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Cablegate: Gao Visit On French Fdi Regime and Practices

DE RUEHFR #3268/01 2141513
R 021513Z AUG 07





E.O. 12958: N/A

1. (U) SUMMARY: French interlocutors confirmed to the GAO (during
the visit of a GAO team to Paris from July 2 through July 5) that
France welcomes Foreign Direct Investment despite a 2005 decree
regulating FDI in sensitive sectors. The screening process
implemented subsequent to the decree did not result in the rejection
of any foreign investment deals in 2006. The government remains
intent on attracting FDI to boost economic growth and job creation.
That said, President Sarkozy, who recently called for a more
activist EU industrial policy, could take a more aggressive stance
in promoting France's national "champions" and interests (septel).
End Summary.

GAO Visits Paris to Study French FDI Regime
2. (U) Three members of the Government Accountability Office (GAO)
visited Paris July 2-5 to conduct a study of how France regulates
Foreign Direct Investment (FDI), and how it implements Decree
2005-1739 of 30 December 2005 regulating FDI in eleven "sensitive"
sectors (see paragraph 16). The GAO team met with Paris Embassy
officers, the Prime Minister's Technical Advisor for International
Economic Affairs, French Finance Ministry officers handling FDI
regulations and financial issues, the Chairman of Invest in France
"Agence Francaise pour les Investissemnents Internationaux AFII",
the U.S. Managing Director of the American Chamber of Commerce in
France, OECD senior analysts and U.S. law firms in Paris.

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The FDI Regime in 11 Sensitive Sectors
3. (U) According to Finance Ministry specialists, adoption of a
2005 decree that defined eleven FDI sectors as sensitive was an
attempt to provide additional transparency, rather than a
significant change in policy. (OECD officials told the GAO that
defining sensitive sectors was necessary for predictability and
transparency -- "what was tacit is now visible.") An unofficial
list of sensitive sectors had existed before the 2005 decree.
French interlocutors described France's investment regime as
"transparent", "open", "business-friendly" and "predictable." As
evidence they pointed to the significant share of the French CAC 40
index held by foreign investors (more than 46.0 percent in 2006).

4. (U) In the French FDI regime there is no generalized screening
of foreign investment; only acquisitions involving sensitive sectors
are screened. The 2005 decree changed the triggers for government
scrutiny in those sectors, stating that any investment granting
control of a firm, or surpassing a 33 percent stake, or involving a
branch of a firm headquartered in France, is subject to government
review. The 2005 decree introduced a distinction between EU
investors and non-EU investors, with a less restrictive regime
applying to the former.

5. (U) France normally considers firms established or incorporated
in other EU countries, and owned or controlled by U.S. residents, as
non-EU firms. To determine if non-EU investors control a firm, the
French government looks at the residency of the headquarters and the
ability of non-EU investors to veto key management decisions or
commercial ties (such as loans, guarantees, options, licenses, or
contracts) that might effectively make the French company dependent
on foreign investors.

In Practice
6. (U) French officials said that the screening process is not
expensive or burdensome. Investors are required to respond to a
2.5-page questionnaire providing information outlined in a March 7,
2003 order that implements decree 2003-196 on financial relations
with foreign countries. Investors applying for screening are
automatically approved if they do not receive a reply from the
Finance Ministry in a two-month period.

7. (U) The period can be extended when more information is
required. In such cases the two month clock does not begin ticking
until the Finance Ministry has all the information it requires about
a transaction. The Finance Ministry maintains an open dialog with
the would-be investor as it seeks a complete understanding of the
application. Every Finance Ministry decision can be appealed in the
French courts and can be challenged before the European Court of
Justice. Only 30 cases were examined by the Finance Ministry in
2006 (of 565 overall planned transactions reported by AFII) and all
were approved. The Finance Ministry is aware of two rejections in
the last ten years, both involving transactions related to defense
matters. Quizzed about the French attitude toward foreign
state-owned companies, French government officials said that France
is more concerned by hedge funds than by sovereign wealth funds, but

PARIS 00003268 002 OF 003

concerns exist about both.

8. (U) The Finance Ministry team reviewing files is small,
essentially concentrated in the "Multicom 2" office of the Finance
Ministry's "Direction Generale du Tresor et de la Politique
Economique" (DGTPE). However, some investments in sensitive sectors
require the consensus of several ministries, including the Defense
Ministry. The Finance Ministry may make arrangements with investors
(as was the case for investments in Thales and EADS) such as
predicating its agreement on commitments for investors to maintain
production and employment in France, or to respect existing
government contracts. (Quizzed by the GAO about the dual
citizenship of employees working for firms with classified defense
contracts, the Finance Ministry responded that the dual citizenship
has only rarely been an issue of contention.) The Finance Ministry
underscored that France is favorable to FDI, and the government's
objective is a "business-friendly regime with more predictability."

Mergers and Acquisitions
9. (U) In response to GAO questioning, Finance Ministry officials
indicated that the Finance Ministry is not automatically involved in
mergers and acquisitions. However, the ministry may be involved
when the government uses its "golden share" in state-owned firms to
protect national interests. The golden share generally gives the
government rights to require prior authorization from the Finance
Ministry for any investor or group of investors acting in concert to
own more than a certain percentage of a firm's capital; to name up
to two non-voting members to the firm's board of directors; and to
block the sale of any assets. Golden shares are not targeted at
foreign investors, the officials claimed. Although energy is not
currently a sensitive sector as defined in the 2005 decree, the
officials raised as an example Gaz de France, in which the
government might use a golden share to oppose any measure that could
jeopardize the security of energy supplies.

