What do proposed reforms mean for Colombia’s cannabis growers?

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Discover the good, the bad, and the in between parts of the latest cannabis reforms as CCI speaks to 20 local cannabis executives.

By: Mat Youkee

“I’ve had a lot of worries in my life, most of which never happened,” so wrote Mark Twain about the perils of second-guessing the future. For the last six months, however, Colombia’s licensed producers (LP) of medicinal marijuana and those awaiting their permits, have anticipated bad news in the form of amendments to Decree 613 governing the cannabis industry. Would conservative president Iván Duque turn his back on the growing industry? Would the country’s big weed firms push for higher barriers to entry in order to squeeze out the little guys? Would a solution be found that could unblock the paralyzed licensing process? 

The proposed changes to the decree, published on 28 May, are open to comments and amendments until 17 June.  A week after their publication, CCI hosted 20 local cannabis executives, mainly from small and medium LPs, at our Bogotá offices in order to discuss the document and take the measure of the mood. There was a lot to like about the reform, a number of serious concerns and, as ever, a lack of clarity over the implementation and impact of some of the suggestions. 

THE GOOD: There was much to like in the new reform. The company representatives universally agreed that new regulations requiring background checks on all shareholders owning over 20% of stock were a positive development. The industry still faces reputational challenges, especially given rumors that former black-market operators have invested in the legal cannabis industry. Some went further, believing that all investors should be subject to checks regardless of the size of their holdings. 

Another bit of welcome news was the decision to allow the fabrication of cannabis derivatives in the country’s Zona Francas, free-trade zones that are subject to special tariffs and taxes. Zona Francas, of which there are over 100 in Colombia, operate as regions outside the national customs registry, meaning that companies operating in them do not have to pay import or export duties for machinery and products and are subjected to a 20% corporate tax rate, rather than the standard 33%. 

“There was a lot to like about the reform, a number of serious concerns and, as ever, a lack of clarity over the implementation and impact of some of the suggestions. “

However, existing regulation prevents the export of cannabis flower and the movement of  product from growing fields to a Zona Franca would have technically been considered an export. An adjustment to the decree allowing these movements of products was seen as positive for the industry by 79% of our company representatives. It does raise some questions, however. How will the big, more advanced firms, who have already invested heavily in their own production facilities, react to paying higher tariffs and taxes to those companies now eying the opportunity of establishing in a Zona Franca? And will all LPs – the vast majority of whom also have fabrication licenses – set up their individual facilities in a local Zona Franca, or will this lead to the consolidation of fabrication, with a large, efficient fabricator processing crop from growers on contract? 

Perhaps surprisingly, the majority of respondents (88%) viewed positively the new requirement for CBD cultivators to have in hand either a fabrication license or a contract with a holder of such license. Our interlocutors agreed that the requirement would create a much-needed filter for serious projects and avoid the mass cultivation of CBD plants without a clear path to transformation. Hemp projects, it should be clarified, are not subject to this new rule. 

THE BAD: Four proposed changes were widely viewed as negative for LPs, however. Previously, cultivation and fabrication licenses could be applied for in parallel. Now the government is proposing that cultivation licenses only be granted if the applicant has a signed and approved fabrication contract, rather than just a document proving the fabrication license is in process. There was unanimous agreement that this would cause serious delays to the permitting process. The Ministry of Health, which oversees the granting of fabrication permits, hasn’t issued a new license for over  three months and companies can expect to wait at least a year for these permits to be processed, and only then can they apply for cultivation. 

In addition, the reforms imply higher standards on the type of products LPs produce. Many had planned to produce and sell a crude cannabis oil, leaving other firms to process it into other products. The new rules state that “cannabis derivatives” are not considered “finished products” and cannot be commercialized in Colombia. The accompanying definitions of “finished products” are suitably ambiguous, leaving many local producers concerned that they could fall foul of a strict approach. 

The previous requirement could be seen as an attempt to filter out smaller companies which lack the means to finance high-end processing facilities. And a proposal that companies be obliged to provide five-year plans for cultivation, extraction and export of their crop adds to that feeling. Previously, firms could get by with a one-year plan and a letter of intent from a local or foreign purchaser. Not only does the extension to a five-year plan make it harder to find a relevant customer, the projections themselves are based on too many variables – from crop seasons to delayed permits – to be anything more than a fantastical stab-in-the-dark by LPs. Roughly three quarters of our surveyed companies thought the reform to be negative, although a minority believed it would bring stability to the sector. 

