Cablegate: Peru 2008 Investment Climate Statement


DE RUEHPE #0151/01 0282029
P 282029Z JAN 08





E.O. 12958: N/A

REF: 07 STATE 158802

The following is Embassy Lima's submission of the 2008 Investment
Climate Statement for Peru.

Openness to Foreign Investment

1. (U) The Peruvian government seeks to attract investment -- both
foreign and domestic -- in nearly all sectors of the economy. The
U.S.-Peru Trade Promotion Agreement (PTPA), signed by President Bush
and President Garcia on December 14, enables Peru to attract
additional investment by clarifying rules for investors, increasing
transparency, reducing barriers to trade, establishing faster
customs procedures, and improving the dispute settlement process.
Peru does not have a bilateral investment treaty (BIT) or tax treaty
with the United States, but these provisions are contained in the
PTPA. The U.S. Congress extended unilateral trade preferences under
the Andean Trade Preferences Act (modified by the Andean Trade
Preferences and Drug Eradication Act, or ATPDEA) to Peru, Colombia,
Bolivia and Ecuador through February 2008. The U.S. Government
recognized Peru's progress on social and economic policy by
selecting Peru for the Millennium Challenge Account's Threshold
Program for fiscal year 2007.

2. (U) During the early 1990s, the Peruvian government promoted
economic stabilization and liberalization policies by lowering trade
barriers, lifting restrictions on capital flows and opening the
economy to foreign investors. Peru experienced marked growth in
foreign investment from 1993-1998. Economic reform and
privatization slowed in the late 1990s however, leading to a
discernible drop in direct and indirect foreign investment flows.
Investment remained stagnant following the collapse of President
Alberto Fujimori's government in November 2000, and through the
period of an interim government and the election of President
Alejandro Toledo in 2001.

3. (U) During his tenure, President Toledo implemented several
pro-investment policies. In April 2002, the government established
ProInversion, building on the foundation of COPRI, the privatization
agency created in 1991. ProInversion seeks to be a "one-stop shop"
for current and potential investors, and has successfully completed
both concessions and privatizations of state-owned enterprises and
natural resources. In 2004, Las Bambas, a copper deposit, was
concessioned to Xstrata TLC, a Swiss company, for USD 121 million
plus 19 percent VAT. In 2005, Bayovar, a state-owned phosphate rock
deposit, was concessioned to a Brazilian company for a 3 percent
royalty, and ProInversion granted British-owned Rio Tinto a
concession for the La Granja copper deposit for USD 22 million.
Additionally, from January-November 2006, the oil and gas leasing
agency Petroperu granted 15 exploration concessions to foreign oil
companies, including 8 to 5 U.S. companies, along the northern coast
and in the jungle.

4. (U) In addition to the 1993 Constitution (enacted January 1,
1994), major laws concerning foreign direct investment in Peru
include the Foreign Investment Promotion Law (Legislative Decree
(DL) 662 of September 1991) and the Framework Law for Private
Investment Growth (DL 757 of November 1991). The two 1991 laws were
implemented by Supreme Decree 162-92-EF (October 1992). Two other
important laws are the Private Investment in State-Owned Enterprises
Promotion Law (DL 674) and the Private Investment in Public Services
Infrastructure Promotion Law (DL 758).

5. (U) The 1993 Constitution guarantees national treatment for
foreign investors and permits foreign investment in almost all
economic sectors. Prior approval is only required in the banking
(for regulatory reasons, also applies to domestic investment) and
defense-related sectors. Foreign investors are advised to register
with ProInversion to obtain the guarantee that they will be able to
repatriate capital, profits and royalties. Foreigners are legally
forbidden from owning a majority interest in radio and television
stations in Peru; nevertheless, foreigners have in practice owned
controlling interests in such companies. Under the Constitution,
foreign interests cannot "acquire or possess under any title, mines,
lands, forests, waters, or fuel or energy sources" within 50
kilometers of Peru's international borders. However, foreigners can
obtain concessions and rights within the restricted areas with the
authorization of a supreme resolution approved by the Cabinet and
the Joint Command of the Armed Forces. All investors -- domestic
and foreign -- need prior approval before investing in weapons
manufacturing industries.

6. (U) In 1991, the Peruvian government began an extensive
privatization program, encouraging foreign investors to participate.
From 1991 through September 2005, privatization revenues totaled
USD 9.4 billion, of which foreign investors were responsible for the
vast majority. Over three-quarters of these transactions took place
from 1994 to 1997. Through September 2005, privatization and
concessions proceeds totaled USD 35.1 million, and generated
investment commitments of USD 1.3 billion. The government has made
only limited progress on privatizations since then, and prospects
for future direct privatizations are not encouraging. The
government has consequently shifted to a strategy of promoting
multi-year concessions as a means of attracting investment into
major projects. In 2000, the Lima airport was concessioned to a
private group (Lima Airport Partners), and in August 2006, nine of
Peru's northern airports were concessioned for 25 years to
Swissport. Peru's other airports, as well as various electricity,
water, sewage, and oil (Petroperu) companies remain state-owned and
operated. In June 2006, the Container Terminal-South Pier of the
important seaport of Callao was concessioned for 30 years to a
consortium of P and O Dover (U.K.) and Uniport (Spain).

