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2011 Investment Climate Statement - Paraguay


2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
May 2011
Report
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Openness to, and restrictions upon, Foreign Investment

The Government of Paraguay (GOP) encourages foreign investment and most sectors are open for private investment. Paraguay guarantees equal treatment of foreign investors under law 117/91 and permits full repatriation of capital and profits under law 60/90. Paraguay has historically maintained the lowest tax burden in the region, with a 10% corporate tax rate and a 10% Value-added Tax (VAT) on most goods and services.

The GOP is exploring concessions to improve road, rail, and waterway networks and to upgrade the international airport. The Paraguayan Senate passed a draft law in late 2010 permitting an airport concession, which the Lower House will review in the near future. A confusing and contradictory legal framework for oil and gas concessions has generated contractual disputes with investors, including U.S. investors.

Paraguayan law supports maquila operations, with value-added subject to a tax rate of 1%. In most cases, inputs are allowed to enter Paraguay tax free, and up to 10 percent of production is allowed for local consumption after paying import taxes and duties. Maquila operations are not restricted geographically or by industry.

Paraguay’s electricity distribution infrastructure is in need of significant investment and upgrades. Beginning in 2011 Paraguay will build a 500-kilovolt transmission line, construct two sub-stations, and make other major infrastructure improvements to the power grid. These projects are open to foreign investors, although funding for key aspects of the project will be restricted to Paraguay, Brazil, Argentina, and Uruguay, members of MERCOSUR (Mercado Común del Sur or Southern Common Market).

Judicial insecurity hinders Paraguay’s investment climate. Many investors find it difficult to adequately enforce contracts, and are frustrated by lengthy bureaucratic procedures and limited transparency and accountability.

Measure

Year

Index/Ranking

TI Corruption Index

2010

146 of 178

Heritage Economic Freedom

2010

81 of 179

World Bank Doing Business

2011

106 of 183

MCC Gov’t Effectiveness*

2011

13% - Not Passing

MCC Rule of Law

2011

19% - Not Passing

MCC Control of Corruption

2011

23% - Not Passing

MCC Fiscal Policy

2011

89% - Passing

MCC Trade Policy

2011

81% - Passing

MCC Regulatory Quality

2011

48% - Not Passing

MCC Business Start Up

2011

21% - Not Passing

MCC Land Rights Access

2011

36% - Not Passing

MCC Natural Resource Mgmt

2011

36% - Not Passing

* MCC scores are ranked relative to Paraguay’s peer group of Lower Middle Income Candidate Countries. 50% represents the median. 0% is worst and 100% is best. Scores above the median meet the performance standard. Scores at or below the median do not meet the performance standard.

Conversion and Transfer Policies

There are no restrictions on the conversion or transfer of foreign currency. Law 60/90 permits the repatriation of capital and profits. There are no controls on foreign exchange transactions, apart from bank reporting requirements for transactions in excess of USD 10,000.

Expropriation and Compensation

Private property has historically been respected in Paraguay as a fundamental right. However, there have been several cases in recent years of expropriations of land without prompt and fair compensation. In 2005, Paraguay’s Congress approved the expropriation of a large piece of foreign-owned land in the Chaco region in the western half of Paraguay. The government compensated the landowners after lengthy negotiations. In recent years groups of “landless” citizens have occupied several farms in order to press the GOP for agrarian land reform.

Dispute Settlement

Law 117/91 guarantees national treatment for foreign investors. This law allows international arbitration for the resolution of disputes between foreign investors and the GOP. Paraguay is a member of the International Center for the Settlement of Investment Disputes (ICSID).

Public institutions in charge of large infrastructure projects often pose difficulties for foreign investors. American investors have described significant frustration during bidding attempts. However, the Dirección Nacional de Contrataciones Públicas (DNCP or National Directorate for Public Contracts), has gradually been building a reputation of transparency and fairness. The DNCP recently ruled against unfair language in a Central Bank contract. This cleared the way for an American company to win the bid.

Corruption in the judicial system has also been a source of frustration for foreigners whose cases have passed to the courts for settlement. However, in one recent case the Supreme Court ruled in favor of the American company.

Performance Requirements and Incentives

A number of tax breaks contained in Law 60/90 are available to investors, however voting board members of any company incorporated in Paraguay must have legal residence. This has posed some obstacles to potential foreign investors.

Law 194/93 contains strong penalties for severing relations with a local distributor or agent. The foreign company must prove just cause for severing the relationship and pay an indemnification. However, courts have ruled in favor of foreign companies in a few cases after just cause was established.

