VZCZCXRO0663
RR RUEHLMC
DE RUEHMU #0763/01 1681923
ZNR UUUUU ZZH
R 161923Z JUN 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 2745
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC

UNCLAS SECTION 01 OF 06 MANAGUA 000763 
 
SIPDIS 
SENSITIVE 
 
STATE PASS USTR 
STATE FOR WHA/ESPC and WHA CEN 
STATE ALSO FOR EEB/BTA and EEB/CBA 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR 
 
E.O. 12958: N/A 
TAGS: EINV ETRD ECON PGOV NU
SUBJECT: EMBASSY AND GON HOST COMPETITIVENESS FORUM 
 
Summary 
------- 

¶1. (SBU) The Embassy and Ministry of Trade, Industry, and Commerce 
(MIFIC) co-hosted a day-long "National Forum on Competitiveness and 
Investment" on May 28, 2008, in Managua, Nicaragua.  The forum, 
which served as a prelude to Secretary Gutierrez' Americas 
Competitiveness Forum (ACF), scheduled for August 17-19 in Atlanta, 
inspired debate and recommendations on topics such as financing for 
small businesses and their incorporation in national and 
international value chains.  Participants also discussed 
institutional factors that contribute to competitiveness, such as 
weaknesses in Nicaragua's rule of law.  However, Vice President 
Jaime Morales Carazo privately questioned the importance of these 
factors.  Deputy Assistant Secretary of Commerce Walter Bastian 
encouraged Nicaraguans to participate in the ACF and continue 
dialogue on competitiveness issues, while Deputy Assistant Secretary 
of Treasury Brian O'Neill described programs on small business 
financing and infrastructure development. 
 
EEB/CBA BFIF Funding Supports Forum 
----------------------------------- 

¶2. (U) With funding from the EEB/CBA Business Facilitation and 
Incentive Fund (BFIF), the Embassy and Ministry of Trade, Industry, 
and Commerce (MIFIC) co-hosted a "National Forum on Competitiveness 
and Investment" on May 28, 2008, in Managua, Nicaragua.  Working 
with MIFIC officials, Econoffs developed that agenda, invited and 
briefed speakers, and provided overall logistical support.  Over 150 
Nicaraguan government officials and private sector representatives 
attended the day long event.  Econoffs are now working with business 
leaders to organize a second forum that would address 
competitiveness issues from their perspective. 
 
Ambassador Describes the "Investment Calculus" 
--------------------------------------------- - 

¶3. (U) Ambassador Trivelli opened the forum by describing the 
"investment calculus" -- factors a company takes into consideration 
when deciding where to make an investment, such as the importance of 
rule of law, regulatory quality, and infrastructure.  He noted the 
importance that Nicaragua's leadership send a clear message that 
investment is welcome as part of the country's efforts to create 
jobs and alleviate poverty.  The Ambassador concluded by describing 
the importance of innovation and productivity gains in allowing the 
private sector to serve as the engine of economic growth. 
 
Vice President Criticizes Savage Capitalism and Socialism 
------------------------- ------------------------------- 

¶4. (U) Vice President Morales followed with remarks emphasizing 
positive areas of engagement between the United States and 
Nicaragua, including the role of CAFTA-DR in job creation and export 
growth.  Morales acknowledged local criticism of free market 
economics and suggested that this was because the "neo-liberal" 
economic model has not been successful in alleviating poverty. 
However, he also discredited socialist alternatives, alluding to the 
"catastrophic effects" of the Sandinista economic policies of the 
1980s.  He observed that both capitalism and socialism taken to 
their extremes are "savage," but defended the leading role of 
government in safeguarding public interests.  [Comment: The Vice 
President was attempting to balance President Ortega's frequent 
criticism of "savage" capitalism by framing it in a context that 
Ortega has not -- that is, all ideological extremism is dangerous. 
End comment.]  Returning to the theme of competitiveness, he listed 
factors such as infrastructure, education, and macroeconomic 
stability as key to efforts to "combat poverty through job creation 
and private investment, both foreign and domestic." 
 
