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Diplomacy in Action

2013 Investment Climate Statement - Peru


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013
Report
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Openness To, and Restrictions Upon, Foreign Investment

The Peruvian government seeks to attract investment -- both foreign and domestic -- in nearly all sectors of the economy. Several high level Peruvian officials, including President Humala, the Minister of Economy and Finance, and the Central Bank President, have attended global business conferences and toured several countries in 2012 in an effort to attract foreign investment. Peruvians and Americans benefit from the United States-Peru Trade Promotion Agreement (PTPA) which entered into force on February 1, 2009. The PTPA establishes a secure, predictable legal framework for U.S. investors operating in Peru. The PTPA protects all forms of investment. U.S. investors enjoy in almost all circumstances the right to establish, acquire and operate investments in Peru on an equal footing with local investors.

The 1993 Constitution guarantees national treatment for foreign investors and permits foreign investment in almost all economic sectors. Under the Constitution, foreign investors have the same rights as national investors to benefit from any investment incentives, such as tax exemptions. Article 6 of Supreme Decree No. 162-92-EF authorizes private investors to carry out any economic activity, provided investors comply with all constitutional precepts, laws and treaties. However, a few exceptions exist. For example, the law excludes investment activities in natural protected areas and manufacturing of war weapons, pursuant to Article 6 of Legislative Decree No. 757. Some laws require that Peruvians own a majority share in companies operating in certain sectors: media, air and land transportation, and private security surveillance services. 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. Prior approval is required for domestic or foreign investment in banking (for financial regulatory reasons) and defense-related sectors. 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.

In addition to the 1993 Constitution, major laws regarding foreign direct investment (FDI) 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). Other important laws include the Private Investment in State-Owned Enterprises Promotion Law (DL 674), the Private Investment in Public Services Infrastructure Promotion Law (DL 758), and specific laws related to agriculture, fisheries and aquaculture, forestry, mining, oil and gas, and electricity.

The Peruvian Government has modified its laws to encourage more foreign investment, such as issuing two important decrees in 2008. The first decree contains the regulations for the Law on Public-Private Partnership. The second decree presents a priority list of projects for public-private partnerships. Among these public-private partnerships are upgrades of major ports (Paita, San Martin, Pisco, Salaverry, Pucallpa, Iquitos, Yurimaguas) as well as regional airport projects, a South American Integrated Regional Infrastructure Project (IIRSA), water treatment, and agricultural projects (Majes-Siguas and Chavimochic). Project opportunities are available on ProInversion’s Project Portfolio page, available at: www.proinversion.gob.pe.

Although Peru’s Constitution guarantees economic freedom under Article 63, the Peruvian Government occasionally has passed measures that contravene free market principles. The Garcia Administration in 2011 stopped a Canadian silver mining project in Puno in response to violent protests opposing the project; the Canadian company is appealing the Government’s project cancellation under the terms of the Canada-Peru Free Trade Agreement. Furthermore, the current President, Ollanta Humala, signed into law in December 2011 a 10-year moratorium on the entry into Peru of genetically-modified organisms (GMOs) to be used for cultivation. Peru also has implemented two sets of rules for importing pesticides, one for “regular” importers which is extremely restrictive and requires a full dossier with technical information, and another for farmers which is rather loose and only requires a written affidavit.

The Peruvian Government created the Private Investment Promotion Agency, ProInversion, in 2002. ProInversion has successfully completed both privatizations and concessions of state-owned enterprises and natural resource-based industries. Major recent concession areas include ports, electrical transmission lines, oil and gas distribution, and telecommunications.

The Government of Peru has undertaken a decentralization of government responsibilities. The Basic Law for Decentralization (DL 27783 issued in 2002), the Organic Law on Regional Governments (DL 27867), and the Organic Law of Municipalities (DL 27972) facilitate and promote direct private investment with regional and local governments. The Framework Law for the Promotion of Decentralized Investment (Law No. 28059 and its regulations in Supreme Decree No. 015-2004-PCM) establishes the regulatory framework so that Peru may promote decentralized investment at its three government levels (national, regional and local).

Peru has made significant strides in various areas measured in The World Bank’s “Doing Business” reports, including reformed procedures on starting a business, securing construction permits, registering property, and closing a business. Although Peru’s efforts to reform business start-up procedures made significant advances according to the 2011 report, Peru declined by seven places in the World Bank’s business start-up ranking from 53rd in 2012 to 60th in 2013. At the same time, Peru lowered the average amount of time it takes to start a business from 41 days (in 2010) to 27 days (in 2011) to 26 days (for both 2012 and 2013). Additionally, the 2013 report notes that Peru has strengthened investor protections through a new law regulating the approval of related-party transactions and making it easier to sue directors when such transactions are prejudicial.