7. (U) In June 2004, the Congress passed a law to exclude the
state-owned oil company Petroperu from privatization and authorized
Petroperu to conduct exploration and production activities. This
modified the government's policy since the early 1990s, when it sold
all of Petroperu's exploration and production units and a major oil
refinery. Under this new law, the government still has an option of
granting concessions on remaining Petroperu assets, including one
pipeline and several refineries. In July 2006, Congress defeated an
executive veto of a bill to "strengthen and modernize" Petroperu.
Under the new law, Petroperu can resume exploration, production and
related activities, including petrochemicals; is freed from
contracting approval by CONSUCODE, the state procurement supervision
agency; is exempted from the approval of its investment projects by
the Government Projects Office (SNIP); and will have a worker on its
board of directors. Petroperu has a strategic alliance with
Brazil's Petrobras.

8. (U) Under the 1993 Constitution, foreign investors have the same
rights as national investors to benefit from any investment
incentives, such as tax exemptions. The PTPA establishes a secure,
predictable legal framework for U.S. investors operating in Peru.
All forms of investment are protected under the Agreement. U.S.
inestors will enjoy in almost all circumstances the right to
establish, acquire and operate investments in Peru on an equal
footing with local investors.

Conversion and Transfer Policies

9. (U) Under Article 64 of the 1993 Constitution, the Peruvian
government guarantees the freedom to hold and dispose of foreign
currency; hence, there are no foreign exchange controls in Peru.
All restrictions on remittances of profits, dividends, royalties,
and capital have been eliminated, although foreign investors are
advised to register their investments with ProInversion (as noted
above) to ensure these guarantees. Exporters and importers are not
required to channel foreign exchange transactions through the
Central Reserve Bank of Peru, and can conduct transactions freely on
the open market. Anyone may open and maintain foreign currency
accounts in Peruvian commercial banks. U.S. firms have reported no
problems or delays in transferring funds or remitting capital,
earnings, loan repayments or lease payments since Peru's economic
reforms of the early 1990s.

10. (U) The 1993 Constitution guarantees free convertibility of
currency. There is, however, a legal limit on the amount that
private pension fund managers can invest in foreign
securities. In May 2004, the Central Reserve Bank of Peru (CR)
increased this limit from 9 percent to 10.5 percent. The low limit
has created local market distortions,
trapping liquidity in Peru that is diverted into local equities and
bonds, driving up their prices to artificially high levels. The
BCR's new board, appointed by the Garcia
Administration, intends to gradually raise this limit, beginning
with an increase to 12 percent. Under the PTPA, Portfolio managers
in the U.S. will be able to provide portfolio management services to
both mutual funds and pension funds in Peru, including to funds that
manage Peru's privatized social security accounts.

11. (U) The BCR is an independent institution, free to manage
monetary policy to maintain financial stability. The BCR's primary
goal is to maintain price stability, via inflation targeting.
Inflation in Peru was 1.6 percent in 2005, 2 percent in 2006, and
1.8 percent in 2007. The government has also implemented policies
to de-dollarize the economy, and deposits in the local currency
(Nuevo Sol) now account for about 36 percent.

Expropriation and Compensation

12. (U) According to the Constitution, the Peruvian government can
only expropriate private property on public interest grounds (such
as for public works projects) or for national security. Any
expropriation requires the Congress to pass a specific act. The
Government of Peru has expressed its intention to comply with
international standards concerning expropriations.

Dispute Settlement

13. (U) Dispute settlement continues to be problematic in Peru,
although the GOP took steps in 2005 to improve the dispute
settlement process. From December 2004 through 2006, the GOP
established 24 commercial courts to rule on investment disputes,
including two courts of appeal. All of these courts are located in
Lima. The commercial courts have substantially improved the process
for commercial disputes. Prior to the existence of the commercial
courts, it took an average of two years to resolve a commercial case
through the civil court system. These new courts, which have
specialized judges, have reduced the amount of time to resolve a
case to two months. Additionally, the enforcement of court
decisions has been reduced from 36 months to 3-6 months. While
about 40 percent of decisions are appealed, most of these are
resolved at the appeals level; very few are appealed to the Supreme

14. (U) The criminal and civil courts of first instance and appeal
are located in the provinces and in Lima. The Supreme Court is
located in Lima. In principle, secured interests in property, both
chattel and real, are recognized. However, the judicial system is

often extremely slow to hear cases and to issue decisions. In
addition, court rulings and the degree of enforcement have been
difficult to predict. The capabilities of individual judges vary
substantially, and allegations of corruption and outside
interference in the judicial system are common. The Peruvian
appeals process also tends to delay final decisions. As a result,
foreign investors, among others, have found that contracts are often
difficult to enforce in Peru. The exposure in 2000 of a network of
corrupt judges controlled by Fujimori advisor Vladimiro Montesinos
led to promises by subsequent governments to address corruption and
reform the judiciary, but progress has been slow.

15. (U) Under the 1997 Law of Conciliation (DL 26872), which went
into effect on January 1, 2000, disputants in many types of civil
and commercial matters are required to consider conciliation before
a judge can accept a dispute to be litigated. Private parties often
stipulate arbitration to resolve business disputes, as a way to
avoid involvement in judicial processes.

16. (U) Peru's commercial and bankruptcy laws have proven difficult
to enforce through the courts. There is an administrative
bankruptcy procedure under INDECOPI (the National Institute for the
Defense of Free Competition and the Protection of Intellectual
Property), but it has proven to be slow and subject to judicial
intervention. The creditor hierarchy is similar to that established
under U.S. bankruptcy law, and monetary judgments are usually made
in the currency stipulated in the contract.

