MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -

UNCLAS SECTION 01 OF 02 MADRID 000907 SIPDIS SIPDIS EUR/WE E.O. 12958: N/A TAGS: BEXP EAGR EAIR ECON EFIN EIND ETRD TBIO SP EINV, UK SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT - MAY 7 MADRID 00000907 001.4 OF 002 EINV: American Business Council lunch with Ambassador and Min of Industry EINV: Macroeconomic risks in Spain EINV/ECON: US Cautions against investing in Spain - According to ABC EINV/ETRD: Deal or no deal - Research money in exchange for patent protection EAGR/TBIO: Biodiesel production and renewable fuel guidelines ¶1. (U) MINISTER OF INDUSTRY CLOS HOSTS AMBASSADOR AND AMERICAN BUSINESS COUNCIL FOR WORKING LUNCH Minister of Industry, Trade and Tourism Joan Clos hosted the Ambassador and an executive group from the American Business Council (ABC) for lunch May 10. The ABC groups the largest U.S. investors in Spain, including Ford, GM, General Electric, American Express, EDS, IBM, and Deloitte. The lunch is the result of a business dialogue launched by the Ambassador earlier this year, and the ABC had prepared a discussion paper outlining the members' concerns about the investment and business climate in Spain. ABC representatives raised a number of issues. They are very concerned about the change in interpretation by the Spanish tax authority concerning holding companies established by multinationals in Spain. The previous government had passed very favorable tax legislation encouraging multinationals to group their international subsidiaries into holding companies based in Spain. The tax authority has, within the past year, changed its interpretation of this law in a way much less advantageous to the firms, and it is seeking retroactive payments. A second issue raised was IPR protection, with the ABC making a strong pitch for Spain to establish an effective notice and takedown regime to fight against illegal downloads. The ABC also requested increased efforts to prevent pirated DVD and CD sales and recommended that bars and restaurants post anti-piracy posters. (Note: These requests track very closely with Embassy's own efforts with the GOS.) The Ford representative raised the costs of rail and road transportation to port for finished industrial goods. The American Express representative raised a fairly technical issue related to the margins that financial services companies can charge users and the payments mechanisms. The Ambassador was accompanied by the DCM, Econ Counselor, and the Deputy Commercial Counselor. Clos was accompanied by Secretary General for Trade Alfredo Bonet, officials from the INVES (Invest in Spain) office and the Office for Trade and Investment. He followed the presentations closely and promised responses. He and the Ambassador agreed to continue the dialogue, with the Ambassador scheduled to host the next working lunch, probably in November. BANK OF SPAIN POINTS TO MACROECONOMIC RISKS IN ITS MAY 3 ECONOMIC BULLETIN ¶2. (U) The Bank of Spain is somewhat less bullish than it has been in the past on Spanish macroeconomic prospects. The Central Bank's language is of course couched in tortured language, but although the Bank does not forecast difficult conditions in the short-term, it does focus more on the Spanish economy's well-known weaknesses. It notes that productivity has not gone up, despite higher capital good investment. Interest rate hikes are "exposing the private sector to adverse changes." In perhaps the most exquisitely phrased statement, the Bank says that "there has been a pause in the rebalancing of national demand and net exports as a percentage of GDP", i.e. the current account deficit is still a very high nine percent of GDP. (Comment: Given that the head of the Spanish Central Bank, Miguel Angel Fernandez Ordonez, is a PSOE loyalist and was appointed to the position by the government, the Bank's warnings, albeit put in gentle terms, are a subtle change. This has been noticed by commentators and adds to speculation that maybe the Spanish economy is in for a slowdown.) (Expansion, May 4) ROSALINI INVESTMENT DISPUTE PROMPTS EDITORIAL ¶3. (U) ABC Says "United States Asks its Big Companies to take Precautions in Investing in Spain": This May 2 front-page headline with an accompanying editorial was prompted by AmCit Dugan Rosalini's complaints that the Barcelona Forum has not yet complied with a Cook County, Illinois judgment. Using language from this year's Investment Climate Statement, Rosalini and his partner got a naturally willing ABC to take potshots against the government on its economic policies, although ABC framed this in the context of generally bad U.S.-Spain relations. The Investment Climate Statement includes a reference to Rosalini's dispute and then advises MADRID 00000907 002.2 OF 002 that in the event American businesses sign a contract stipulating a U.S. court as the venue for resolving disputes, the U.S. business should find in advance an expeditious way to execute a possible U.S. judgment in Spain as there is not treaty between the U.S. and Spain recognizing judgments in the other country. In a prototypical example of how the print media work in Spain, ABC spun this in to something bigger even though towards the end of the article it concedes that the Barcelona Forum case is an "exception." (ABC, May 2) FARMAINDUSTRIA OFFERS 300 MILLION FOR RESEARCH ¶4. (U) Research & Development-based Pharmaceutical Industry offers Euros 300 million for more research in rare diseases over five years if GOS agrees to provide product patent protection for drugs that benefited from process patent protection prior to 1992: Farmaindustria, which represents Spanish and the major American R&D pharmaceutical companies in Spain made this offer public on May 7. The industry has already floated the idea in private meetings with the government. The Ambassador has also mentioned it in meetings with President Zapatero's former Economic Adviser, Miguel Sebastian. This is the first time the drug companies have made the offer public, and the first time the industry has proposed a specific number. There are a number of blockbuster drugs, particularly medicines dealing with cholesterol, that will lose patent protection shortly unless patent policy is changed (the companies say this can be done without legislation). The R&D-based industry uses the argument that this would "harmonize" Spanish patent practice with most other major EU countries. The companies also say that TRIPS obliges Spain to provide this additional protection, although USG lawyers do not agree with this argument. The Embassy has been supportive of the R&D-based pharmaceutical industry on public policy grounds. (Comment: It is interesting that the industry has now tabled a concrete offer. We wonder though whether the government will have the appetite to stave off lawsuits from the generics manufacturers even if significant additional research in rare diseases is presumably attractive.) (Expansion, May 8, 2000) BIODIESEL PRODUCTION FUTURE LOOKS PROMISING ¶5. (U) If Spanish biodiesel producers were to bring on-line all of the production capacity that is currently indicated (on the books) for production by 2010, Spain would become one of the leading producers of renewable fuels in Europe. By January 2008, production capacity will likely be at about two million tons, and by January 2011 that capacity is indicated at almost nine million tons. ¶6. (U) However, most analysts here in Spain doubt that the biodiesel projects currently on the books for 2008 and beyond will become reality. On the positive side of the equation are the EU renewable fuels guidelines, a new Spanish law (to be announced this year) that will require renewable fuels mixing, and a new generation of oilseeds crushing plants that can refine and direct the renewable oil to a variety of uses, including biodiesel, human consumption, import, export, etc. ¶7. (U) On the unknown, but very important side of the equation is biodiesel-production profitability. For the many small-scale production plants, currently operating and planned, that are dedicated to producing only biodiesel (single-outlet market),commodities markets can be especially pernicious as evidenced by the recent run-up in cereals commodity prices and a sharp drop in crude oil prices. Aguirre