SEC GUTIERREZ MEETS WITH US COMPANIES

UNCLAS ASUNCION 000584 SENSITIVE SIPDIS WHA/FO CKELLY, WHA/BSC MDRUCKER, FOR COMMERCE SECRETARY GUTIERREZ, AMB LGUTIERREZ E.O. 12958: N/A TAGS: ECIN PGOV EIND ECON EINV ETRD PREL PA SUBJECT: SEC GUTIERREZ MEETS WITH US COMPANIES REF: ASUNCION ¶1. (SBU) SUMMARY: U.S. companies operating in Paraguay met with Secretary Gutierrez and the U.S. delegation for President Lugo's inauguration at the Chamber of Commerce August 14. The companies indicated that insecurities in the judicial system undermine Paraguay's capacity to attract foreign investment. Companies in the agriculture sector worried about becoming targets of Lugo's administration via a tax on their production. Exxon Mobil shared its concerns about PDVSA's support to Petropar. The companies were cautiously optimistic, with mixed expectations of the direction that Lugo's administration might take. All participants expressed concerns with the government's thus-far limited engagement with the private sector. END SUMMARY. ¶2. (SBU) The Chamber of Commerce (AMCHAM) hosted August 14 a working group meeting with key US companies for Secretary Gutierrez and the U.S. delegation to President Lugo's inauguration. Cargill, ADM, Continental Grains, Citibank Paraguay, PriceWaterhouseCoopers, Exxon Mobil Paraguay, and Sheraton represented the group of U.S. companies. Secretary Gutierrez opened the meeting by describing a growing tendency toward pragmatic economic policies in Latin America, and indicated that private sector investment is critical to growth and job creation. He asked the participating companies to share their views about the business environment, their expectations of Lugo,s administration, and the role that the U.S. can play. Secretary Gutierrez emphasized that the U.S. views Paraguay as a partner, and that the U.S. seeks to maintain trade and commercial ties with Paraguay. -------------- THE AGRICULTURE SECTOR COMPANIES -------------- ¶3. (SBU) Cargill, which has over 125 million USD invested in Paraguay (mostly in the soy business),accounts for over 35 percent of all Paraguayan exports and over 70 percent of the country,s industrial capacity in the agro-sector, employs 460 people, and is one of the largest corporate tax payers in the country (over 1 billion USD paid in taxes). Cargill has a joint-venture with Coca Cola to commercialize the natural sweetener &stevia8 and has provided small producers with over 60 million USD in cash advances for inputs. The Cargill representative asserted that Lugo's idea of taxing commodities exports could create problems for the sector. Continental Grains agreed, arguing that the government could expand its tax-base by taxing net earnings instead of production. ¶4. (SBU) ADM, which has 1.5 billion USD in sales and employs 650 people, said it was cautiously optimistic about Lugo's administration, but worried about the lack of serious engagement from the government on economic policy. ADM echoed the other agriculture companies' concerns about taxing production instead of earnings, and explained that Lugo,s administration runs the risk of hurting the country's most productive economic sector. The ADM representative noted the agro-sector needs an active campaign to inform the public about the economic and social benefits that it brings to Paraguay in order to reduce the sector's risk of becoming targets of aggressive economic policies. The companies explained that in the past, the US Embassy supported public information campaigns and asked for additional Embassy collaboration. ¶5. (SBU) The Continental Grains (Conti) representative encouraged the U.S. to continue its support of economic formalization, complaining that the informal sector free-rides at the expense of the formal sector. He indicated that Lugo's administration should look to expand its tax-base to include the informal sector, not narrow it by increasing the tax burden on existing formal enterprises. The Conti rep also contended that a production tax could be unconstitutional. Finally, he said the new government should apply stricter phyto-sanitary standards to guarantee the quality of fresh produce. -------------- THE FINANCIAL SECTOR -------------- ¶6. (SBU) Citibank (Citi) Paraguay, with over 400 million USD in assets, described its partnership with the Overseas Private Investment Corporation (OPIC),under which OPIC has committed 95 million USD in credit guarantees. Citi was moderately optimistic about the incoming administration but warned that President Lugo faces significant challenges in maintaining a cohesive front in a coalition government. Citi said that inflation has remained at single digits, and that dollar loans are on average priced at 7 to 9 percent, with fixed rates as low as 9 percent. ¶7. (SBU) PriceWaterhouseCoopers (PWC),the (self-proclaimed) number one auditing firm in country, asserted that Paraguay's international image as a less-than-serious country plagued by judicial insecurity is one of the main reasons why serious foreign investors invest elsewhere. The PWC official indicated that Paraguay does not have a certifying accounting body, and that the quality of audits is inconsistent. -------------- OIL AND CONSTRUCTION COMPANIES -------------- ¶8. (SBU) Exxon Mobil, which recently celebrated its 100 year anniversary in Paraguay, operates in the commercialization of oil, gas and diesel. Exxon,s market share is 14 percent, making it the third largest distributor in Paraguay with over 120 gas stations and over 300 employees. Exxon pays over 13 million USD in taxes, and is the only private company operating in the sector in Paraguay. Exxon's General Manager said it is difficult for Exxon to maintain a long-term investment plan because of judicial insecurity. Exxon Paraguay gets a good amount of its supply from Petropar, and the rest is procured in the open market. The Exxon representative expressed concern regarding Petropar's intentions to upgrade its small local refinery with PDVSA's support, saying the project makes little economic sense. He also commented that PDVSA,s diesel is expensive and of poor quality. ¶9. (SBU) The Sheraton Hotel's director emphasized the need for the new government to maintain a close dialogue with the private sector. He described Paraguay's need to improve its competitiveness and infrastructure and opined that infrastructure upgrades can only occur with private sector participation. While the government has signaled its interest in public-private partnerships, he said, there are not concrete indications of the direction these partnerships will take. The Sheraton representative agreed that judicial insecurity severely hinders Paraguay,s prospects for foreign investment. Other AMCHAM Directors argued that lasting judicial reform is only possible with an accompanying change in attitudes towards corruption. Secretary Gutierrez noted that a strong judicial system was key to the economic success of several Asian countries, where clear rules attracted foreign direct investment. -------------- COMMENT -------------- ¶10. (SBU) COMMENT: The companies identified Paraguay's weak judicial system as the Lugo administration's main challenge. Their expectations of Lugo,s presidency were cautiously optimistic, with mixed expectations of the direction that Lugo might take. Their frustration with their limited engagement to date with the new administration is legitimate. If Lugo is to successfully implement his economic policies, he will need to reach out to the private sector, and soon. END COMMENT. ¶11. Secretary Gutierrez did not have an opportunity to clear this cable before departure. Please visit us at http://www.state.sgov.gov/p/wha/asuncion AYALDE