The GOP frequently makes changes in its customs procedures. This makes it difficult for exporters to ensure they are following the most current procedures, which can delay shipments and lead to unexpected costs. The burden of compliance is most often borne by importers. In 2009, a customs resolution restricted the ports-of-entry for some goods, including household cleaning products.

Paraguay is not a signatory to the WTO Agreement on Government Procurement. The GOP changed its procurement rules in 2009, in an effort to encourage local production. Government procurements must be awarded to Paraguayan producers, except for material and services not produced in Paraguay. The GOP will give preference to a locally produced good even if it is up to 70% more expensive than the imported good. Importers of foreign goods can participate in these procurements only when locally manufactured products and service providers are unavailable or when the GOP fails to award a contract to a domestic supplier. The GOP may also call for international bids.

Right to Private Ownership and Establishment

Foreign and domestic private entities may establish and own business enterprises. Foreign businesses do not need to be associated with Paraguayan nationals for investment purposes. There is no restriction on repatriation of capital and profits. Private entities may freely establish, acquire, and dispose of business interests.

Protection of Property Rights

The 1992 constitution guarantees the right of private property ownership. While it is common to use property as security for loans, the lack of consistent property surveys and registries often makes it impossible to foreclose. In some cases, acquiring title documents for land can take two years or more.

Paraguay is recognized as a regional distribution and manufacturing hub for counterfeit merchandise. In 2009 Paraguay and the United States signed a Memorandum of Understanding (MOU) detailing a plan to combat Intellectual Property Rights (IPR) violations. Paraguay is currently under Section 306 monitoring in the U.S. Trade Representative’s Special 301 Report.

Under the new penal code established in 2009, IPR offenders will face stiffer penalties (two to eight years jail time and/or fines). Paraguay has ratified all of the Uruguay Round accords, including the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), and has ratified two World Intellectual Property Organization (WIPO) copyright treaties.

Despite these positive steps by the GOP, IPR violations remain a serious concern. Paraguay does not have a framework for safeguarding confidential data associated with regulatory approvals. As a result, some companies have decided against marketing certain products in Paraguay, such as the latest pharmaceuticals.

Transparency of the Regulatory System

The business registration process was modified in late 2006 with USG assistance. The GOP instituted a coordinated system among all the offices involved, reducing the number of steps and the time to open a business to 35 days and lowering the cost to approximately USD 250.

Regulatory agencies for sectors such as telecommunications, energy, potable water, and the environment are inefficient and opaque. Politically motivated changes in the leadership of regulating agencies negatively impact firms and investors. Corruption is common in these institutions as time consuming processes provide opportunities for the civil servants to seek bribes to accelerate the paperwork.

Draft laws are often introduced into Congress by politically-connected special interest groups, with limited opportunity for public comment. Public participation often requires direct lobbying and press campaigns.

Efficient Capital Markets and Portfolio Investment

Paraguay’s banking system includes 15 banks with a total USD 9.5 billion in assets and USD 7.3 billion in deposits. Non-performing loans in the banking sector totaled just 1.5% of total loans in 2010. The banking system is generally sound, but remains overly liquid. Long term financing for capital investment projects is scarce. Most lending facilities are short term.

Credit is available but expensive. High collateral requirements are generally imposed. The high cost of capital makes the stock market an attractive, although underdeveloped option. Paraguay has a relatively small capital market that began less than 20 years ago. In 2010 the Asuncion Stock exchange, comprised of just 93 companies, handled USD 121million in transactions, compared to USD 99 million in transactions in 2009. Many family-owned enterprises fear losing control, dampening enthusiasm for public offerings.

Competition from State Owned Enterprises

Paraguay’s State Owned Enterprises (SOEs) are active in the oil (fuel distribution), cement, electricity (distribution and generation), water, and telecommunication sectors. In general, SOEs are monopolies with no private sector participation. Most of the SOEs operate independently but maintain an administrative link with line ministries, namely the Ministry of Public Works.

SOEs’ corporate governance is weak. Only the Itaipú and Yacyretá bi-national hydroelectric dams have a board of directors. Other SOEs operate with politically appointed advisors and executives. Only the two bi-national dams are required to have an independent audit. The SOEs are often overstaffed and are an outlet for patronage, resulting in poor administration and services. The SOEs burden the country’s fiscal position, running deficits most years.

