US embassy cable - 04BOGOTA4839

C O N F I D E N T I A L SECTION 01 OF 03 BOGOTA 004839 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR BENNETT HARMAN 
 
E.O. 12958: DECL: 04/29/2014 
TAGS: ECON, ETRD, CO, FTA 
SUBJECT: ANDEAN FTA ANALYSIS: TELECOMS AND NON-FINANCIAL 
SERVICES IN COLOMBIA 
 
 
Classified By: DCM Milton Drucker for reasons 1.5 (b and d) 
 
1. (C) SUMMARY:  Telecoms and other non-financial services 
account for 59 percent of Colombia's GDP.  Despite two waves 
of liberalization, regulatory barriers still protect 
state-owned service providers from private and foreign firms. 
 Barriers to foreign providers of professional services are 
fairly restrictive, with licensing, residency and nationality 
requirements, as well as ill-defined economic need tests. 
Colombia is likely to continue liberalization and seek 
improvements in services regulation to compensate for market 
failures, externalities and asymmetries.  In the long run, 
services liberalization could increase GDP and national 
welfare by an estimated 10 and 15 percent respectively.  This 
is the fifth in a series of sector briefs developed in 
preparation for the Andean FTA.  The summaries are based on 
in-depth studies which are available from USAID Bogota.  END 
SUMMARY. 
 
Background 
 
4. (U) Services as a percentage of GDP increased from 49 
percent in 1990 to 59 percent in 2001.  Liberalization of 
trade in services, however, has been slower than in goods. 
USAID estimates further liberalization of the sector could 
increase GDP and national welfare by 10 and 15 percent 
respectively.  An initial stage opened the economy to foreign 
investment, allowed private companies to provide public 
infrastructure services like telecommunications (3 percent of 
GDP), energy, gas and water (3 percent of GDP), and 
privatized public companies.  In the latter 1990's, a second 
stage gradually increased competition in these sectors as 
well as in social and government services (21 percent of 
GDP), transportation, and gas.  Foreign investment in 
services was nearly 62 percent of total foreign investment 
over the last decade. 
 
5. (SBU) Barriers to trade in services include quantitative 
restrictions, price controls, discriminatory standards, 
licenses, and discriminatory access to distribution networks. 
  The GOC designs and implements policy and regulates, 
supervises and controls the market. The Colombian 
Constitution does not require regulators to be independent 
from the executive branch in carrying out these functions. 
 
6. (U) Since 1994, Colombia has posted a US$ 1.5 billion 
annual trade deficit in services.  Exports of travel services 
amounted to US$ 962 million in 2002, and include tourism, 
health and education (foreign patients and students treated 
and studying in Colombia).  Exports of transportation and 
communication services together amounted to US$ 800 million 
in 2002.   In 2002, 24,669 temporary workers were allowed 
from Colombia into the United States, mainly specialists, 
corporate transfers, and recognized athletes and artists. 
Likewise, 67,544 business people entered the United States in 
2002. 
 
Barriers to Professional Services 
 
7. (U) Professional services are the most restricted. 
Residency requirements restrict foreign trade of such 
services, while accreditation and license requirements 
restrict temporary professional services.  Economic needs 
tests are required when foreign professionals operate 
temporarily.  These restrictions apply to accounting, 
bookkeeping, auditing, architecture, engineering, urban 
planning, medical and dental services, among others. 
Accreditation and degree homologation mechanisms, as well as 
regulations that restrict prices, income, and advertising 
also inhibit trade. Colombia argues that regulation is 
necessary to counter asymmetric market information and 
externalities. 
 
8. (U) Health service providers must register with regulatory 
authorities, which impose strict parameters on costs and 
service quality.  Foreign educational institutions must have 
resident status before operating.  Legal services are limited 
to firms licensed under Colombian law.  Foreign law firms can 
operate only under joint venture and under the licenses of 
Colombian lawyers.  A commercial presence is required for 
information-processing services.  Tourism services must be 
registered and licensed by authorities. 
Barriers to Telecommunications Services 
 
9. (SBU) Colombian telecom reforms have sought to promote 
competition in an existing environment of natural monopoly, 
and with some success.  Reforms have eased access to 
essential networks for market providers.  However the tariff 
regime continues to cross-subsidize local telephony with 
higher long-distance fees, and higher income households 
subsidize telephone services for lower income households. 
Cross-subsidies control prices and limit competition, 
creating an important market entry cost.  Local prices are 25 
percent under the international average and long-distance 35 
percent above average, creating distortions that inhibit the 
entrance of new competitors.  Altogether, Colombia's 
regulatory structure produces an estimated 34 percent 
over-cost in telecommunications. 
10. (U) Other barriers to telecommunications services include 
commercial presence and licensing requirements for both 
foreign and local operators.  The Telecommunications 
Regulatory Commission (CRT) may establish economic need tests 
for the approval of licenses for the provision of voice, 
facsimile, e-mail, and other value-aggregate services. 
However, parameters that determine "economic need tests" are 
not clearly established. 
 
