PRESIDENT'S PARTY PUBLICLY SUPPORTS CAFTA-DR, BUT

UNCLAS SECTION 01 OF 03 SAN JOSE 001828 SIPDIS SENSITIVE WHA/CEN EB FOR WCRAFT, BLAMPRON E FOR DEDWARDS WHA/EPSC FOR KURS, LGUMBINER STATE PASS TO USTR FOR RVARGO, CPADILLA, AMALITO E.O. 12958: N/A TAGS: ETRD ECPS ECON PREL PGOV SOCI CS SUBJECT: PRESIDENT'S PARTY PUBLICLY SUPPORTS CAFTA-DR, BUT OUTLOOK FOR NECESSARY IMPLEMENTATION LEGISLATION UNCLEAR REF: (A) SAN JOSE 01774 (B) SAN JOSE 01639 ¶1. (U) Summary. Members of President Pacheco's Social Christian Unity Party (PUSC) are publicly urging him to send the United States-Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) to the Legislative Assembly as soon as possible, despite the continued failure to pass the Fiscal Reform bill (Note: President Pacheco has made passage of fiscal reform a condition for his sending CAFTA- DR to the Assembly for ratification [Ref A]). PUSC representatives also requested that the Administration send the necessary CAFTA-DR-related legislation; including bills to allow competition in the telecommunications and insurance markets. Currently, these industries are run by the state-owned monopolies, the Costa Rican Institute of Electricity (ICE) and the National Institute of Insurance (INS),respectively. The gradual opening of these markets to competition is required to implement the trade agreement. Other legislation, although not required to implement CAFTA-DR, is necessary to increase the global competitiveness of Costa Rican companies. End Summary ¶2. (U) After meeting on August 8, 2005, the PUSC Assembly members (deputies) officially gave a "public vote of support" to CAFTA-DR. They also urged the President to send the trade agreement and information about the complementary agenda to the Assembly. "We have always been respectful of the Administration and its decisions, but we believe that it is necessary to be able to move forward on this issue in Congress," said Lillian Salas, PUSC deputy and party leader, after the meeting with her fellow deputies. The PUSC deputies also want to discuss the legislative projects related to implementation of CAFTA-DR, such as those opening the telecommunications and insurance markets to competition. -------------- -------------- Legislation Required to Implement CAFTA-DR in Costa Rica- THE PARALLEL or IMPLEMENTATION AGENDA -------------- -------------- ¶3. (U) The proposed legislation that will open the telecommunications and insurance markets to competition as required by CAFTA-DR has not yet been sent to the Assembly. The Administration has referred to these projects as the "parallel agenda" or the "implementation agenda" to CAFTA- DR - that legislation that must be completed to comply with the requirements of CAFTA-DR. Based on various sources, including personnel within the GOCR, the telecommunications legislation, known as the "Telecommunications Act," is being managed by the Ministries of Foreign Trade (COMEX) and Finance with input from the various interested parties such as ICE. Reportedly, neither legislative project has been finalized by the Administration. Gilberto Barrantes, the Economy Minister and new Coordinator of the President's Economic Council, stated that he expects a first draft of the Telecommunications Act this week. However, he called attention to the importance of moving forward on the proposed Law to Strengthen and Modernize ICE (see paragraph 7). ¶4. (U) One month ago, Finance Vice Minister David Fuentes told Econoff that the insurance and telecommunications legislation would be sent to the Assembly by the end of August 2005. However, lack of progress on the Telecommunications Act has caused a delay. Finance Minister Federico Carrillo stated that he expects the telecommunications legislation to be presented in November and maintains that the insurance legislation will be ready in August. COMMENT: It is clear that the telecommunications legislation is more complex and politically sensitive than the insurance legislation. However, the need to proceed in the telecommunications arena is, arguably, more urgent because, under CAFTA-DR, the opening of the telecommunications market starts on January 1, 2006, while January 1, 2008 marks the opening of the insurance market. END COMMENT. -------------- -- Legislation to Improve Global Competitiveness - THE COMPLEMENTARY AGENDA -------------- -- ¶5. (U) Other legislation that is not required to implement CAFTA-DR, but is necessary to ensure Costa Rica can take advantage of the opportunities created by the agreement, is referred to as the "complementary agenda" (Ref B). To date, we have been told by the GOCR that the complementary agenda will focus on upgrading infrastructure (mostly rural roads and highways) and increasing the competitiveness of small- and medium-size enterprises. Costa Rica has arranged for approximately USD 209 million of funding