Corporate Social Responsibility

Corporate Social Responsibility (CSR) is growing with the support of Paraguay’s largest firms. The private sector is taking measures to institutionalize CSR under initiatives such as the Paraguayan Good Governance Program. An initiative sponsored by the U.S. Department of Commerce, Paraguay’s Good Governance Program has established a rigorous process to certify a firm’s adherence and practice of governance principles, including CSR.

Political Violence

Paraguay has not traditionally been affected by political violence. While Paraguay has been spared the large number of kidnappings that occur in neighboring Latin American countries, there have been a few high profile cases in recent years, most of them attributed to the leftist Paraguayan People’s Army (EPP). The GOP has aggressively responded to the EPP threat with combined military and police operations, showing marked success in 2010. Land invasions, marches, and organized protests occur, mostly by rural and indigenous communities making demands on the government, but these events rarely turn violent.

Corruption

Paraguay has a legacy of corruption that is slowly being addressed. The GOP has taken several steps to combat corruption, including the creation of a transparent, internet-based government procurement system; the appointment of respected apolitical officials to key posts; and, increased civil society input and oversight.

The cornerstone of U.S. anti-corruption assistance to Paraguay is the USD 30.3 million two-year MCC Threshold Country Program (TCP) Stage II that began in October 2009. TCP Stage II seeks to strengthen prosecutors’ investigative capacity, the judiciary’s disciplinary and internal control systems, the public administration’s internal control mechanisms, and control over contraband and smuggling.

Bribery is a crime in Paraguay, but is rarely prosecuted. Paraguay has signed the United Nations Convention against Corruption.

Bilateral Investment Agreements

Paraguay has bilateral investment agreements or treaties with the following countries: Argentina, Brazil, Chile, France, South Africa, Taiwan, United Kingdom, and Uruguay. Paraguay has signed other investment agreements with Austria, Belgium, the Netherlands, Luxembourg, Costa Rica, Ecuador, El Salvador, Germany, Hungary, Korea, Netherlands, Peru, Romania, Spain, Switzerland, and Venezuela.

The Paraguay-United States Open Skies agreement went into effect in May 2005. Paraguay and the United States discuss investment and trade priorities at the annual Joint Council on Trade and Investment (JCTI), a bilateral mechanism to advance common investment and trade objectives.

OPIC and Other Investment Insurance Programs

The United States and Paraguay signed a 1992 investment guaranty agreement, allowing OPIC to begin full operations in Paraguay. OPIC has financed telecommunications, forestry projects, and various renewable energy projects. OPIC has also partnered with Citibank to support over USD 160 million in loans for small and medium sized enterprises (SMEs) and for micro finance loans.

Paraguay is a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

Labor

With a population growth rate above 3% per annum, job creation to meet the increasing demand is one of the most pressing issues for the GOP. However, despite a large and growing labor force, the weak education system limits the supply of well-educated workers. Local businesspeople cite repeatedly the lack of a trained work force as a major obstacle to growth.

The rigidity of Paraguay’s labor code also hinders employment and productivity. It is very difficult to lay-off a full-time employee. Firms often opt for periodic renewals of “temporary” work contracts.

Foreign Trade Zones/Free Ports

Paraguay is a landlocked country with no seaports. About three-fourths of commercial goods are transported by barge on the Paraguay-Parana river system that connects Paraguay with Buenos Aires, Argentina and Montevideo, Uruguay. Paraguay has agreements with Uruguay, Argentina, Brazil, and Chile on free-trade ports and warehouses for the reception, storage, handling, and trans-shipment of merchandise.

In late 2010 the Buenos Aires port union implemented a 15-day blockade of Paraguayan commerce. The blockade was lifted only after the GOP threatened to boycott the MERCOSUR presidential summit. Competition for control of the waterway, the underlying cause for the port confrontation, persists.

Foreign Direct Investment Statistics

Total foreign direct investment (FDI) was USD 2.6 billion in 2009 (18% of GDP), up from USD 2.4 billion in 2008 (14% of GDP), according to Central Bank statistics. The services sector accounted for 70% of FDI and manufacturing for the remaining 30%. The United States is the largest foreign investor in Paraguay with USD 1.2 billion, followed by Brazil at USD 339 million, Argentina at USD 171million, and Luxembourg at USD 158 million.

American fast food companies (Pizza Hut, Burger King, McDonald's) have all expanded in 2010. American agro business leader Archer Daniels Midland (ADM) invested USD 23 million in the nation’s first fertilizer plant this year.



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