17. (U) International arbitration of disputes between foreign
investors and the government or state-controlled firms is included
in the 1993 Constitution. Although Peru theoretically accepts
binding arbitration, on a few occasions over the past three years,
parastatal companies and Government Ministries disregarded
unfavorable judgments. Previously, the Government of Peru turned
these arbitration cases over to the judiciary, where they were
bureaucratically delayed until the companies conceded the cases.
However, effective July 2005, the Supreme Court ruled that all
arbitration findings and awards are final and not subject to

18. (U) Peru is a party to the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (the New York Convention of
1958), and to the International Center for the Settlement of
Investment Disputes (the Washington Convention of 1965). Disputes
between foreign investors and the Government of Peru regarding
pre-existing contracts must still be submitted to national courts.
However, investors who conclude a juridical stability agreement for
additional investments may submit disputes with the government to
national or international arbitration if stipulated in the
agreement. In 2005, the government resolved a high-level dispute by
upholding the decision of an arbitration panel and making payment.

19. (U) Several private organizations -- including the Universidad
Catolica, the Lima Chamber of Commerce and the American Chamber of
Commerce -- operate private arbitration centers. The quality of
these centers varies, however, and investors should choose a venue
for arbitration carefully.

20. (U) The U.S.-Peru Trade Promotion Agreement includes a chapter
on dispute settlement. The core obligations of the Agreement,
including labor and environment provisions, are subject to the
dispute settlement provisions of the agreement. Dispute panel
procedures set high standards of openness and transparency through
open public hearings; public release of legal submissions by
parties; special labor or environment expertise for disputes in
these areas; and, opportunities for interested third parties to
submit views. The Agreement emphasizes promoting compliance through
consultation and trade-enhancing remedies.

Performance Requirements and Incentives

21. (U) Peru offers both foreign and national investors legal and
tax stability agreements to stimulate private investment. These
agreements guarantee that the statutes on income taxes, remittances,
export promotion regimes (such as drawback), administrative
procedures, and labor hiring regimes in effect at the time of the
investment contract will remain unchanged for that investment for 10
years. To qualify, an investment must exceed USD 10 million in the
mining and hydrocarbons sectors or USD 5 million in other sectors
within two years. An agreement to acquire more than 50 percent of a
company's shares in the privatization process may also qualify an
investor for a juridical stability agreement, provided that the
infusion will expand the installed capacity of the company or
enhance its technological development.

22. (U) There are no performance requirements that apply exclusively
to foreign investors. Legal stability agreements are subject to
Peruvian civil law, which means they cannot be altered unilaterally
by the government. Investors are also offered protection from
liability for acquiring state-owned enterprises.

23. (U) Laws specific to the petroleum and mining sectors also
provide assurances to investors. However, in 2000, the government
modified the General Mining Law, substantially reducing benefits to
investors in that sector. Among the changes were: a reduction in
the term concessionaires are granted to achieve the minimum annual
production; an increase in fees for holding non-productive
concessions; an increase in fines for not achieving minimum
production within the allotted time; a reduction in the maximum
allowable annual accelerated depreciation; and revocation of the
income tax exemption for reinvested profits. In 2004, Congress
approved a bill charging a 1 to 3 percent royalty on mining
companies' sales. The changes do not affect those investors who
have signed legal stability agreements with the government. Under
the U.S.-Peru Trade Promotion Agreement, Peru agreed to eliminate a
measure affecting any sector in which a government concession is
needed, such as transportation, energy and mining, that requires
U.S. enterprises to buy locally. In the future, U.S. companies will
be free to purchase on the basis of price and quality, not origin of
goods in these sectors.

24. (U) In December 2006, after increased social demands for a share
of mining profits, the Garcia Administration and mining companies
agreed to a "voluntary contribution" system whereby mining companies
will invest in community infrastructure projects. This agreement
averted adoption of a more restrictive mining law, allows mining
companies to control where they invest their contributions, and
ceases to apply if the prices of mined products drop.

25. (U) Parties may freely negotiate contractual conditions related
to licensing arrangements and other aspects of technology transfer
without prior authorization. Registry of a technology transfer
agreement is required for a payment of royalties to be counted
against taxes. Such registration is automatic upon submission to

26. (U) Current laws limit foreign employees to no more than 20
percent of the total number of employees in a local company (whether
owned by foreign or national interests), and restricts their
combined salaries to no more than 30 percent of the total company
payroll. However, DL 689 (November 1991) provides a variety of
exceptions to these limits. For example, a foreigner is not counted
against a company's total if he or she holds an immigrant visa, has
a certain amount invested in the company (currently about USD 4,000)
or is a national of a country that has a reciprocal labor or dual
nationality agreement with Peru. Foreign banks and service
companies, and international transportation companies are also
exempt from these hiring limits, as are all firms located in free
trade zones. Furthermore, companies may apply for exemption from
the limitations for managerial or technical personnel. With the
entry into force of the U.S.-Peru Trade Promotion Agreement, Peru
has agreed to exceed its commitments made in the WTO, and to
dismantle significant services and investment barriers, such as
measures that require U.S. firms to hire nationals rather than U.S.
professionals and measures requiring the purchase of local goods.

Right to Private Ownership and Establishment

27. (U) Foreign and domestic entities are generally permitted the
right to establish and own business enterprises and to engage in
most forms of remunerative activity. Subject to the restrictions
listed earlier in this document, both foreign and domestic entities
may invest in any legal economic activity -- including foreign
direct investment, portfolio investment, and investment in real
property. Private entities may generally freely establish, acquire,
and dispose of interests in business enterprises. In the case of
some privatized companies deemed important by the government,
privatization agency ProInversion has included a so-called "golden
share" clause in the sales contract, which allows the government to
veto a potential future purchaser of the privatized assets.

