The hurdles Colombia's mining industry needs to overcome

According to the latest Fraser Institute survey, Colombia experienced one of the steepest declines in the policy perception index last year, ranking 83rd out of 86 countries as the fourth least attractive jurisdiction for investment.

A number of factors, including the uncertainty affecting the mining sector, particularly due to regulatory changes and announcements of legal reforms, are among the reasons that led to this decline and are causing concern for the mining industry in the country.

Although Colombia has less than 3% of its territory under title for mining and exploration, the sector is an important contributor to the economy.

According to data from the Colombian mining association, in the last four years the sector has contributed 20tn pesos (almost US$5bn) in royalties, 36tn in taxes and other types of contributions, and 33tn pesos in social investment.

According to experts, Colombia has significant potential, but it has been unable to advance several projects that would increase reserves, including those needed for the energy transition advocated by the government of President Gustavo Petro.

BNamericas spoke to Laura Lizarazo, global risk analyst at consultancy Control Risks, about the problems affecting the industry in Colombia as well as the short-term outlook.

BNamericas: What is the current situation of mining in Colombia?

Lizarazo: The industry is facing an unprecedented situation of extreme regulatory uncertainty.

Gustavo Petro's administration aims to transform the country's mining profile, basically reorienting the industry towards four overriding objectives: energy transition, industrialization, food security to guarantee the availability of fertilizers and their production in the domestic market, and strengthening critical infrastructure through the development of the metallurgical industry and other areas.

This approach would substantially change the regulatory and normative model that has operated in the country’s industry for more than 20 years.

At this time, the mining code, in force since 2001, is the umbrella that regulates the sector and has an openly pro-industry, pro-foreign investment model, with a series of regulatory, administrative and tax incentives.

What the Petro government is trying to do is to turn things around, to transform the rules of the game to guarantee greater state intervention in the industry.

BNamericas: Would the creation of state mining company EcoMinerales support that policy?

Lizarazo: EcoMinerales is part of the intention of the Petro administration to give the State much stronger sovereign intervention capabilities in the exploitation of non-renewable natural resources, including minerals. This would imply a substantial transformation of the rules of the game. To materialize this transformation, the government has proposed a fairly abundant number of legislative initiatives as well as executive actions, including decrees and resolutions that are not subject to legislative review or approval but that together would mean a radical transformation of the sector.

Many of these initiatives are still being debated and defined, which is why the levels of regulatory uncertainty facing the sector are extremely high.

There is no clarity regarding the concrete form in which these regulatory changes will materialize and, therefore, the sector is not clear regarding the direction that the industry will take during the remainder of the Petro administration, until 2026.

BNamericas: The government is betting on the energy transition and for this, minerals are needed, especially copper.

Lizarazo: There are elements of tension between the Petro administration's vision for transforming the industry and the way to materialize the change.

However, the exploitation of strategic minerals such as copper, platinum and gold is a priority on the public policy agenda of this administration.

Although, for example, the licensing processes have slowed down under this government, there are some projects in line to begin prefeasibility processes, license application processes, and this is one of the areas in which some investment opportunities have opened up for the private sector, even under this panorama of such strong regulatory uncertainty.

BNamericas: But there is no progress with mining projects in Colombia.

Lizarazo: There are modest levels of expectations and enthusiasm regarding the sector, as far as strategic minerals are concerned.

Colombia does not have giant copper deposits, but there are significant prospects and there is a georeferencing that has already prioritized certain areas with potential for this mineral. This overlaps with areas where there are gold deposits.

There is a range of opportunities in medium-scale projects that, although still incipient, if accompanied by public policy decisions and high-level political support can surely advance during the rest of this administration.

Although this administration has been characterized by rhetoric that would seem at first to be anti-mining, it does not fully correspond to the reality of public policies of the administration, which advocates for a different model of the industry in which environmental protection and much stricter standards of compliance and integrity in environmental, social and governance matters are prioritized.

