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Cablegate: Legislating Against Economics

VZCZCXYZ0053
PP RUEHWEB

DE RUEHLP #1659/01 1652002
ZNR UUUUU ZZH
P 142002Z JUN 07
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 3969
INFO RUEHAC/AMEMBASSY ASUNCION 6854
RUEHBO/AMEMBASSY BOGOTA 4199
RUEHBR/AMEMBASSY BRASILIA 8083
RUEHBU/AMEMBASSY BUENOS AIRES 5333
RUEHCV/AMEMBASSY CARACAS 2568
RUEHPE/AMEMBASSY LIMA 2720
RUEHMD/AMEMBASSY MADRID 3507
RUEHMN/AMEMBASSY MONTEVIDEO 4668
RUEHQT/AMEMBASSY QUITO 5199
RUEHSG/AMEMBASSY SANTIAGO 9796
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUMIAAA/USCINCSO MIAMI FL
RUEHUB/USINT HAVANA 0362
RHEHNSC/NSC WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS LA PAZ 001659

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/AND
TREASURY FOR SGOOCH

E.O. 12958: N/A
TAGS: EAGR ECON EINV ELAB EMIN ENRG EPET BL
SUBJECT: LEGISLATING AGAINST ECONOMICS

(SBU) Since the Morales administration came to power, the GOB
has enacted a number of laws and decrees, some eliminating
prior norms, which have had negative economic ramifications.
The GOB does not appear to have fully considered the economic
and legal consequences of some measures prior to their
implementation. As one analyst explained, "the
administration first jumps into the pool and then checks to
see if it has any water." Following are several examples of
areas in which the GOB has legislated against the laws of
economics, and even against its own stated objectives:

- YPFB Vetoed: In May 2007, President Morales vetoed the
Hydrocarbons Sustainable Development Law passed by congress
that would have enabled the new contracts between state oil
company YPFB and private production firms to come fully into
force. The law would have specifically enabled the annex
that defines YPFB's share of company profits to enter into
effect. The president's veto threatens the future of YPFB
and the GOB's "nationalization" program.

- Energy Shortages: In June 2007, President Morales
promulgated supreme decree 29158 aimed at avoiding shortages
of liquid petroleum gas (LPG) caused by capped domestic
prices, which cause poor production incentives and large
contraband incentives. Bolivia is essentially subsidizing
neighboring countries by providing them with contraband LPG
at less than half the cost in those countries. Instead of
attacking the root cause of this problem, i.e., subsidized
prices, decree 29158 places 13 prohibitions on the sale of
LPG, gasoline, and diesel, some of which are punishable by
imprisonment.

- Free Contracting: In May 2006, the GOB issued a decree
eliminating article 55 of decree 21060 that allowed free
contracting of employees. Business owners predict that this
new decree will decrease efficiency and lead to greater
unemployment.

- Agrarian Reform: In November 2006, the GOB proposed and
congress approved amendments to the agrarian reform law,
which large agricultural producers claim have resulted in
legal insecurity and made it difficult for them to access
credit for their businesses.

- Trade: In April 2006, Bolivia entered into the People's
Trade Agreement with Cuba and Venezuela, while refusing to
negotiate a trade agreement with the U.S. Bolivia traded USD
0 with Cuba in 2006, and sales to Venezuela did not improve
compared with previous years.

- Investments: In May 2007, Bolivia withdrew from the
International Center for the Settlement of Investment
Disputes, making its already poor investment climate and
international reputation worse. This action had no
beneficial effect for Bolivia, which will still be obliged to
use ICSID's Additional Facility. The GOB has announced its
intentions to renegotiate bilateral investment treaties and
alter its investment law, which guarantees access to
international arbitration.

- Company Take-Overs: The GOB declared in June 2006 that it
would regain ownership of nine companies that were partially
privatized in the 1990s. On the whole, these companies
currently operate efficiently and have significantly expanded
access to the services they provide, such as
telecommunications and electricity, during the past decade.
The government has begun its campaign with three hydrocarbons
companies and one telecommunications firm, but has not
completed its objectives due to legal obstacles. The GOB's
plan to increase public sector control over these strategic
economic areas is likely to lead to a decline of company
efficiency and a drain on the national treasury. The
announcement to take over gas pipeline operator Transredes
has already resulted in a freeze on Transredes' credit which
has delayed the implementation of important pipeline
expansion projects that are desired by the GOB.

- Water Provision: The private water company Aguas de
Illimani was kicked out of Bolivia because the public
complained that the costs were too high. It was replaced
with a public company, EPSAS, that recently announced plans
to raise rates.

- Mining Nationalization: The GOB's nationalization of
Swiss-owned mineral smelter Vinto in February 2007 resulted
in a decline of sales and loss of profits.
URS

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