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SUBJECT: PERU 2007 INVESTMENT CLIMATE STATEMENT (PART 1/2)
REF: 06 STATE 178303
The following is Part 1 of Embassy Lima’s submission of the 2007 Investment Climate Statement for Peru.
Openness to Foreign Investment
The Peruvian government seeks to attract investment — bothforeign and domestic — in nearly all sectors of theeconomy. The U.S.-Peru Trade Promotion Agreement (PTPA),pending approval by the U.S. Congress, would enable Peru toattract additional investment by clarifying rules forinvestors, increasing transparency, reducing barriers totrade, establishing faster customs procedures, andimproving the dispute settlement process. Peru does nothave a bilateral investment treaty (BIT) or tax treaty withthe United States, but these provisions are contained inthe PTPA. The U.S. Congress extended unilateral tradepreferences under the Andean Trade Preferences Act(modified by the Andean Trade Preferences and DrugEradication Act, or ATPDEA) to Peru, Colombia, Bolivia andEcuador through June 2007. The U.S. Government recognizedPeru’s progress in economic policy and other issues byselecting Peru for the Millennium Challenge Account’sThreshold Program for fiscal year 2007.
During the early 1990s, the Peruvian government promotedeconomic stabilization and liberalization policies bylowering trade barriers, lifting restrictions on capitalflows and opening the economy to foreign investors. Peruexperienced marked growth in foreign investment from 1993-1998. Economic reform and privatization slowed in the late1990s however, leading to a discernible drop in direct andindirect foreign investment flows. Investment remainedstagnant following the collapse of President AlbertoFujimori’s government in November 2000, and through theperiod of an interim government and the election ofPresident Alejandro Toledo in 2001.
During his tenure, President Toledo implemented severalpro-investment policies. In April 2002, the governmentestablished ProInversion, building on the foundation ofCOPRI, the privatization agency created in 1991.ProInversion seeks to be a “one-stop shop” for current andpotential investors, and has successfully completed bothconcessions and privatizations of state-owned enterprisesand natural resources. In 2004, Las Bambas, a copperdeposit, 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 aBrazilian company for a 3 percent royalty, and ProInversiongranted British-owned Rio Tinto a concession for the LaGranja copper deposit for USD 22 million. Additionally,from January-November 2006, the oil and gas leasing agencyPetroperu granted 15 exploration concessions to foreign oilcompanies, including 8 to 5 U.S. companies, along thenorthern coast and in the jungle.
In addition to the 1993 Constitution (enacted January 1,1994), major laws concerning foreign direct investment inPeru include the Foreign Investment Promotion Law(Legislative Decree (DL) 662 of September 1991) and theFramework Law for Private Investment Growth (DL 757 ofNovember 1991). The two 1991 laws were implemented bySupreme Decree 162-92-EF (October 1992). Two otherimportant laws are the Private Investment in State-OwnedEnterprises Promotion Law (DL 674) and the PrivateInvestment in Public Services Infrastructure Promotion Law(DL 758).
The 1993 Constitution guarantees national treatment forforeign investors and permits foreign investment in almostall economic sectors. Prior approval is only required inthe banking (for regulatory reasons, also applies todomestic investment) and defense-related sectors. Foreigninvestors are advised to register with ProInversion toobtain the guarantee that they will be able to repatriatecapital, profits and royalties. Foreigners are legallyforbidden from owning a majority interest in radio andtelevision stations in Peru; nevertheless, foreigners havein practice owned controlling interests in such companies.Under the Constitution, foreign interests cannot “acquireor possess under any title, mines, lands, forests, waters,or fuel or energy sources” within 50 kilometers of Peru’sinternational borders. However, foreigners can obtainconcessions and rights within the restricted areas with theauthorization of a supreme resolution approved by theCabinet and the Joint Command of the Armed Forces. Allinvestors — domestic and foreign — need prior approvalbefore investing in weapons manufacturing industries.
In 1991, the Peruvian government began an extensiveprivatization program, encouraging foreign investors toparticipate. From 1991 through September 2005,privatization revenues totaled USD 9.4 billion, of whichforeign investors were responsible for the vast majority.Over three-quarters of these transactions took place from1994 to 1997. Through September 2005, privatization andconcessions proceeds totaled USD 35.1 million, andgenerated investment commitments of USD 1.3 billion. Thegovernment has made only limited progress on privatizationssince then, and prospects for future direct privatizationsare not encouraging. The government has consequentlyshifted to a strategy of promoting multi-year concessionsas a means of attracting investment into major projects.In 2000, the Lima airport was concessioned to a privategroup (Lima Airport Partners), and in August 2006, nine ofPeru’s northern airports were concessioned for 25 years toSWISSport. Peru’s other airports, as well as variouselectricity, water, sewage, and oil (Petroperu) companiesremain state-owned and operated. In June 2006, theContainer Terminal-South Pier of the important seaport ofCallao was concessioned for 30 years to a consortium of Pand O Dover (U.K.) and Uniport (Spain).
