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2013 Investment Climate Statement - Paraguay


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013
Report
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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 recognizes the need to improve road, rail, and waterway networks and to upgrade the international airport. Currently there is a draft law presented in the lower house that will provide a legal framework for future Public-Private Partnerships. If the draft becomes law, it is expected that several public works projects will be funded by private companies.

Paraguayan law supports maquila operations, with the value-add subject to a 1% tax rate. In most cases, inputs are allowed to enter Paraguay tax free, and up to 10% 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. Paraguay has scheduled to complete a 400-kilometer 500-kilovolt transmission line, two new sub-stations, and other major infrastructure improvements to the power grid in 2013. More remains to be done for the power grid, especially around and within Asuncion. These projects are usually open to foreign investors.

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

2012

150 of 176

Heritage Economic Freedom

2012

79 of 179

World Bank Doing Business

2013

103 of 183

MCC Gov’t Effectiveness*

2013

13% - Not Passing

MCC Rule of Law

2013

22% - Not Passing

MCC Control of Corruption

2013

22% - Not Passing

MCC Fiscal Policy

2013

90% - Passing

MCC Trade Policy

2013

86% - Passing

MCC Regulatory Quality

2013

50% - Not Passing

MCC Business Start Up

2013

22% - Not Passing

MCC Land Rights and Access

2013

54% - Passing

MCC Natural Resource Protection

2013

47% - Not Passing

* MCC scores are ranked relative to Paraguay’s peer group of Lower Middle Income Candidate Countries; 50% represents the median, 0% is the worst, and 100% is the 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. The Dirección Nacional de Contrataciones Públicas (DNCP or National Directorate for Public Contracts) exists to ensure transparency and fairness in public bids that exceed USD 150,000. Of the 1,471 bids held by the DNCP in 2011, only 81 were open to international companies. Of those, only 5 were awarded to international companies. Corruption in the judicial system has been a source of frustration for foreigners whose cases have passed to the courts for settlement.

Performance Requirements and Incentives

A number of tax breaks contained in Law 60/90 are available to investors. Voting board members of any company incorporated in Paraguay must have legal residence, which takes a minimum of 90 days to establish. This could pose an obstacle to potential foreign investors.

Under Paraguayan law 194/93, foreign companies must demonstrate just cause to terminate, modify, or decide not to renew contracts with Paraguayan distributors. Severe penalties and high fines may result if a court determines that the foreign company ended the relationship with its distributor without first having established that just cause exists. This requirement often leads to expensive out-of-court settlements. In a few cases, the courts have upheld the rights of foreign companies to terminate representation agreements after finding the requisite showing of just cause. However, this law may discourage U.S. investment due to concerns about potential lawsuits and interference with contractual relations in the future.

Regarding customs procedures, Paraguay requires that specific documentation for imports, such as the commercial receipt, certificate of origin, and cargo manifest, be certified by either the Paraguayan consulate in the country of origin or, by paying an additional fee, at the Ministry of Foreign Affairs in Paraguay. Paraguay also requires all companies operating in the country to contract the services of a customs broker. The customs broker fees are standardized by Paraguayan law.

Paraguay is not a signatory to the WTO Agreement on Government Procurement. In December 2011, the GOP passed a new law (4558/11) that gives preference in government bids to locally produced goods even if they are up to 20 percent more expensive than imported goods.

Right to Private Ownership and Establishment

Foreign and domestic private entities may establish and own business enterprises. Foreign businesses are not legally required 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’s porous border region with Argentina and Brazil is a known center of piracy and contraband. For over a decade the United States maintained a Memorandum of Understanding (MOU) with Paraguay pertaining to IPR protection and enforcement. This MOU expired in April 2012 and the new version is still being negotiated. Paraguay is presently under Section 306 monitoring in the U.S. Trade Representative’s Special 301 Report. 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.

Concerns also remain about inadequate protection against unfair commercial use of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products and the shortcomings in Paraguay’s patent regime. Law 3283/07 and Law 3519/08 require that pharmaceutical products and agrochemical products be first registered in Paraguay to be eligible for data protection. The law also limits data protection to five years instead of the more commonly accepted international standard of ten years. Additionally, law 2593/05 that modifies Paraguay’s patent law has no regulatory enforcement. Because of this, foreign pharmaceutical companies have seen their patented products openly replicated and marketed under other names by Paraguayan pharmaceutical companies.

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. This is an improvement; however, some aspects of opening a business are still lengthy and costly, such as building health inspections and environmental licenses.

Regulatory agencies supervisory functions over 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 front-line civil servants to seek bribes to accelerate the paperwork.