11. (U) Most restrictions on foreign telecom services have 
been lifted, though concessions are only granted to firms 
legally set-up in Colombia.  Foreign investment is allowed in 
telecommunications firms, but under WTO rules Colombia limits 
foreign investment in these firms based on an economic needs 
test.  Colombia permits 100 percent foreign ownership of 
telecoms, but high license fees form a significant barrier to 
entry. A prohibition on long-distance "call-back" services is 
the only specific discrimination against foreign providers. 
 
Barriers to Energy Services 
 
12. (C) Energy generation was liberalized through 
privatization in the 1990's.  However, energy distribution 
and transmission are less open due to crossed subsidies, the 
deterioration of state-owned distributors, and decreasing 
demand. Under the current price structure, higher-income 
households and industrial and commercial consumers provide a 
20 percent subsidy for poor households, limiting competition 
and creating distortions. As a consequence, household energy 
consumption is 10 percent larger than industrial energy 
consumption. Although the cost of energy generation is lower 
in Colombia than in most Latin American countries, prices for 
industrial energy consumption are on average 30 percent 
higher than in those countries. Additionally, the strong 
dependency of regulatory entities (CREG) on the government 
results in a lack of incentives to open to competition that 
would affect the already deteriorated public distribution 
companies. 
 
Barriers to Audiovisual, Television and Radio Services 
 
13. (C) The independent National TV Commission (CNTV) 
formulates TV policy, regulates market structure, and 
oversees content. CNTV has created a model of open TV where 
private programmers use state-owned channels under exclusive 
agreement.  CNTV gives concessions for cable and subscription 
TV under regional licensing agreements, but new licenses are 
subject to economic need tests, which are not clearly defined 
and lack transparency.  CNTV requires 50 percent national 
content for programming and 70 percent for prime time, while 
foreign artists in national productions are limited to 10 
percent of staring roles. CNTV is widely considered one of 
the GOC's more bureaucratic institutions. 
 
14. (U) Radio broadcasting is licensed through auctions to 
private operators. The Communications Ministry licenses, 
regulates, and oversees radio stations, and operates the 
national radio broadcast station.  Colombia restricts foreign 
participation in state TV (40 percent) and in radio stations 
(25 percent).  All films are taxed to finance the national 
Cinema Development Fund, which promotes national film 
productions. 
 
Barriers to Transportation Services 
 
15. (U) In spite of liberalizing reforms, maritime and air 
cabotage services (transport between two points in a country) 
remain strongly restricted, as are transborder transportation 
services. Land cargo transport companies must have a 
commercial presence in the country and be licensed. 
Likewise, only Colombian residents can provide domestic or 
international air transport.  Colombia's law permits 
international cabotage companies to provide services "only 
when there is no national capacity to provide the service." 
Maritime companies may not lease foreign flagged vessels, 
unless they show there are no Colombian vessels that meet 
their needs. Colombian nationals must own at least 60 percent 
of maritime agencies.  The captain, officers, and 80 percent 
of the crew of Colombian vessels must be Colombians.  This 
also applies to foreign vessels that stay in Colombian waters 
longer than six months. All airlines are obliged to hire 90 
percent Colombian personnel, and Colombian pilots must 
command commercial flights. 
 
16. (C) Getting to the Table:  What GOC Needs to Do 
 
A. Provide Colombian supervisory authorities with greater 
independence from policy-making institutions to avoid the use 
of regulatory barriers to protect state-owned companies. 
Without greater independence, supervisory authorities will 
continue to lack legal, budgetary and technical autonomy, and 
the GOC and Congress will continue to interfere in their 
regulatory decisions. 
 
B. Unify regulatory oversight to avoid inefficiency.  The 
Superintendent of Industry and Commerce oversees all sectors 
but energy utilities, which are inefficiently overseen by the 
Public Services Superintendent. 
 
C. Determine clear regulatory parameters of economic need 
tests, which are an instrument that limit competition in 
various sectors. 
 
17. (C) Overall GOC Demands on Services 
 
A. Colombia will press the U.S. to ease visa restrictions for 
workers and students seeking U.S. educational services. Visa 
policy is non-negotiable, but the increase in trade will 
prompt increased legitimate travel plans and therefore more 
visas. GOC would gain political cover with estimates of 
increased travel for legitimate business. 
 
B. Similarly, because small and medium enterprises cannot 
afford a permanent presence abroad, the GOC may press for 
improved access of temporary workers to the U.S. 
 
18 (C) GOC Positions on Services Products 
 
A. The GOC hopes to improve accreditation under reciprocal 
agreements.  However in Colombia professional accreditation 
is granted by the government, but in the U.S. it is the role 
of professional associations.  The GOC might agree to define 
economic need tests for the temporary movement of 
professionals. 
 
B. Colombia may lift restrictions on transportation and 
cabotage services under a condition of reciprocity, though 
9/11 related policies may hamper liberalization. 
 
C. Colombia might replace price-controlling and 
competition-limiting cross-subsidies in favor of direct 
subsidies to guarantee universal coverage for certain 
services. However, fiscal difficulties limit the GOC's 
negotiating capacity. 
 
D. GOC may liberalize the energy market, but this would 
require privatizing state-owned energy distributors that have 
largely failed, but have been protected by the CREG through 
biased regulation. 
WOOD