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.

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Legislation Required to Implement CAFTA-DR in Costa Rica-
THE PARALLEL or IMPLEMENTATION AGENDA
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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.

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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.

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THE STATUS OF THE LAW TO STRENGTHEN AND MODERNIZE ICE
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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

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COMMENT
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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