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INFO RUEHQT/AMEMBASSY QUITO 1702
RUEHBO/AMEMBASSY BOGOTA 5444
RUEHBR/AMEMBASSY BRASILIA 7727
RUEHBU/AMEMBASSY BUENOS AIRES 3246
RUEHCV/AMEMBASSY CARACAS 1010
RUEHLP/AMEMBASSY LA PAZ JAN SANTIAGO 1701
RUEHAC/AMEMBASSY ASUNCION 1890
RUEHMN/AMEMBASSY MONTEVIDEO 9409
RUEHMD/AMEMBASSY MADRID 2957
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 0549
RUCPDOC/USDOC WASHDC
RUCPCIM/CIMS NTDB WASHDC

UNCLAS LIMA 000151 
 
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 2008 INVESTMENT CLIMATE STATEMENT 
 
REF: 07 STATE 158802 
 
The following is Embassy Lima's submission of the 2008 Investment 
Climate Statement for Peru. 
 
Openness to Foreign Investment 
------------------------------ 
 
¶1. (U) 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), signed by President Bush 
and President Garcia on December 14, enables 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 February 2008.  The U.S. Government 
recognized Peru's progress on social and economic policy by 
selecting Peru for the Millennium Challenge Account's Threshold 
Program for fiscal year 2007. 
 
¶2. (U) 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. 
 
¶3. (U) 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. 
 
¶4. (U) 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). 
 
¶5. (U) 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. 
 
¶6. (U) 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). 
 
¶7. (U) 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. 
 
¶8. (U) Under the 1993 Constitution, foreign investors have the same 
rights as national investors to benefit from any investment 
incentives, such as tax exemptions.  The PTPA establishes a secure, 
predictable legal framework for U.S. investors operating in Peru. 
All forms of investment are protected under the Agreement. U.S. 
inestors will enjoy in almost all circumstances the right to 
establish, acquire and operate investments in Peru on an equal 
footing with local investors. 
 
Conversion and Transfer Policies 
-------------------------------- 
 
¶9. (U) 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. 
 
¶10. (U) 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 (CR) 
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.  Under the PTPA, Portfolio managers 
in the U.S. will be able to provide portfolio management services to 
both mutual funds and pension funds in Peru, including to funds that 
manage Peru's privatized social security accounts. 
 
¶11. (U) 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, 2 percent in 2006, and 
1.8 percent in 2007.  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 
------------------------------ 
 
¶12. (U) 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 
------------------ 
 
¶13. (U) 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. 
 
¶14. (U) The criminal and civil courts of 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. 
 
¶15. (U) 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. 
 
¶16. (U) 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. 
 
¶17. (U) 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. 
 
¶18. (U) 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. 
 
¶19. (U) 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. 
 
¶20. (U) The U.S.-Peru Trade Promotion Agreement includes a chapter 
on dispute settlement.  The core obligations of the Agreement, 
including labor and environment provisions, are subject to the 
dispute settlement provisions of the agreement.  Dispute panel 
procedures set high standards of openness and transparency through 
open public hearings; public release of legal submissions by 
parties; special labor or environment expertise for disputes in 
these areas; and, opportunities for interested third parties to 
submit views.  The Agreement emphasizes promoting compliance through 
consultation and trade-enhancing remedies. 
 
Performance Requirements and Incentives 
--------------------------------------- 
 
¶21. (U) 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. 
 
¶22. (U) 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. 
 
¶23. (U) 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.  Under 
the U.S.-Peru Trade Promotion Agreement, Peru agreed to eliminate a 
measure affecting any sector in which a government concession is 
needed, such as transportation, energy and mining, that requires 
U.S. enterprises to buy locally. In the future, U.S. companies will 
be free to purchase on the basis of price and quality, not origin of 
goods in these sectors. 
 
¶24. (U) 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. 
 
¶25. (U) 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. 
 
¶26. (U) 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.  With the 
entry into force of the U.S.-Peru Trade Promotion Agreement, Peru 
has agreed to exceed its commitments made in the WTO, and to 
dismantle significant services and investment barriers, such as 
measures that require U.S. firms to hire nationals rather than U.S. 
professionals and measures requiring the purchase of local goods. 
 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
¶27. (U) 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 
----------------------------- 
 
¶28. (U) 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. 
 
¶29. (U) 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. 
 
¶30. (U) 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, http://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. 
 
¶31. (U) 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). 
 
¶32. (U) Under the U.S.-Peru Trade Promotion Agreement, Peru agrees 
to ratify or accede to the following agreements by the date of entry 
into force of the agreement: the Convention Relating to the 
Distribution of Program-Carrying Signals Transmitted by Satellite 
(1974); the Budapest treaty on the International Recognition of the 
Deposit of Microorganisms for the Purposes of Patent Procedure 
(1977) as amended in 1980; the WIPO Copyright Treaty (1996); the 
WIPO Performances and Phonograms Treaty (1996); the Patent 
Cooperation Treaty (1970) as amended in 1979; the Trademark Law 
Treaty (1994); and the International Convention for the Protection 
of New Varieties of Plants (1991)(UPOV Convention).  Peru agrees to 
make a reasonable effort to ratify or accede to the following 
agreements: the Patent Law Treaty (2000); the Hague Agreement 
Concerning the international Registration of Industrial Designs 
(1999); and the Protocol Relating to the Madrid agreement Concerning 
the international Registration of Marks (1989). 
 
¶33. (U) 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 2006, with damage to U.S. industry estimated at USD 53.5 
million.  IIPA estimates motion picture piracy accounts for 63 
percent of the market for a loss of USD 12 million.  IIPA considers 
that software piracy levels dropped slightly to 70% with estimated 
trade losses due to business software piracy rose in 2006 to $27.0 
million. 
 
