Thursday, February 20, 2020

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The Supreme Court of Colombia on January 17 notified a group of investors suing a fiduciary over a failed medical-office-building project near Medellin that a fiduciary has extremely limited legal obligations to oversee performance of shaky real-estate development projects or verify crucial financial assertions made by the developer.

The group of investors had sued Colombian fiduciary Corficolombiana (a subsidiary of banking giant Grupo Aval) arguing that project developer Arcor Inmobiliaria SA had failed to achieve the mandatory 50% “equilibrium point” of funding from project investors -- as required by the contract -- before receiving the investor funds from Corficolombiana.

(Editor's full disclosure: Medellin Herald obtained a copy of the Court ruling directly from the lawyer who represented the plaintiffs, among which included myself and my wife).

Arcor asserted that it had accumulated COP$4.57 billion (US$1.6 million) in investor deposits for the project -- supposedly exceeding the Arcor-calculated 50% “equilibrium point” that triggered disbursement of investor funds from Corficolombiana to Arcor.

However, Arcor’s claim that it had supposedly reached the 50% “equilibrium point” lacked a required signed statement from the official financial auditor, the Supreme Court ruling noted.

Nevertheless, the Supreme Court ruled that the lack of this signed document was “insufficient to demonstrate the non-compliance of the fiduciary.”

The only actual work Arcor performed at the site was demolition of an old building, digging a hole for the proposed basement parking lot and erecting a handful of pillars. No new building was ever constructed, leaving the investors with a loss that collectively exceeds US$2 million.

Following Arcor's abandonment of the project, a Circuit Court in Cali (where Corficolombiana is headquartered) confirmed its liquidation. Years later, the lot upon which the building was to be erected was resold to a third party, the funds from which enabled the project investors to recoup about half their original investments.

A hard lesson for investors in Colombian development projects (“sobre planos”) supposedly guaranteed by fiduciaries: Don’t assume that fiduciaries are actually checking the performance of construction contractors or that they truly know whether the “equilibrium point” has in reality been reached. Under the Supreme Court ruling, fiduciaries can just take the word of contractors about contract compliance, no matter how phony or flimsy those claims may be.

For example: Arcor provided documents -- obtained by the suing investors -- claiming to show that it had bought numerous plumbing fixtures for the office building. But these fixtures never showed up at the site -- and neither the fiduciary nor the contractor ever explained to investors what happened to these materials.

Investors also had been led to believe that the 50% “equilibrium point” supposedly pertained to funds obtained for the actual proposed office building, not later add-ons. Yet Arcor had included in the “equilibrium point” funds it supposedly obtained from the sale of additional mini-booths (“burbujas”) – which in any case were never built.

So, a first warning: naive investors shouldn't assume that having a fiduciary involved in a new-build project in Colombia somehow provides guarantees protecting investors against contractor non-compliance or fraud.

Second warning: Investors also should note that Corficolombiana has been tied to several other, high-profile construction scandals in Colombia.

One example: Corficolombiana’s ex-president José Elías Melo is now facing criminal charges in the massive Odebrecht bribery scandal involving highway construction projects in Colombia.

Melo – who has denied the charges – is alleged to have known about bribes totaling US$6.5 million that Odebrecht officials admit they paid to high government officials in order to obtain contracts for the giant “Ruta del Sol” phase-two highway project, according to the Colombian attorney general.

Another example: More recently, 132 national and international investors in the unfinished, abandoned, multi-million-dollar “Meritage” condominium and commercial-center project adjacent to the "variante al aeropuerto" highway between Medellin and the international airport at Rionegro have been victimized by another scandal involving Corficolombiana.

In total, the Meritage investors had paid more than COP$47 billion (US$16.6 million) for future apartments and commercial spaces in a project snarled by criminal charges involving alleged narcotraffickers.

A lawyer representing investors filing suit to recover their funds claims that the investors have been “abandoned” by project fiduciary Corficolombiana as well as the Colombian attorney general, who moved to halt and seize the project.

According to the lawyer, the attorney general supposedly should have warned investors about investing in a site whose legal ownership is entangled in a dispute between alleged drug-mafia kingpins.

In an October 7, 2017 report about the Meritage scandal by Colombian daily newspaper El Tiempo, foreign investor Paul Torres was quoted as saying that “Colombia doesn’t offer any guarantees to foreign investors.”

Similarly, a June 15, 2017 report from Medellin-based newspaper El Colombiano had this to say about the Meritage scandal: “In this country, it’s no longer enough to study the history of property titles, according to the Civil Code, but rather one must search until infinity to discover possible crimes of previous [property] owners. A very grave issue for legal security.”