Below follows a chart indicating Peru’s rankings in international studies.

Transparency International Corruption Perceptions Index, 2012:

83/174

Heritage Foundation Index of Economic Freedom, 2012:

41/184

World Bank Ease of Doing Business Rank, 2013:

43/185

Peru reached upper-middle income country status in 2009, and is officially ineligible for Millennium Challenge Corporation assistance.

Conversion and Transfer Policies

There are no reported difficulties in obtaining foreign exchange. Under Article 64 of the 1993 Constitution, the Peruvian government guarantees the freedom to hold and dispose of foreign currency. The Peruvian Government has eliminated all restrictions on remittances of profits, dividends, royalties, and capital, although foreign investors are advised to register their investments with ProInversion to ensure these guarantees. Exporters and importers are not required to channel foreign exchange transactions through the Central Reserve Bank of Peru (BCR) 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. Under the PTPA, portfolio managers in the United States are able to provide portfolio management services to both mutual funds and pension funds in Peru, including funds that manage Peru’s privatized social security accounts. Plans are under development which will make Peru a more attractive market for foreign portfolio management companies to manage Peruvian pension funds.

The 1993 Constitution guarantees free convertibility of currency. However, there are legal limits on the amount that private pension fund managers (AFPs) can invest in foreign securities. Over the years, the BCR has gradually increased the operating limit, which reached 30% in September 2010. Although Congress increased the maximum limit to 50% in July 2011, the BCR has only recently been considering increasing its current 30% operating limit. For several years, AFPs have protested the low operating limit on grounds that the Peruvian securities market remains small and unable to absorb the incessantly increasing funds the AFPs manage.

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 at year-end in Peru reached 3.9% in 2007, 6.7% in 2008, 0.3% in 2009, 2.1% in 2010, 4.7% in 2011, and 2.7% in 2012.

The Peruvian Government also has implemented policies to de-dollarize the economy but in the last few years the market has been more effective in reducing dollarization as the Peruvian Nuevo Sol has trended to appreciate vis-à-vis the U.S. dollar. U.S. dollars account for a decreasing share of banking system transactions, according to the Peruvian Banking Superintendence (SBS). In 2001, U.S. dollars accounted for 82% of loans and 73% of deposits. On October 31, 2012, U.S. dollars accounted for 51% of loans and 42% of deposits.

The foreign exchange market operates freely, for the most part. To quell “extreme variations” of the exchange rate, the Central Bank intervenes through purchases and sales in the market without imposing controls on exchange rates or transactions. In the last few years, the Central Bank has consistently purchased U.S. dollars to mitigate the risk that spillover from expansionary U.S. monetary policy might result in over-valuation of the Peruvian Nuevo Sol relative to the U.S. dollar, distorting international trade. This policy is likely to continue for the foreseeable future, until U.S. economic recovery begins to tighten credit conditions.

Expropriation and Compensation

According to the Peruvian Constitution, the Peruvian government can only expropriate private property on public interest grounds such as 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. On January 12, 2012, Congress approved legislation to expropriate a number of homes and other real estate adjacent to the Lima Airport for an airport expansion project. Compensation for expropriations is based on fair market value.

Dispute Settlement

The PTPA includes a chapter on dispute settlement, which applies to implementation of the Agreement’s core obligations, including labor and environment provisions. Dispute panel procedures set high standards of openness and transparency through the following measures: open public hearings; public release of legal submissions by parties, enlisting special labor or environment expertise for disputes in these areas, and opportunities for interested third parties to submit views. The Agreement emphasizes compliance through consultation and trade-enhancing remedies. The Agreement also encourages arbitration and other alternative dispute resolution measures for disputes between private parties.

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 Peruvian Government regarding pre-existing contracts must still enter national courts, unless otherwise permitted, such as through provisions found in the PTPA. In addition, investors who conclude a juridical stability agreement may submit disputes with the government to national or international arbitration if stipulated in the agreement. Several private organizations -- including the American Chamber of Commerce, the Lima Chamber of Commerce, and Universidad Catolica – operate private arbitration centers. The quality of such centers varies, however, and investors should choose arbitration venues carefully.

Dispute settlement generally remains problematic in Peru; although in 2004 the Peruvian Government began taking steps to improve the dispute settlement process by establishing commercial courts to rule on investment disputes, including two courts of appeal. These 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. With their specialized judges, the commercial courts have reduced the amount of time to resolve a case to just two months. The appeals level resolves most of these cases, so that few appeals cases reach the Supreme Court.

The criminal and civil courts of first instance and appeal are heard at the provincial level. The Supreme Court is located in Lima. In principle, Peruvian law recognizes secured interests in property, both movable and immovable. With the exception of the commercial courts, the judicial system is often extremely slow to hear cases and to issue decisions. A large backlog of cases further complicates decision-making.