¶34. (U) 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. 
 
¶35. (U) 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. 
 
¶36. (U) 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. 
 
¶37. (U) Under the U.S.-Peru Trade Promotion Agreement, in all 
categories of intellectual property rights (IPR), U.S. companies 
will be treated at least as well as Peruvian companies, and the 
agreement makes a number of important improvements to IPR 
protections. The Agreement provides for improved standards for the 
protection and enforcement of a broad range of intellectual property 
rights, which are consistent, both with U.S. standards of protection 
and enforcement and with emerging international standards. Such 
improvements include state-of-the-art protections for digital 
products such as U.S. software, music, text, and video; stronger 
protection for U.S. patents, trademarks and test data, including an 
electronic system for the registration and maintenance of 
trademarks; and further deterrence of piracy and counterfeiting of 
criminalizing end-user piracy. 
 
Transparency of the Regulatory System 
------------------------------------- 
 
¶38. (U) 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.  Under the U.S. - Peru Trade 
Promotion Agreement, U.S. financial service suppliers have full 
rights to establish subsidiaries or branches for banks and insurance 
companies. 
 
¶39. (U) 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. 
 
¶40. (U) 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. 
 
¶41. (U) U.S. firms have complained that SUNAT's aggressive behavior 
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. 
 
¶42. (U) 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. 
 
¶43. (U) 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 
building 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 
--------------------------------------------- ----- 
 
¶44. (U) 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 2007, firms placed USD 1.67 billion on the local bond 
market (compared with USD 1.55 billion in CY 2006), which has been 
propelled in recent years by demand for investment instruments by 
private pension fund companies.  By November 2007, pension funds 
managed a total of USD 20.2 billion, a 47 percent surge over the 
November 2006 level (USD 13.7 billion), thus creating a huge and 
growing appetite for financial instruments by pension funds.  The 
low 20 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. 
 
¶45. (U) 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. 
 
¶46. (U) Total assets of the commercial banks were USD 29.8 billion 
at the end of June 2007, 25 percent above the same period of 2006. 
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, 1.3 
percent of total loans were assessed as non-performing as of 
November 2007, 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. 
 
¶47. (U) 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. 
Peuvian 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. 
 
¶48. (U) 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. 
 
¶49. (U) Foreign direct investment registered with ProInversion as of 
the end of 2006 was USD 15.37 billion, compared with USD 15.31 
billion a year earlier.  ProInversion estimated growth of private 
foreign direct investment will reach USD 20.00 billion in 2008. 
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 
------------------ 
 
¶50. (U) 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.  In September 2007, residents of three northern Piura towns 
voted overwhelmingly in a referendum to reject mining projects in 
their region, which has stalled development of a large copper mining 
project.  Other communities around Peru have expressed interest in 
holding similar referenda.  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 2007, 
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. 
 
¶51. (U) 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 conflict.  It is reasonable to posit that many of 
these efforts should pay off to reduce social conflicts for 
investors in 2007. 
 
¶52. (U) 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.  Sendero remnants are presumed to have killed 11 
police, 20 civilians, and one member of the military, and committed 
over 80 terrorist acts in coca-growing areas during 2007.  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. 
 
¶53. (U) 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 
---------- 
 
¶54. (U) 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. 
 
¶55. (U) 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. 
 
¶56. (U) The G8 initiative has already shown some positive results. 
A hemisphere-wide state procurement organization - the 
Inter-American Organization of Government Procurement Institutions - 
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. 
 
¶57. (U) 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 72 (out 
of 179 countries) in its 2007 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 
------------------------------- 
 
¶58. (U) 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), signed by President Bush 
on December 14, eliminates 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 
-------------------------------------------- 
 
¶59. (U) 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 exchange rate between the 
U.S. dollar and the Nuevo Sol decreased this past year to under 3 
soles. Peru is a member of the Multilateral Investment Guarantee 
Agency. 
 
 
Labor 
----- 
 
¶60. (U) 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).  On October 1, 2007 the government increased the statutory 
monthly minimum wage by 10 percent to $176 (550 soles).  The law 
provides for a 48-hour workweek and one day of rest and requires 
companies to pay overtime for more than eight hours of work per day 
and additional compensation for work at night.  Unions in essential 
public services, as determined by the government, must provide a 
sufficient number of workers during a strike to maintain operations. 
The law bans government unions in essential public services from 
striking. It also requires strikers to notify the labor ministry in 
advance before carrying out a job action. According to the labor 
ministry, one legal strike and 65 illegal strikes took place during 
the year. According to labor leaders, permission to strike was 
difficult to obtain, in part because the labor ministry feared 
harming the economy. The Ministry of Labor justified its decisions 
by citing unions' failure to fulfill the legal requirements 
necessary to strike. 
 
¶61. (U) 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. 
 
¶62. (U) 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 laor 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. 
 
¶63. (U) 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. 
 
¶64. (U) 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. 
 
¶65. (U) 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. 
 
¶66. (U) 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 
------------------------------ 
 
¶67. (U) 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. 
 
¶68. (U) 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 
------------------------------------ 
 
¶69. (U) The stock of registered foreign direct investment in Peru 
was USD 15.3 billion in June 2007 according to ProInversion, versus 
USD 14.3 billion at the end of 2006.  ProInversion data place 
Spanish investors as holding the largest share (30 percent), with 
USD 4.7 billion invested.  The United States is the second largest 
investor, with USD 2.6 billion, and the United Kingdom is third, 
with USD 2.5 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 17.4 percent.  By 
sector, communications received 31.6 percent of foreign direct 
investment in 2006, followed by the mining industry (18.7 percent), 
manufacturing (15.0 percent), and finance (12.5 percent). 
 
¶70. (U) 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. 
NEALON