Protection of Property Rights

28. (U) As noted in the Dispute Settlement section, in principle,
secured interests in property (both chattel and real) are
recognized. However, the Peruvian judicial system is often very
slow to hear cases and to issue decisions, outcomes have been
difficult to predict and enforce, and corruption is frequently
alleged. The Peruvian appeals process also delays final outcomes of
cases. Thus, foreign investors, among others, have found that
contracts are often difficult to enforce in Peru. Improving the
judicial system is a stated priority of the Peruvian Government.

29. (U) Protection of intellectual property rights (IPR) in Peru has
improved over the past decade, but still falls short of U.S. and
international standards in several areas. Peru remains on USTR's
Special 301 "Watch List" due to concerns about continued high rates
of copyright piracy, a lack of protection for confidential test data
submitted for the marketing approval of pharmaceutical and
agrochemical products, and inadequate enforcement of IPR laws,
particularly with respect to the relatively weak penalties that have
been imposed on IPR violators.

30. (U) The Peruvian government agency charged with promoting and
defending intellectual property rights is the Institute for the
Defense of Competition and Protection of Intellectual Property
(INDECOPI,, established in 1992.
Legislative Decree 822 of 1996 and Andean Community Decisions 344
and 486 protect patents, trademarks, and industrial designs.
Copyrights are protected by Legislative Decree No. 822 of 1996 and
by Andean Community Decision 351.

31. (U) Peru belongs to the World Trade Organization (WTO) and the
World Intellectual Property Organization (WIPO). It is also a
signatory to the Paris Convention on Industrial Property, Geneva
Convention for the Protection of Sound Recordings, Bern Convention
for the Protection of Literary and Artistic Works, Brussels
Convention on the Distribution of Satellite Signals, Phonograms
Convention, Satellites Convention, Universal Copyright Convention,
the World Copyright Treaty, and the World Performances and
Phonographs Treaty and the Film Register Treaty. In December 1994,
the Peruvian Congress ratified the World Trade Organization's
Agreement on Trade-Related Aspects of Intellectual Property

32. (U) Under the U.S.-Peru Trade Promotion Agreement, Peru agrees
to ratify or accede to the following agreements by the date of entry
into force of the agreement: the Convention Relating to the
Distribution of Program-Carrying Signals Transmitted by Satellite
(1974); the Budapest treaty on the International Recognition of the
Deposit of Microorganisms for the Purposes of Patent Procedure
(1977) as amended in 1980; the WIPO Copyright Treaty (1996); the
WIPO Performances and Phonograms Treaty (1996); the Patent
Cooperation Treaty (1970) as amended in 1979; the Trademark Law
Treaty (1994); and the International Convention for the Protection
of New Varieties of Plants (1991)(UPOV Convention). Peru agrees to
make a reasonable effort to ratify or accede to the following
agreements: the Patent Law Treaty (2000); the Hague Agreement
Concerning the international Registration of Industrial Designs
(1999); and the Protocol Relating to the Madrid agreement Concerning
the international Registration of Marks (1989).

33. (U) Peru's legal framework provides for easy registration of
trademarks, and inventors have been able to patent their inventions
since 1994. Peru's 1996 Industrial Property Rights Law provides an
effective term of protection for patents and prohibits devices that
decode encrypted satellite signals, along with other improvements.
Peruvian law does not provide pipeline protection for patents or
protection from parallel imports. Although Peruvian law provides
for effective trademark protection, counterfeiting of trademarks,
copyrighted products, and imports of pirated merchandise are
widespread. The International Intellectual Property Alliance
estimates that the piracy level in Peru for recorded music was 98
percent in 2006, with damage to U.S. industry estimated at USD 53.5
million. IIPA estimates motion picture piracy accounts for 63
percent of the market for a loss of USD 12 million. IIPA considers
that software piracy levels dropped slightly to 70% with estimated
trade losses due to business software piracy rose in 2006 to $27.0

34. (U) Peru's Copyright Law is generally consistent with the TRIPs
Agreement. However, textbooks, books on technical subjects,
audiocassettes, motion picture videos and software are widely
pirated. While the government, in coordination with the private
sector, has conducted numerous raids over the last few years on
large-scale distributors and users of pirated goods, and has
increased other types of enforcement, piracy continues to be a
significant problem for legitimate owners of copyrights in Peru.

35. (U) Despite increased enforcement actions by INDECOPI, the
judicial branch has failed to impose sentences that adequately deter
future IPR violations. The Peruvian government in July 2004
increased the minimum penalty for piracy to four years imprisonment,
although there have yet to be any convictions under the new law.
Peru now has six prosecutors (two fiscalias) dedicated full-time to
intellectual property cases. In a major breakthrough, in November
2006, four special courts of first instance and one special appeals
court in Lima were assigned IPR duties, effective 2007.

36. (U) An IPR Toolkit for Peru can be found on the Embassy and
Commercial Service Lima's websites. Besides being a guide to
registering and protecting IP, it contains a list of lawyers and
other organizations that can provide support on an on-going basis.

37. (U) Under the U.S.-Peru Trade Promotion Agreement, in all
categories of intellectual property rights (IPR), U.S. companies
will be treated at least as well as Peruvian companies, and the
agreement makes a number of important improvements to IPR
protections. The Agreement provides for improved standards for the
protection and enforcement of a broad range of intellectual property
rights, which are consistent, both with U.S. standards of protection
and enforcement and with emerging international standards. Such
improvements include state-of-the-art protections for digital
products such as U.S. software, music, text, and video; stronger
protection for U.S. patents, trademarks and test data, including an
electronic system for the registration and maintenance of
trademarks; and further deterrence of piracy and counterfeiting of
criminalizing end-user piracy.