Vice President Questions Rule of Law Indicators 
--------------------------------------------- -- 

¶5. (SBU) During a pull-aside with Vice President Morales, DAS 
Bastian highlighted the upcoming ACF in Atlanta, stating that he 
hoped to identify a "Nicaraguan project" that can be funded at the 
Forum as a deliverable.  [Note: The Vice President will, as he did 
last year, lead the Nicaraguan delegation, which will also include 
MIFIC Minister Solorzano and Presidential Delegate for Investment 
Promotion Alvaro Baltodano, who also participated in the pull-aside. 
 End note.]  DAS O'Neill emphasized the importance of Nicaragua 
staying on track in its economic and financial programs and 
identified the need to negotiate a solution to a government debt 
default related to bonds issued to resolve a banking crisis in 2001 
(septel).  Both USG officials emphasized that ideological rhetoric 
critical of market economics and private investment is not helpful. 
At some point, "perception is reality." 
 
¶6. (SBU) Ambassador Trivelli added that weak rule of law drags down 
Nicaragua's rankings in international business and competitiveness 
indicators and hinders the country's efforts to attract investment. 
Vice President Morales responded that actions speak louder than 
words.  He reasserted that international indicators such as the 
World Economic Forum (WEF) Global Competitiveness Index are based on 
perception and, therefore, unimportant.  He highlighted China's high 
growth rate, despite extensive corruption, as an example of why 
indicators and rankings do not matter.  The Vice President went on 
to disparage the United States for attempting to "impose standards 
that do not fit the realities of this country."  DAS Bastian closed 
the conversation by suggesting that instead of arguing about the 
validity of indicators and rankings, Nicaragua should "develop a 
long-term vision of its future -- Where does it want to be in 30 
years, and what kind of economy does it want to have?" 
 
INCAE Dean: Focus on Competitiveness Indicators 
--------------------------------------------- -- 

¶7. (U) Niels Ketelhohn, Dean of the INCAE Business School in 
Managua, provided a general macroeconomic overview, noting the risk 
that inflation, forecast by some economists to reach 22% for 2008, 
poses to economic stability.  He also underscored the importance of 
exports to Nicaragua's economic development and highlighted growing 
Nicaraguan trade with the United States, which accounts for more 
than 50% of total exports.  Ketelhohn told the audience that many of 
Nicaragua's poor would bear the brunt of rising food prices but that 
net producers of agricultural products stand to benefit.  He 
referred to the WEF Global Competitiveness Index, where Nicaragua 
currently ranks 111th of 131 countries (worse than Albania but 
slightly better than Burkina Faso), to describe weaknesses in 
Nicaragua's investment climate.  Ketelhohn noted that Nicaragua 
ranks especially low in judicial independence (129th), port 
infrastructure (124th); and education (123rd).  In conclusion, he 
reminded participants that, "the aspiration to lift our people out 
of poverty is rooted in the success of the private sector." 
 
Private Sector: Rule of Law Does Matter 
--------------------------------------- 

¶8. (U) Jose Adan Aguerri, President of the Federation of Nicaraguan 
Business Associations (COSEP), also focused on the WEF Global 
Competitiveness Index, listing additional weaknesses for Nicaragua 
such as access to credit (121st), competition policy (129th), and 
technology transfer (126th).  He also identified advantages, such as 
Nicaragua's flexible labor laws (26th), the ease of opening a 
business (16th), and rules governing profit repatriation (21st). 
Aguerri moved on to political issues, describing the negative impact 
the government's public discourse has on the investment climate.  He 
specifically mentioned the negative impact "judicial uncertainty" 
has had on the investment climate, and lamented delays in approving 
laws important to the investment climate, such as the Coastal Law. 
He concluded with an overview of COSEP's "Pillars of Development," 
an export-led growth strategy that includes industry specific 
initiatives as well as an active role for government in meeting the 
country's infrastructure, financing, and education needs.  He 
highlighted the role of COSEP in opening channels of communication 
with the government, but admitted limited progress on proposed 
initiatives. 
 
Small Business Success Stories 
------------------------------ 

¶9. (U) Paul Davidson, Operations Manager for AGORA Partnerships, 
described his business model as one of identifying entrepreneurs 
eager to grow their business, providing technical assistance, and 
offering financing through direct equity stakes.  AGORA 
Partnerships, with support from the U.S. Agency for International 
Development, has provided technical assistance to 47 firms and 
venture capital to five companies.  Carlos Solorzano, owner of 
VegyFrut, a company in which AGORA has invested, illustrated the 
growth his firm has sustained by working with AGORA Partnerships. 
Founded in 2006, VegyFrut, now processes daily 4,000 pounds of fresh 
fruits and vegetables for local and regional clients, including for 
U.S. franchises such as McDonald's and Quiznos. 
 
