Peru's Investment Climate Statement 2006

UNCLAS LIMA 000117

SIPDIS

SIPDIS

DEPT FOR WHA/AND, WHA/EPSC, EB/IFD/OIA
TREASURY FOR OASIA/INL
COMMERCE FOR 4331/MAC/WH/MCAMERON
DEPT PASS TO USTR

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC USTR PE
SUBJECT: Peru's Investment Climate Statement 2006

REF: 05 State 201904


1. The following is Post's submission of Peru's 2006
Investment Climate Statement, as requested in reftel.

Openness to Foreign Investment
--------------


2. The Peruvian government seeks to attract investment --
both foreign and domestic -- in nearly all sectors of the
economy. In December 2005, Peru concluded negotiations of a
free trade agreement with the United States, which could be
in force by January 2007. A free trade agreement will
enable Peru to attract additional investment by reducing
barriers to trade, establishing proper customs procedures
and improving the dispute settlement process.


3. During the early 1990s, the Peruvian government promoted
economic stabilization and liberalization policies through
the lowering trade barriers, the lifting restrictions on
capital flows and the opening the economy to foreign
investors. Peru experienced marked growth in foreign
investment from 1993-1998. Economic reform and
privatization slowed in the late 1990s however, which led to
a discernible drop in direct and indirect foreign investment
flows. Investment remained stagnant following the collapse
of President Alberto Fujimori's government in November 2000,
and through the period of an interim government and the
election of President Alejandro Toledo in 2001.


4. During his tenure, President Toledo has implemented
several pro-investment policies. In April 2002, the
government established ProInversion, building on the
foundation of COPRI, the privatization agency created in

1991. The new agency seeks to be a "one-stop shop" for
current and potential investors. A difficult political
climate and controversial actions by the judiciary, some
regulatory agencies and Congress, however, led to the
indefinite postponement of some major planned privatizations
in mid-2002. However, since 2004, ProInversion has
successfully completed both concessions and privatizations
of state-owned enterprise and natural resources. In 2004,
Las Bambas, a gold and mining operation, was concessioned to
Xstrata TLC, a Swiss company, for $122 million. In 2005,
Bayovar, a state-owned phosphate plant, was concessioned to
a Brazilian company for more than $300 million. Most
recently, ProInversion granted British-owned Rio Tinto a
concession for the La Granja copper mine for $22 million.
Additionally, in 2004-2005, the Ministry of Mines and
Energy granted 15 concessions to foreign oil exploration
companies, including three U.S. companies, along the
northern coast and in the jungle.


5. In addition to the 1993 Constitution (enacted January 1,
1994),major laws concerning foreign direct investment in
Peru include the Foreign Investment Promotion Law
(Legislative Decree (DL) 662 of September 1991) and the
Framework Law for Private Investment Growth (DL 757 of
November 1991). The two 1991 laws were implemented by
Supreme Decree 162-92-EF (October 1992). Two other
important laws are the Private Investment in State-Owned
Enterprises Promotion Law (DL 674) and the Private
Investment in Public Services Infrastructure Promotion Law
(DL 758). Under Article 63 of the Constitution, "national
and foreign investment are subject to the same terms" and
are permitted in almost all economic sectors.


6. The 1993 Constitution guarantees national treatment for
foreign investors. The Peruvian government does not screen
foreign direct investment nor does it require foreign
investors to register their investments. Foreign investment
does not require prior approval, except in banking (and
domestic investment as well, for regulatory reasons) and
defense-related industries. Foreign investors are advised
to register with ProInversion to obtain the guarantee that
they will be able to repatriate capital, profits, and
royalties. Foreigners are legally forbidden from owning
majority interest in radio and television stations in Peru;
nevertheless, foreigners have in practice owned controlling
interests in such companies. In addition, under the
Constitution, foreign interests cannot "acquire or possess
under any title, mines, lands, forests, waters, or fuel or
energy sources" within 50 kilometers of Peru's international
borders. However, foreigners can obtain concessions and
rights within the restricted areas with the authorization of
a supreme resolution approved by the Cabinet. Such
authorization requires a favorable opinion from the Joint
Command of the Armed Forces. All investors -- domestic and
foreign -- need prior approval before investing in weapons
manufacturing industries.


7. In 1991, the Peruvian government began an extensive
privatization program, encouraging foreign investors to
participate. From 1991 through September 2005,
privatization revenues totaled $9.4 billion, of which
foreign investors were responsible for the vast majority.
Over three quarters of these transactions took place in the
1994-1997 period. Through September 2005, privatization and
concessions proceeds totaled $35.1 million, and generated
investment commitments of $1.3 billion. The Toledo
government committed to a broad program of some $3 billion
in further privatizations and concessions over its five year-
term, but faced strong popular and political opposition by
mid-2002. The government has made only limited progress on
privatizations since then, and prospects for future direct
privatizations are not encouraging. The government has
consequently shifted to a strategy of promoting multi-year
concessions as a means of attracting investment into major
projects.