BNamericas: Demanding higher and better standards is good for the industry, why is this a problem?

Lizarazo: The real problem is the institutionality in Colombia, not only that which governs the mining sector, but also regulatory decisions regarding oversight and control of compliance with these much stricter standards, since they have extremely limited capacities.

One thing is the role and another is the ability to implement what the rules dictate. There are significant deficiencies in terms of inter-institutional or inter-agency coordination at the national level and also at the territorial level.

It’s very difficult, for example, for the Colombian State to guarantee or deploy oversight, control and compliance capabilities in territories where the State’s capacity and presence are extremely limited.

BNamericas: Which areas specifically?

Lizarazo: These are precisely the areas that have mining potential. For example, the department of Chocó has important gold deposits, and also copper. Also Antioquia, Nariño, Cauca, where there is another underlying structural problem that mining faces, not only this administration, since it is a historical problem. The governance of many of these territories is not exercised by the State, but by illegal actors, whether purely criminal or subversive actors, such as guerrillas.

There is an important challenge that the State, not just the Petro administration, has with respect to the mining industry.

BNamericas: What can the mining industry expect this year and by the end of the Petro administration?

Lizarazo: Basically, what we have seen so far: high levels of regulatory uncertainty, occasional speeches that might seem radical or confusing regarding the development of the industry, lack of clarity regarding the direction that this administration wants to take.

This government does not have political capital, a system of alliances in congress, or sufficiently high levels of approval to push forward the huge volume of initiatives it has simultaneously to transform so many fronts of the country's productive system. Therefore, many of these initiatives will remain half-finished or barely on paper.

We’ll see the industry continue to face very high levels of regulatory uncertainty, with mixed signals regarding whether investment is desirable.

BNamericas: Are community demands and opposition to extractive projects another challenge for the sector?

Lizarazo: We must not lose sight of the fact that all these processes and debates on the profile, nature, impact and relevance of extractive activities in general are not exclusive to Colombia and not to the administration of President Petro.

These are debates that societies around the world are having, even though they are not necessarily left-wing governments.

In Colombia there are historical demands and struggles by communities regarding extractive activities throughout the country, and these demands will persist, whether Petro is in power or not.

These are challenges that affect the mining industry, not only in Colombia, but in the region and the world in general, with specific conditions in each market.

BNamericas: Is the coal sector one of the most affected by current uncertainty and policies?

Lizarazo: Open-pit coal mining is the sector of the mining industry that has suffered the most under this administration. The new mining law, for example, will completely ban open-pit mining, so this sector faces a discouraging outlook.

However, there are other segments of the industry that have development opportunities, especially those of strategic minerals.

The industry faces an uncertain outlook, but with very specific sectoral opportunities and also general challenges that impact the different segments in different ways.

BNamericas: But there are several mining projects at a standstill, for example, due to a lack of environmental licenses.

Lizarazo: Regarding policy decisions that depend exclusively on the executive, such as environmental licenses, the results will vary depending on the profile of the project.

We cannot speak of comprehensive and consistent government support for the country's mining industry. Support will be on a case-by-case basis, depending on the profile of the project, its potential operational footprint, its geographic location, among other factors.

BNamericas: Has uncertainty affected mining investments?

Lizarazo: There is a slowdown in investments.

According to figures from [statistics agency] DANE and the central bank, in recent years there has been a significant drop in investment levels in the sector, and this is linked to the turbulent political environment and the turbulent regulatory developments for the sector.

The mining industry says there are no conditions of legal security to continue investing if this government intends to change the rules of the game.

There is a much weaker appetite from investors in the country's mining sector.

According to the latest survey by Brújula Minera, a couple of weeks ago 49% of executives from the main mining companies surveyed said they have no intention of increasing their operations in the country, when about four years ago that percentage was around 27%.

The weaker appetite for investing in the mining industry goes hand in hand with the atmosphere of uncertainty and sometimes confusing rhetoric of President Petro.