Colombia: Extractives for Prosperity May 2014 Colombia Extractives for Prosperity Colombia: Extractives for Prosperity Capstone Report, School of International and Public Affairs, Columbia University Valle Avilés Pinedo Samantha Holt Michael Bellanton Michael Bellantoni Kine Martinussen Fernando Peinado Gustavo Rojas German Cash Daniel Mendoza Gustavo Rojas Maneesha Shrivastava Federico Sersale Alejandra Espinosa Nicholas Nassar Federico Sersale Carolyn Westeröd1 Supervised by Professor Jenik Radon, Esq. Colombia: Extractives for Prosperity May 2014 Acknowledgments The Columbia University School of International and Public Affairs’ Colombia Capstone group would like to acknowledge the many individuals and organizations that provided invaluable assistance in creating this report: - Professor Jenik Radon, the capstone advisor, for his mentorship and outstanding wisdom. - Fundacion Foro Nacional por Colombia, for helping plan our field trip to Colombia, and for their wisdom and valuable guidance through the development of this project. - Columbia University SIPA, for providing financial support for this Project. - The over 50 interviewees from government organizations, civil society, the oil industry, the mining industry, environmental specialists, academia, and elsewhere, who generously offered their time to meet with us in Colombia and New York. Their guidance was invaluable for the development of this Project. - The authors of the other reports in the Columbia University, School of International and Public Affairs Natural Resources: Potentials and Challenges series: o Oil: Uganda’s Opportunity for Prosperity o Mozambique: Mobilizing Extractive Resources for Development o Tanzania: Harnessing Resource Wealth for Sustainable Development 2 Colombia: Extractives for Prosperity May 2014 Table of Contents Abbreviations .................................................................................................................................. 8 Executive Summary ....................................................................................................................... 10 The Economic and Commercial Implications of the Extractive Industry in Colombia....... 10 Bilateral Investment, Legal Aspects ................................................................................... 11 Promoting Good Governance ............................................................................................ 12 Media, Transparency and Accountability .......................................................................... 12 The Social Impacts of the Extractive Industries in Colombia ............................................ 12 Managing Colombia’s Rich Environmental Resources ...................................................... 13 Introduction ................................................................................................................................... 14 Context and Objective ............................................................................................................... 14 Methodology ............................................................................................................................. 16 Report Structure ........................................................................................................................ 16 The Economic and Commercial Implications of the Extractive Industry in Colombia....... 16 Promoting Good Governance ............................................................................................ 17 The Social Impacts of the Extractive Industries in Colombia ............................................ 17 Media, Transparency, and Accountability ......................................................................... 17 Managing Colombia’s Rich Environmental Resources ...................................................... 17 1 The Economic Implications of the Extractive Industry in Colombia ....................................... 19 1.1 The Colombian Economy ................................................................................................. 19 Macroeconomy.................................................................................................................. 19 Better Understanding the Effects of the Extractive Industry on the Economy ................. 23 1.2 Hydrocarbon Exploration and Development ................................................................... 25 1.2.1 Crude Oil Overview ................................................................................................... 25 1.2.2 Global Crude Oil Market Development ..................................................................... 27 Crude Oil Demand ............................................................................................................. 27 Crude Oil Supply ................................................................................................................ 28 Crude Oil Prices ................................................................................................................. 29 1.2.3 Natural Gas Overview ............................................................................................... 30 1.2.4 Global Natural Gas Market Development ................................................................. 30 Natural Gas Demand ......................................................................................................... 30 Natural Gas Supply ............................................................................................................ 31 1.3 Mining Exploration and Development ............................................................................. 32 1.3.1 Colombian Coal Overview ......................................................................................... 32 Update Railway Infrastructure .......................................................................................... 33 1.3.2 Global Coal Market Development ............................................................................. 34 Coal Demand ..................................................................................................................... 34 Coal Supply ........................................................................................................................ 35 Coal Prices ......................................................................................................................... 35 1.3.3 Hydrocarbons and Coal in Colombia’s Economy ...................................................... 36 Rents and Revenues .......................................................................................................... 37 2 Fiscal Policy Framework of Colombia: Royalties, Taxes and Windfall Profits ......................... 45 2.1 The Colombian Economy and the Resource Curse .......................................................... 45 2.2 Symptoms of the Resource Curse .................................................................................... 47 3 Colombia: Extractives for Prosperity May 2014 2.3 Recent Government Reform Addressing the Symptoms of the Resource Curse ............ 49 2.3.1 Royalty Reform of 2011 ............................................................................................ 50 Improve Royalty Revenue Transparency ........................................................................... 50 2.3.2 Tax Reform of 2012 ................................................................................................... 51 2.3.3 Fiscal Rule of 2011 .................................................................................................... 54 Managing the Economy ..................................................................................................... 55 2.4 Generating Revenue for Future Generations .................................................................. 56 Implement a Wind Fall Tax ................................................................................................ 56 The Savings and Stabilization Fund ................................................................................... 57 The Pension Fund .............................................................................................................. 57 The Science and Technology Fund .................................................................................... 58 3 Bilateral Investment, Legal Aspects ........................................................................................ 64 3.1 Context - Bilateral Investment Treaties ........................................................................... 64 3.1.1 What is a Bilateral Investment Treaty ....................................................................... 64 3.2 Colombia and Bilateral Investment Treaties .................................................................... 65 3.2.1 Define the Expropriation Clause ............................................................................... 65 3.2.2 The Fair and Equitable Treatment Clause ................................................................. 66 3.3 Bilateral Investment Treaties and the Environment ........................................................ 67 3.3.1 Include Environmental Provisions in the BITs ........................................................... 67 The Importance of Upholding Public Policy Interests in the Preamble of the BITs .......... 67 3.3.2 ......................................................................................................................................