8. In June 2004, the Congress passed a law to exclude the
state-owned oil company PetroPeru from privatization and
authorized PetroPeru to conduct exploration and production
activities. This modified the government's policy since the
early 1990s, when it sold all of PetroPeru's exploration and
production units and a major oil refinery. Under this new
law, the government still has an option of granting
concessions on remaining PetroPeru assets, including one
pipeline and several refineries. In December 2005,
PetroPeru introduced a bill in the Congress to resume
exploration and production activities and to be freed from
contracting approval by CONSUCODE, the state contracting
agency. The bill has passed the Economic Commission and is
still pending debate by the Plenary. It is not expected to
pass.


9. Under the Constitution, foreign investors have the same
rights as national investors to benefit from any investment
incentives, such as tax exemptions.

Conversion and Transfer Policies
--------------


10. Under Article 64 of the 1993 Constitution, the Peruvian
government guarantees the freedom to hold and dispose of
foreign currency; hence, there are no foreign exchange
controls in Peru. All restrictions on remittances of
profits, dividends, royalties, and capital have been
eliminated, although foreign investors are advised to
register their investments with ProInversion (as noted
above) to ensure these guarantees. Exporters and importers
are not required to channel foreign exchange transactions
through the Central Reserve Bank of Peru and can conduct
transactions freely on the open market. Anyone may open and
maintain foreign currency accounts in Peruvian commercial
banks. U.S. firms have reported no problems or delays in
transferring funds or remitting capital, earnings, loan
repayments or lease payments since Peru's economic reforms
of the early 1990s.


11. The 1993 Constitution guarantees free convertibility of
currency. There is, however, a legal limit on the amount
that private pension fund managers can invest in foreign
securities. In May 2004, the Central Bank increased this
limit from 9 percent to 10.5 percent. The low limit has
created local market distortions, trapping liquidity in Peru
that is diverted into local equities and bonds, driving up
their prices to artificially high levels.


12. The Central Reserve Bank of Peru is an independent
institution, free to manage monetary policy to maintain
financial stability. The Central Bank's primary goal is to
maintain price stability, via a targeted rate of inflation
During most of 2005 (January through end-August),the
Peruvian Sol trended slightly down towards 3.25 to the
dollar, as the Central Bank supported the dollar amid
ballooning exports and emigrants' remittances. At the end
of August 2005, the U.S. Federal Reserve began to increase
its federal fund rate from 1 percent to 3 percent, matching
the Peruvian Central Bank's interest rate. When the U.S.
federal interest rate increased to more than 3 percent in
October, it became more profitable for institutional
investors to buy dollars and deposit them abroad, accounting
the appreciation of the dollar versus the sol. This trend
continues, as the U.S. federal fund rate is now at 4.25
percent through December 2005. Additionally, the start of
the Peruvian electoral campaign cycle in October 2005 and
the uncertainly surrounding the upcoming Presidential
elections have caused investors to hedge their bets and
purchase additional dollars.

Expropriation and Compensation
--------------


13. According to the Constitution, the Peruvian government
can only expropriate private property on public interest
grounds (such as for public works projects) or for national
security. Any expropriation requires the Congress to pass a
specific act. The Government of Peru has expressed its
intention to comply with international standards concerning
expropriations. Adequate payment to owners of agricultural
lands expropriated by the Peruvian government in the late
1960s/early 1970s is still an issue.

Dispute Settlement
--------------


14. Dispute settlement continues to be problematic in Peru,
although the GOP has taken steps in 2005 to improve the
dispute settlement process. In December 2004, with
assistance from USAID, the GOP established eight commercial
courts (seven courts of first instance or juzgados and one
appeals court or sala to rule on investment disputes. These
courts officially began functioning in April 2005. The GOP
established five additional juzgados in October 2005, and
another ten, plus an additional appeals court, will begin
operations in Lima by May 2006. The commercial courts have
substantially improved the process for commercial disputes.
Prior to the existence of the commercial courts, it took an
average of two years to resolve a commercial case through
the civil court system. These new courts, which have
specialized judges, have reduced the amount of time to
resolve one case to two months, a reduction of 90 percent.
Additionally, the enforcement of court decisions has been
reduced from 36 months to 3-6 months. While about 40
percent of decisions are appealed, most of these are decided
at the appeals level; very few are appealed to the Supreme
Court level. The GOP will continue to train judges on
commercial law and expects this rate of resolution and
enforcement to be maintained. While these courts currently
only operate in Lima, the GOP has plans to expand into other
areas of Peru beginning in 2006. The Judiciary has approved
the opening of two regional courts, one in Arequipa and one
in Huancayo. There are also plans to open courts in Callao
and the northern district of Lima, pending Judiciary
approval.