Medellin-based multinational retail giant Exito is enjoying ever-greater success with its “Didetexco” clothing manufacture/export subsidiary – even in the face of Colombia’s  competitive problems with illegal, below-cost, and unethical clothing vendors (mainly exporting from Asia).

In a presentation to the Colombiatex 2018 annual show here January 23, Didetexco general manager Ramiro Arango and fashion coordinator Juliana Rincon pointed to tremendous growth in the division’s production, sales and exports – with 97% of clothing for Exito’s domestic and foreign markets made right here in Colombia.

“To ‘democratize’ fashion is our goal, with everyday-low-prices and sustainability,” Arango said.

The Didetexco clothing division – launched here in 1949 by Exito founder Gustavo Toro Quintero – initially tapped relatively low-cost supplies (scraps and remains from Medellin’s major textile manufacturers) and also provided dignified labor for seamstresses coming from vulnerable economic sectors.

Today’s business model for Didetexco involves tapping “sinerproveedores” – that is, scores of independent workshops in many Colombian towns and cities (including municipalities in Antioquia). These workshops employ some 9,000 directly or indirectly, mostly female heads-of-households.

While these workers aren’t direct employees of Exito, Didetexco nevertheless ensures that these workers receive all legal Colombian salary and benefits packages – in contrast to certain Asian countries that unethically employ slave-like child labor in clothing manufacture, dump toxic chemical byproducts, or sell to third parties that might be laundering illegal drug money by importing below-cost clothing.

In 2017, Didetexco’s “sinerproveedores” produced 33 million items of clothing -- up 153% since 2015 -- with 2.79 million of those units sold for export, up 390% since 2015, Arango boasted here.

For Exito, having Didetexco enables expansion of its domestic clothing retail sales to its recently acquired retail chains in Argentina and Uruguay -- via clothing exports from Colombia -- as well as to Brazil, which until recently (December 2017) had tariffs that made it cheaper to export designs rather than clothes.

However, thanks to a new free-trade agreement (eliminating tariffs on clothes), it’s possible that Exito in future could export at least some clothes from Colombia to Brazil.

The Didetexco subsidiary also is now exporting clothes from Colombia to France as well as to Africa, Arango showed.

Thanks to special agreements between Didetexco and several well-known clothing designers (including Silvia Tcherassi), Exito clothing brand-names now include Arkitect, Bronzini, People, Bluss, Custer, Myst lingerie, WKD, Coqui, Carrel, Eventi and Ama’s.

Besides having strong brand names, other competitive advantages enjoyed by Didetexco/Exito include: mid- and long-term deals with the “sinerproveedores;” strong capacity and expertise in exporting; creative designers; strong knowledge of fashion trends; seasonal product lines; “complete package” products; strong marketing and communications; ethical labor and environmental practices; aggressive brand promotion; strong controls on product supply in response to demand; and growing consumer awareness, Arango said.

In addition, “we can react fast and produce fast” in response to changing fashion trends, he said. “From runway to retail, we do fast turnaround. You can’t do that with Bangladesh or China,” even though those countries may offer relatively cheap costs for clothing -- but can't offer fast shipping.

The Didetexco business model also employs a firm “gross margin return on investment” (GMROI) policy that ensures relatively fast inventory rotation, as products will go straight from factories to stores, not to warehouses, he said.

“We also fight [alongside Colombia’s fellow law-abiding clothing makers] to ensure just import duties, so that we can formalize more jobs,” he added.


Medellin-based Celsia – the electric-power division of corporate giant Grupo Argos – on January 26 reported full-year 2017 net profits of COP$251 billion (US$89 million), up 47% from COP$171 billion (US$61 million) in 2016.

Earnings before interest, taxes, depreciation and amortization (EBITDA) hit COP$1.12 trillion (US$399 million) for full-year 2017, up 9% year-on-year -- an all-time record.

As for fourth-quarter (4Q) 2017, net profits dipped slightly, to COP$71 billion (US$25 million), down from COP$75 billion (US$27 million) in 4Q 2016. However, 4Q 2017 EBITDA rose 21% year-on-year.

Consolidated earnings for full-year 2017 dipped 18% year-on-year, to COP$3.1 trillion (US$1.1 billion) because of a decline in thermal-power generation and lower power prices in Colombia, the company explained. However, 4Q 2017 consolidated earnings rose 4% year-on-year.