Another problematic proposed reform requires that applications for cultivation licenses be accompanied by a registered strain of cannabis. At the end of last year, hundreds of companies filed registration requests for thousands of marijuana strains with the ICA, a government agriculture agency. Following the application for registration, the ICA must conduct agronomic evaluation testing (PEA) at their cultivation sites. But given the sheer volume of requests, the ICA has not been unable to keep up and to date only 33 strains have been registered, meaning new license applicants have a limited choice of what they can grow and will have to purchase registered strains at unknown prices. Alternatively, they will have to wait until the ICA gets round to conducting a PEA at their site. 

Source: Nostromo Research & Advisory

THE CONFUSED: The two proposed changes to the decree that most divided attendees both pertained to small growers and local communities. The room was split down the middle about whether requirements for a consulta previa (prior consultation) with local communities before developing a project should be considered a positive or neutral reform. It’s fair to say that cannabis entrepreneurs are aware of the need to develop socially-responsible projects in rural areas and to respect the traditions and cultures of nearby indigenous groups. 

Those who viewed the reform positively thought it would establish a “social license” for their project to operate and help ensure good practices throughout the country. However, Colombia’s oil and mining projects have been frequently hindered by the consulta previa process. Often, having conducted a consultation with nearby populations, more distant communities later demand that their views and objections to the new project be heard. Extractive projects must conduct consulta previa with all communities “affected” by their work, but the dimensions of the necessary effect are not specified. This means the courts often side with communities and demand companies conduct further consultations with more distant groups causing delays and, occasionally, opportunities for corruption. 

“Perhaps surprisingly, the majority of respondents (88%) viewed positively the new requirement for CBD cultivators to have in hand either a fabrication license or a contract with a holder of such license.”

A further proposed change demands that fabrication license holders provide technical training for the small growers – from whom existing legislation requires they purchase 10% of their feedstock. In our survey, respondents were split three ways with a roughly equal number viewing the reform as positive, neutral and negative. This split probably reflects a deeper disagreement about the practicality and risks of the existing 10% rule, which the technical support requirement appears to reinforce, rather than the reform itself. During discussions some LPs emphasized the important role that the marijuana industry has in supporting small growers and indigenous groups, rightly pointing out that they had been ignored during the oil and mining booms. Providing support to small growers would ensure local livelihoods and provide higher quality product for fabrication. 

The counter-position does not deny the importance of supporting local communities, but sees the current requirement to source feedstock from local growers as a clumsy mechanism. It’s still far from certain whether there will be enough small growers to supply medium and large growers (of which there are 200 licensed and over 1,000 awaiting permits). Will purchase prices be fixed, or will small-growers be able to sell to the highest bidder? If there is an ample market of buyers, what incentives are there for small growers to invest – in infrastructure, security and growing techniques – in order to meet higher standards? Technical assistance could be an additional cost for companies without a visible benefit, affecting competitiveness. 

Nebulous references to the 10% purchase requirement have been in Colombian marijuana regulations since the early days, and many firms had assumed the clause would be modified or omitted. Instead the technical support proposal appears to reinforce the government’s commitment to the policy. With no projects in commercial production there have been no good-practice standards to follow and the role of small-growers is a topic CCI plans to investigate further in future editions. 

RESPITE: If all this seems a lot to take in, breathe easy. The proposed reforms cannot be enacted before the Ministries of Health, Justice and Agriculture issue their own resolutions to define the country’s cannabis production quantities. That is likely to take some time and is unlikely to come much before the end of the year. Applications for licenses will be subject to the old rules in the meantime. But this will increase the rush for licensing, extends delays and highlights an important omission of the new reform: The new rules give no indication of how the government plans to build the institutional capacity and oversight to grow the industry at its true potential and ensure its rules are adhered to.

Any unanswered questions? Want to know more? Send me an email mat@colcannin.com  or connect with me on twitter @colcannin

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