15. The criminal and civil courts of first instance and
appeal are located in the provinces and in Lima. The
Supreme Court is located in Lima. In principle, secured
interests in property, both chattel and real, are
recognized. However, the judicial system is often extremely
slow to hear cases and to issue decisions. In addition,
court rulings and the degree of enforcement have been
difficult to predict. The capabilities of individual judges
vary substantially, and allegations of corruption and
outside interference in the judicial system are common. The
Peruvian appeals process also tends to delay final
decisions. As a result, foreign investors, among others,
have found that contracts are often difficult to enforce in
Peru. The exposure in 2000 of a network of corrupt judges
controlled by Fujimori advisor Vladimiro Montesinos led to
promises by subsequent governments to address corruption and
reform the judiciary, but progress has been slow.


16. Under the 1997 Law of Conciliation (DL 26872),which
went into effect on January 1, 2000, disputants in many
types of civil and commercial matters are required to
consider conciliation before a judge can accept a dispute to
be litigated. Private parties often stipulate arbitration
to resolve business disputes, as a way to avoid involvement
in judicial processes.


17. Peru's commercial and bankruptcy laws have proven
difficult to enforce through the courts. The Toledo
government established an administrative bankruptcy
procedure under INDECOPI (the National Institute for the
Defense of Free Competition and the Protection of
Intellectual Property) to facilitate the process. This is
now under review, since, in practice, the administrative
bankruptcy process has proven to be slow, often dragging on
for years at a time, and subject to judicial intervention.
The creditor hierarchy is similar to that established under
U.S. bankruptcy law, and monetary judgments are usually made
in the currency stipulated in the contract.


18. A law permitting international arbitration of disputes
between foreign investors and the government or state-
controlled firms was promulgated in December 1992. The same
proviso was later included in the 1993 Constitution. As a
result, the Government of Peru accepts binding international
arbitration of investment disputes in accordance with
national legislation or international treaties to which it
is a party. Although Peru theoretically accepts binding
arbitration, on a few occasions over the past three years,
one involving a U.S. company, parastatal companies and
Government Ministries disregarded unfavorable judgments.
Previously, the Government of Peru turned these arbitration
cases over to the judiciary, where they were
bureaucratically delayed until the companies conceded the
cases. However, effective July 2005, the Supreme Court
ruled that all arbitration findings and awards are final and
not subject to appeal. In December 2005, the U.S. company
received payment of a previously disputed arbitral award of
$1.9 million.


19. Peru is a party to the Convention on the Recognition
and Enforcement of Foreign Arbitral Awards (the New York
Convention of 1958),and to the International Center for the
Settlement of Investment Disputes (the Washington Convention
of 1965). Disputes between foreign investors and the
Government of Peru regarding pre-existing contracts must
still be submitted to national courts. However, investors
who conclude a juridical stability agreement for additional
investments may submit disputes with the government to
national or international arbitration if stipulated in the
agreement. In 2005, the government resolved a high-level
ATPDEA dispute by abiding by the decision of an arbitration
panel in favor of foreign investors.


20. Several private organizations, including the
Universidad Catolica and the Lima Chamber of Commerce,
operate private arbitration centers. The quality of these
centers varies, however, and investors should choose a venue
for arbitration carefully. In one 2001 case involving the
Lima Chamber of Commerce's arbitration center, a U.S.
investor discovered irregularities in the way the case had
been handled by the center.


21. The Peruvian government committed to resolve nine
commercial disputes as a condition of the U.S granting trade
benefits under the Andean Trade Promotion and Drug
Eradication Act (ATPDEA) in 2002. In April 2004, the
Peruvian government provided USTR with "roadmaps" for the
resolution of several of these investment disputes. As of
December 2005, three ATPDEA commercial disputes remain.


22. In December 2005, Peru and the United States concluded
negotiations on a free trade agreement. Once signed and
ratified, the agreement is expected to come into force in
January 2007. The agreement includes a chapter on dispute
settlement and, upon implementation, should further clarify
the resolution process in Peru.

Performance Requirements and Incentives
--------------


23. Peru offers both foreign and national investors legal
and tax stability agreements to stimulate private
investment. These agreements guarantee that the statutes on
income taxes, remittances, export promotion regimes (such as
drawback),administrative procedures, and labor hiring
regimes in effect at the time of the investment contract
will remain unchanged for that investment for 10 years. To
qualify, an investment must exceed $10 million in the mining
and hydrocarbons sectors or $5 million in other sectors
within two years. An agreement to acquire more than 50
percent of a company's shares in the privatization process
may also qualify an investor for a juridical stability
agreement, provided that the infusion will expand the
installed capacity of the company or enhance its
technological development.


24. There are no performance requirements that apply
exclusively to foreign investors. Legal stability
agreements are subject to Peruvian civil law, which means
they cannot be altered unilaterally by the government.
Investors are also offered protection from liability for
acquiring state-owned enterprises.