Transparency of the Regulatory System

38. (U) The transparency and independence of regulatory processes
have become central issues for foreign investors in Peru. Many of
the central government entities with which foreign firms must deal
-- including the entities that maintain the company registry and
supervise securities and exchanges (CONASEV), handle privatization
and investment issues (ProInversion), and handle competition policy
and intellectual property matters (INDECOPI) -- have procedures that
are relatively transparent and predictable. Banks, insurance
companies and private pension funds are regulated primarily by the
Superintendency of Banking and Insurance (SBS), which is charged
with determining the qualifications of potential market entrants and
regulating firms once they have begun operations. SBS regulations
are also seen as being transparent. Under the U.S. - Peru Trade
Promotion Agreement, U.S. financial service suppliers have full
rights to establish subsidiaries or branches for banks and insurance

39. (U) When the GOP privatized state-owned monopolies in the areas
of telecommunications, electrical generation and distribution, and
the hydrocarbons sector in the late 1990s, the GOP established
regulatory institutions to oversee the newly private sectors.
Delays and lack of predictability in the rulings of these
institutions, including OSIPTEL (telecom) and OSINERG (energy), have
at times in the past been notable impediments to doing business in

40. (U) In December 2005, OSIPTEL published a new law that lowers
Peru's high mobile termination rates to levels comparable to
international rates over a 3-year period. Several U.S. companies
have encountered problems with the energy sector regulator (OSINERG)
over its hesitancy to provide clear regulation for the energy
sector. Some regulatory agencies have in the past been subject to
politically motivated government intervention in their technical

41. (U) U.S. firms have complained that SUNAT's aggressive behavior
and interpretation of law are often contrary to the spirit of the
law and intent of government policies, complicating normal business
operations. The remuneration of SUNAT employees is determined, in
part, by the theoretical tax liability they uncover in audits.

42. (U) Businesses point out that SUNAT's retroactive
reinterpretation of regulations and laws, its levying of
disproportionate fines, and initiation of full company audits when
companies request a refund or legal revaluation of assets for
depreciation purposes, create additional investment and trade
barriers. In one case, a U.S. firm requested an improper drawback
of USD 1,345, only to face SUNAT fines of USD 645,000. Although the
case was resolved, new legislation was needed to correct the
problem. In instances involving airline fuels, certain minerals,
and other products, SUNAT declared that these goods sold abroad,
which under Peruvian government policy are exempted from taxes, were
not considered exports and were therefore subject to VAT. Two
recent laws were necessary to correct this practice for airline
fuels and services. SUNAT often does not follow standard
international practice in the way it taxes new activities. To
correct these problems, the independent tax tribunals act to check
any abuses by SUNAT. In 2004, the GOP established a tax ombudsman
who must approve SUNAT's request to appeal adverse tax tribunal
decisions. In the past two years, the tax ombudsman has acted in
several cases to end unwarranted litigation of disputed assessments.
In 2005, a U.S. company won long-standing tax cases against SUNAT
as a result of these improvements.

43. (U) A 2006 World Bank study found that Peru has significantly
lowered the average amount of days it takes to start a business from
98 (2005 study) to 72. Various procedures -- such as obtaining
building licenses or certificates of occupancy -- require many
steps. Municipal authorities issue most licenses and requirements
vary widely by locality. As a result, information on necessary
procedures is often difficult to obtain. Business people often
complain of excessive red tape; one major foreign investor found
that starting project construction and a business required several
hundred permits, many of which the responsible government entities
were unaware they had to issue. Other investors argue that local
governments and municipalities, which are seeking new revenue
sources, sometimes withhold licenses or create regulations, thus
hindering the ability to do business or making it costlier. Even
though import tariffs are substantially lower than previously (the
simple average tariff is 8.3 percent ad valorem plus surcharges as
of January 2007; the trade-weighted average using 2005 import
figures is 5.6 percent), import duties, together with the 19 percent
value added tax on goods, high social security tax rates, and
certain labor laws, increase investment costs significantly and
hinder the efficient mobilization and allocation of investment
capital. Businesses can apply for VAT reimbursement.

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

44. (U) Credit is allocated on market terms and the banking industry
in Peru is generally considered to be competitive in offering
services to business customers. Private pension funds have competed
in recent years with financial companies for bonds issued by
companies, as demand for securities greatly exceeds supply. Foreign
investors can obtain credit on the local market and several of them
have done so in the last few years as terms were more competitive
than those of the usual international centers. The private sector
has access to a variety of credit instruments. From January through
early December 2007, firms placed USD 1.67 billion on the local bond
market (compared with USD 1.55 billion in CY 2006), which has been
propelled in recent years by demand for investment instruments by
private pension fund companies. By November 2007, pension funds
managed a total of USD 20.2 billion, a 47 percent surge over the
November 2006 level (USD 13.7 billion), thus creating a huge and
growing appetite for financial instruments by pension funds. The
low 20 percent cap placed by the Central Bank on what the pension
funds can invest abroad provides local bond issuers (including the
government) and loan seekers with a captive capital market.

