantages, but also due to its adherence to the rule of law and international commitments.