A recent article by Boston Consulting Group’s Jorge Becerra and Agustín Costa discusses the economic importance of “The Andean Three” – Chile, Colombia and Peru, countries not often on the radar of the legal community. But maybe they should be. While Brazil has been the focus of much of our attention with regards to the Latin American legal market, the combined GDP of these three countries is 65% that of Mexico and is forecast to grow faster than Brazil or Mexico over the next five years.
There are many reasons for this, report Becerra and Costa, including rising foreign direct investment. The Andean Three are also increasingly being viewed as “a new driver of regional dynamism.” They have free trade and investment agreements and last year merged their stock exchanges to create a central bourse, the Integrated Latin American Market (MILA). The MILA has Latin America’s second largest market capitalization after Brazil’s Bovespa, as well as the largest number of listed companies. All three countries have market-friendly democracies that favor investment and free trade and they share strong trade links with the growing economies of Asia. Total trade with Asia amounts to about 10% of the combined GDP of the three nations – about twice as much as the other large economies in Latin America.
Last fall, Colombia’s Free Trade Agreement with the United States was finally approved by the US Congress and is set to take effect next month. The International Trade Commission estimates that the tariff reductions in the Agreement will expand exports of U.S. goods alone by more than $1.1 billion.
Peru’s economy has expanded by an average of 5.6% annually over the past five years; for Chile the rate was 5.1% and in Colombia the rate was 4.6%. Cross-border mergers and acquisitions within the bloc averaged 40 per year from 2007 to 2010, more than double the average from 2003 to 2006. Competition policies and tax rates are also business-friendly, contributing to the attractive environment for investors, especially those in the energy and mining sectors.
Legal Market
Despite the growing importance of the Andean Three in the global economy, international firms have only just begun to enter the local markets.
Major international law firms have a rather small footprint in Colombia, with Baker & McKenzie and Norton Rose being the most visible players. Baker & McKenzie has offices in Chile and Colombia and Norton Rose, thanks to its merger in January with Canada’s Macleod Dixon, has an office in Bogotá, Colombia. Macleod Dixon opened the office in 2010 prompted by major new investments in Colombia, including the acquisition by Ecopetrol, the Colombian state oil company, and Calgary’s Talisman of BP’s Colombian subsidiary. In February, Holland & Knight announced its intent to open a new office in Bogotá, which would make it only the second major U.S.-based law firm to have an office in Colombia. The office, which is expected to open this month, will advise non-Colombian companies that wish to enter the Colombian market as well as Colombian enterprises looking to expand abroad.
In Chile, international firms have also not generally established a presence on the ground. A number of the leading Spanish firms, for example – including Uría & Menéndez, Garrigues, and Cuatrecasas – have established links to local firms in the country. An exception is Baker & McKenzie, whose local firm, Cruzat Ortúzar & Mackenna, is a member of Baker & McKenzie International, a Swiss Verein. But increased interest by foreign investors in the region’s natural resources and demand for power has involved local firms as well as international players in significant transactions. Chile’s largest local firm, Carey y Cia, recently worked with Australian firm Freehills to advise Origin Energy Ltd. regarding its acquisition of 51% of Xstrata Copper’s hydroelectric project developer in Chile, Energia Austral. Origin will initially invest $75 million in project development costs and potentially a further $75 million toward a final investment decision.
In Peru’s small legal market, national firm Muñiz Ramírez is the market leader. And while the market does not attract a significant amount of attention from international firms, there are exceptions. Squire Sanders, for example, in addition to its offices in Rio de Janeiro and the Dominican Republic, has an extensive network of independent local and regional firms across Latin America, including Peru (and also Chile, Colombia and a number of other countries).
As investors consider their strategies in the region, Becerra and Costa offer these guidelines:
- Take advantage of the Andean Three’s economic integration. At the same time, companies should keep in mind that there are still differences among Chile, Colombia, and Peru . . . whether a company is analyzing the case for investing in Colombia, Chile, or Peru, it should take into account the potential to expand into one or both of the other two nations.
- Approach the Andean Three differently from other Latin American markets . . . the open business environment of the three Andean nations increasingly resembles that of developed nations.
- Take advantage of the growing linkages between the Andean Three and Asia . . . Chile, Colombia, and Peru should occupy a privileged spot on the agenda of any truly global company with a clear action plan for the region.
For those law firms crafting a new or expanded strategy for Latin America, this is good advice as well.
Posted by Marianne Purzycki