25. Laws specific to the petroleum and mining sectors also
provide assurances to investors. However, in 2000, the
government modified the General Mining Law, substantially
reducing benefits to investors in that sector. Among the
changes were: a reduction in the term concessionaires are
granted to achieve the minimum annual production; an
increase in fees for holding non-productive concessions; an
increase in fines for not achieving minimum production
within the allotted time; a reduction in the maximum
allowable annual accelerated depreciation; and revocation of
the income tax exemption for reinvested profits. The
changes do not affect those investors who have signed legal
stability agreements with the government.


26. Parties may freely negotiate contractual conditions
related to licensing arrangements and other aspects of
technology transfer without prior authorization. Registry
of a technology transfer agreement is required for a payment
of royalties to be counted against taxes. Such registration
is automatic upon submission to ProInversion.


27. Current law limits foreign employees to no more than 20
percent of the total number of employees in a local company
(whether owned by foreign or national interests),and
restricts their combined salaries to no more than 30 percent
of the total company payroll. However, DL 689 (November
1991) provides a variety of exceptions to these limits. For
example, a foreigner is not counted against a company's
total if he or she holds an immigrant visa, has a certain
amount invested in the company (currently about $4,000) or
is a national of a country that has a reciprocal labor or
dual nationality agreement with Peru. Foreign banks and
service companies, and international transportation
companies are also exempt from these hiring limits, as are
all firms located in free trade zones. Furthermore,
companies may apply for exemption from the limitations for
managerial or technical personnel.

Right to Private Ownership and Establishment
--------------


28. Foreign and domestic entities are generally permitted
the right to establish and own business enterprises and to
engage in most forms of remunerative activity. Subject to
the restrictions listed earlier in this document, both
foreign and domestic entities may invest in any legal
economic activity -- including foreign direct investment,
portfolio investment, and investment in real property.
Private entities may generally freely establish, acquire,
and dispose of interests in business enterprises. In the
case of some privatized companies deemed important by the
government, privatization agency ProInversion has included a
so-called "golden share" clause in the sales contract, which
allows the government to veto a potential future purchaser
of the privatized assets.

Protection of Property Rights
--------------


29. As noted in the Dispute Settlement section, in
principle, secured interests in property (both chattel and
real) are recognized. However, the Peruvian judicial system
is often very slow to hear cases and to issue decisions,
outcomes have been difficult to predict and enforce, and
corruption is frequently alleged. The Peruvian appeals
process also delays final outcomes of cases. Thus, foreign
investors, among others, have found that contracts are often
difficult to enforce in Peru. Improving the judicial system
is one of President Toledo's top stated priorities.


30. Peru belongs to the World Trade Organization (WTO) and
the World Intellectual Property Organization (WIPO). It is
also a signatory to the Paris Convention, Bern Convention,
Rome Convention, Phonograms Convention, Satellites
Convention, Universal Copyright Convention, the World
Copyright Treaty, the World Performances and Phonographs
Treaty and the Film Register Treaty. After two years on the
United States government's "Priority Watch List" under the
Special 301 provisions of the 1988 Trade Act, Peru was
lowered to the "Watch List" in 2001 following steps on the
part of the Government of Peru to address intellectual
property rights (IPR) piracy. Peru remains on the Watch
List due to concerns about continued high rates of copyright
piracy and inadequate enforcement of IPR laws, particularly
with respect to the relatively weak penalties that have been
imposed on IPR violators. Although the Peruvian Government
in July 2004 increased the minimum penalty for piracy to
four-year's imprisonment, there have yet to be any
convictions under the new law. Other factors contributing
to continued placement on the "Watch List" include Peru's
lack of second-use patent protection for pharmaceuticals and
a lack of protection for confidential test data that is
submitted for the marketing approval of pharmaceutical and
agrochemical products.


31. Peru's 1996 Industrial Property Rights Law provides an
effective term of protection for patents and prohibits
devices that decode encrypted satellite signals, along with
other improvements. Peruvian law does not provide for
pipeline protection for patents or protection from parallel
imports. Although Peruvian law provides for effective
trademark protection, counterfeiting of trademarks and
imports of pirated merchandise are widespread.


32. Peru's Copyright Law is generally consistent with the
TRIPS Agreement. However, textbooks, books on technical
subjects, audiocassettes, motion picture videos and software
are widely pirated. While the government, in coordination
with the private sector, has conducted numerous raids over
the last few years on large-scale distributors and users of
pirated goods and has increased other types of enforcement,
piracy continues to be a significant problem for legitimate
owners of copyrights in Peru.

Transparency of Regulatory System
--------------


33. The transparency and independence of regulatory
processes have become central issues for foreign investors
in Peru. Many of the central government entities with which
foreign firms must deal -- including the entities that
maintain the company registry and supervise securities and
exchanges (CONASEV),handle privatization and investment
issues (ProInversion),and handle competition policy and
intellectual property matters (INDECOPI) -- have procedures
that are relatively transparent and predictable. However,
several foreign pharmaceutical companies, as well as the
motion picture and music industry, continue to face
increasing levels of piracy of their products, highlighting
that INDECOPI, SUNAT and the Peruvian National Police are
not effectively protecting and upholding patents. Banks,
insurance companies and private pension funds are regulated
primarily by the Superintendency of Banking and Insurance
(SBS),which is charged with determining the qualifications
of potential market entrants, and regulating firms once they
have begun operations. SBS regulations are also seen as
being transparent.