In June 2004, the Congress passed a law to exclude thestate-owned oil company Petroperu from privatization andauthorized Petroperu to conduct exploration and productionactivities. This modified the government’s policy sincethe early 1990s, when it sold all of Petroperu’sexploration and production units and a major oil refinery.Under this new law, the government still has an option ofgranting concessions on remaining Petroperu assets,including one pipeline and several refineries. In July2006, Congress defeated an executive veto of a bill to”strengthen and modernize” Petroperu. Under the new law,Petroperu can resume exploration, production and relatedactivities, including petrochemicals; is freed fromcontracting approval by CONSUCODE, the state procurementsupervision agency; is exempted from the approval of itsinvestment 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.
Under the 1993 Constitution, foreign investors have thesame rights as national investors to benefit from anyinvestment incentives, such as tax exemptions.
Conversion and Transfer Policies
Under Article 64 of the 1993 Constitution, the Peruviangovernment guarantees the freedom to hold and dispose offoreign currency; hence, there are no foreign exchangecontrols in Peru. All restrictions on remittances ofprofits, dividends, royalties, and capital have beeneliminated, although foreign investors are advised toregister their investments with ProInversion (as notedabove) to ensure these guarantees. Exporters and importersare not required to channel foreign exchange transactionsthrough the Central Reserve Bank of Peru, and can conducttransactions freely on the open market. Anyone may openand maintain foreign currency accounts in Peruviancommercial banks. U.S. firms have reported no problems ordelays in transferring funds or remitting capital,earnings, loan repayments or lease payments since Peru’seconomic reforms of the early 1990s.
The 1993 Constitution guarantees free convertibility ofcurrency. There is, however, a legal limit on the amountthat private pension fund managers can invest in foreignsecurities. In May 2004, the Central Reserve Bank of Peru(BCR) 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 localequities and bonds, driving up their prices to artificiallyhigh levels. The BCR’s new board, appointed by the GarciaAdministration, intends to gradually raise this limit, beginning with an increase to 12 percent.
The BCR is an independent institution, free to managemonetary policy to maintain financial stability. The BCR’sprimary goal is to maintain price stability, via inflationtargeting. Inflation in Peru was 1.6 percent in 2005 and 2percent in 2006. The government has also implemented policies to de-dollarize the economy, and deposits in thelocal currency (nuevo sol) now account for about 36percent.
Expropriation and Compensation
According to the Constitution, the Peruvian government canonly expropriate private property on public interestgrounds (such as for public works projects) or for nationalsecurity. Any expropriation requires the Congress to passa specific act. The Government of Peru has expressed itsintention to comply with international standards concerningexpropriations.
Dispute settlement continues to be problematic in Peru,although the GOP took steps in 2005 to improve the disputesettlement process. From December 2004 through 2006, the GOP established 24 commercial courts to rule on investmentdisputes, including two courts of appeal. All of thesecourts are located in Lima. The commercial courts havesubstantially improved the process for commercial disputes.Prior to the existence of the commercial courts, it took anaverage of two years to resolve a commercial case throughthe civil court system. These new courts, which havespecialized judges, have reduced the amount of time toresolve a case to two months. Additionally, theenforcement of court decisions has been reduced from 36months to 3-6 months. While about 40 percent of decisionsare appealed, most of these are resolved at the appealslevel; very few are appealed to the Supreme Court.
The criminal and civil courts f first instance and appealare located in the provinces and in Lima. The SupremeCourt is located in Lima. In principle, secured interestsin property, both chattel and real, are recognized.However, the judicial system is often extremely slow tohear cases and to issue decisions. In addition, courtrulings and the degree of enforcement have been difficultto predict. The capabilities of individual judges varysubstantially, and allegations of corruption and outsideinterference in the judicial system are common. ThePeruvian appeals process also tends to delay finaldecisions. As a result, foreign investors, among others,have found that contracts are often difficult to enforce inPeru. The exposure in 2000 of a network of corrupt judgescontrolled by Fujimori advisor Vladimiro Montesinos led topromises by subsequent governments to address corruptionand reform the judiciary, but progress has been slow.
Under the 1997 Law of Conciliation (DL 26872), which wentinto effect on January 1, 2000, disputants in many types ofcivil and commercial matters are required to considerconciliation before a judge can accept a dispute to belitigated. Private parties often stipulate arbitration toresolve business disputes, as a way to avoid involvement injudicial processes.
