Ambassador Sees Positives During Visit To

UNCLAS SECTION 01 OF 03 ASUNCION 000714

SIPDIS

STATE FOR WHA/BSC, WHA/EPSC
STATE PASS TO USTR FOR SCRONIN, LYANG
USAID FOR AA/LAC ADOLFO FRANCO
TREASURY FOR OSIA MAUREEN WAFER
COMMERCE ITA SARAH COOK
NSC FOR MIKE DEMPSEY
SOUTHCOM FOR POLAD
US SOUTHERN COMMAND MIAMI, FLORIDA

E.O. 12958: N/A
TAGS: ECON EAID ETRD EAGR EIND PA
SUBJECT: Ambassador Sees Positives During Visit To
Paraguays Tri-Border Region

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Summary
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1. Ambassador traveled to the departments of Alto Parana,
the capital of which is Ciudad del Este, and Itapua May 14-

15. During his visit, he attended the Santa Rita Expo, a
major regional agricultural fair, and helped to inaugurate
a USAID-funded municipal tax collection system in Ciudad
del Este. He also toured one of the countrys largest
commercial fruit juice factories and met with leaders of
the local business community. With much of the current
focus on the tri-border region concentrated on smuggling
and other illegal activities, this visit highlighted some
of the positive economic developments taking place in the
area. End Summary.

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Fair Scenes
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2. Located approximately one hour southwest of Ciudad del
Este, the farming community of Santa Rita is a center of
soy cultivation in Eastern Paraguay. Its prosperous
commercial farmers, most of them immigrants from
neighboring states in Southern Brazil, began arriving in
the area in the early 1970s. Expo Santa Rita, the areas
annual agricultural fair, is a showcase for both local
companies and internationally known agro-businesses,
including ADM and Cargill. According to the Expos
organizers, roughly 80 percent of Santa Ritas residents
are either Brazilians or of Brazilian descent. This
his
connection manifests itself through music, food, and
language, with Portuguese being the mother tongue of the
vast majority of inhabitants.


3. The fair included exhibits of the latest in world-class
farm machinery, with exhibits from John Deere and New
Holland. Combines, sprayers and tractors, most with
comfortable, air-conditioned cabins and onboard computers,
are a stark contrast to the mule-powered farm implements
still common on small subsistence farms in rural Paraguay.
Aided by technologically advanced implements, the
commercial farmers of Eastern Paraguay are able to reap two
harvests of soy per year, plus an additional crop of winter
wheat. Many commercial farmers also diversify into corn
and other feed crops, providing them with a standard of
living high above the average Paraguayan, and lending towns
like Santa Rita a measure of prosperity.

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Municipal Tax System Reform
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4. Ambassador attended the inauguration of a new tax
administration system powered by software provided to the
municipality of Ciudad del Este (CDE) by USAID. The new
software aided CDE, the second largest municipality in
Paraguay, to reform its chaotic and inefficient tax system.
The tax project, which began in March 2004, has already
helped CDE increase property tax collections by 24 percent,
resulting in USD $400,000 in additional revenue for the
municipality. The tax collection software should augment
the programs effectiveness. Among the more visible signs
of the windfall are public works projects, including the
illumination of one city square, as well as street
improvements. During the inauguration ceremony, CDEs
mayor renewed his promise to use additional funds for
public works programs aimed at improving the quality of
life in the city.

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Private Sector Perspectives
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5. During a private meeting with representatives of the
local business community, Ambassador discussed the current
t
business and regulatory environment in CDE. In contrast to
the exuberant attitude of the mayor and other municipality
officials, the business leaders were cautious in their
optimism. Several shared personal anecdotes of
difficulties navigating local bureaucracy. Local business
leaders are also concerned about the new border area law
that prohibits foreigners from purchasing land within 50-
kilometers of Paraguays borders. The law, aimed mainly at
Brazilian agriculturalists, is also a seen as a political
retaliation against the strict border controls recently
instituted by the Brazilian authorities. The law could
discourage potential foreign investment. It also makes it
difficult for Brazilian farmers to get access to credit for
agro-business, as it calls into question the succession of
land ownership.


6. Despite pessimism from some in the business community,
CDE does seem to be attracting outside investment.
Brazilian firm Mega Plasticos, which has two plants in Sao
Paulo state under the name Industrias de Plasticos Bariri
Ltds., is opening a synthetic leather factory just outside
CDE. According to Embassy sources, the USD 18 million
investment is one of the largest in Paraguay in recent
years. The factory will operate under Paraguays maquila
regulations, allowing it to take advantage of numerous
fiscal exemptions, such as a tax exemption on all
machinery, equipment, parts, raw materials and components.
The plant will also benefit from Paraguays low labor costs
and low electricity tariffs. By satisfying preferential
MERCOSUR rules of origin obtained by Paraguay in 2003, with
which only 40 percent of production costs have to originate
in Paraguay for the products to qualify as MERCOSUR
products (versus 60 percent in other members),the
factorys final products will be exempt from all taxes and
duties in the regional market. Paraguays preferential
status begins to phase out in 2008.


7. Mega Plasticos entry into CDE was facilitated by
ed by
Paraguay Vende, the USAID-funded program whose object is to
create legal jobs in legitimate commercial activities.
Paraguay Vende is providing information and guidance to
Mega Plasticos to reduce transaction costs, including
helping the company sidestep requests for bribes, and to
establish trusting business relationships in Paraguay.
Paraguay Vende has helped Mega Plasticos meet maquila
requirements, provided input during discussions with
national environmental authorities, and has helped with
various administrative matters ranging from security to
utilities. Other Paraguay Vende successes include
increased production and exports by Xtreme, a local wood
molding company, which currently exports all of its
production to the US.

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Labors Fruits
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8. Ambassador concluded his trip by visiting Frutika, a
successful grower, packager, and marketer of fruits and
fruit juices. Frutika owners, Mrs. Beate de Kress, is a
a
German national who arrived in Paraguay with her husband in
the late 1970s. Originally intending to farm soy, the
couple eventually expanded into commercial citrus
production and packaging. Today the Frutika factory
supports several hundred families in the community of
Kressburger. Its production methods and machinery are
world-class, and no part of its produce is wasted. Even
rind and excess pulp, both byproducts of the juice
production process, are sold to local farmers as an
additive for livestock feed.


9. Frutika sells much of its production domestically, but
also exports concentrate to Holland and Korea. The company
continues to expand its product line, with tomatoes its
latest addition. It is in the preliminary stage of growing
strawberries, which it uses to produce jam. Both
production and product development take place under the
watchful eye of Kress, who exhibits tireless drive and
determination, and who has invested both time and money in
product research and technology. In addition to its
impressive production line, Frutikas inventory control is
also world-class, allowing the factory to track each
consignment of juice to its final destination. Frutika has
also entered into a relationship with Paraguay Vende to
identify Brazilian importers interested in its products.

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Comment
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10. With most of the focus on Eastern Paraguay centered on
contraband and other illegal activities, the Ambassadors
recent visit gave a glimpse of the regions potential.
Blessed with rich farmland, a strategic geographic position
and a favorable investment climate for both agriculture and
manufacturing, such potential must be encouraged and
occasionally prodded if it is to provide a lasting
alternative to illegal activity.