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Colombia's Drinks Industry Faces Free Market Challenges
Impact International / May 15, 1996

By Larry Luxner

BOGOTA -- Colombian legislators are now debating a bill that would preserve the government's traditional monopoly over liquor production, but only if distilleries maintain acceptable levels of efficiency and productivity.

Otherwise, production of aguardiente -- Colombia's national drink -- and other popular spirits would pass to the private sector.

The bill, known officially as the Ley de Regimen Propio de Monopolios, is supported by Enrique Guío Reyes, executive president of the Colombian Liquor Industry Association (ACIL in Spanish), which represents all 14 state-owned liquor factories.

"We're working with the government on this law right now," said Guío, interviewed last month in Bogotá. "It provides a way to measure efficiency. If these distilleries don't become more efficient, they'll be privatized."

Of Colombia's 33 departments or states, 14 have their own liquor factories, producing mainly aguardiente, an unaged spirit distilled from sugar-cane molasses and popular among lower- and middle-income Colombians. The price of a 750-ml bottle of aguardiente is fixed by the government at 4,800 pesos (around $4.80). Rum, by compari-son, costs around 6,000 pesos ($6.00) and its price is not regulated by the government.

In 1995, national production of aguardiente came to around 133 million bottles. About 90% of that was produced by the four biggest distilleries: Fábrica de Licores de Antioquia (FLA); Empresas de Licores de Cundinimarca (ELC); Industria Licorera de Caldas (ILC) and Industria de Licores del Valle (ILV).

The largest by far was FLA, whose plant in Medellín produced 64.6 million units of Aguardiente Antioqueño, Ron Medellín and other spirits -- about 75% of it for consumers in the department of Antioquia, and the remaining 25% for customers in other departments and in Peru, the United States and the Netherlands Antilles.

Daniel Villegas Díaz, manager of FLA and a former senator in the Conservative party, says last year's sales came to $185 million, of which an astounding $150 million was clear profit. This year, the plant -- which employs 580 people and is one of Medellín's largest employers -- expects to sell 66 million bottles worth $235 million.

Francisco Piedrahita Echeverri, executive president of the Medellín Chamber of Commerce, says Colombian law permits the importation but not the production of hard spirits. Originally viewed as a way to generate revenue for the departments and protect public health by guaranteeing production standards, traditional state ownership of liquor factories is strongly supported by departmental governments, many of which fear a sudden loss of pesos if the distilleries are privatized.

"The liquor industry has always been a state monopoly. It's a source of revenue," says Piedrahita. "To produce aguardiente costs very little, and they have a very high profit margin. What they make pays the salaries of teachers in Medellín and other cities."

Colombia's second-largest liquor producer is ELC, which distills and bottles Nectar aguardiente for Bogotá and other cities in the department of Cundinimarca. The company, founded in 1905, has 350 employees. This year, production will hit 32.4 million bottles, of which 92% will be Nectar aguardiente and the remaining 8% Rum Vero, a product slated for eventual export to the United States, Germany and Central America.

Héctor Enrique León, ELC's commercial adviser, says that while his own distillery earned $2.2 million last year, most of Colombia's smaller state-owned distilleries -- including those in the outlying departments of Tolima, Cauca, Nariño, Boyacá, Huica, Meta, Santander and Putumayo -- are losing money.

"I don't see any likelihood of the larger companies being privatized in the near future. We're not receiving any subsidies from the government. On the contrary, we're giving money to the state," he said. "On the other hand, the smaller businesses are poorly administered. Many of them are burdened by the high cost of pensions for retired workers."

As a result, he said, whereas ELC can produce a 750-ml bottle of Nectar for between $1.00 and $1.10, the smaller companies -- saddled with too many employees foisted upon them by politicians who reward supporters with government jobs -- might have to spend between $1.60 and $1.80 to produce a similar bottle.

"They're faced with a dilemma -- to keep producing and losing money, or contract with us and improve their profit margins," says León. "We've received requests from three of these companies so far. We can do a year's production for these three in one month."

At ILC, the country's third-largest liquor producer, operations have temporarily been curtailed pending the outcome of an investigation into fraudulent accounting practices and environmental contamination. Similar accusations have been leveled against distilleries in other departments; in 1990, Impact International visited the Tres Esquinas rum plant in Cartagena, which was characterized by filthy working conditions and careless employees. A few months ago, that plant -- which had been shut down for several years -- reopened under new management.

One reason smaller companies are suffering is declining consumption of their chief product: aguardiente. This is partly due to the increasing local presence of four global conglomerates -- United Distillers, Seagram's, Pedro Domecq and International Distillers & Vintners -- and increasing consumption of beer and imported liquor brands. According to a January 1996 article in the newspaper La Republica, "this year will be decisive for those companies linked to the liquor business. The entry of these four multinationals into the Colombian market has sounded an alarm for local importers and state liquor producers."

Guío, former manager of Industria Licorera de Boyacá, agrees. "The [local] liquor industry is basically flat. Tastes are changing. The Colombian consumer is now drinking more beer and imported liquors. One of our objectives is to mount a public-relations campaign to promote national drinks."

To that end, Colombia's biggest aguardiente producers are looking to export their product. In 1990, after overcoming opposition from Puerto Rico and the U.S. Virgin Islands, the Colombian government won the right to export 4,500 products including aguardiente -- though not rum -- to the United States duty-free under the Andean Trade Preference Act (ATPA) as a reward for Colombia's efforts to fight drug trafficking.

On March 1, however, Washington decertified Colombia -- meaning that it now equates Colombia with such pariah nations as Iran, Syria, Burma and Afghanistan when it comes to drug-interdiction efforts. The controversial decision, which came only two weeks after Colombia's prosecutor-general, Alfonso Valdivieso, formally charged President Ernesto Samper with accepting up to $6 million from the Cali cocaine cartel to finance his 1994 election campaign, could have far-reaching implications for the Colombian economy.

With decertification -- which must be approved by Congress within 30 days -- about $70 million in military and family-planning assistance will be automatically cut off. Nevertheless, the Clinton administration could have, but did not, cut off privileges under the ATPA, which saves Colombia between $50 million and $60 million in tariffs every year. It could have also suspended electronic transfers between U.S. and Colombian banks, under one of several measures outlined by the International Emergency Economic Powers Act.

Even so, Guillermo Schafer, general manager of the ELC aguardiente plant in Bogotá, called Washington's ruling "anachronistic" and counter-productive.

"We're not worried about decertification. We export very little," he said. "But for the country, it's very negative."

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