BOLIVIA INVESTMENT CLIMATE STATEMENT 2009

UNCLAS LA PAZ 000069

SIPDIS

OPIC; USTR FOR BHARMAN; EB/IFD/OIA

E.O. 12958: N/A
TAGS: BL EFIN EINV ETRD KTDB PGOV ELAB
SUBJECT: BOLIVIA INVESTMENT CLIMATE STATEMENT 2009

REF: 08 STATE 123907


1. (U) Bolivia remains a difficult place to do business.
Economic activity is often disrupted by social unrest
resulting from centuries of economic, political, and social
inequality, and indigenous, labor, and anti-globalization
organizations have recently targeted private investment )-
particularly foreign investment )- as the cause of many of
the country,s ills. Political violence can escalate quickly.


2. (U) Social unrest, weak judicial security, arbitrary
regulatory decisions, widespread corruption, and cumbersome
bureaucratic procedures may adversely affect companies,
operations and ventures.


3. (U) Investments may also be affected by policy changes
proposed by the Evo Morales administration. During the 2005
presidential campaign, Morales pledged to nationalize natural
resources, move away from market-oriented economic policies,
and empower Bolivia's indigenous population. Since his
January 2006 inauguration, Morales has "nationalized" the
hydrocarbons industry (forcing companies to negotiate new
contracts and offering the state-owned oil company majority
share of five firms),the telecommunications industry, and
threatened the mining and forestry sectors with similar
action. In 2009 he has mentioned other sectors such as
electricity and transportation as possible nationalization
targets. Resulting political and economic uncertainty
presents challenges for potential investors.


4. (U) Companies considering doing business in Bolivia should
carefully weigh the advantages and risks of potential
investments, conduct extensive due diligence before
committing funds, and retain competent Bolivian legal and
other counsel. Bolivia's new draft constitution, which will
go to the voters for approval on January 25, 2009, mandates
significant change to Bolivia's investment regime, including
an end to international arbitration and reservation of
exploration of natural resources to the state.

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Openness to Foreign Investment
--------------


5. (U) Bolivia's legal framework, at the present, remains
generally open to foreign investment. Foreign firms are not
subject to special registration requirements. However, they
may be adversely affected by inconsistent and arbitrary
regulatory decisions, unfavorable interpretations of laws,
and an easily corrupted judicial system that may deny due
process.


6. (U) The Investment Law (Law 1182, 1990) provides for
national treatment of foreign firms and guarantees the
unimpeded repatriation of profits, the free convertibility of
currency, and the right to international arbitration (limited
to contractual rights) in all sectors. Laws governing
activities in the mining (Law 1777, 1997) and hydrocarbons
(Law 3058, 2005) sectors authorize joint ventures, and
association or provision of services to state-owned
corporations.

7. (U) Investors should note recent changes in hydrocarbons
legislation. Hydrocarbons Law 3058 (issued in May 2005)
required investors to migrate to new contracts within 180
days, imposed an additional 32 percent tax on revenues, and
forced producers to relinquish all hydrocarbons to the state.
The law also required companies to sell all hydrocarbons
through YPFB and to satisfy the domestic market (at
artificially prices set by the hydrocarbons regulator) before
exporting.


8. (U) The government's May 1, 2006 Supreme Decree
"nationalizing" the hydrocarbons sector generally restated
the provisions of the 2005 statute, giving companies six
months to negotiate new operating contracts, transferring
control over the entire production chain to the state, and
offering state-run Yacimientos Petroliferos Fiscales
Bolivianos (YPBF) majority share of five companies. Although
private upstream operators and YPFB have been negotiating
these new provisions, as of December 2008 terms and
conditions for delivery agreements have still not been
settled for most operators.


9. (U) All production companies signed new contracts in
October 2006, just days before the negotiation deadline, and
agreed to pay 50 percent in taxes and royalties, plus a
varying take for YPFB. In late November 2007, the Bolivian
Congress approved the new contracts. Separate negotiations
between the Bolivian government and the five companies
destined for YPFB takeover are ongoing. As of December 2008,
YPFB has been able to settle with most international
operators in the sector.