45. (U) All firms listed on the Lima Stock Exchange (Bolsa de
Valores de Lima) or the Public Registry of Securities must be vetted
by CONASEV, the National Commission for the Supervision of
Companies, Securities and Exchanges, which maintains the Public
Registry of Securities and Stock Brokers. CONASEV is the Peruvian
government entity charged with the study, promotion, and regulation
of the securities and commodities markets, the control of market
participants, the maintenance of a transparent and orderly market,
the setting of accounting standards and the publication of financial
information about covered companies. As part of CONASEV's goal to
promote market transparency, to prevent monopolies, and to prevent
fraud, issuers of stock are required to inform CONASEV and the
relevant stock exchange or body in charge of supervising the

centralized trading mechanism, of events that affect or might affect
the stock, the company, or any public offerings. Although trading
on insider information is technically a crime, no one has been
charged and punished under the law.

46. (U) Total assets of the commercial banks were USD 29.8 billion
at the end of June 2007, 25 percent above the same period of 2006.
The banking system is considered generally sound, as it weathered
rather well a severe El Nino and global financial turmoil in
1997-98. Sound supervision, combined with competition, led to a
significant consolidation in the sector, which still continues.
Consequently, 12 commercial banks comprise the system, of which 3
banks account for just over three-fourths of loans and almost
four-fifths of deposits. Banks have revamped operations, increased
capitalization, and reduced costs in recent years. As of November
2006, foreigners had significant shares in nine banks, of which they
were majority owners of four commercial banks (including two of the
country's largest). Under the SBS's conservative criteria, 1.3
percent of total loans were assessed as non-performing as of
November 2007, down from a high of 11 percent in early 2001. The
system also has 3 specialized institutions ("financieras") and 39
thriving micro-lenders and savings banks.

47. (U) Larger private firms often use "cross-shareholding" and
"stable shareholder" arrangements to restrict investment by
outsiders -- not necessarily foreigners -- in their firms. As close
families or associates generally control ownership of Peruvian
corporations, hostile takeovers are practically non-existent.
Peuvian law and regulations do not authorize or encourage private
firms to adopt articles of incorporation or association to limit or
restrict foreign participation; nor are there any private or public
sector efforts to restrict foreign participation in industry
standards-setting organizations.

48. (U) In 2006, SBS approved a license for the first U.S. company
to provide retail credit services, thus increasing competition for
incumbent banks and Chilean finance companies.

49. (U) Foreign direct investment registered with ProInversion as of
the end of 2006 was USD 15.37 billion, compared with USD 15.31
billion a year earlier. ProInversion estimated growth of private
foreign direct investment will reach USD 20.00 billion in 2008.
Foreign portfolio investment (dematerialized holdings of securities
only) totaled USD 9.6 billion in October 2006, up from USD 7.7
billion at the end of December 2005.

Political Violence

50. (U) Although political violence against investors is not a
common practice, the mining and petroleum communities witnessed an
increase in protests, some violent, in 2005. These leveled off in
2006. In September 2007, residents of three northern Piura towns
voted overwhelmingly in a referendum to reject mining projects in
their region, which has stalled development of a large copper mining
project. Other communities around Peru have expressed interest in
holding similar referenda. These protests caused several foreign
companies to significantly delay or abandon plans to establish
operations. Protests against the mining industry occurred for
various reasons. Although environmental concerns were often the
cited pretext, in many cases protestors were seeking social
infrastructure investments not provided by the government. Often
times, well-organized groups, such as the Ronderos (local
self-defense groups established during the Shining Path terrorist
attacks) or NGOs, exaggerated a local community's concerns, bringing
in protestors from outside the local community to foment protests
against the companies. In at least two incidents in 2005 and 2006,
the local mayor and other local authorities led strikes against two
large foreign mining companies in an effort to secure additional
funds or development promises from the companies. During 2007,
there were road blockages and acts of vandalism by groups protesting
mining operations, coca growers protesting the Government's
eradication policies, and farmers seeking increased government
tariff protections and financial support. Some indigenous
communities in an oil production area used river and road blockages
as a way to press for their demands on a long-standing pollution
case. A common thread for many protests is the lack of government
provision of basic services such as health and education. Another
complaint that can underlie what appear to be environmental protests
is a lack of access by local communities to the various "canons,"
the funds set aside by the government out of the taxes or royalties
paid by the oil, gas and mining firms for local community
development. In some mining areas, firms and local leaders have
alleged that narcotraffickers are fomenting protests as a way to
keep prying eyes away from their activities.

51. (U) When significant conflicts developed in the first few months
of the Garcia Administration, cabinet ministers and often the Prime
Minister became personally involved in successfully resolving the
protests. The government established a commission in late 2006 to
prevent and resolve social conflicts in the extractive industries.
In addition, various NGOs have become involved in conflict
resolution activities. At the same time, the National Society of
Mining and Petroleum (SNMPE), as well as the government, have become
involved in assisting local communities to access the extractive
industry canons as a way to both stimulate local development and
head off social conflict. It is reasonable to posit that many of
these efforts should pay off to reduce social conflicts for
investors in 2007.

52. (U) Political violence remains a concern in the coca-growing
regions. The Shining Path (Sendero Luminoso) terrorist organization
has become increasingly aggressive and involved in narcotrafficking
in these areas. Sendero remnants are presumed to have killed 11
police, 20 civilians, and one member of the military, and committed
over 80 terrorist acts in coca-growing areas during 2007. The
Shining Path killed eight civilians and five police officers in
2006, and were responsible for 92 serious terrorist incidents that
year. In December 2005, the Shining Path killed 13 police officers
in several ambushes in coca-going areas of Huanuco and Apurimac.
President Garcia continues to reauthorize 60-day states of emergency
in parts of Peru's five departments where the Shining Path operates,
suspending some civil liberties and giving the armed forces
authority to maintain public order.

