PERU 2007 INVESTMENT CLIMATE STATEMENT (PART 1/2)

UNCLAS LIMA 000221 SIPDIS SIPDIS DEPT FOR EB/IFD/OIA, WHA/AND, WHA/EPSC PASS EXIM, OPIC, TDA COMMERCE FOR 4331/MAC/WH/MCAMERON USTR FOR BHARMAN AND MCARRILLO GENEVA FOR USTR E.O. 12958: N/A TAGS: EINV EFIN ETRD KTDB ELAB PGOV OPIC USTR PE SUBJECT: PERU 2007 INVESTMENT CLIMATE STATEMENT (PART 1/2) REF: 06 STATE 178303 The following is Part 1 of Embassy Lima's submission of the 2007 Investment Climate Statement for Peru. Openness to Foreign Investment -------------- The Peruvian government seeks to attract investment -- both foreign and domestic -- in nearly all sectors of the economy. The U.S.-Peru Trade Promotion Agreement (PTPA), pending approval by the U.S. Congress, would enable Peru to attract additional investment by clarifying rules for investors, increasing transparency, reducing barriers to trade, establishing faster customs procedures, and improving the dispute settlement process. Peru does not have a bilateral investment treaty (BIT) or tax treaty with the United States, but these provisions are contained in the PTPA. The U.S. Congress extended unilateral trade preferences under the Andean Trade Preferences Act (modified by the Andean Trade Preferences and Drug Eradication Act, or ATPDEA) to Peru, Colombia, Bolivia and Ecuador through June 2007. The U.S. Government recognized Peru's progress in economic policy and other issues by selecting Peru for the Millennium Challenge Account's Threshold Program for fiscal year 2007. During the early 1990s, the Peruvian government promoted economic stabilization and liberalization policies by lowering trade barriers, lifting restrictions on capital flows and 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, leading 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. During his tenure, President Toledo implemented several pro-investment policies. In April 2002, the government established ProInversion, building on the foundation of COPRI, the privatization agency created in 1991. ProInversion seeks to be a "one-stop shop" for current and potential investors, and has successfully completed both concessions and privatizations of state-owned enterprises and natural resources. In 2004, Las Bambas, a copper deposit, was concessioned to Xstrata TLC, a Swiss company, for USD 121 million plus 19 percent VAT. In 2005, Bayovar, a state-owned phosphate rock deposit, was concessioned to a Brazilian company for a 3 percent royalty, and ProInversion granted British-owned Rio Tinto a concession for the La Granja copper deposit for USD 22 million. Additionally, from January-November 2006, the oil and gas leasing agency Petroperu granted 15 exploration concessions to foreign oil companies, including 8 to 5 U.S. companies, along the northern coast and in the jungle. 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). The 1993 Constitution guarantees national treatment for foreign investors and permits foreign investment in almost all economic sectors. Prior approval is only required in the banking (for regulatory reasons, also applies to domestic investment) and defense-related sectors. 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 a majority interest in radio and television stations in Peru; nevertheless, foreigners have in practice owned controlling interests in such companies. 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 and the Joint Command of the Armed Forces. All investors -- domestic and foreign -- need prior approval before investing in weapons manufacturing industries. In 1991, the Peruvian government began an extensive privatization program, encouraging foreign investors to participate. From 1991 through September 2005, privatization revenues totaled USD 9.4 billion, of which foreign investors were responsible for the vast majority. Over three-quarters of these transactions took place from 1994 to 1997. Through September 2005, privatization and concessions proceeds totaled USD 35.1 million, and generated investment commitments of USD 1.3 billion. 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. In 2000, the Lima airport was concessioned to a private group (Lima Airport Partners),and in August 2006, nine of Peru's northern airports were concessioned for 25 years to Swissport. Peru's other airports, as well as various electricity, water, sewage, and oil (Petroperu) companies remain state-owned and operated. In June 2006, the Container Terminal-South Pier of the important seaport of Callao was concessioned for 30 years to a consortium of P and O Dover (U.K.) and Uniport (Spain). 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 July 2006, Congress defeated an executive veto of a bill to "strengthen and modernize" Petroperu. Under the new law, Petroperu can resume exploration, production and related activities, including petrochemicals; is freed from contracting approval by CONSUCODE, the state procurement supervision agency; is exempted from the approval of its investment projects by the Government Projects Office (SNIP); and will have a worker on its board of directors. Petroperu has a strategic alliance with Brazil's Petrobras. Under the 1993 Constitution, foreign investors have the same rights as national investors to benefit from any investment incentives, such as tax exemptions. Conversion and Transfer Policies -------------- 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. 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 Reserve Bank of Peru (BCR) 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. The BCR's new board, appointed by the Garcia Administration, intends to gradually raise this limit, beginning with an increase to 12 percent. The BCR is an independent institution, free to manage monetary policy to maintain financial stability. The BCR's primary goal is to maintain price stability, via inflation targeting. Inflation in Peru was 1.6 percent in 2005 and 2 percent in 2006. The government has also implemented policies to de-dollarize the economy, and deposits in the local currency (nuevo sol) now account for about 36 percent. Expropriation and Compensation -------------- 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. Dispute Settlement -------------- Dispute settlement continues to be problematic in Peru, although the GOP took steps in 2005 to improve the dispute settlement process. From December 2004 through 2006, the GOP established 24 commercial courts to rule on investment disputes, including two courts of appeal. All of these courts are located in Lima. 