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Conversion and Transfer Policies
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10. (U) Currency is freely convertible at Bolivian banks and
exchange houses. The official exchange rate is determined by
the Central Bank's daily auction of dollars, where the bank
offers a given amount of dollars and sets a minimum price.
The parallel rate has tracked the official rate closely,
which suggests the market finds the Central Bank's policy
acceptable.


11. (U) The Banking Law (Law 1488, 1993) establishes
regulations for foreign currency hedging and authorizes banks
to maintain accounts in foreign currencies. This accommodates
the steady demand for U.S. dollars. There are no restrictions
of any kind on currency transfers or remittances. However,
the Central Bank established during the last quarter of 2007
a one percent fee for all money transfers larger than one
thousand US dollars. Also, since November 2008, any
hard-currency cash larger than ten thousand U.S. dollars
entering or leaving the country must be registered with and
authorized by the Central Bank and Ministry of Finance.

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Expropriation and Compensation
--------------


12. (U) Article 22 of the Bolivian Constitution allows the
government to expropriate property for the public good or
when the property does not fulfill a "social purpose." It
also stipulates that individuals and firms be awarded just
compensation.


13. (U) The Mining and Hydrocarbons Laws outline procedures
for expropriating land to develop underlying concessions. In
2007, the Bolivian government nationalized the Vinto smelter
belonging to Swiss company Glencore; requests from Glencore
for negotiations were ignored, and the smelter is now run by
the state mining company COMIBOL. COMIBOL also regained
control of the Huanuni tin deposit, evicting small
cooperative mining operations that had previously been given
rights to exploit portions of the deposit and returning all
Huanuni mining to state control.

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Dispute Settlement
--------------


14. (U) Property and contractual rights may be enforced in
Bolivian courts, but the legal process is time-consuming and
may be subject to political influence and corruption.


15. (U) Efforts to improve Bolivia's justice system have
generated results in some regional courts. Past decisions by
the Supreme Court and Constitutional Tribunal have
occasionally been influenced by outside factors, but both
have generally rendered fair decisions. However, neither
Bolivian nor foreign firms can rely on the judicial system to
effectively enforce contracts.


16. (U) The Bolivian government currently accepts binding
international arbitration. The Investment Law provides for
arbitration in accordance with the Bolivian Constitution and
international norms, while the Arbitration and Conciliation
Law (Law 1770, 1997) outlines arbitration procedures and
enforcement mechanisms. The law states that international
agreements, such as the Convention on the Settlement of
Investment Disputes between States and Nationals of Other
States and the New York Convention of 1958 on the Recognition
and Enforcement of Foreign Arbitral Awards, must be honored.
It mandates the recognition of foreign decisions and awards
and establishes procedures for the Supreme Court's execution
of decisions. In October 2007, however, Bolivia became the
first country ever to withdraw from the International Center
for the Settlement of Investment Disputes (ICSID),a World
Bank referee for investment disputes. The draft constitution,
which will go to referendum on January 25, 2009, contains
language that seems to limit the ability of international
companies to apply for international arbitration or
diplomatic intervention in disputes.


17. (U) Bolivia's Commercial Code (Decree Law 14379, 1977)
has roots dating from 1939. Although many of its provisions
have been modified and supplanted by more specific
legislation, it continues to provide general guidance for
commercial activities.

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Performance Requirements and Incentives
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18. (U) The Bolivian government does not impose performance
requirements as conditions for establishing, maintaining, or
expanding businesses. It does not generally provide tax or
investment incentives for foreign investors, but some
municipalities have established property tax exemptions for
businesses located in their areas.


19. (U) Foreign firms are allowed to participate in
government-sponsored research and development programs, but
few, if any, such programs exist.