53. (U) There is little government presence in the remote
coca-growing zones of the Monzon and the Apurimac-Ene River valleys.
The U.S. Embassy in Lima restricts visits by official personnel to
these areas because of the threat of violence by narcotics
traffickers and remaining columns of the Shining Path. Information
about insecure areas and recommended personal security practices can
be found at


54. (U) It is illegal in Peru for a public official or employee to
accept any type of outside remuneration for the performance of his
or her official duties. Peru has ratified both the UN Convention
Against Corruption and the Organization of American States'
Inter-American Convention Against Corruption. Peru is not a member
of the Organization of Economic Cooperation and Development, and has
not signed the OECD Convention on Combating Bribery.

55. (U) Peru is one of four nations worldwide participating as a
pilot country in the G8 anti-corruption and transparency initiative.

The U.S., other G8 partners and NGOs helped the Peruvian government
develop an action plan that includes activities in six areas: a)
citizen information/internet connectivity; b) improving central
government fiscal transparency; c) development of GOP procurement
systems; d) improving regional/local government transparency and
management; e) improvement of transparency of extractive industry
revenues; and f) development of asset forfeiture systems and

56. (U) The G8 initiative has already shown some positive results.
A hemisphere-wide state procurement organization - the
Inter-American Organization of Government Procurement Institutions -
was created under the leadership of Peru's State Procurement Council
(CONSUCODE). As of January 2007, eight countries are in the process
of adopting the network agreement, prior to its signature (Bolivia,
Colombia, Ecuador, Honduras, Mexico, Paraguay, Peru and Paraguay).
Also, efforts are underway to provide Internet connections to
approximately 90 municipal governments located in areas most
affected by terrorism and poverty. The rural connectivity project
will allow these governments access to national systems, part of the
GOP's E-government initiatives, aimed at creating greater
transparency and citizen access to public information.

57. (U) U.S. firms have reported only a small number of problems
directly resulting from corruption, usually in government
procurement processes and in the judicial sector, but the revelation
in late 2000 of a broad and deep corruption ring organized by former
presidential advisor Vladimiro Montesinos heightened awareness of
the problem. Transparency International ranked Peru number 72 (out
of 179 countries) in its 2007 Corruption Perception Index. While
anti-corruption efforts have been a stated priority of both the
Toledo and Garcia Governments, in practice most resources are
directed at investigating Fujimori-era corruption. In 2001,
President Toledo appointed an anti-corruption "czar" to lead
government efforts, but this official resigned in 2002 and has yet
to be replaced. Private sector groups have increased efforts to
combat corruption through an NGO called "ProEtica," which represents
Transparency International in Peru.

Bilateral Investment Agreements

58. (U) Peru has signed bilateral investment agreements with 29
countries (listed below), but not with the United States. The
U.S.-Peru Trade Promotion Agreement (PTPA), signed by President Bush
on December 14, eliminates the need for a bilateral investment

Peru's Current Bilateral Investment Agreements
Argentina (1994)
Australia (1995)
Bolivia (1993)
Chile (2000)
China (1994)
Colombia (1994)
Cuba (2000)
Czech Republic (1994)
Denmark (1994)
Ecuador (1999)
El Salvador (1997)
Finland (1995)
France (1993)
Germany (1995)
Italy (1994)
Korea (1993)
Malaysia (1995)
The Netherlands (1994)
Norway (1995)
Paraguay (1994)
Portugal (1994)
Romania (1994)
Singapore (2003)
Spain (1994)
Sweden (1994)
Switzerland (1991)
Thailand (1991)
United Kingdom (1993)
Venezuela (1996)

OPIC and Other Investment Insurance Programs

59. (U) The Overseas Private Investment Corporation (OPIC), an
independent U.S. Government agency, offers medium- to long-term
financing and political risk insurance. OPIC signed agreements with
Peru in December 1992, and in July 1994, OPIC began approving
requests for political risk insurance (including for
inconvertibility of currency). In 2001, OPIC provided project
finance loans of USD 108.4 million. In 2005, OPIC provided USD 800
million worth of insurance coverage for a copper mine and a startup
finance company received USD 27 million worth of OPIC insurance
coverage. Because of the free convertibility of currency, the U.S.
Embassy purchases Peruvian currency for expenses on an as-needed
basis, at the market exchange rate. The exchange rate between the
U.S. dollar and the Nuevo Sol decreased this past year to under 3
soles. Peru is a member of the Multilateral Investment Guarantee


60. (U) Labor is abundant and trainable, although there are
shortages of highly skilled workers in some fields and wages for
professional staff are high (sometimes higher than U.S. wages in the
mining sector for positions in the managerial and consulting
fields). On October 1, 2007 the government increased the statutory
monthly minimum wage by 10 percent to $176 (550 soles). The law
provides for a 48-hour workweek and one day of rest and requires
companies to pay overtime for more than eight hours of work per day
and additional compensation for work at night. Unions in essential
public services, as determined by the government, must provide a
sufficient number of workers during a strike to maintain operations.
The law bans government unions in essential public services from
striking. It also requires strikers to notify the labor ministry in
advance before carrying out a job action. According to the labor
ministry, one legal strike and 65 illegal strikes took place during
the year. According to labor leaders, permission to strike was
difficult to obtain, in part because the labor ministry feared
harming the economy. The Ministry of Labor justified its decisions
by citing unions' failure to fulfill the legal requirements
necessary to strike.