Peru’s commercial and bankruptcy laws have proven difficultto enforce through the courts. There is an administrativebankruptcy procedure under INDECOPI (the National Institutefor the Defense of Free Competition and the Protection ofIntellectual Property), but it has proven to be slow andsubject to judicial intervention. The creditor hierarchyis similar to that established under U.S. bankruptcy law,and monetary judgments are usually made in the currencystipulated in the contract.
International arbitration of disputes between foreigninvestors and the government or state-controlled firms isincluded in the 1993 Constitution. Although Perutheoretically accepts binding arbitration, on a fewoccasions over the past three years, parastatal companiesand Government Ministries disregarded unfavorablejudgments. Previously, the Government of Peru turned thesearbitration cases over to the judiciary, where they werebureaucratically delayed until the companies conceded thecases. However, effective July 2005, the Supreme Courtruled that all arbitration findings and awards are finaland not subject to appeal.
Peru is a party to the Convention on the Recognition andEnforcement of Foreign Arbitral Awards (the New YorkConvention of 1958), and to the International Center forthe Settlement of Investment Disputes (the WashingtonConvention of 1965). Disputes between foreign investorsand the Government of Peru regarding pre-existing contractsmust still be submitted to national courts. However,investors who conclude a juridical stability agreement foradditional investments may submit disputes with thegovernment to national or international arbitration ifstipulated in the agreement. In 2005, the governmentresolved a high-level dispute by upholding the decision ofan arbitration panel and making payment.
Several private organizations — including the UniversidadCatolica, the Lima Chamber of Commerce and the AmericanChamber of Commerce — operate private arbitration centers.The quality of these centers varies, however, and investorsshould choose a venue for arbitration carefully.The U.S.-Peru Trade Promotion Agreement, currently pendingapproval by the U.S. Congress, includes a chapter ondispute settlement and, upon implementation, should furtherclarify the resolution process in Peru.
Performance Requirements and Incentives
Peru offers both foreign and national investors legal andtax stability agreements to stimulate private investment.These agreements guarantee that the statutes on incometaxes, remittances, export promotion regimes (such asdrawback), administrative procedures, and labor hiringregimes in effect at the time of the investment contractwill remain unchanged for that investment for 10 years. Toqualify, an investment must exceed USD 10 million in themining and hydrocarbons sectors or USD 5 million in othersectors within two years. An agreement to acquire morethan 50 percent of a company’s shares in the privatizationprocess may also qualify an investor for a juridicalstability agreement, provided that the infusion will expandthe installed capacity of the company or enhance itstechnological development.
There are no performance requirements that applyexclusively to foreign investors. Legal stabilityagreements are subject to Peruvian civil law, which meansthey cannot be altered unilaterally by the government.Investors are also offered protection from liability foracquiring state-owned enterprises.
Laws specific to the petroleum and mining sectors alsoprovide assurances to investors. However, in 2000, thegovernment modified the General Mining Law, substantiallyreducing benefits to investors in that sector. Among thechanges were: a reduction in the term concessionaires aregranted to achieve the minimum annual production; anincrease in fees for holding non-productive concessions; anincrease in fines for not achieving minimum productionwithin the allotted time; a reduction in the maximumallowable annual accelerated depreciation; and revocationof the income tax exemption for reinvested profits. In2004, Congress approved a bill charging a 1 to 3 percentroyalty on mining companies’ sales. The changes do notaffect those investors who have signed legal stabilityagreements with the government.
In December 2006, after increased social demands for ashare of mining profits, the Garcia Administration andmining companies agreed to a “voluntary contribution”system whereby mining companies will invest in communityinfrastructure projects. This agreement averted adoptionof a more restrictive mining law, allows mining companiesto control where they invest their contributions, andceases to apply if the prices of mined products drop.
Parties may freely negotiate contractual conditions relatedto licensing arrangements and other aspects of technologytransfer without prior authorization. Registry of atechnology transfer agreement is required for a payment ofroyalties to be counted against taxes. Such registrationis automatic upon submission to ProInversion.
Current laws limit foreign employees to no more than 20percent of the total number of employees in a local company(whether owned by foreign or national interests), andrestricts their combined salaries to no more than 30percent of the total company payroll. However, DL 689(November 1991) provides a variety of exceptions to theselimits. For example, a foreigner is not counted against acompany’s total if he or she holds an immigrant visa, has acertain amount invested in the company (currently about USD4,000) or is a national of a country that has a reciprocallabor or dual nationality agreement with Peru. Foreignbanks and service companies, and internationaltransportation companies are also exempt from these hiringlimits, as are all firms located in free trade zones.Furthermore, companies may apply for exemption from thelimitations for managerial or technical personnel.