20. (U) Work permit, visa, and residence requirements are
non-discriminatory. The government sets a minimum monthly
wage each year, but many workers in the formal private sector
earn more. In 2007, Bolivia began requiring tourist visas for
American citizens. Work visas have not been affected by the
change.

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Right to Private Ownership and Establishment
--------------


21. (U) Foreign and domestic private entities have equal
right to establish, acquire, and dispose of business
interests and to engage in remunerative activity. Private and
public entities enjoy equal access to markets, credit,
licenses, and supplies.

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Protection of Property Rights
--------------


22. (U) Bolivian law guarantees property rights, but rights
are not always effectively enforced. The Agrarian Law (Law
1715, 1996) outlines the rights and obligations of land
ownership and establishes an independent Agrarian
Superintendent to administer the law's provisions, while the
Office of Property Registry oversees the acquisition and
disposition of land, real estate, and mortgages. In November
2006, the Agrarian Law was modified by Law 3545, which
provides that property deemed unproductive in biannual
reviews will revert to the state and places limits on
landowners, legal recourse.


23. (U) Despite efforts to reform the National Agrarian
Reform Service (INRA) and related entities, challenges to
land titles are common, and Bolivia lacks an adequate system
of title verification. Competing claims to land titles and
the absence of a reliable dispute resolution process create
risk and uncertainty in real property acquisition. Illegal
squatting on rural private property is an ongoing problem.


24. (U) Efforts to protect intellectual property rights (IPR)
are insufficient, despite the government's 1999 creation of
the National Intellectual Property Service (SENAPI). The
organization oversees all IPR-related activities, but its
reach is limited.


25. (U) The Copyright Law (Law 1322, 1992) protects literary,
artistic, and scientific works for the lifetime of the author
plus 50 years. It protects the rights of Bolivian authors,
foreign authors domiciled in Bolivia, and foreign authors
published for the first time in Bolivia. Foreigners not
domiciled in Bolivia enjoy protection to the extent provided
in international conventions and treaties to which Bolivia is
a party. Bolivian copyright protection includes the exclusive
right to copy or reproduce works; to revise, adapt, or
prepare derivative works; to distribute copies of works; and
to publicly communicate works. Although the exclusive right
to translate works is not explicitly granted, the law does
prevent unauthorized adaptation, transformation,
modification, and editing. The law also provides protection
for software and databases.


26. (U) The Bolivian Film and Video Law (Law 1302, 1991)
contains elements of IPR protection, establishing a National
Movie Council (CONACINE) to oversee the domestic film
industry and requiring that all films and videos shown or
distributed in Bolivia be registered with the organization.


27. (U) SENAPI reviews patent registrations for form and
substance and publishes notices of proposed registrations in
the Official Gazette; if there are no objections within 30
working days, the organization grants patents for a period of
20 years.


28. (U) The registration of trademarks parallels that of
patents. Once obtained, a trademark is valid for a 10-year
renewable period. It can be canceled if not used within three
years of the date of grant.


29. (U) Bolivia has no laws protecting trade secrets.


30. (U) Despite existing legal provisions )- the Copyright
Law recognizes copyright infringement as a public offense,
and the 2001 Bolivian Criminal Procedures Code provides for
the criminal prosecution of IPR violations )- the
enforcement of intellectual property rights remains
insufficient, and Bolivia remains on the U.S. Trade
Representative's Special 301 Watch List. Video, music, and
software piracy rates are among the highest in Latin America,
with the International Intellectual Property Alliance
estimating that piracy levels have reached 100 percent for
motion pictures and over 90 percent for recorded music. The
new draft constitution explicitly states that "the right to
access to medicines may not be restricted by intellectual
property rights." It is unclear how this statement will be
interpreted, should the draft constitution pass.


31. (U) Bolivia belongs to the World Intellectual Property
Organization and is a signatory to the Nice Agreement and the
Paris, Bern, and Geneva Conventions.