¶10. (U) Merling Preza, General Manager of coffee cooperative 
PRODECOOP, described the cooperative's transformation since it was 
founded by 20 small farmers in 1993.  The cooperative is now one of 
the most successful producers of fair trade coffee in Nicaragua, 
earning its members a 22% price premium on sales for the 2006-07 
harvest.  Preza said the cooperative has focused on investment in 
key infrastructure to improve quality control and provided technical 
assistance to members to improve their farming practices.  Preza 
credited PRODECOOP's success to efforts made to understand the full 
value chain for coffee and meet buyers' needs. 

¶11. (U) Armando Fernandez, President of the CAMPOAPAN dairy 
cooperative, described the success he and 24 other dairy farmers 
have had since 1991 when they founded the cooperative to process and 
distribute their milk products.  With support from the U.S. 
Department of Agriculture to improve quality and safety, the plant 
is now U.S. FDA certified, and in 2007 the cooperative exported $3.6 
million in dairy products to the United States.  Fernandez 
highlighted CAMPOAPAN's efforts to introduce new technology in 
farming and processing, but noted that poor road infrastructure and 
the high cost of working capital still limit growth for his and many 
others cooperatives. 
 
Panel Discusses Value Chain for Small Businesses 
--------------------------------------------- --- 

¶12. (U) Jorge Brenes, General Manager of Nicaragua's Export and 
Producers Association (APEN), observed that many sectors continue to 
grow despite the competitive disadvantages that many businesses face 
in Nicaragua.  As an example, he noted that bean production 
continues to increase at an annual rate of 12%.  Brenes asserted 
that market forces are driving this growth; if producers are quick 
to respond to increasing demand, they can take advantage of rising 
food prices and other market opportunities.  Alberto Pereira, 
General Manager of Hortifruti, the fresh fruit and vegetable 
division of Wal-Mart - Nicaragua, described his company's efforts to 
help small producers through technical assistance and financing 
provided in cooperation with partners such as the U.S. Agency for 
International Development. 
 
¶13. (U) In response to an audience question on government 
initiatives to support small businesses, Guillermo Lopez, Director 
of Small Business Development at MIFIC, described MIFIC's work with 
the World Bank, the United Nations Industry Development 
Organization, and other donors to design programs that support the 
establishment of an effective agro-industrial policy that includes 
assistance for small farmers so that they may better participate in 
value chains.  MIFIC also plans to continue support for a Bolanos 
administration effort that provided support for economic clusters, 
encouraging technology transfer and productivity gains among related 
firms. 
 
¶14. (U) Jaime Arguello, Director of FINCA - Nicaragua, a 
microfinance organization supported by the U.S. Department of 
Agriculture, answered several questions on financing options 
available for small businesses, particularly in the agricultural 
sector.  Arguello told the audience that his organization continues 
to support lending practices that place more weight on the 
development of a coherent business plan than the quality of 
collateral; however, he recognized that, in general, interest rates 
remain relatively high, around 20%, and terms on most loans are less 
than a year.  Pedro Haslam, President of the Nicaraguan Federation 
of Agro-industrial Cooperatives (FENIAGRO), shared experiences from 
the borrower's perspective, corroborating the difficulties 
identified by Arguello.  He added that in order to obtain credit, 
farmers must be able to increase productivity. 
 
DAS Bastian Invites Nicaraguans to the ACF 
------------------------------------------ 

¶15. (U) Commerce DAS Walter Bastian congratulated MIFIC for 
organizing the forum, noting that the event provides an excellent 
opportunity to learn from others on how to improve competitiveness. 
He urged participants to recognize the importance of competitiveness 
as part of the Nicaraguan economic agenda.  He extended a general 
invitation to Secretary Gutierrez' Americas Competitiveness Forum to 
be held in Atlanta, August 17 - 19, for discussions on themes such 
as trade logistics, renewable energy, education, and tourism. 
Bastian announced that Secretary Gutierrez plans to visit Nicaraguan 
after the ACF, perhaps in late September. 
 
¶16. (U) Bastian stressed the importance of free trade agreements 
such as CAFTA-DR, which has helped increase Nicaraguan exports by 
35% since its inception in 2006.    He noted that Nicaragua has 
benefited more than any other Central American country, thanks in 
large part to Cone Denim's $100 million investment, the largest 
foreign investment in the region since the implementation of the 
treaty.  For U.S. businesses, trade with countries that have signed 
agreements with the United States represents 90% of U.S. trade in 
the hemisphere and over 40% of U.S. trade around the world. 
 
