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.

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THE AGRICULTURE SECTOR COMPANIES
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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.

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THE FINANCIAL SECTOR
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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.

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OIL AND CONSTRUCTION COMPANIES
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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.

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COMMENT
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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.

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