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Transparency of the Regulatory System
--------------


32. (U) The Bolivian regulatory system is generally
transparent and consistent. Bolivia has no laws directly
regulating competition. Instead, related articles are
incorporated into laws governing activity in specific
sectors.


33. (U) The Sectoral Regulatory System (SIRESE) Law (Law
1600, 1994) establishes general principles governing
anti-competitive practices, expressly prohibiting companies
engaging in regulated activities from participating in
agreements, contracts, decisions, or practices whose purpose
or effect is to hinder, restrict, or distort competition.


34. (U) The law created an autonomous regulatory body
comprised of a general superintendent and five specific
superintendents to oversee the water, electricity,
telecommunications, transportation, and hydrocarbons sectors.
However, the current administration has overruled and limited
regulators, administrative decisions. Market forces largely
determine public utility prices, but most are periodically
reviewed and approved by the relevant superintendent, with
regulated prices occasionally established through relatively
transparent procedures and formulas. An exception is potable
water and garbage collection, for which municipalities set
local rates.


35. (U) The Electricity Law (Law 1604, 1994),the
Telecommunications Law (Law 1632, 1995),and the Hydrocarbons
Law (Law 1689, 1996) define the characteristics and functions
of their respective superintendents.


36. (U) The Morales administration stated in 2007 that it
planned to modify the regulatory structure by placing the
superintendents under the control of relevant ministries,
potentially decreasing the regulators, freedom from
political interference. As of December 2008, some regulatory
bodies (superintendencies) have been preserved as before, but
subject to open political pressure and discretionary
decisions.


37. (U) A similar regulatory system governs the financial
sector, but several laws have changed its structure over the
last five years. Commercial banking is regulated by a
different regulator from pension and stocks.

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Efficient Capital Markets and Portfolio Investment
-------------- --------------


38. (U) Bolivian commercial banks were once closely held
operations lending only to well known individuals or firms,
but foreign and national institutions now play a role in the
banking system. Bolivian banks have developed the capacity to
adjudicate credit risk and evaluate expected rates of return
in line with international norms. Over time, they have
directed their services to small and micro enterprises around
the country.


39. (U) Credit is allocated on market terms, but foreign
investors may find it difficult to qualify for loans from
local banks due to the requirement that domestic loans be
issued exclusively against domestic collateral. Since
commercial credit is generally extended on a short-term basis
at high interest rates, most foreign investors prefer to
obtain credit abroad. Most Bolivian borrowers are small and
medium sized enterprises (SMEs) and have received a large
share of credits over the last four years. In 2007, the
government created a Productive Development Bank (PDB)
designed to support SMEs and other entities.


40. (U) Established Bolivian firms may issue short- or
medium-term debt in local capital markets, which act
primarily as secondary markets for fixed return securities.
Bolivian capital markets have sought to expand their handling
of local corporate bond issues and equity instruments. The
Securities Law (Law 1834, 1998) laid the groundwork for
creating a truly modern securities exchange, but social
unrest and economic disruptions have slowed its development.
Over the last few years, several Bolivian companies and some
foreign firms have been able to raise funding through local
capital markets.


41. (U) Although most accounting regulations follow
international principles, Bolivian accounting and reporting
procedures do not fully conform to world standards. Bolivian
firms commonly maintain several accounting books: one for tax
authorities, one for bankers, and another for management.
Financial sector regulations restrict extraordinary
compensations and financial transactions for managers and
senior executives.

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Political Violence
--------------


42. (U) Bolivia is prone to social unrest that can quickly
become violent and disrupt the transportation of goods and
people. In March and April 2000, protests against foreign
investment in the Cochabamba municipal water system led to
roadblocks and demonstrations across the country.


43. (U) Roadblocks were even more serious in September and
October 2000, when rural indigenous groups, coca growers, and
a variety of labor and social movements united in opposition
to various government policies. Concessions by the Bolivian
government ended these and subsequent protests, but not
before the roadblocks caused serious economic hardship and
interrupted Bolivian exports.