61. (U) The presence of organized labor in the Peruvian economy has
declined; in 2005, 8.6 percent of the labor force was organized.
Unemployment in Lima officially stood at 7.2 percent in October
2006, compared with 7.9 percent a year earlier. Surveys show that
53.5 percent of Lima's economically active population was
underemployed in the third quarter of 2006, mostly working in the
informal sector for below subsistence wages. The statutory monthly
minimum wage was raised in January 2006 to 500 soles (about USD
155). Some workers, like miners, are highly paid and also (per
statute) receive a share of company profits.

62. (U) In 1991-1992, a new labor law and other related statutes
replaced extremely inflexible old statutes and regulations. The new

laws allow for multiple forms of unions across company or
occupational lines, thus permitting multiple unions in the same
company. Workers in probation status or on short-term contracts are
not eligible for union membership. Bargaining agreements are
considered contractual agreements, valid only for the life of the
contract. Productivity provisions must be included in any
collective bargaining agreement. The number of officials and the
amount of time union officials may devote to union work with pay is
limited to 30 days per year. Unless there is a pre-existing labor
contract covering an occupation or industry as a whole, unions must
negotiate with each company individually. A laor law passed in
July 1995 liberalized hiring. Business leaders lauded the above
changes, saying they led to greater efficiency. Labor leaders
disagreed, arguing that the new labor laws eroded labor protections
and encouraged outsourcing in a way that undercut union activity.

63. (U) With Peru's return to democracy in 2000, Peruvian organized
labor regained some, but by no means all, of the protections enjoyed
in the pre-Fujimori era. A decision by the Constitutional Tribunal
in 2004, for example, legitimized collective industry-wide
bargaining in the civil construction industry. Labor leaders saw
this as a potential precedent to be applied to other activities, but
that has not yet happened. Furthermore, new laws added to labor
inflexibility because the restrictions for termination and
downsizing have made businesses reluctant to hire new employees and
have created incentives to outsource.

64. (U) Either unions or management can request binding arbitration
in contract negotiations. Strikes can be called only after approval
by a majority of all workers (union and non-union) voting by secret
ballot and only in defense of labor rights. Unions in essential
public services, as determined by the government, must provide a
sufficient number of workers during a strike to maintain

65. (U) The 1993 Constitution provides for a maximum workday of
eight hours, with 48 hours as the maximum week. The labor code also
sets 24 hours rest per week and 30 days paid annual vacation for all
workers. Workers readily sacrifice these and other benefits in
exchange for regular employment. Strike activity declined markedly
over the ensuing nine years and since new labor laws were passed,
worker efficiency rose substantially. However, strikes and militant
industrial action increased again in late 2002 and early 2003, with
additional strikes in 2004. The overall number of strikes fell in
2005. Through October 2005, there were 58 strikes with a loss of
442,586 man-hours, compared with 91 strikes and a loss of 515,480
man-hours in the same period of 2004.

66. (U) Congress continues to debate a comprehensive labor law
reform, which may result in a return to inflexibility of the
conditions of dismissal for employees.

Foreign Trade Zones/Free Ports

67. (U) Peruvian law currently covers two types of free trade zones:
export, transformation, industry, trade and services zones
(CETICOS), and a free trade zone (ZOFRATACNA) in Tacna. The rules
and tax benefits applying to these zones are the same for foreign
and national investors.

68. (U) Companies established at the CETICOS and ZOFRATACNA, which
export no less than 92 percent of their output (more than 80 percent
of production for the Loreto CETICOS and more than 50 percent for
ZOFRATACNA), are exempted until 2012 from all taxes, dues and
contributions to the central government and municipalities,
particularly income, sales (IGV), Municipal Promotion (IPM) and
excise (ISC) taxes. CETICOS exist at Ilo, Matarani and Paita, with
one authorized but not operating at Loreto. There is a concern that
the Peruvian Government does not have the proper WTO waivers to
validate the CETICOS export requirement. The U.S. automotive
industry has expressed a specific concern that U.S. brands are
unable to compete with used Japanese vehicles that enter the
Peruvian market duty-free through the CETICOS. Importers located in
ZOFRATACNA pay only 8 percent customs duties (normal rates are 12 or
20 percent) on 1,086 items sold to retailers in the city of Tacna.

Foreign Direct Investment Statistics

69. (U) The stock of registered foreign direct investment in Peru
was USD 15.3 billion in June 2007 according to ProInversion, versus
USD 14.3 billion at the end of 2006. ProInversion data place
Spanish investors as holding the largest share (30 percent), with
USD 4.7 billion invested. The United States is the second largest
investor, with USD 2.6 billion, and the United Kingdom is third,
with USD 2.5 billion. However, according to the U.S. Department of
Commerce, U.S. registered investment in Peru through December 2006
totaled USD 3.9 billion on a replacement-cost basis. The statistics
are skewed because ProInversion records investments on the basis of
country registry, rather than control. Thus, an investor registered
in the Bahamas, for example, is recorded as British even if the
parent is a U.S. company. As a result, U.S.-controlled investment
represents a much higher share than the official 17.4 percent. By
sector, communications received 31.6 percent of foreign direct
investment in 2006, followed by the mining industry (18.7 percent),
manufacturing (15.0 percent), and finance (12.5 percent).

70. (U) As of the end of 2006, investors had signed 640 legal
stability contracts with the Government of Peru through
ProInversion. Legal stability contracts commit the government not
to apply any future changes in the income tax, labor and other laws
governing a specific investment in exchange for commitments to
invest a given amount. In addition to these contracts, the
Government of Peru has signed numerous tax, foreign exchange and
administrative stability contracts through several ministries,
mainly the Ministry of Energy and Mines.

© Scoop Media

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