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 a case to two months. 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 resolved at the appeals level; very few are appealed to the Supreme Court. The criminal and civil courts f 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. 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. Peru's commercial and bankruptcy laws have proven difficult to enforce through the courts. There is an administrative bankruptcy procedure under INDECOPI (the National Institute for the Defense of Free Competition and the Protection of Intellectual Property),but it has proven to be slow 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. International arbitration of disputes between foreign investors and the government or state-controlled firms is included in the 1993 Constitution. Although Peru theoretically accepts binding arbitration, on a few occasions over the past three years, 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. 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 dispute by upholding the decision of an arbitration panel and making payment. Several private organizations -- including the Universidad Catolica, the Lima Chamber of Commerce and the American Chamber of Commerce -- operate private arbitration centers. The quality of these centers varies, however, and investors should choose a venue for arbitration carefully. The U.S.-Peru Trade Promotion Agreement, currently pending approval by the U.S. Congress, includes a chapter on dispute settlement and, upon implementation, should further clarify the resolution process in Peru. Performance Requirements and Incentives -------------- 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 USD 10 million in the mining and hydrocarbons sectors or USD 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. 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. 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. In 2004, Congress approved a bill charging a 1 to 3 percent royalty on mining companies' sales. The changes do not affect those investors who have signed legal stability agreements with the government. In December 2006, after increased social demands for a share of mining profits, the Garcia Administration and mining companies agreed to a "voluntary contribution" system whereby mining companies will invest in community infrastructure projects. This agreement averted adoption of a more restrictive mining law, allows mining companies to control where they invest their contributions, and ceases to apply if the prices of mined products drop. 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. Current laws limit 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 USD 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 -------------- 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 -------------- 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 a stated priority of the Peruvian Government. Protection of intellectual property rights (IPR) in Peru has improved over the past decade, but still falls short of U.S. and international standards in several areas. Peru remains on USTR's Special 301 "Watch List" due to concerns about continued high rates of copyright piracy, a lack of protection for confidential test data submitted for the marketing approval of pharmaceutical and agrochemical products, and inadequate enforcement of IPR laws, particularly with respect to the relatively weak penalties that have been imposed on IPR violators. The Peruvian government agency charged with promoting and defending intellectual property rights is the Institute for the Defense of Competition and Protection of Intellectual Property (INDECOPI, www.indecopi.gob.pe),established in ¶1992. Legislative Decree 822 of 1996 and Andean Community Decisions 344 and 486 protect patents, trademarks, and industrial designs. Copyrights are protected by Legislative Decree No. 822 of 1996 and by Andean Community Decision 351. Peru belongs to the World Trade Organization (WTO) and the World Intellectual Property Organization (WIPO). It is also a signatory to the Paris Convention on Industrial Property, Geneva Convention for the Protection of Sound Recordings, Bern Convention for the Protection of Literary and Artistic Works, Brussels Convention on the Distribution of Satellite Signals, Phonograms Convention, Satellites Convention, Universal Copyright Convention, the World Copyright Treaty, and the World Performances and Phonographs Treaty and the Film Register Treaty. In December 1994, the Peruvian Congress ratified the World Trade Organization's Agreement on Trade-Related Aspects of Intellectual Property (TRIPs). Peru's legal framework provides for easy registration of trademarks, and inventors have been able to patent their inventions since 1994. 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 pipeline protection for patents or protection from parallel imports. Although Peruvian law provides for effective trademark protection, counterfeiting of trademarks, copyrighted products, and imports of pirated merchandise are widespread. The International Intellectual Property Alliance estimates that the piracy level in Peru for recorded music was 98 percent in 2004-2005, with damage to U.S. industry estimated at USD 100 million. IIPA estimates motion picture piracy accounts for 60 percent of the market for a loss of USD 5.5 million. Indecopi considers that software piracy levels remained the same as 2004 levels, at 56 percent. 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. Despite increased enforcement actions by INDECOPI, the judicial branch has failed to impose sentences that adequately deter future IPR violations. The Peruvian government in July 2004 increased the minimum penalty for piracy to four years imprisonment, although there have yet to be any convictions under the new law. Peru now has six prosecutors (two fiscalias) dedicated full-time to intellectual property cases. In a major breakthrough, in November 2006, four special courts of first instance and one special appeals court in Lima were assigned IPR duties, effective 2007. An IPR Toolkit for Peru can be found on the Embassy and Commercial Service Lima's websites. Besides being a guide to registering and protecting IP, it contains a list of lawyers and other organizations that can provide support on an on-going basis. POWERS