44. (U) Disruptive and violent social protests occur
regularly in La Paz and El Alto. In February 2003, units of
the National Police mutinied against the Sanchez de Lozada
administration. Spurred by a misunderstood government
proposal to introduce income taxes, mutinous police units
fought loyal military units, and, with the police absent,
rioters looted and burned government buildings and private
businesses. Although order was restored within 36 hours with
minimal damage to U.S. firms, the death toll in La Paz was
over 30.


45. (U) Violence was even worse during the October 2003 &gas
war,8 a social and political dispute that resulted in the
deaths of over 60 people and ended with the resignation of
President Sanchez de Lozada. His successor, Carlos Mesa,
resigned after similarly violent protests in El Alto in June

2005.


46. (U) More recently, various groups have staged large-scale
protests and blockaded roads. On numerous occasions, major
airports have been completely shut down and in September of
2008, American Airlines canceled their flights in and out of
the country for over 20 days due to the takeover of the Santa
Cruz airport. Political unrest will likely continue in the
near future.

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Corruption
--------------


47. (U) Corruption in the public sector and in many
non-governmental institutions is endemic. Officials accused
of corruption are rarely prosecuted or convicted.


48. (U) In 2005, the Bolivian government introduced a series
of reforms to modernize its operations, improve existing
legislation, and increase citizen participation in politics,
adopting the Financial Administration and Control (SAFCO)
Law, the State Employees Statute Act, and the Sworn
Declaration of Property and Income Law. The government also
created a Judiciary Council, a Human Rights Ombudsman, a
Constitutional Court, and a Civil Service Superintendent. A
cabinet-level presidential appointee is empowered to
investigate corruption at any level in any branch of
government. As of year-end 2006, congress was still
considering an anti-corruption bill proposed by the Morales
administration. In January 2009, congress re-announced their
plan to pass a corruption law, however it has not yet been
formally proposed.


49. (U) Bolivia's National Integrity Plan outlines proposals
for judicial reform and state modernization. Under the
government's Institutional Reform Project (PRI),the Customs
Service, the National Revenue Service, and the Ministries of
Housing, Education, and Agriculture have been reformed and
professionalized. The National Road Service was disbanded for
corruption in 2006 and replaced by another government entity,
the Bolivian Highway Association.


50. (U) With international assistance, the last several
governments have also worked to overhaul the Customs Service.
Corruption has reportedly fallen since the August 1999
Customs Reform Law, but contraband continues to flow into and
out of Bolivia. The Minister of Finance heads a multi-agency
council on contraband issues.

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Bilateral Investment Agreements
--------------


51. (U) Bolivia has signed bilateral investment treaties
(BITs) with Argentina, Belgium/Luxembourg, China, France,
Germany, Italy, Mexico, the Netherlands, Peru, Romania,
Spain, Switzerland, the United Kingdom, and the United
States. In 2006, however, the new Bolivian administration
announced that it intends to renegotiate all its bilateral
investment treaties. As of January 2009, the Morales
administration is awaiting the January 25 referendum on the
draft constitution, which if passed will allow it to
renegotiate all international treaties. Officials suggest
that some Bilateral Investment Treaties will be rejected
because they were &illegally8 passed while others may be
renegotiated because they treat Bolivian interest
inequitably. It is uncertain how enthusiastically foreign
governments will pursue renegotiating such agreements.


52. (U) The U.S.-Bolivia BIT entered into force in June 2001.
Investors are entitled to the better of national treatment or
most favored nation (MFN) treatment when they initiate an
investment and while they maintain that investment, subject
to certain limited and specifically described exceptions
listed in annexes and protocols.


53. (U) Expropriation can occur only in accordance with
international law, e.g., for a public purpose, in a
nondiscriminatory manner, under due process of law, and in a
manner accompanied by prompt, adequate, and effective
compensation.