DAS O'Neill Briefs on SME and Infrastructure Initiatives 
--------------------- ---------------------------------- 

¶17. (U) Treasury DAS Brian O'Neill briefed participants on two 
Treasury initiatives that support competitiveness in Latin America. 
In July 2007, Treasury launched the Latin American Infrastructure 
Development Program, in partnership with the International Finance 
Corporation of the World Bank, to fund feasibility studies in 
support of private investment in infrastructure.  Together, they 
have contributed $12 million (including $4.6 million from the USG) 
to the program to date, with another $8 million slated over the next 
two years.  O'Neill told attendees that the program targets three 
constraints that discourage private investment in infrastructure, 
that is, lack of reliable information on good projects for potential 
investors, unfamiliarity with ways to structure and tender projects, 
and problems with the regulatory environment.  To date, the 
initiative has committed $1.3 million for 12 feasibility studies, on 
projects that have the potential to attract $2.6 billion in 
infrastructure investment. 
 
¶18. (U) O'Neill told participants that Treasury launched the Latin 
America Small Business Lending Initiative in June 2007.  The effort 
to expand and improve access to commercial financing for small 
businesses is taking place through a three-part initiative.  The 
Inter-American Development Bank (IDB) Multilateral Investment Fund 
is providing technical cooperation grants and loans to local banks. 
The U.S. Overseas Private Investment Corporation is offering 
guarantees and loans to banks that work with small businesses. 
Treasury's Office of Technical Assistance is targeting Latin 
American countries in the design and implementation of regulations 
and oversight of credit providers to small businesses.  O'Neill 
explained that the IDB has committed $10 million to the initiative, 
including $500,000 lent to local bank BANCENTRO in November 2007. 
OPIC has committed $150 million, and already approved $52 million, 
in loans to banks throughout the region as part of the initiative. 
 
Private Sector on Food Crisis and Nicaraguan Response 
--------------------------------------------- -------- 

¶19. (U) Mario Amador, President of the National Council of Sugar 
Producers (CNPA) remarked on the challenges and opportunities facing 
agro-industry as a result of the emerging food crisis caused by 
rising energy costs, the use of arable land to produce biofuels, 
climate change, developed-country agricultural subsidies, market 
speculation, rising food demand in China and India, and a lack of 
agricultural productivity growth.  He noted that several large 
agricultural producers have responded by imposing export 
restrictions.  In the case of Central America, Amador observed 
countries increasingly depend on food imports, especially rice, to 
meet internal demand, and very few countries are net exporters. 
 
¶20. (U) Amador noted that unlike many other countries, for Nicaragua 
the food crisis represents an opportunity to become an important 
food supplier for the region and beyond.  He called for renewed 
efforts to increase agricultural productivity through the 
introduction of new plant varieties, including those developed 
through biotechnology; improved access to financing, especially for 
small farmers; and greater public investment in infrastructure.  He 
added that "the cornerstone of any effort to increase agricultural 
production is a judicial system that provides legal certainty to 
farmers, especially when it comes to land titling, and to all other 
members of the value chain, regardless of their size." 
 
GON View on Competitiveness and Investment Promotion 
--------------------------------------------- ------- 

¶21. (U) Alvaro Baltodano, Presidential Delegate for Investment 
Promotion, told the audience that private and public investment is 
the foundation of Nicaragua's development strategy.  He reasoned 
that "it is investment that encourages improvements in 
competitiveness."  He said the government's role in this context is 
to foster investment in health and education, promote employment, 
develop transportation and other economic infrastructure, and 
protect the environment.  In particular, he noted government efforts 
to increase geothermal and hydroelectric production throughout the 
country.  He also mentioned the government's intention to develop 
ports on the Atlantic coast, including a deep water port at Monkey 
Point and a highway along the Pacific coast 
 
¶22. (U) Baltodano highlighted the efforts of ProNicaragua, the 
government's investment promotion agency, to attract investment in 
the agro-industrial sector, including milk, meat, and bean 
processing and the cultivation and processing of African palm and 
other biofuels.  He commented on efforts to attract logistics and 
assembly operations and technology firms.  Baltodano mentioned 
efforts to incorporate small businesses into value chains. 
 
