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Cablegate: Embassy and Gon Host Competitiveness Forum

VZCZCXRO0663
RR RUEHLMC
DE RUEHMU #0763/01 1681923
ZNR UUUUU ZZH
R 161923Z JUN 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 2745
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC

UNCLAS SECTION 01 OF 06 MANAGUA 000763

SIPDIS
SENSITIVE

STATE PASS USTR
STATE FOR WHA/ESPC and WHA CEN
STATE ALSO FOR EEB/BTA and EEB/CBA
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR

E.O. 12958: N/A
TAGS: EINV ETRD ECON PGOV NU
SUBJECT: EMBASSY AND GON HOST COMPETITIVENESS FORUM

Summary
-------

1. (SBU) The Embassy and Ministry of Trade, Industry, and Commerce
(MIFIC) co-hosted a day-long "National Forum on Competitiveness and
Investment" on May 28, 2008, in Managua, Nicaragua. The forum,
which served as a prelude to Secretary Gutierrez' Americas
Competitiveness Forum (ACF), scheduled for August 17-19 in Atlanta,
inspired debate and recommendations on topics such as financing for
small businesses and their incorporation in national and
international value chains. Participants also discussed
institutional factors that contribute to competitiveness, such as
weaknesses in Nicaragua's rule of law. However, Vice President
Jaime Morales Carazo privately questioned the importance of these
factors. Deputy Assistant Secretary of Commerce Walter Bastian
encouraged Nicaraguans to participate in the ACF and continue
dialogue on competitiveness issues, while Deputy Assistant Secretary
of Treasury Brian O'Neill described programs on small business
financing and infrastructure development.

EEB/CBA BFIF Funding Supports Forum
-----------------------------------

2. (U) With funding from the EEB/CBA Business Facilitation and
Incentive Fund (BFIF), the Embassy and Ministry of Trade, Industry,
and Commerce (MIFIC) co-hosted a "National Forum on Competitiveness
and Investment" on May 28, 2008, in Managua, Nicaragua. Working
with MIFIC officials, Econoffs developed that agenda, invited and
briefed speakers, and provided overall logistical support. Over 150
Nicaraguan government officials and private sector representatives
attended the day long event. Econoffs are now working with business
leaders to organize a second forum that would address
competitiveness issues from their perspective.

Ambassador Describes the "Investment Calculus"
--------------------------------------------- -

3. (U) Ambassador Trivelli opened the forum by describing the
"investment calculus" -- factors a company takes into consideration
when deciding where to make an investment, such as the importance of
rule of law, regulatory quality, and infrastructure. He noted the
importance that Nicaragua's leadership send a clear message that
investment is welcome as part of the country's efforts to create
jobs and alleviate poverty. The Ambassador concluded by describing
the importance of innovation and productivity gains in allowing the
private sector to serve as the engine of economic growth.

Vice President Criticizes Savage Capitalism and Socialism
------------------------- -------------------------------

4. (U) Vice President Morales followed with remarks emphasizing
positive areas of engagement between the United States and
Nicaragua, including the role of CAFTA-DR in job creation and export
growth. Morales acknowledged local criticism of free market
economics and suggested that this was because the "neo-liberal"
economic model has not been successful in alleviating poverty.
However, he also discredited socialist alternatives, alluding to the
"catastrophic effects" of the Sandinista economic policies of the
1980s. He observed that both capitalism and socialism taken to
their extremes are "savage," but defended the leading role of
government in safeguarding public interests. [Comment: The Vice
President was attempting to balance President Ortega's frequent
criticism of "savage" capitalism by framing it in a context that
Ortega has not -- that is, all ideological extremism is dangerous.
End comment.] Returning to the theme of competitiveness, he listed
factors such as infrastructure, education, and macroeconomic
stability as key to efforts to "combat poverty through job creation
and private investment, both foreign and domestic."