54. (U) Investors have the right to promptly transfer funds
into and out of either country using market exchange rates.
This covers all investment-related transfers, including
interest, liquidation proceeds, repatriated profits, and
infusions of additional financial resources after initial
investments.


55. (U) The ability of either government to require investors
to adopt inefficient and trade-distorting practices is
limited, and performance requirements such as local content
and export quotas are prohibited.


56. (U) Investors have the right to submit an investment
dispute with the treaty partner's government to international
arbitration, with no obligation to use the host country's
domestic courts. Several cases have been brought against the
Bolivian government relating to their nationalization
efforts, however, no court decisions have yet been reached.


57. (U) Investors also have the right to employ the top
managerial personnel of their choice, regardless of
nationality.

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OPIC and Other Investment Insurance Programs
--------------


58. (U) The 1985 U.S.-Bolivia Investment Insurance Agreement
provides for a full range of Overseas Private Investment
Corporation (OPIC) programs, including political risk
insurance and loan financing. OPIC provides financing
assistance to U.S. firms through direct loans and guarantees
issued by U.S. financial institutions.


59. (U) The International Bank for Reconstruction and
Development,s (IBRD) Multilateral Investment Guarantee
Agency (MIGA) has offered a complete line of investment
guarantees to foreign investors in Bolivia since October

1991.

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Labor
--------------


60. (U) Approximately two-thirds of Bolivia's population of
9.8 million as of 2007 is considered &economically active,8
a figure that includes teenagers and children legally
prohibited from working. Overall, between 60 and 65 percent
of laborers participate in the informal economy, where no
contractual employer-employee relationships exist.


61. (U) Foreign investors generally find the labor force
stable, with low turnover rates and high levels of manual
dexterity. Relatively low education and literacy levels tend
to limit labor productivity, a fact reflected in the low cost
of labor. Unskilled labor is readily available, but skilled
workers are often harder to find. Many workers - both skilled
and unskilled have migrated to other countries to look for
work, mainly Chile, Argentina and Spain.


62. (U) Bolivian labor law guarantees workers the right of
association and the right to organize and bargain
collectively. Most companies are unionized, and nearly all
unions belong to the Confederation of Bolivian Workers (COB).
Despite international perceptions, extensive labor unrest in
the private sector is uncommon, and most foreign firms enjoy
positive labor-management relations.

63. (U) Bolivian labor law also restricts child labor and
provides for worker safety, but enforcement is often
ineffective.

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Free Trade Zones
--------------


64. (U) The Bolivian government created free trade zones
(FTZs) under Supreme Decrees 22410 and 22526. The National
Council on Free Trade Zones (CONZOF) oversees all industrial
and commercial FTZs and authorizes operations. Free trade
zones exist in the cities of El Alto, Cochabamba, Santa Cruz,
Oruro, Puerto Aguirre (on the Brazilian border),and
Desaguadero (on the Peruvian border).


65. (U) A proposed FTZ in Guayaramerin in the Beni Department
is not yet fully operational. The FTZ in Cobija, meanwhile,
has proven unattractive to investors due to a lack of roads,
limited basic infrastructure and corruption scandals.

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Foreign Direct Investment Statistics
--------------


66. (U) U.S. investments accounted for approximately
one-third of net foreign direct investment (FDI) inflows of
USD 1.7 billion between 2001 and 2006, followed by Brazil,
Argentina, Italy, and Spain (each with about 10 percent) and
France and the United Kingdom (each with about five percent).


67. (U) Over last six years, U.S. companies have invested an
estimated USD 750 million in the mining sector, USD 420
million in the hydrocarbons sector, USD 290 million in energy
production and distribution, and USD 230 million in
telecommunications.


68. (U) According to the Bolivian Central Bank, or its
Balance of payments statistics, FDI was approximately USD 278
million in 2006, USD 200 million in 2007, and USD 370 million
as of September 2008. The Bolivian government has not
released a breakdown of FDI by country since 2006.
URS