VZCZCXYZ0000
PP RUEHWEB

DE RUEHPE #0221/01 0261836
ZNR UUUUU ZZH
P 261836Z JAN 07
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC PRIORITY 3718
INFO RUEHQT/AMEMBASSY QUITO 0958
RUEHBO/AMEMBASSY BOGOTA 4299
RUEHBR/AMEMBASSY BRASILIA 7181
RUEHBU/AMEMBASSY BUENOS AIRES 2749
RUEHCV/AMEMBASSY CARACAS 0104
RUEHLP/AMEMBASSY LA PAZ JAN SANTIAGO 1070
RUEHAC/AMEMBASSY ASUNCION 1591
RUEHMN/AMEMBASSY MONTEVIDEO 9084
RUEHMD/AMEMBASSY MADRID 2792
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHGV/USMISSION GENEVA 0481

UNCLAS LIMA 000221 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EB/IFD/OIA, WHA/AND, WHA/EPSC 
PASS EXIM, OPIC, TDA 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
USTR FOR BHARMAN AND MCARRILLO 
GENEVA FOR USTR 
 
E.O. 12958:  N/A 
TAGS: EINV EFIN ETRD KTDB ELAB PGOV OPIC USTR PE
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 -- both 
foreign and domestic -- in nearly all sectors of the 
economy.  The U.S.-Peru Trade Promotion Agreement (PTPA), 
pending approval by the U.S. Congress, would enable 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 June 2007.  The U.S. Government recognized 
Peru's progress in economic policy and other issues by 
selecting Peru for the Millennium Challenge Account's 
Threshold Program for fiscal year 2007. 
 
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. 
 
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. 
 
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). 
 
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. 
 
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). 
 
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. 
 
Under the 1993 Constitution, foreign investors have the 
same rights as national investors to benefit from any 
investment incentives, such as tax exemptions. 
 
Conversion and Transfer Policies 
-------------------------------- 
 
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. 
 
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 
(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 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. 
 
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 and 2 
percent in 2006.  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 
------------------------------ 
 
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 
------------------ 
 
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 Court. 
 
The criminal and civil courts f 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. 
 
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. 
 
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. 
 
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 appeal. 
 
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. 
 
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. 
The U.S.-Peru Trade Promotion Agreement, currently pending 
approval by the U.S. Congress, includes a chapter on 
dispute settlement and, upon implementation, should further 
clarify the resolution process in Peru. 
 
Performance Requirements and Incentives 
--------------------------------------- 
 
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. 
 
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. 
 
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. 
 
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. 
 
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 ProInversion. 
 
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. 
 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
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 
----------------------------- 
 
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. 
 
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. 
 
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, www.indecopi.gob.pe), 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. 
 
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 (TRIPs). 
 
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 2004-2005, with damage 
to U.S. industry estimated at USD 100 million.  IIPA 
estimates motion picture piracy accounts for 60 percent of 
the market for a loss of USD 5.5 million.  Indecopi 
considers that software piracy levels remained the same as 
2004 levels, at 56 percent. 
 
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. 
 
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. 
 
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. 
POWERS