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R 021513Z AUG 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 9274
INFO RUEATRS/DEPT OF TREASURY WASHDC
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RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 03 PARIS 003268 
 
SIPDIS 
 
SENSITIVE 
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PASS FEDERAL RESERVE 
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TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
USDOC FOR 4212/MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV FR
SUBJECT:  GAO VISIT ON FRENCH FDI REGIME AND PRACTICES 
 
 
¶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. 
 
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 
installations; 
-- 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. 
 
Comment 
------- 
¶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. 
 
PEKALA