34. When the GOP privatized state-owned monopolies in the
areas of telecommunications, electrical generation and
distribution, and the hydrocarbons sector in the late 1990s,
the GOP established regulatory institutions to oversee the
newly private sectors. Several of these regulatory
institutions, including telecommunications regulator OSIPTEL
and energy sector regulator OSINERG, are inexperienced and
slow. The delays and lack of predictability in their
rulings have in some cases been notable impediments to doing
business in Peru.


35. In 2004-2005, two U.S. companies faced competitive
disadvantages over OSIPTEL's very slow process for seeking
regulation of the excessively high mobile termination rates
of the market leader. In December 2005, however, OSIPTEL
published a new law that makes Peru's high mobile
termination rates comparable to international rates over a
three-year period. Two U.S. companies have encountered
problems with the energy sector regulator (OSINERG) over
its hesitancy to provide clear regulation for the energy
sector. Some agencies, including the tax authority (SUNAT),
OSIPTEL, the General Directorate for Civil Aviation (DGAC)
and the transportation regulator (OSITRAN),have been
subject to politically motivated government intervention in
their technical operations. In 2005, a small U.S. company,
funded by an OPIC guarantee, was forced out of business due
to unfair competition when the DGAC authorized the Peruvian
Air Force to fly cheaper priced civic flights.


36. The Toledo government replaced the heads of all
regulatory agencies, but improvements in transparency have
been uneven.


37. U.S. firms have complained that the autonomous tax
authority's (SUNAT) aggressive behavior and interpretation
of law are often contrary to the spirit of the law and
intent of government policies, complicating normal business
operations. The remuneration of SUNAT employees is
determined, in part, by the theoretical tax liability they
uncover in audits. While the U.S. Embassy has not received
complaints that SUNAT employees are soliciting bribes for
lower tax assessments, this incentive system has sometimes
produced convoluted and unpredictable interpretations of the
tax law.


38. Businesses point out that SUNAT's retroactive
reinterpretation of regulations and laws, its levying of
disproportionate fines, and initiation of full company
audits when companies request a refund or legal revaluation
of assets for depreciation purposes, create additional
investment and trade barriers. In one case, a U.S. firm
unwittingly requested an improper drawback of $1,345, only
to face SUNAT fines of $645,000. Although the case was
resolved, new legislation was needed to correct the problem.
In instances involving airline fuels, certain minerals, and
other products, SUNAT declared that these goods sold abroad,
which under Peruvian government policy are exempted from
taxes, were not considered exports and were therefore
subject to VAT. Two recent laws were necessary to correct
this practice for airline fuels and services. SUNAT often
does not follow standard international practice in the way
it taxes new activities. To correct these problems, the
independent tax tribunals act to check any abuses by SUNAT.
In 2004, the GOP established a tax ombudsman who must
approve SUNAT's request to appeal adverse tax tribunal
decisions. In the past two years, the tax ombudsman has
acted in several cases to end unwarranted litigation of
disputed assessments. In 2005, a U.S. company won long-
standing tax cases against SUNAT as a result of these
improvements.


39. A 2004 World Bank study found that starting a business
takes an average of 98 days in Peru, among the longest in
the Western Hemisphere. Various procedures -- such as
obtaining building licenses or certificates of occupancy --
require many steps. Municipal authorities issue most
licenses and requirements vary widely by locality. As a
result, information on necessary procedures is often
difficult to obtain. Business people often complain of
excessive red tape; one major foreign investor found that
starting project construction and a business required
several hundred permits, many of which the responsible
government entities were unaware they had to issue. Other
investors argue that local governments and municipalities,
which are seeking new revenue sources, sometimes withhold
licenses or create regulations, thus hindering the ability
to do business or making it costlier. Even though import
tariffs are substantially lower than previously, import
duties (the simple average tariff is a 10.1 percent ad
valorem plus surcharge as of November 2005; the 2004 trade-
weighted average is 9.4 percent),together with the 19
percent value added tax on goods, high social security tax
rates, and certain labor laws increase investment costs
significantly and hinder the efficient mobilization and
allocation of investment capital. Although businesses can
apply for VAT reimbursement, they often do not; when a
company applies for reimbursement, the SUNAT conducts a full
company audit.