Total power generation in Colombia for full-year 2017 totalled 5,226 gigawatt-hours (GWh), down from 5,596 GWh in 2016. However, 4Q 2017 generation rose 31% year-on-year thanks to heavier rainfall that enabled greater output at Celsia’s hydroelectric plants.

Celsia’s power operations in Central America generated 9% more income in 2017 versus 2016, hitting US$245 million.

Celsia president Ricardo Sierra added that the company is “very content” with its 2017 financial results, adding that Celsia is now a leader in development of solar-photovoltaic power arrays as well as photovoltaic roofs for commercial operators -- including the Compañia Nacional de Chocolates chocolate factory in Rionegro, just outside Medellin.

Meanwhile, Celsia hailed a recent decision by Colombia’s national power regulator (CREG) that has boosted the financial outlook for thermal power generation -- via a “marginal scarcity price” scheme that allows thermal power generators to tap special revenues mainly generated by hydropower operators. These special revenues enable thermal power generators to survive for months or years until called-upon to boost output during occasional droughts that sap Colombia’s overwhelmingly hydropower-dependent electrical grid.

The company also hailed the recent start-up of a natural gas regasification plant in Cartagena, enabling thermal power generators to tap liquefied natural gas (LNG) imports during periods of peak demand for gas in Colombia.


Medellin business-development agency Agencia de Cooperación e Inversión de Medellín y el Área Metropolitana (ACI) announced January 19 that Switzerland-based multinational consultant Amaris plans to expand its Colombian and South American operations following start-up of new offices at Medellin’s “Ruta N” high-tech hosting center.

“Teamwork between ACI Medellín, Ruta N and ProColombia, managed to consolidate the presence of this company in the country,” according to ACI.

Amaris – now operating through 65 offices in 50 countries, with some 700 corporate clients – chose Medellin for expansion because of the “innovative environment offered by the city and its strategic geographical location to support its other offices in the provision of recruitment services, human resources, administration, finance and technical support,” according to ACI.

“Ruta N offered us a pleasant work environment,” added Sara Mondragón, platform manager at Amaris Medellin. “Thanks to the other [high-tech] companies installed [here], we are surrounded by an innovative and challenging environment. We constantly interact with the members of other foreign companies that are part of the Ruta N ecosystem” and “we see an excellent opportunity to benefit from their knowledge of the Colombian market.

“To make this decision we made an analysis of the environment and the quality of life in Latin America. Medellín was the best decision [considering] cost, safety, quality of life, institutional support and human talent,” Mondragón concluded.

Amaris -- founded in Switzerland in 2007 -- specializes in business-administration consulting, information technology, telecommunications, engineering, biotech and pharmaceutical sectors.

“With a turnover of €187 million [US$228 million], its goal in 2018 is to reach a team of 5,000 employees -- currently amounting to 3,650 -- and thus ratify itself as a world leader in independent consulting,” according to the company.


The latest monthly survey of leading banks and financial firms by Colombia’s Banco de la Republica (the national bank) finds that the Colombian peso is likely to trade in a range of COP$2,800 to COP$3,200 per US$1 during 2018, with a foreseen average of COP$2,995/US$1 by year-end.

The monthly survey (see: http://www.banrep.gov.co/es/informe-estadisticas-monetarias-y-cambiarias) of 40 leading private banks, stock analysts, pension funds and international organizations also sees the COP/US dollar trading in roughly the same ranges through 2019 and 2020.

Severe cold weather in the northern hemisphere in recent weeks has boosted global energy demand, with the result that rising oil prices -- traded in US dollars -- habitually weaken relative values of the US dollar against other currencies, including the Colombian peso.

As a result, the Colombian peso has been trading below COP$2,900/US$1 in the last couple of weeks, down from more than COP$3,000/US$1 during several days in Decemeber 2017.

The same survey also found that full-year 2018 inflation is likely to come-in at around 3.47%, with full-year 2019 inflation seen at around 3.33%.

Gross domestic product (“PIB” in Spanish initials) is seen growing by 2.45% this year, according to the average forecast of the surveyed analysts.


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About Medellin Herald

Medellin Herald is a locally produced, English-language news and advisory service uniquely focused upon a more-mature audience of visitors, investors, conference and trade-show attendees, property buyers, expats, retirees, volunteers and nature lovers.

U.S. native Roberto Peckham, who founded Medellin Herald in 2015, has been residing in metro Medellin since 2005 and has traveled regularly and extensively throughout Colombia since 1981.

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