Vice President Questions Rule of Law Indicators
--------------------------------------------- --

5. (SBU) During a pull-aside with Vice President Morales, DAS
Bastian highlighted the upcoming ACF in Atlanta, stating that he
hoped to identify a "Nicaraguan project" that can be funded at the
Forum as a deliverable. [Note: The Vice President will, as he did
last year, lead the Nicaraguan delegation, which will also include
MIFIC Minister Solorzano and Presidential Delegate for Investment
Promotion Alvaro Baltodano, who also participated in the pull-aside.
End note.] DAS O'Neill emphasized the importance of Nicaragua
staying on track in its economic and financial programs and
identified the need to negotiate a solution to a government debt
default related to bonds issued to resolve a banking crisis in 2001
(septel). Both USG officials emphasized that ideological rhetoric
critical of market economics and private investment is not helpful.
At some point, "perception is reality."

6. (SBU) Ambassador Trivelli added that weak rule of law drags down
Nicaragua's rankings in international business and competitiveness
indicators and hinders the country's efforts to attract investment.
Vice President Morales responded that actions speak louder than
words. He reasserted that international indicators such as the
World Economic Forum (WEF) Global Competitiveness Index are based on
perception and, therefore, unimportant. He highlighted China's high
growth rate, despite extensive corruption, as an example of why
indicators and rankings do not matter. The Vice President went on
to disparage the United States for attempting to "impose standards
that do not fit the realities of this country." DAS Bastian closed
the conversation by suggesting that instead of arguing about the
validity of indicators and rankings, Nicaragua should "develop a
long-term vision of its future -- Where does it want to be in 30
years, and what kind of economy does it want to have?"

INCAE Dean: Focus on Competitiveness Indicators
--------------------------------------------- --

7. (U) Niels Ketelhohn, Dean of the INCAE Business School in
Managua, provided a general macroeconomic overview, noting the risk
that inflation, forecast by some economists to reach 22% for 2008,
poses to economic stability. He also underscored the importance of
exports to Nicaragua's economic development and highlighted growing
Nicaraguan trade with the United States, which accounts for more
than 50% of total exports. Ketelhohn told the audience that many of
Nicaragua's poor would bear the brunt of rising food prices but that
net producers of agricultural products stand to benefit. He
referred to the WEF Global Competitiveness Index, where Nicaragua
currently ranks 111th of 131 countries (worse than Albania but
slightly better than Burkina Faso), to describe weaknesses in
Nicaragua's investment climate. Ketelhohn noted that Nicaragua
ranks especially low in judicial independence (129th), port
infrastructure (124th); and education (123rd). In conclusion, he
reminded participants that, "the aspiration to lift our people out
of poverty is rooted in the success of the private sector."

Private Sector: Rule of Law Does Matter
---------------------------------------

8. (U) Jose Adan Aguerri, President of the Federation of Nicaraguan
Business Associations (COSEP), also focused on the WEF Global
Competitiveness Index, listing additional weaknesses for Nicaragua
such as access to credit (121st), competition policy (129th), and
technology transfer (126th). He also identified advantages, such as
Nicaragua's flexible labor laws (26th), the ease of opening a
business (16th), and rules governing profit repatriation (21st).
Aguerri moved on to political issues, describing the negative impact
the government's public discourse has on the investment climate. He
specifically mentioned the negative impact "judicial uncertainty"
has had on the investment climate, and lamented delays in approving
laws important to the investment climate, such as the Coastal Law.
He concluded with an overview of COSEP's "Pillars of Development,"
an export-led growth strategy that includes industry specific
initiatives as well as an active role for government in meeting the
country's infrastructure, financing, and education needs. He
highlighted the role of COSEP in opening channels of communication
with the government, but admitted limited progress on proposed
initiatives.

Small Business Success Stories
------------------------------

9. (U) Paul Davidson, Operations Manager for AGORA Partnerships,
described his business model as one of identifying entrepreneurs
eager to grow their business, providing technical assistance, and
offering financing through direct equity stakes. AGORA
Partnerships, with support from the U.S. Agency for International
Development, has provided technical assistance to 47 firms and
venture capital to five companies. Carlos Solorzano, owner of
VegyFrut, a company in which AGORA has invested, illustrated the
growth his firm has sustained by working with AGORA Partnerships.
Founded in 2006, VegyFrut, now processes daily 4,000 pounds of fresh
fruits and vegetables for local and regional clients, including for
U.S. franchises such as McDonald's and Quiznos.