Efficient Capital Markets and Portfolio Investment
-------------- --------------


40. Credit is allocated on market terms and the banking
industry in Peru is generally considered to be competitive
in offering services to business customers. Foreign
investors can obtain credit on the local market and several
of them have done so in the last few years as terms were
more competitive than those of the usual international
centers. The private sector has access to a variety of
credit instruments. In the year through early-December
2005, firms placed $1.2 billion on the local bond market
(compared with $1.2 billion in calendar 2004),which has
been propelled in recent years by demand for investment
instruments by private pension fund companies. By October
2005, pension funds managed a total of $9.37 billion, a 24%
surge over the October 2004 level ($7.54 billion),thus
creating a big and growing appetite for financial
instruments by pension funds. The 10.5% cap placed by the
central bank on what the pension funds can invest abroad,
means that local bond issuers (including the government) and
loan seekers have a captive capital market for them.


41. All firms listed on the Lima Stock Exchange (Bolsa de
Valores de Lima) or the Public Registry of Securities must
be vetted by CONASEV, the National Commission for the
Supervision of Companies, Securities and Exchanges, which
maintains the Public Registry of Securities and Stock
Brokers. CONASEV is the Peruvian government entity charged
with the study, promotion, and regulation of the securities
and commodities markets, the control of market participants,
the maintenance of a transparent and orderly market, the
setting of accounting standards and the publication of
financial information about covered companies. As part of
CONASEV's goal to promote market transparency, to prevent
monopolies, and to prevent fraud, issuers of stock are
required to inform CONASEV and the relevant stock exchange
or body in charge of supervising the centralized trading
mechanism, of events that affect or might affect the stock,
the company, or any public offerings. Although trading on
insider information is technically a crime, no one has been
punished under the law.


42. Total assets of the commercial banks were $20.7 billion
at the end of October 2005, 10% above the same period of

2004. The banking system is considered generally sound, as
it weathered rather well a severe El Nino and global
financial turmoil in 1997-98. Sound supervision combined
with competition, led to a significant consolidation in the
sector, which still continues. Consequently, 14 commercial
banks remain in the system, of which three banks account for
over two-thirds of loans and three-fourths of deposits.
This number will shrink to 13 once the early-December 2005
purchase of the third largest local bank by a large Canadian
bank is completed, as it will be merged with a small local
bank. Banks have revamped operations, increased
capitalization, and reduced costs in recent years. As of
November 2005, foreigners were majority owners of nine and
had shares in twelve commercial banks. Under the SBS's
conservative criteria, 2.6 percent of total loans were
assessed as non-performing as of October 2005, down from a
high of 11 percent in early 2001. The system also has three
specialized institutions ("financieras") and about 40
thriving micro-lenders and savings banks.


43. Larger private firms often use "cross-shareholding" and
"stable shareholder" arrangements to restrict investment by
outsiders -- not necessarily foreigners -- in their firms.
As close family or associates generally control ownership of
Peruvian corporations, hostile takeovers are practically non-
existent. Peruvian law and regulations do not authorize or
encourage private firms to adopt articles of incorporation
or association to limit or restrict foreign participation;
neither are there any private or public sector efforts to
restrict foreign participation in industry standards-setting
organizations.


44. Foreign direct investment registered with ProInversion
as of November 2005 was $12.7 billion, compared with $12.9
billion a year earlier. Foreign portfolio investment
totaled $3.7 billion through September 2005, up from $3.0
billion a year earlier.

Political Violence
--------------


45. Although political violence against investors is not a
common practice, the mining community witnessed an increase
in protests, some violent, in 2005. Violent invasions of
mining exploration and excavation sites occurred more than a
dozen times at more than seven sites in 2005, causing
several foreign companies to significantly delay or to
abandon plans to establish operations. Protests against the
mining industry occurred for various reasons, including
environmental and social concerns. Often times, well-
organized groups, such as the Ronderos, will exaggerate a
local community's concerns, bringing in protestors from all
areas to foment violence against the mines. In at least one
instance in 2005, the local mayor led a strike against a
large foreign mining company in an effort to extort
additional funds from the company. During 2005, there were
road blockages and acts of vandalism by groups protesting
mining operations, coca growers protesting the Government's
eradication policies, and farmers seeking increased
government tariff protections and financial support. There
were also river blockages by some native communities seeking
a share of the oil and gas royalties.


46. Political violence remains a concern in the coca-
growing regions. The Sendero Luminoso (SL) terrorist
organization has become increasingly aggressive in these
areas, carrying out three deadly ambushes of police and
military personnel in 2005, including a December 5 attack in
Ayacucho that killed five policemen and wounded a policeman
and a prosecutor. There is no illicit foreign investment
and little government presence in the remote coca-growing
zones of the Monzon and the Apurimac-Ene River (VRAE)
valleys. The U.S. Embassy in Lima restricts visits by
official personnel to these areas because of the threat of
violence by narcotics traffickers and remaining columns of
the SL terrorist group. Information about insecure areas
and recommended personal security practices can be found at
http://www.ds-osac.org/.


47. On January 1-4, 2005, approximately 160 members of the
ultra-nationalist Ethno-Cacerista Movement seized a police
station, took hostages, and killed four policemen, before
surrendering to the authorities. The brother of the leader
of this uprising is now one of the leading candidates for
the Presidency.

