US embassy cable - 05BOGOTA2561

UNCLAS SECTION 01 OF 02 BOGOTA 002561 
 
SIPDIS 
 
STATE FOR USTR - TIFFANY SMITH, COMMERCE FOR ITA/MAC/WH AND 
COMPLIANCE CENTER 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, KIPR, CO 
SUBJECT: REGIONAL COLOMBIAN LIQUOR MONOPOLIES TARGET EACH 
OTHER 
 
1. Summary. Emboffs made a recent visit to one of Colombia's 
regional "licoreras" to learn how these publicly held 
monopolies manufacture and distribute Colombia's favorite 
hard liquors, aguardiente (cane liquor) and rum.  Emboffs 
also held a follow on meeting with the Executive Director of 
the National Association of Colombian Licoreras.  These 
meetings confirmed many of the suspicions of American liquor 
exporters about the publicly held monopolies, and shed new 
light on the complex political and economic forces shaping 
the regulatory regime of liquor importation into Colombia. 
End Summary. 
 
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Visit to the Licorera 
--------------------- 
 
2.  In late February, emboffs visited the "Empresa de Licores 
de Cundinamarca," the regional liquor monopoly for the 
department immediately surrounding and including Bogota.  The 
visit to the physical production plant of Cundinamarca's 
Nectar Aquardiente and Ron de Santa Fe provided a fine 
display of the inefficient practices of a publicly held 
monopoly.  For instance, the Executive Director of the 
National Association, Luz Maria Zapata, accompanied emboffs 
and the factory director on the tour.  She mentioned on an 
aside that this was the first time she had seen the recently 
upgraded machinery in the plant.  She asked the plant 
director if their efficiency had improved, to which he 
responded yes.  Zapata then asked how many people had been 
fired as a result, and he responded none.  He said that in 
fact, they were now cleaning the medium sized factory four to 
five times a day with all of the additional labor available. 
 
3.  It became clear in meetings after the factory tour that 
the chiefs of the licorera were not well informed on issues 
much beyond the actual production and distribution of their 
own line of products.  This surprised emboffs, as concerns 
expressed by the Distilled Spirits Council of the United 
States (DISCUS) implied that the licoreras themselves have a 
regulatory role involved in the importation of liquors. 
 
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The Departments Pitted Against Each Other 
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4.  At the follow-on meeting, Zapata was very open, and 
clarified a number of issues.  She noted that the national 
laws concerning liquor importation delegate certain 
authorities to the Departmental Assemblies, not to the 
licorera monopolies.  The rules allow the legislature of one 
department to exclude the liquor of another Colombian 
department.  The decision making on excluding and targeting 
any liquor from outside the department is political--left 
entirely in the hands of the departmental government.  The 
licoreras only produce and market their own product.  The 
regions take great pride in their local liquors, but even 
more importantly, they aggressively protect the market 
against other Colombian departments.  The tax revenues are 
used for social and educational purposes.  In short, the 
discriminatory practices are more than just economic 
protectionism of inefficient monopolies. 
 
5.  The protectionism of the departmental governments also 
varies widely based on the attitudes and needs of the 
population.  The government of Antioquia (which has 
Colombia's second largest city, Medellin) goes to great 
lengths to shut out any outside competition.  Cundinamarca 
(which includes Bogota), on the other hand, is less 
aggressive about closing the market to competition, though 
national laws favor its rum over rival Ron Viejo de Caldas 
(see para 9). 
 
----------------- 
How the Law Works 
----------------- 
 
6.  The two national laws relevant to liquor controls are Law 
223 of 1995 and Law 788 of 2002.  Law 788 supercedes Law 223, 
and contains three noteworthy aspects.  First, it contains 
the devolution of power discussed above--giving the majority 
of power directly to the departmental governments.  For 
example, it gives the departmental governments the authority 
to test alcoholic content, bringing only disputes to the 
national government.  The previous law maintained this 
authority for the national government, giving department 
governments only the authority to request testing when 
desired.  Another example is the addition in Law 788 of the 
authority for departmental governments to place 
discriminatory controls like minimum amounts sold and 
contract taxes (participaciones) on all out of department 
liquors, whether they be of Colombian or foreign origin.  The 
discriminatory concerns that the Distilled Spirits Council of 
the United States (DISCUS) has raised, such as the use of 
strip stamps by the regional governments, and requirements on 
minimum amounts sold, are thus better understood as aimed at 
inter-regional discrimination, not an attempt to specifically 
exclude international goods from the market. 
 
7.  Second, Law 788 gives special status to the islands of 
San Andres and Providencia, Colombia, islands situated off 
the coast of Nicaragua.  They are popular resort destinations 
for Colombians, and constitute their own department.  Law 788 
explicitly exempts this department from consumption taxes on 
foreign liquors that are imported directly to the islands, 
without being nationalized on the mainland.  Colombian 
liquors from other departments are subject to a greatly 
reduced tax, but are not entirely exempt like foreign 
liquors. 
 
8.  Finally, Law 788 imposes a discriminatory consumption tax 
regime based on alcohol content that appears to specifically 
target imports.  The Law 233 tax regime mandated the 
following regime based on alcohol content: 
 
--a 20 percent tax between 2.5 and 15 percent, 
--a 25 percent tax between 15 and 20 percent, 
--a 35 percent tax between 20 and 35 percent, 
--a 40 percent tax in excess of 35 percent. 
 
The new regime under Law 788 mandates this scheme, taxing 
each percentage point of alcohol content the following rate 
in pesos: 
 
--a 110 peso tax between 2.5 and 15 percent, 
--a 180 peso tax between 15 and 35 percent, 
--a 270 peso tax in excess of 35 percent. 
 
9.  Aquardiente has a 29 percent alcohol content and 
Colombian rum has either a 35 percent or 40 percent alcohol 
content depending on the brand.  (Note: Cundinamarca's Ron de 
Santa Fe conveniently has a 35 percent alcohol content, while 
rival Ron Viejo de Caldas has a 40 percent alcohol content. 
End Note.)  Many of the most popular American spirits are 
above the 35 percent margin, and thus subject to a much 
higher tax rate than aquardiente and some of the popular rum 
brands. 
 
----------- 
Conclusions 
----------- 
 
10.  The motivating force behind the monopolistic practices 
in Colombia include regional pride and competition as opposed 
to a concerted effort to guard the national market from 
imports.  Nevertheless, the article in Law 788 that places a 
much higher tax on liquors with content over 35 percent does 
appear to be a direct attempt to exclude foreign goods from 
the market.  Departments like Cundinamarca and San Andres 
Island offer a much better climate for liquor importation 
then departments like Antioquia.  In the case of San Andres, 
the market is purposefully left open by national law, while 
in Cundinamarca, the popular rum brand is protected by the 
national law, but the local legislature has been less prone 
to use tactics like applying minimum amounts sold to protect 
the local market.  The four major licoreras may all be 
inefficiently run monopolies, but they are very popular for 
the tax revenues they generate for social spending in the 
most populous departments.  Executive Director Zapata argued 
Americans should pay more attention to the beer market.  She 
claims that it is not the hard liquor sector that has the 
worst discriminatory practices, but rather the beer sector. 
Unlike hard liquors, she states, it is nearly impossible to 
find imported beer in all of Colombia.  While emboffs have 
found foreign beer available in stores and restaurants, 
American beer is scarce in Colombia. 
WOOD