10. (U) Merling Preza, General Manager of coffee cooperative
PRODECOOP, described the cooperative's transformation since it was
founded by 20 small farmers in 1993. The cooperative is now one of
the most successful producers of fair trade coffee in Nicaragua,
earning its members a 22% price premium on sales for the 2006-07
harvest. Preza said the cooperative has focused on investment in
key infrastructure to improve quality control and provided technical
assistance to members to improve their farming practices. Preza
credited PRODECOOP's success to efforts made to understand the full
value chain for coffee and meet buyers' needs.

11. (U) Armando Fernandez, President of the CAMPOAPAN dairy
cooperative, described the success he and 24 other dairy farmers
have had since 1991 when they founded the cooperative to process and
distribute their milk products. With support from the U.S.
Department of Agriculture to improve quality and safety, the plant
is now U.S. FDA certified, and in 2007 the cooperative exported $3.6
million in dairy products to the United States. Fernandez
highlighted CAMPOAPAN's efforts to introduce new technology in
farming and processing, but noted that poor road infrastructure and
the high cost of working capital still limit growth for his and many
others cooperatives.

Panel Discusses Value Chain for Small Businesses
--------------------------------------------- ---

12. (U) Jorge Brenes, General Manager of Nicaragua's Export and
Producers Association (APEN), observed that many sectors continue to
grow despite the competitive disadvantages that many businesses face
in Nicaragua. As an example, he noted that bean production
continues to increase at an annual rate of 12%. Brenes asserted
that market forces are driving this growth; if producers are quick
to respond to increasing demand, they can take advantage of rising
food prices and other market opportunities. Alberto Pereira,
General Manager of Hortifruti, the fresh fruit and vegetable
division of Wal-Mart - Nicaragua, described his company's efforts to
help small producers through technical assistance and financing
provided in cooperation with partners such as the U.S. Agency for
International Development.

13. (U) In response to an audience question on government
initiatives to support small businesses, Guillermo Lopez, Director
of Small Business Development at MIFIC, described MIFIC's work with
the World Bank, the United Nations Industry Development
Organization, and other donors to design programs that support the
establishment of an effective agro-industrial policy that includes
assistance for small farmers so that they may better participate in
value chains. MIFIC also plans to continue support for a Bolanos
administration effort that provided support for economic clusters,
encouraging technology transfer and productivity gains among related
firms.

14. (U) Jaime Arguello, Director of FINCA - Nicaragua, a
microfinance organization supported by the U.S. Department of
Agriculture, answered several questions on financing options
available for small businesses, particularly in the agricultural
sector. Arguello told the audience that his organization continues
to support lending practices that place more weight on the
development of a coherent business plan than the quality of
collateral; however, he recognized that, in general, interest rates
remain relatively high, around 20%, and terms on most loans are less
than a year. Pedro Haslam, President of the Nicaraguan Federation
of Agro-industrial Cooperatives (FENIAGRO), shared experiences from
the borrower's perspective, corroborating the difficulties
identified by Arguello. He added that in order to obtain credit,
farmers must be able to increase productivity.

DAS Bastian Invites Nicaraguans to the ACF
------------------------------------------

15. (U) Commerce DAS Walter Bastian congratulated MIFIC for
organizing the forum, noting that the event provides an excellent
opportunity to learn from others on how to improve competitiveness.
He urged participants to recognize the importance of competitiveness
as part of the Nicaraguan economic agenda. He extended a general
invitation to Secretary Gutierrez' Americas Competitiveness Forum to
be held in Atlanta, August 17 - 19, for discussions on themes such
as trade logistics, renewable energy, education, and tourism.
Bastian announced that Secretary Gutierrez plans to visit Nicaraguan
after the ACF, perhaps in late September.

16. (U) Bastian stressed the importance of free trade agreements
such as CAFTA-DR, which has helped increase Nicaraguan exports by
35% since its inception in 2006. He noted that Nicaragua has
benefited more than any other Central American country, thanks in
large part to Cone Denim's $100 million investment, the largest
foreign investment in the region since the implementation of the
treaty. For U.S. businesses, trade with countries that have signed
agreements with the United States represents 90% of U.S. trade in
the hemisphere and over 40% of U.S. trade around the world.