Right to Private Ownership and Establishment
Foreign and domestic entities are generally permitted theright to establish and own business enterprises and toengage in most forms of remunerative activity. Subject tothe restrictions listed earlier in this document, bothforeign and domestic entities may invest in any legaleconomic 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 thecase of some privatized companies deemed important by thegovernment, privatization agency ProInversion has includeda so-called “golden share” clause in the sales contract,which allows the government to veto a potential futurepurchaser of the privatized assets.
Protection of Property Rights
As noted in the Dispute Settlement section, in principle,secured interests in property (both chattel and real) arerecognized. However, the Peruvian judicial system is oftenvery slow to hear cases and to issue decisions, outcomeshave been difficult to predict and enforce, and corruptionis frequently alleged. The Peruvian appeals process alsodelays final outcomes of cases. Thus, foreign investors,among others, have found that contracts are often difficultto enforce in Peru. Improving the judicial system is astated priority of the Peruvian Government.
Protection of intellectual property rights (IPR) in Peruhas improved over the past decade, but still falls short ofU.S. and international standards in several areas. Peruremains on USTR’s Special 301 “Watch List” due to concernsabout continued high rates of copyright piracy, a lack ofprotection for confidential test data submitted for themarketing approval of pharmaceutical and agrochemicalproducts, and inadequate enforcement of IPR laws,particularly with respect to the relatively weak penaltiesthat have been imposed on IPR violators.
The Peruvian government agency charged with promoting anddefending intellectual property rights is the Institute forthe Defense of Competition and Protection of IntellectualProperty (INDECOPI, www.indecopi.gob.pe), established in¶1992. Legislative Decree 822 of 1996 and Andean CommunityDecisions 344 and 486 protect patents, trademarks, andindustrial designs. Copyrights are protected byLegislative Decree No. 822 of 1996 and by Andean Community Decision 351.
Peru belongs to the World Trade Organization (WTO) and theWorld Intellectual Property Organization (WIPO). It isalso a signatory to the Paris Convention on IndustrialProperty, Geneva Convention for the Protection of SoundRecordings, Bern Convention for the Protection of Literaryand Artistic Works, Brussels Convention on the Distributionof Satellite Signals, Phonograms Convention, SatellitesConvention, Universal Copyright Convention, the WorldCopyright Treaty, and the World Performances andPhonographs Treaty and the Film Register Treaty. InDecember 1994, the Peruvian Congress ratified the WorldTrade Organization’s Agreement on Trade-Related Aspects ofIntellectual Property (TRIPs).
Peru’s legal framework provides for easy registration oftrademarks, and inventors have been able to patent theirinventions since 1994. Peru’s 1996 Industrial PropertyRights Law provides an effective term of protection forpatents and prohibits devices that decode encryptedsatellite signals, along with other improvements. Peruvianlaw does not provide pipeline protection for patents orprotection from parallel imports. Although Peruvian lawprovides for effective trademark protection, counterfeitingof trademarks, copyrighted products, and imports of piratedmerchandise are widespread. The International IntellectualProperty Alliance estimates that the piracy level in Perufor recorded music was 98 percent in 2004-2005, with damageto U.S. industry estimated at USD 100 million. IIPAestimates motion picture piracy accounts for 60 percent ofthe market for a loss of USD 5.5 million. Indecopiconsiders that software piracy levels remained the same as2004 levels, at 56 percent.
Peru’s Copyright Law is generally consistent with the TRIPsAgreement. However, textbooks, books on technicalsubjects, audiocassettes, motion picture videos andsoftware are widely pirated. While the government, incoordination with the private sector, has conductednumerous raids over the last few years on large-scaledistributors and users of pirated goods, and has increasedother types of enforcement, piracy continues to be asignificant problem for legitimate owners of copyrights inPeru.
Despite increased enforcement actions by INDECOPI, thejudicial branch has failed to impose sentences thatadequately deter future IPR violations. The Peruviangovernment in July 2004 increased the minimum penalty forpiracy to four years imprisonment, although there have yetto be any convictions under the new law. Peru now has sixprosecutors (two fiscalias) dedicated full-time tointellectual property cases. In a major breakthrough, inNovember 2006, four special courts of first instance andone special appeals court in Lima were assigned IPR duties,effective 2007.
An IPR Toolkit for Peru can be found on the Embassy andCommercial Service Lima’s websites. Besides being a guideto registering and protecting IP, it contains a list oflawyers and other organizations that can provide support onan on-going basis.