Identifier
Created
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Origin
07LIMA221
2007-01-26 18:36:00
UNCLASSIFIED
Embassy Lima
Cable title:  

PERU 2007 INVESTMENT CLIMATE STATEMENT (PART 1/2)

Tags:  EINV EFIN ETRD KTDB ELAB PGOV OPIC USTR PE 
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VZCZCXYZ0000
PP RUEHWEB

DE RUEHPE #0221/01 0261836
ZNR UUUUU ZZH
P 261836Z JAN 07
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC PRIORITY 3718
INFO RUEHQT/AMEMBASSY QUITO 0958
RUEHBO/AMEMBASSY BOGOTA 4299
RUEHBR/AMEMBASSY BRASILIA 7181
RUEHBU/AMEMBASSY BUENOS AIRES 2749
RUEHCV/AMEMBASSY CARACAS 0104
RUEHLP/AMEMBASSY LA PAZ JAN SANTIAGO 1070
RUEHAC/AMEMBASSY ASUNCION 1591
RUEHMN/AMEMBASSY MONTEVIDEO 9084
RUEHMD/AMEMBASSY MADRID 2792
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHGV/USMISSION GENEVA 0481
UNCLAS LIMA 000221

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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