Panel Discussion on Investment and Competitiveness 
--------------------------------------------- ----- 

¶23. (U) Alejandro Martinez Cuenca, President of the International 
Foundation for the Global Economic Challenge (FIDEG), described 
competitiveness as "improving factors important to productivity 
gains, which, in turn, are the basis of economic growth."  He 
decried Nicaragua's weaknesses regarding respect for private 
property and judicial independence.  Martinez claimed that 
principled leadership and open communication are essential to 
attracting investment to Nicaragua.  He offered Vietnam as an 
example of a country with a similar history but very different 
economic trajectory, with annual growth averaging 7.5% for the last 
ten years.  In the last three years, Nicaragua's growth has declined 
from 4% to 2.5%.  Martinez asked rhetorically, "Why is Vietnam 
growing and not Nicaragua?" 
 
¶24. (U) Rodrigo Caldera, Senior Advisor for ARENECOM, a 
Japanese-Mexican manufacturer of automobile wiring harnesses, shared 
the perspective of a foreign investor that competes worldwide from 
its base in Nicaragua.  He suggested that the government should play 
a more active role in facilitating business.  He stressed the 
importance of 24-hour customs service for his business, since 
ARNECOM ships all of its products by land because ocean shipping is 
limited in Nicaragua.  He said that power outages not only affect 
production, but also damage costly equipment.  In conclusion, he 
urged the government to provide consistent and clear rules for 
business and to continue to invest in infrastructure improvements. 
 
¶25. (U) Juan Bugna, a past President of the National Tourism Chamber 
of Commerce (CANTUR), discussed the risk that investors in tourism 
projects face.  Risk is exacerbated by the lack of clear rules, such 
as the pending Coastal Law, which would strengthen coastal property 
rights.  To attract more investment to the sector, Bugna believes 
the government must build basic infrastructure, not just provide 
fiscal incentives to the individual investor -- because whatever an 
investor saves on taxes, he later spends on compensating for power 
outages or water shortages.  Bugna called for effective dialogue 
between the public and private sector to address these and other 
issues related to competitiveness. 
 
IDB Support for Private Sector Investment 
----------------------------------------- 

¶26. (U) Steven Puig, Vice President for Private Sector Operations at 
the IDB, talked about his bank's efforts to work with the private 
sector to finance projects that have a "development impact."  He 
explained that the IDB has several "windows" through which to work. 
One window serves large companies and banks to provide financing for 
projects up to $200 million.  Another serves small companies, 
financing projects and providing technical assistance.  The 
Multilateral Investment Fund (FOMIN) invests venture capital.  The 
bank also provides credit and grants of up to $10 million per 
project to companies with which it establishes an alliance.  Puig 
indicated IDB interest in expanding all of these activities, 
especially in Central America and the Caribbean. 
 
Minister Solorzano: In Defense of Bean Market Intervention 
------------------- -------------------------------------- 

¶27. (U) MIFIC Minister Solorzano declared that a primary objective 
of the Ortega administration is to implement policies that encourage 
economic growth and promote exports.  He stated that there is no 
place for politics in business; the two should be conducted 
independently of each other.  Solorzano characterized the "harsh 
political discourse" between the government and opposition parties 
as "noise" that does not influence the true investment climate in 
Nicaragua.  Countering previous citations of Nicaragua's poor 
showing in worldwide competitiveness rankings, Solorzano argued that 
one should differentiate between indicators that measure perception 
versus those that measure operations on the ground, where he thinks 
Nicaragua is doing well.  He defended the government's effort to 
stabilize food commodity prices through the state-owned food 
commodity wholesaler ENABAS, arguing that it is the responsibility 
of government to ensure affordable food to its citizens.  Solorzano 
concluded that the current administration maintains a very close 
relationship with the private sector, and that they routinely 
cooperate to resolve doing-business issues. 
 
Comment 
------- 

¶28. (SBU) Our goal in organizing this forum -- the first event of 
its kind that MIFIC has organized since the Ortega administration 
took office in January 2007 -- was to engage the GON and the private 
sector in a cooperative dialogue on competitiveness.  In negotiating 
the agenda for the forum with us, MIFIC sought to avoid difficult 
issues such as energy, infrastructure, and rule of law.  When these 
issues were raised, officials were quick to dismiss their relevance 
to Nicaragua's competitiveness.  With this in mind, we believe it is 
important to allow the private sector to take the lead on a second 
event that allows for dialogue on these and other issues.  The 
results of these two national fora and the ACF could feed into a 
smaller event when Secretary Gutierrez visits in late September. 
 
TRIVELLI