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Colombia in Transition: A Nation Moves Away from Commodities and Leaps Toward Services

Colombia in Transition: A Nation Moves Away from Commodities and Leaps Toward Services
President Santos sees a future in IT.

Colombia has officially broken out of its agricultural and commodities exports shell to include professional services as a key strategic focus for growth.  President Juan Manuel Santos and select industry leaders rolled up their sleeves during the annual “Acuerdos Para La Prosperidad” (Treaties Toward Progress) summit held in Medellin two weeks ago, to discuss Colombian competitiveness in the context of sixteen strategic industries. In addition to big oil and mining, agriculture and medical tourism, among others, a breakout session on outsourcing services exposed some of Colombia’s opportunities and challenges going forward.  Strong economic growth continues to make Colombia an increasingly attractive domestic market for global services.  Stakeholders also remained united while charting measures to strengthen exports, particularly in nurturing human capital development and streamlining the business environment.

In a town hall meeting format local stakeholders carved out a passionate dialog about Colombia’s future in outsourcing.  In attendance were government stakeholders and some of Colombia’s biggest veteran and hopeful global services players.  Fabian Saavedra General Director at DirectTV Pan American contact center operations, Anna Maria Sanchez the national director of contact center services for Coomeva Group, and Peter Kroll Country Manager for Capgemini Mexico, were among some of the heavy hitters.

In a special announcement addressed directly to President Santos, Kroll from Capgemini pledged to employ 400 IT professionals in Colombia by 2014.  When asked where they planned to establish their delivery center, Kroll explained that “we’re still analyzing the options but it’s not going to be Bogota; we’re currently researching Medellin, Barranquilla, the Coffee Triangle, and Bucaramanga.

Jose Lorenzo Country Manager of Colombia for Capgemini said Bogota is getting too expensive.  Real estate and cost of living in the country’s capital are between 25 and 50 percent higher than second tier cities like Medellin and Cali.

Peso Rising

Major investments in the mining and oil sector have bolstered Colombia’s economy but a stronger peso is eroding margins for non-commodity exporters.  The economy grew 4.9 percent in the second quarter from a year earlier, beating most analyst forecasts according to Bloomberg.  Foreign direct investment jumped by 26 percent this year as 10 billion + dollars flooded the country over the last six months.  For the first time in eleven years the unemployment rate fell to single digits to 9.8 percent.  Overall annual consumer inflation rates have also remained stable at three percent, meeting government goals.

These positive economic signals surely came as welcome news for President Santos, but analysts remain wary over strong performance of the Colombian peso and its potential impact on exports.  Economists point to the ballooning value of the Brazilian real in 2010 and 2011 as a lesson for Colombia’s central bank which remains determined to fight off a global rally on the Colombian peso.  Stronger economic performance also makes for a stronger domestic outsourcing market, as demand for IT and other services grows across key verticals such as finance and telecoms.  However, a much stronger peso could prove debilitating for nearshore and offshore exports to the United States and Europe.

Government-Sponsored Training

Taxes and human capital development were top of the agenda during the outsourcing breakout session. The Colombian government has various safety nets and programs designed to create employment and to stimulate investment in training, but they come at a cost.  Employers pay a 29.5 percent tax (aka parafiscales) on each employee’s basic salaries that goes to health care, pension, and other services.  Out of the total tax four percent of salaries go into supporting SENA, a government job creation program that provides training services for all industries.  In addition to four percent of basic salaries, companies are obligated to hire one SENA training contractor for every 20 FTEs.

Alejandro Delgado of Colombia’s Productive Transformation Program stressed that clear communication between SENA and the private sector is critical to ensuring training program effectiveness. During the breakout session stakeholders discussed the option of introducing private sector competition as a way to improve the quality of the training program scheme, by allowing private companies to compete for the learning contract funds.  Other innovative programs like iSpeak have been launched to both strengthen and track Colombia’s bilingual talent pool.

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Grooming Medellin

During the presidential summit on Saturday Aníbal Gaviria, the Mayor of Medellin, informed the audience that his city has been nominated for the ‘City of the Year’ competition organized by the Urban Land Institute, a non-profit organization focused on land use and real estate development issues.  Medellin and Sao Paulo are the only two Latin American cities chosen for the contest.  With 3.5 million inhabitants Medellin is the second largest metropolitan area in Colombia and is a hotbed of economic activity.

It boasts strong schools and major investments in infrastructure including Latin America’s longest roadway tunnel cutting through the mountains to Medellin’s international airport.  The project is scheduled for completion by 2014 and will reduce travel time to the airport by half.  A robust metro rail system is efficient, extensive and reliable.  The highly popularized Metro Cable, an extension of the Metro system into some of Medellin’s poorest neighborhoods known as las comunas demonstrates the city’s proactive policies toward bottom-up economic empowerment.

Informal Sector Issues

Despite the recent economic progress Colombia still has fundamental issues to overcome.  Fifty percent of the country’s workforce is employed within the informal sector – similar to other Latin American countries.  That translates to 40 percent of gross national product, according to the World Bank.  For the most part these people work untaxed and ineligible for public services, leaving them vulnerable and more prone to fall into illicit activities.

More troubling is the fact that only 15 percent of the informally employed have educational attainment higher than the 12th grade, compared to 50 percent of those working in the formal sector.  Government officials have implemented measures to ‘formalize’ Medellin’s economy which has resulted in friction between vested interests, as was witnessed in El Centro de Medellin last Monday (by this reporter) when a protest against unlicensed street vendor restrictions turned violent.  Store windows were smashed and 39 people were arrested as local authorities took measures to restore order.

Despite the challenges, there is a genuine sense that government and industry are working diligently, collectively and proactively to truly improve the way of life for the country’s residents.  The well planned and executed Acuerdos Para La Prosperidad summit intended to create direct dialog with top political and private sector leadership is case in point.  Likewise there is a sense of pride and a positive energy among the residents of Medellin which signals the transformation through which this city is undergoing.

(Editor’s Note: The author, Luke Bujarski, was one of the guest speakers during the “Treaties Toward Progress” conference in Medellin. Nearshore Americas thanks the organizers for being invited to participate.)

About Luke Bujarski

Based in New York City, Luke Bujarski has over ten years of market research and international business experience. As former head of research for NSAM, Luke has traveled to the following markets performing market analysis: Guatemala, Panama, Colombia, Brazil, Mexico and Honduras.
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