DAS O'Neill Briefs on SME and Infrastructure Initiatives
--------------------- ----------------------------------

17. (U) Treasury DAS Brian O'Neill briefed participants on two
Treasury initiatives that support competitiveness in Latin America.
In July 2007, Treasury launched the Latin American Infrastructure
Development Program, in partnership with the International Finance
Corporation of the World Bank, to fund feasibility studies in
support of private investment in infrastructure. Together, they
have contributed $12 million (including $4.6 million from the USG)
to the program to date, with another $8 million slated over the next
two years. O'Neill told attendees that the program targets three
constraints that discourage private investment in infrastructure,
that is, lack of reliable information on good projects for potential
investors, unfamiliarity with ways to structure and tender projects,
and problems with the regulatory environment. To date, the
initiative has committed $1.3 million for 12 feasibility studies, on
projects that have the potential to attract $2.6 billion in
infrastructure investment.

18. (U) O'Neill told participants that Treasury launched the Latin
America Small Business Lending Initiative in June 2007. The effort
to expand and improve access to commercial financing for small
businesses is taking place through a three-part initiative. The
Inter-American Development Bank (IDB) Multilateral Investment Fund
is providing technical cooperation grants and loans to local banks.
The U.S. Overseas Private Investment Corporation is offering
guarantees and loans to banks that work with small businesses.
Treasury's Office of Technical Assistance is targeting Latin
American countries in the design and implementation of regulations
and oversight of credit providers to small businesses. O'Neill
explained that the IDB has committed $10 million to the initiative,
including $500,000 lent to local bank BANCENTRO in November 2007.
OPIC has committed $150 million, and already approved $52 million,
in loans to banks throughout the region as part of the initiative.

Private Sector on Food Crisis and Nicaraguan Response
--------------------------------------------- --------

19. (U) Mario Amador, President of the National Council of Sugar
Producers (CNPA) remarked on the challenges and opportunities facing
agro-industry as a result of the emerging food crisis caused by
rising energy costs, the use of arable land to produce biofuels,
climate change, developed-country agricultural subsidies, market
speculation, rising food demand in China and India, and a lack of
agricultural productivity growth. He noted that several large
agricultural producers have responded by imposing export
restrictions. In the case of Central America, Amador observed
countries increasingly depend on food imports, especially rice, to
meet internal demand, and very few countries are net exporters.

20. (U) Amador noted that unlike many other countries, for Nicaragua
the food crisis represents an opportunity to become an important
food supplier for the region and beyond. He called for renewed
efforts to increase agricultural productivity through the
introduction of new plant varieties, including those developed
through biotechnology; improved access to financing, especially for
small farmers; and greater public investment in infrastructure. He
added that "the cornerstone of any effort to increase agricultural
production is a judicial system that provides legal certainty to
farmers, especially when it comes to land titling, and to all other
members of the value chain, regardless of their size."

GON View on Competitiveness and Investment Promotion
--------------------------------------------- -------

21. (U) Alvaro Baltodano, Presidential Delegate for Investment
Promotion, told the audience that private and public investment is
the foundation of Nicaragua's development strategy. He reasoned
that "it is investment that encourages improvements in
competitiveness." He said the government's role in this context is
to foster investment in health and education, promote employment,
develop transportation and other economic infrastructure, and
protect the environment. In particular, he noted government efforts
to increase geothermal and hydroelectric production throughout the
country. He also mentioned the government's intention to develop
ports on the Atlantic coast, including a deep water port at Monkey
Point and a highway along the Pacific coast

22. (U) Baltodano highlighted the efforts of ProNicaragua, the
government's investment promotion agency, to attract investment in
the agro-industrial sector, including milk, meat, and bean
processing and the cultivation and processing of African palm and
other biofuels. He commented on efforts to attract logistics and
assembly operations and technology firms. Baltodano mentioned
efforts to incorporate small businesses into value chains.