for these initiatives with the majority of the resources being provided by a USD 117 million loan from the Inter-American Development Bank (IDB). ¶6. (U) Other smaller loans will be provided by the World Bank and the Central American Bank of Economic Integration (BCIE) to fund education projects and improve customs systems, respectively (Ref B). COMMENT: Legislative Assembly approval of these loans is necessary prior to disbursal of funds. To date, no legislation has been provided to the Assembly on any of these loans. However, based on information provided to Econoff, the necessary legislation should be sent to the Assembly within the next two months. END COMMENT. -------------- -------------- THE STATUS OF THE LAW TO STRENGTHEN AND MODERNIZE ICE -------------- -------------- ¶7. (U) At the time that Costa Rican negotiators signed CAFTA-DR in May 2004, it was assumed and reflected in the text of the agreement that Costa Rica would pass a Law to Strengthen and Modernize ICE by December 31, 2004. The Costa Rican negotiators inserted this requirement into the agreement to enact a law to give ICE sufficient autonomy and resources to be able to compete against potential competitors in an open telecommunications market. The proposed law was introduced in the Assembly prior to the signing of CAFTA-DR and was referred for review to the Assembly's Special Mixed Commission for ICE, consisting of deputies from various parties as well as consultants from inside and outside the GOCR. This Commission is currently studying the bill and deciding whether it should be referred to the Assembly floor for a vote. ¶8. (U) The bill has been stuck in the Commission because of difficulties surrounding the issues of: (1) distribution of spectrum frequencies; (2) the amount of taxes, if any, that ICE will pay to the GOCR; and (3) how the rights to concessions for use of natural resources will be handled. There are some members of this commission, such as Gloria Valerin, a PUSC deputy and President of the Special Mixed Commission, who would like the bill passed in its current form, which would give ICE unprecedented autonomy and special treatment such as rights to most, if not all, of the spectrum of mobile telecommunications frequencies and exemption from paying taxes. There are other members of the Commission, such as Libertarian Movement deputy Federico Malavassi, who are reluctant to give ICE such special treatment, which they believe would reduce the likelihood of any real competition in telecommunications. COMMENT: Eladio Gonzalez, Adviser to the Commission and a legal expert who wrote the legislation, told Econoff that if the Telecommunications Act is completed correctly, i.e., a clear regulatory framework is constructed and a strong and unbiased regulator is established, the passage of the ICE Modernization bill would not conflict with the requirements of CAFTA-DR. END COMMENT. ¶9. (U) Valerin, stated, "We will not give an inch. If they want the complementary agenda, they should approve the strengthening (of ICE). We are not going to permit the weakening of ICE in this project." COMMENT: Post believes that the proposed law in its current form and depending on the final Telecommunications Law that will be passed, may result in the inability of Costa Rica to comply with the equal treatment provisions required by CAFTA-DR. The parts of the bill that may cause these problems coincide with those issues already identified in the Mixed Commission's review. END COMMENT -------------- COMMENT -------------- ¶10. (SBU) One key aspect of the legislative projects associated with the parallel or implementation agenda should be the creation of a new entity or strengthening of an existing organization that is independent and capable of competently regulating the telecommunications and insurance industries. This is important to ensure that all potential competitors are treated equally and have the same opportunities to access the markets, as required by the spirit and letter of CAFTA-DR. This is no small task since the GOCR has very little experience in regulating competitive markets, and the most likely regulator, the Regulatory Authority of Public Services (ARESEP),is not considered effective in regulating much simpler sectors. In addition, ARESEP has its hands full with regulating everything from taxi fares to gasoline prices. ¶11. (SBU) The pressure to send CAFTA-DR and all related legislation required for its implementation is mounting, and it is now clear that if CAFTA-DR were sent to the Assembly today, there would be enough votes to pass it. However, many knowledgeable people doubt whether the Assembly has the ability to create the necessary legislation to fulfill commitments made in the agreement (especially in the telecommunications sector) or the commitment to try to do so in a timely manner. KAPLAN