10. (U) The GAO team was also interested in any regulations related
to mergers and acquisitions in the banking and insurance sectors.
Finance Ministry interlocutors said there was no cap on FDI in
either sector, but that mergers and acquisitions require the
approval of the banking authority ("Comite des Etablissements de
Credit et des Entreprises d'Investissement - CECEI") or the
insurance authority ("Autorite de Controle des Assurances et des
Mutuelles - ACAM").

Comments on France's and U.S. Investors' Images
11. (SBU) In an aside one official said he thought that the 2005
decree on sensitive sectors had not been necessary, given that the
government had other rules at its disposal (e.g. taxes, norms, local
regulations etc.) to derail undesirable FDI. The decree had created
"a bad image" and sent "a protectionist message," he thought.
(Note: According to the 2006 American Chamber of Commerce-Bain &
Company Barometer, major factors that tarnish France's investment
image include the 35-work week, as well as high income and social
taxes. End note.) The AFII (which assists foreigners with French
investment procedures) director stated that the lengthy process to
receive visas and official approvals, including work papers and
social security documents, can also discourage investment.

12. (U) While today's foreign investors face less interference than
before, France has not entirely overcome a sometimes reflexive
opposition to foreign investment. A lawyer who frequently
represents foreign investors told the GAO team that the French
public has a negative perception that U.S. firms have "tough"
management policies, focusing on short-term profits at the expense
of employment.

Possible Directions of Sarkozy's Policy
13. (U) The managing director of the American Chamber of Commerce
in Paris predicts that the FDI regime will be more open with
President Sarkozy. According to the AmCham, France is able to
compete and has already showed it can adapt quickly to new
technologies. Other participants in the GAO meetings said they
expected France's FDI regime to remain open, given President Nicolas
Sarkozy's pragmatism and his awareness of the benefits to France of
FDI. Sarkozy is seen as likely to continue previous government
efforts to attract FDI to France to spur economic growth and job
creation. However, some interlocutors cautioned that he could be
attracted by business-unfriendly policies that seek to protect
employment against outsourcing.

PARIS 00003268 003 OF 003

14. (SBU) The Prime Minister's Technical Advisor did not foresee
any major change in FDI policy in the next few months, except in the
energy sector. FDI in the energy sector is likely to be part of a
broad internal EU discussion, and may become a national security
issue in the future. A private consulting firm representative
interpreted Sarkozy's recent calls for an EU industrial policy as
foretelling of a "presidentialization" of the FDI regime to promote
France's national interests. The Finance Ministry expects the
French government to have an intra-EU debate on FDI issues.

The EU and the French FDI Regime
15. (U) The European Commission initially questioned whether the
2005 FDI decree respected the free circulation of capital, or the
freedom of establishment within the EU. According to the Prime
Minister's adviser, French FDI regulations should not make any
difference between "pure" EU companies and EU companies that may be
controlled or owned by non-EU investors. Though the PM's adviser
did not raise the question of revisiting that issue, an AFII legal
specialist predicted a solution would be found at the EU level for
rules pertaining to FDI by EU companies, including those which are
controlled or owned by non-EU investors.

The Eleven Sensitive Sectors
16. (U) The 2005 investment decree applies broadly to "activities,"
so an investor has to be cognizant about getting approval for
investment even if only tangentially involved in one of the defined
sectors. The eleven categories are:
-- activities involving gambling (gambling was added to the initial
10-sector list officially to fight against money laundering and
prevent addiction to games, though most observers say it was to
protect local economic and political interests);
-- activities concerning private security, specifically where
security is provided to: an operator of vital importance, civil
aviation or maritime ports and zones where national defense secrets
are kept;
-- activities involving the research, development or production of
means to combat the illicit use by terrorists of pathogenic or toxic
agents, or to prevent the health consequences of such use;
-- activities concerning material used for the interception of
communications and for eavesdropping;
-- activities related to centers of evaluation for security
certification of computer products or systems;
-- activities related to goods or services of computer system
security used by public or private operators of defense
-- activities related to dual-use technologies, as defined by EU
regulations 1334/2000 of June 222, 2000;
-- activities related to cryptology resources, as well to cryptology
for ensuring confidence in the digital economy;
-- activities exercised by firms that are depositaries of national
defense secrets;
-- activities of research, production or sale of arms, munitions,
powders and explosive substances destined for military use;
-- activities exercised by firms that have concluded contracts for
study or for providing equipment for the Ministry of Defense, either
directly or by subcontractor, for any of the goods or services
listed above.

17. (U) The GOF, and Minister of Economy, Finance and Employment
Christine Lagarde in particular, is aware that France has to improve
its attractiveness to investors, rather than introduce measures
which could appear to be impediments to investment. According to a
recent Ernst and Young analysis, France's ability to create new
national "champions" is limited and it will increasingly require FDI
to drive economic growth.

18. (U) The GAO delegation has cleared this cable.


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