Efficient Capital Markets and Portfolio Investment

Paraguay’s banking system includes 16 banks with a total USD 13.2 billion in assets and USD 9.3 billion in deposits. Non-performing loans in the banking sector totaled just 2.2% of total loans in 2012. 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. As of November 2012, the Asuncion Stock exchange, comprised of 95 companies, totaling USD 120 million in transactions, up substantially from USD 82 million in transactions in 2011. Many family-owned enterprises fear losing control, dampening enthusiasm for public offerings.

In 2011, Banco Bilbao Vizcaya Argentaria (BBVA) Paraguay raised USD 100 million through a private offering of 9.75 percent bonds that will mature on February 11, 2016. BBVA Paraguay will use the proceeds for long-term investment in agribusiness and reforestation in Paraguay. In 2012, Banco Continental S.A.E.C.A., one of the largest banks in Paraguay, issued debt for USD 200 million due in 2017. These transactions are very important to the banking sector in Paraguay and its ability to access the international capital market.

The GOP plans to issue Paraguay’s first sovereign bonds in 2013 to accelerate development in the country. The issuance will support the government’s effort to finance key development programs designed to promote development and job creation such as a two-way highway from Asuncion to Ciudad del Este with a cost of approximately USD 180 million, a 500kV line from the Yacyreta Dam to Villa Hayes with a cost of USD 200 million, improvements in the National Cement Industry for USD 45 million and upgrades to government offices in general with the remaining funds. The government hopes that the emission of the nation’s first sovereign bond will pave the way for Paraguayan businesses to access credit on the international market.

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. Additionally the private sector is taking measures to institutionalize ethical business conduct under initiatives such as the Pacto Etico Comercial (Business Ethics Pact). An initiative sponsored by the U.S. Department of Commerce, the Pacto Etico Comercial includes over 100 local, U.S., and international companies that have committed to create a code of ethics and undergo a rigorous auditing process to reach certification.

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 responded to the EPP threat with combined military and police operations. Land invasions, marches, and organized protests occur, mostly by rural and indigenous communities making demands on the government, but these events rarely turn violent. A glaring exception was the violent encounter between police and land invaders on June 15 in the eastern city of Curuguaty, resulting in the deaths of seven policemen and eleven private citizens. The tragedy spurred the National Congress to impeach President Fernando Lugo.

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 was the USD 30.3 million, two-year MCC Threshold Country Program (TCP) Stage II, which= ended in April 2012. TCP Stage II sought 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 signed the United Nations Convention against Corruption in 2005.

Bilateral Investment Agreements

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

The Paraguay-United States Open Skies agreement went into effect in May 2005; however, a dispute over mandatory travel agent commissions under Paraguayan law caused the only U.S.-flagged carrier (American Airlines) to leave Paraguay shortly thereafter. Despite no changes to the mandatory commissions, American Airlines decided to return to Paraguay in November 2012, operating a non-stop, direct route between Miami and Asuncion. The GOP worked diligently and effectively to meet the high security standards that the Transportation Security Administration (TSA) demanded of Asuncion’s Silvio Pettirossi International Airport before authorizing the commencement of the American Airlines flight.

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 large and growing labor force is one of the most pressing issues for the GOP. However, 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 after ten consecutive years of employment. 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 30-day blockade of Paraguayan commerce. The blockade was lifted only after President Fernando Lugo threatened to boycott the looming MERCOSUR Summit. Competition for control of the waterway, the underlying cause for the port confrontation, persists. In June 2012, in protest of the impeachment of President Lugo and the swearing in of President Federico Franco, MERCOSUR members Brazil, Argentina and Uruguay voted to suspend Paraguay from participation in the trade bloc’s meetings and summits. No official economic sanctions were levied against Paraguay, but the political suspension persists and likely will remain until the next president takes office on August 15, 2013. Paraguay was not afforded the opportunity to present its defense.

Foreign Direct Investment Statistics

Total foreign direct investment (FDI) was USD 4.4 billion in 2012 (18% of GDP), up from USD 3.8 billion in 2011 (15% of GDP), according to Central Bank statistics. The services sector accounted for 78% of FDI and manufacturing 18%. The United States is the largest foreign investor in Paraguay with USD 1.9 billion (as of June 2012), followed by Brazil at USD 498 million, Argentina at USD 285 million, and Spain at USD 225 million.

President Energy, a joint venture between U.S. and British investors has begun formal seismic testing in the Chaco to verify oil deposits ahead of physical drilling forecasted for late 2013 and early 2014. American investors from Texas engaged in a protracted legal battle with the GOP over oil drilling concession rights in the Chaco, which ended amicably in mid 2012 and paved the way for the formation of the President Energy exploration efforts.

American fast food companies (Pizza Hut, Burger King, McDonald's, Quiznos and Yogurberry) all expanded their presence in 2012. American agro business leader Archer Daniels Midland (ADM) invested USD 23 million in the nation’s first fertilizer plant in 2010 and in 2012 completed an oil processing plant that cost USD 180 million.



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