VZCZCXYZ0004
PP RUEHWEB

DE RUEHPE #0222/01 0261840
ZNR UUUUU ZZH
P 261840Z JAN 07
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC PRIORITY 3725
INFO RUEHQT/AMEMBASSY QUITO 0965
RUEHBO/AMEMBASSY BOGOTA 4306
RUEHBR/AMEMBASSY BRASILIA 7188
RUEHBU/AMEMBASSY BUENOS AIRES 2756
RUEHCV/AMEMBASSY CARACAS 0111
RUEHLP/AMEMBASSY LA PAZ JAN SANTIAGO 1077
RUEHAC/AMEMBASSY ASUNCION 1598
RUEHMN/AMEMBASSY MONTEVIDEO 9091
RUEHMD/AMEMBASSY MADRID 2799
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 0488

UNCLAS LIMA 000222 
 
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 2/2) 
 
REF: 06 STATE 178303 
 
The following is Part 2 of Embassy Lima's submission of the 2007 
Investment Climate Statement for Peru. 
 
Transparency of the Regulatory System 
------------------------------------- 
 
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. 
 
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 Peru. 
 
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 operations. 
 
U.S. firms have complained that SUNAT's aggressive behaior 
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. 
 
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. 
 
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 buildng 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 
--------------------------------------------- ----- 
 
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 2006, 
firms placed USD 1.55 billion on the local bond market 
(compared with USD 1.47 billion in CY 2005), which has been 
propelled in recent years by demand for investment 
instruments by private pension fund companies.  By October 
2006, pension funds managed a total of USD 13.4 billion, a 
43 percent surge over the October 2005 level (USD 9.4 
billion), thus creating a huge and growing appetite for 
financial instruments by pension funds.  The low 12 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. 
 
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. 
 
Total assets of the commercial banks were USD 24.1 billion 
at the end of October 2006, 16 percQt above the same 
period of 2005.  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, 1.9 percent of total loans were assessed as non- 
performing as of October 2006, 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. 
 
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.  Peruvian 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. 
 
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. 
 
Foreign direct investment registered with ProInversion as 
of the end of 2005 was USD 14.3 billion, compared with USD 
13.9 billion a year earlier.  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 
------------------ 
 
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.  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 
2005 and 2006, 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. 
 
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 
conflicts.  It is reasonable to posit that many of these 
efforts should pay off to reduce social conflicts for 
investors in 2007. 
 
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.  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. 
 
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 
http://www.ds-osac.org/. 
 
Corruption 
---------- 
 
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. 
 
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 legislation. 
 
The G8 initiative has already shown some positive results. 
A hemisphere-wide state procurement organization Q the 
Inter-American Organization of Government Procurement 
Institutions Q 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. 
 
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 70 (out of 
163 countries) in its 2006 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 
------------------------------- 
 
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), pending 
approval by the U.S. Congress, would eliminate the need for 
a bilateral investment agreement.  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 
-------------------------------------------- 
 
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 risk of 
significant depreciation of the exchange rate over the next 
year is negligible.  Peru is a member of the Multilateral 
Investment Guarantee Agency. 
 
Labor 
----- 
 
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).  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. 
 
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 labor 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. 
 
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. 
 
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 operations. 
 
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. 
 
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 
------------------------------ 
 
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. 
 
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 
------------------------------------ 
 
The stock of registered foreign direct investment in Peru 
was USD 14.3 billion in December 2006, according to 
ProInversion, versus USD 13.9 billion at the end of 2005. 
ProInversion data place Spanish investors as holding the 
largest share (33 percent), with USD 4.7 billion invested. 
The United States is the second largest investor, with USD 
2.3 billion, and the United Kingdom is third, with USD 2.2 
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 
15.8 percent.  By sector, communications received 34.7 
percent of foreign direct investment in 2006, followed by 
the manufacturing industry (15.3 percent), mining (14.8 
percent), and finance (12.5 percent). 
 
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. 
POWERS