Panel Discussion on Investment and Competitiveness
--------------------------------------------- -----

23. (U) Alejandro Martinez Cuenca, President of the International
Foundation for the Global Economic Challenge (FIDEG), described
competitiveness as "improving factors important to productivity
gains, which, in turn, are the basis of economic growth." He
decried Nicaragua's weaknesses regarding respect for private
property and judicial independence. Martinez claimed that
principled leadership and open communication are essential to
attracting investment to Nicaragua. He offered Vietnam as an
example of a country with a similar history but very different
economic trajectory, with annual growth averaging 7.5% for the last
ten years. In the last three years, Nicaragua's growth has declined
from 4% to 2.5%. Martinez asked rhetorically, "Why is Vietnam
growing and not Nicaragua?"

24. (U) Rodrigo Caldera, Senior Advisor for ARENECOM, a
Japanese-Mexican manufacturer of automobile wiring harnesses, shared
the perspective of a foreign investor that competes worldwide from
its base in Nicaragua. He suggested that the government should play
a more active role in facilitating business. He stressed the
importance of 24-hour customs service for his business, since
ARNECOM ships all of its products by land because ocean shipping is
limited in Nicaragua. He said that power outages not only affect
production, but also damage costly equipment. In conclusion, he
urged the government to provide consistent and clear rules for
business and to continue to invest in infrastructure improvements.

25. (U) Juan Bugna, a past President of the National Tourism Chamber
of Commerce (CANTUR), discussed the risk that investors in tourism
projects face. Risk is exacerbated by the lack of clear rules, such
as the pending Coastal Law, which would strengthen coastal property
rights. To attract more investment to the sector, Bugna believes
the government must build basic infrastructure, not just provide
fiscal incentives to the individual investor -- because whatever an
investor saves on taxes, he later spends on compensating for power
outages or water shortages. Bugna called for effective dialogue
between the public and private sector to address these and other
issues related to competitiveness.

IDB Support for Private Sector Investment
-----------------------------------------

26. (U) Steven Puig, Vice President for Private Sector Operations at
the IDB, talked about his bank's efforts to work with the private
sector to finance projects that have a "development impact." He
explained that the IDB has several "windows" through which to work.
One window serves large companies and banks to provide financing for
projects up to $200 million. Another serves small companies,
financing projects and providing technical assistance. The
Multilateral Investment Fund (FOMIN) invests venture capital. The
bank also provides credit and grants of up to $10 million per
project to companies with which it establishes an alliance. Puig
indicated IDB interest in expanding all of these activities,
especially in Central America and the Caribbean.

Minister Solorzano: In Defense of Bean Market Intervention
------------------- --------------------------------------

27. (U) MIFIC Minister Solorzano declared that a primary objective
of the Ortega administration is to implement policies that encourage
economic growth and promote exports. He stated that there is no
place for politics in business; the two should be conducted
independently of each other. Solorzano characterized the "harsh
political discourse" between the government and opposition parties
as "noise" that does not influence the true investment climate in
Nicaragua. Countering previous citations of Nicaragua's poor
showing in worldwide competitiveness rankings, Solorzano argued that
one should differentiate between indicators that measure perception
versus those that measure operations on the ground, where he thinks
Nicaragua is doing well. He defended the government's effort to
stabilize food commodity prices through the state-owned food
commodity wholesaler ENABAS, arguing that it is the responsibility
of government to ensure affordable food to its citizens. Solorzano
concluded that the current administration maintains a very close
relationship with the private sector, and that they routinely
cooperate to resolve doing-business issues.

Comment
-------

28. (SBU) Our goal in organizing this forum -- the first event of
its kind that MIFIC has organized since the Ortega administration
took office in January 2007 -- was to engage the GON and the private
sector in a cooperative dialogue on competitiveness. In negotiating
the agenda for the forum with us, MIFIC sought to avoid difficult
issues such as energy, infrastructure, and rule of law. When these
issues were raised, officials were quick to dismiss their relevance
to Nicaragua's competitiveness. With this in mind, we believe it is
important to allow the private sector to take the lead on a second
event that allows for dialogue on these and other issues. The
results of these two national fora and the ACF could feed into a
smaller event when Secretary Gutierrez visits in late September.

TRIVELLI

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