Corruption
--------------


48. It is illegal in Peru for a public official or employee
to accept any type of outside remuneration for the
performance of his or her official duties. Peru has
ratified both the UN Convention Against Corruption and the
Organization of American States' Inter-American Convention
Against Corruption. Peru is not a member of the
Organization of Economic Cooperation and Development, and
has not signed the OECD Convention on Combating Bribery.

49. Peru is one of four nations worldwide participating as
a pilot country in the G8 anti-corruption and transparency
initiative. The U.S. has worked vigorously to help the
Peruvian government prepare a detailed action plan, in
coordination with other G8 partners and NGOs, of activities
it will pursue under the initiative. The plan envisions
activities in six areas: a) citizen information/internet
connectivity; b) improving central government fiscal
transparency; c) development of GOP procurement systems; d)
improving regional/local government transparency and
management; e) improvement of transparency of extractive
industry revenues; and f) development of asset forfeiture
systems and legislation. Total project expenditure under
the initiative is expected to be $40 million in 2005-06,
with the U.S. already funding some projects.


50. U.S. firms have reported only a small number of
problems directly resulting from corruption, usually in
government procurement processes and in the judicial sector,
but the revelation in late 2000 of a broad and deep
corruption ring organized by former presidential advisor
Vladimiro Montesinos has heightened awareness of the
problem. Transparency International ranked Peru number 74
(out of 145 countries) in its 2004 Corruption Perception
Index. (In the same study, Chile was ranked 20, Brazil was
number 59, Colombia was ranked 60 and Argentina was ranked
108.) While anti-corruption efforts have been a stated
priority of the Toledo Government, in practice most
resources are directed at investigating Fujimori-era
corruption. In 2001, President Toledo appointed an anti-
corruption "czar" to lead government efforts, but this
official resigned in 2002 and has yet to be replaced.
Private sector groups have increased efforts to combat
corruption through an NGO called "ProEtica," which
represents Transparency International in Peru.

Bilateral Investment Agreements
--------------


51. Peru has signed bilateral investment agreements with 29
countries (listed below). In December 2005, the United
States and Peru finalized negotiations for a bilateral trade
agreement, eliminating the need for a bilateral investment
agreement. The agreement has yet to be approved and
ratified by both the U.S. and Peruvian Congresses but is
scheduled to go into effect on January 1, 2007, to prevent
any lapse in preferential benefits. Peru is currently the
43rd largest export market for U.S. goods, with U.S. exports
exceeding over $1.7 billion through October 2005. U.S.
foreign direct investment in Peru totaled $3.9 billion
through December 2004. The U.S.-Peru Trade Promotion
Agreement (TPA) extends the list of countries in the Western
Hemisphere with which the United States has completed such
agreements and would complement the goal of completing Free
Trade Area of the Americas (FTAA) negotiations.

Peru's Current Bilateral Investment Agreements

Argentina (1994) El Salvador Portugal (1994)
(1997)
Australia (1995) Finland (1995) Rumania (1994)
Bolivia (1993) France (1993) Singapore (2003)
Chile (2000) Germany (1995) Spain (1994)
China (1994) Italy (1994) Sweden (1994)
Colombia (1994) Korea (1993) Switzerland
(1991)
Cuba (2000) Malaysia (1995) Thailand (1991)
Czech Rep (1994) Netherlands United Kingdom
(1994) (1993)
Denmark (1994) Norway (1995) Venezuela (1996)
Ecuador (1999) Paraguay (1994)

OPIC and Other Investment Insurance Programs
--------------


52. The Overseas Private Investment Corporation (OPIC),an
independent U.S. Government agency, offers medium- to long-
term financing and political risk insurance. OPIC signed
agreements with Peru in December 1992, and in July 1994,
OPIC began approving requests for political risk insurance
(including for inconvertibility of currency). In 2001, OPIC
provided project finance loans of $108.4 million. In 2005,
OPIC provided $800 million worth of insurance coverage for a
copper mine. A startup finance company received $27 million
worth of OPIC insurance coverage. Because of the free
convertibility of currency, the U.S. Embassy purchases
Peruvian currency for expenses on an as-needed basis, at the
market exchange rate. The risk of significant depreciation
of the exchange rate over the next year is negligible. Peru
is a member of the Multilateral Investment Guarantee Agency.

Labor
--------------


53. Labor is abundant and trainable, although there are
shortages of highly skilled workers in some fields and wages
for professional staff are high (sometimes higher than U.S.
wages in the mining sector for positions in the managerial
and consulting fields). The presence of organized labor in
the Peruvian economy has declined; it is estimated that less
than five percent of the labor force is organized.
Unemployment in Lima officially stood at 7.9 percent in
October 2005, compared with 9.2 the previous year; surveys
show that about 55 percent of the economically active
population was underemployed, mostly working in the informal
sector for below subsistence wages. As of August 2005, the
statutory monthly minimum wage was $141 (460 soles). Most
workers in the formal sector receive more than the minimum
wage, as well as additional non-wage benefits.


