Expert Opinion: The Special Hydrocarbon Exchange Regime—Innovative or Outdated?

The increasing currency flows from foreign investment directed towards the hydrocarbon sector, have been stimulated largely due to laws that Colombia’s national government has implemented in order to stimulate investment in this sector. The time has come to discuss and to analyze the regulatory structure that governs the special exchange rate regime in Colombia, and the rules of the game offered to this special area of the economy, with the aim of creating a more dynamic investment climate and bringing the exchange rules up to date.

It is public knowledge that most oil exploration firms operating in the country are of foreign origin. Their activities take place in the country by means of affiliates or subsidiaries that are domestically incorporated as branches of foreign companies operating under commercial law and with the approval of the Ministry of Mines and Energy.

In this context, the major issue for debate in the past months between the Bank of The Republic, the entity that regulates  exchange rate activities; and the petroleum sector, has been the legal and accounting inability to settle financing transactions between the aforementioned subsidiaries and their foreign headquarters, and foreign debts, as the Colombian special exchange regime does not make accommodations for such transactions when subsidiaries are exclusively designed to operate by means of assets initially capitalized by the parent company. Supplementary investments (ISCA), at the end of the fiscal year or in any subsequent fiscal year must be liquidated through the same special exchange regime that was used to bring the assets in, meaning the loss of “derechos cambiarios” (exchange rate advantage) from the income generated from the credit instrument or foreign sourced investment In other words, these resources enter the country but then may never leave, until the foreign company subsidiary is actually liquidated.

It has been argued with some reason, by various experts in this field, that the Colombian Exchange Regime manifests itself in two different ways. The general regime that applies to all those residents or non residents that exchange currency through the open market; and the Special Exchange Regime which applies to companies in the hydrocarbon and mining sectors. Due to the special emphasis and protection that the Colombian government has historically wanted to provide this strategic sector, the advantages and disadvantages of being in a special regime exist where on one hand there are true concessions to facilitate operations, but on the other hand there are some restrictions that can negatively affect the progress of the sector. Operators considering their financial needs may decide to waive the special exchange rate regime and all its pertinent benefits, and elect into the (normal) domestic regime when the disadvantages out way the benefits.

It is true that Colombia has maintained this special regime for the hydrocarbon sector for more than 40 years, but the Colombian economy has evolved and the petroleum industry has completely transformed, due primarily to the progress and advancement in the financial system. Therefore, the questions that people interested in these matters are asking are: Will a special exchange rate regime still be necessary in a regulatory system that offers several alternatives to manage exchange rate operations in the hydrocarbon business? Or will it be necessary to revise the general exchange rate structure and unify the rules across all sectors? The ball is in play, and the players are the national government through the Bank of The Republic, and the petroleum sector.

This analysis piece was submitted by Luis Enrique Buitrago Garzón, who warrants that he retains the copyright and sole responsibility for its content. It does not reflect the position or opinion of Finance Colombia. Mr. Buitrago’s contact information is below.