54. In 1991-1992, a new labor law and other related
statutes replaced a greater number of old statutes and
regulations. The new laws allow for multiple forms of
unions across company or occupational lines, thus permitting
multiple unions in the same company. Workers in probation
status or on short-term contracts are not eligible for union
membership. Bargaining agreements are considered
contractual agreements, valid only for the life of the
contract. Productivity provisions must be included in any
collective bargaining agreement. The number of officialsand the amount of time union officials may devote to union
work with pay is limited to 30 days per year. Unless there
is a pre-existing labor contract covering an occupation or
industry as a whole, unions must negotiate with each company
individually. A labor law passed in July 1995 liberalized
hiring.


55. Business leaders lauded the above changes, saying they
led to greater efficiency. Labor leaders disagreed, arguing
that the new labor laws eroded labor protections and
encouraged outsourcing in a way that undercut union
activity. With Peru's return to democracy in 2000, Peruvian
organized labor regained some, but by no means all, of the
protections enjoyed in the pre-Fujimori era. A decision by
the Constitutional Tribunal in 2004, for example,
legitimized collective industry-wide bargaining in the civil
construction industry. Labor leaders saw this as a
potential precedent to be applied to other activities. That
has not yet happened, however.


56. Either unions or management can request binding
arbitration in contract negotiations. Strikes can be called
only after approval by a majority of all workers (union and
non-union) voting by secret ballot and only in defense of
labor rights. Unions in essential public services, as
determined by the government, must provide a sufficient
number of workers, as determined by the employer, during a
strike to maintain operations.


57. The 1993 Constitution provides for a maximum workday of
eight hours, with 48 hours as the maximum week. The labor
code also sets 24 hours rest per week and 30 days paid
annual vacation for all workers. Workers readily sacrifice
these and other benefits in exchange for regular employment.
Strike activity declined markedly over the past nine years
and since new labor laws were passed, worker efficiency rose
substantially. However, strikes and militant industrial
action increased again in late 2002 and early 2003, with
additional strikes in 2004. The overall number of strikes
fell in 2005. Through October 2005, there were 58 strikes
with a loss of 442,586 man-hours, compared with 91 strikes
and a loss of 515,480 man-hours in the same period of 2004.
Congress continues to debate a comprehensive labor law
reform, but the law remains delayed over the conditions of
dismissal for employees.

Foreign Trade Zones/Free Ports
--------------


58. Current Peruvian law governs the two types of free
trade zones: export, transformation, industry, trade and
services zones (CETICOS),and a free trade zone (ZOFRATACNA)
in Tacna. The rules and tax benefits applying to these
zones are the same for foreign and national investors.


59. Companies established at the CETICOS and ZOFRATACNA,
which export no less than 92 percent of their output (more
than 80 percent of production for the Loreto CETICOS and
more than 50 percent for ZOFRATACNA),are exempted until
2012 from all taxes, dues and contributions from the central
government and municipalities, particularly income, sales
(IGV),Municipal Promotion (IPM) and excise (ISC) taxes.
CETICOS exist at Ilo, Matarani and Paita, with one
authorized but not operating at Loreto. There is a concern
that the Peruvian Government does not have the proper WTO
waivers to validate the CETICOS export requirement. The
U.S. automotive industry has expressed a specific concern
that U.S. brands are unable to compete with used Japanese
vehicles that enter the Peruvian market duty-free through
the CETICOS. Importers locating in ZOFRATACNA pay only
eight percent customs duties (normal rates are 12 or 20
percent) on 1,086 items sold to retailers in the city of
Tacna.

Foreign Direct Investment Statistics
--------------


60. The stock of registered foreign direct investment in
Peru was $12.7 billion by November 2005, according to
ProInversion, versus $12.9 billion at the end of 2004.
ProInversion data place Spanish investors as holding the
largest share (25 percent),with $3.2 billion invested.
The United Kingdom is the second largest investor, with $2.8
billion, and the United States is third, with $2.0 billion.
However, calculated on a replacement-cost basis, the U.S. is
by far the largest source of foreign direct investment in
Peru. According to the U.S. Department of Commerce, U.S.
registered investment in Peru through December 2004 totaled
$3.9 billion. The statistics are skewed because
ProInversion records investments on the basis of country
registry, rather than control. Thus, an investor registered
in the Bahamas, for example, is recorded as British even if
the parent is a U.S. company. As a result, U.S.-controlled
investment represents a much higher share than the official
15.7 percent. By sector, communications received 29 percent
of foreign direct investment in 2005, followed by finance
(17.4 percent),manufacturing industry (14.8 percent),
mining (13.6 percent),and electricity (12.9 percent).

61. As of November 2005, investors had signed 413 legal
stability contracts with the Government of Peru. Legal
stability contracts commit the government not to apply any
future changes in the income tax, labor and other laws
governing a specific investment in exchange for commitments
to invest a given amount.

STRUBLE