Court rulings and the degree of enforcement have been difficult to predict. The competence of individual judges varies, and allegations of corruption, political interference, and outside interference in the judicial system are common. Frequent use of appellate processes as a delay tactic lead to the belief among foreign investors that contracts can be difficult to enforce in Peru.

The 1997 Law of Conciliation (DL 26872) requires disputants in many types of civil and commercial matters to consider conciliation before a judge can accept a dispute for litigation. Private parties often resort to arbitration to resolve business disputes, avoiding involvement in judicial processes.

Peru has a creditor rights hierarchy similar to that established under U.S. bankruptcy law, and monetary judgments are usually made in the currency stipulated in the contract. However, administrative bankruptcy procedures under INDECOPI (the National Institute for the Defense of Free Competition and the Protection of Intellectual Property) have proven to be slow and subject to judicial intervention. Compounding this difficulty are occasional laws passed to protect specific debtors from action by creditors that would force them into bankruptcy or liquidation.

The 1993 Constitution permits international arbitration of disputes between foreign investors and the government or state-controlled firms. Previously, the Government of Peru appealed arbitration cases to the judiciary, where they were typically delayed until the international companies conceded the cases. To reinforce Peruvian law, the Supreme Court ruled that effective July 2005, all arbitration findings and awards are final and not subject to appeal.

Performance Requirements and Incentives

The PTPA has resulted in benefits to U.S. enterprises seeking to invest in Peru. Under the PTPA, Peru has made concessions beyond its commitments to the WTO and has dismantled significant investment barriers, such as measures that required U.S. firms to hire nationals rather than U.S. professionals, and measures requiring the purchase of local goods.

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 drawbacks, or refunds of duties), 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 US$10 million in the mining and hydrocarbons sectors or US$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 legal or tax stability agreement, provided that the added investment will expand the installed capacity of the company or enhance its technological development.

There are no performance requirements that apply exclusively to foreign investors. Peruvian civil law applies to legal stability agreements, which means the Peruvian Government cannot unilaterally alter agreements. Notwithstanding these protections, investors should be aware that government officials have delivered negative remarks to the press regarding companies exercising their contractual rights and obligations.

Laws specific to investment in the petroleum and mining sectors provide assurances to investors in those sectors. However, a history of tightening of benefits has occurred in these industries. 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.

After a growing number of local communities demanded shares of mining profits from their areas, the Garcia Administration and mining companies agreed in 2006 to a "voluntary contribution" system whereby companies agreed to provide funding to the government (in addition to the regular corporate income tax) for community infrastructure projects. This voluntary contribution averted adoption of a more restrictive mining law. The agreement allowed mining companies to control where their contributions were invested and did not apply if the prices of metals or minerals drop below certain levels. As the voluntary contribution agreement was to expire at the end of 2011 during a period of extraordinary profits for extractive industries, the Humala Administration and mining companies agreed in August 2011 to replace it with a new tax scheme. While the new tax was initially expected to generate about US$1.1 billion annually, declining metals prices suggest that the contribution in 2012 may only have reached around US$755 million.

With regard to licensing arrangements, private parties may freely negotiate contractual conditions related to licensing arrangements and other aspects of technology transfer without governmental authorization. A registry of a technology transfer agreement with INDECOPI is required for a payment of royalties to be counted against taxes.

Current law limits foreign employees to 20 percent of the total number of employees in a local company (whether owned by foreign or national interests). The combined salaries of foreign employees are limited to no more than 30 percent of the total company payroll. However, DL 689 from 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 US$4,000), or is a national of a country that has a reciprocal labor or dual nationality agreement with Peru. The United States and Peru tolerate dual nationality, but do not have a formal agreement. Furthermore, the law exempts foreign banks, and international transportation companies from these hiring limits, as well as all firms located in free trade zones. Companies may apply for exemption from the limitations for managerial or technical personnel.

The Peruvian government does not maintain any measures that are inconsistent with Trade-Related Investment Measure (TRIM) requirements, according to a WTO Committee on Trade-Related Investment Measure notification dated August 19, 2010.

Although there are no discriminatory or onerous visa, residence, or work permit requirements that inhibit foreign investors' mobility, the application and approval process can be lengthy.

Right to Private Ownership and Establishment

Peruvian law generally grants foreign and domestic entities 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 immovable 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, the 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

The Peruvian Government recognizes and enforces secured interests in property, both movable and immovable. The Peruvian Government is working on improving the registry of those rights which will further enable the government’s enforcement capabilities.

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. Peru’s Copyright Law is generally consistent with the TRIPS Agreement.

While the legal framework for protection of intellectual property (IP) in Peru has improved over the past decade, including the law enacted in 2011 to criminalize the sale of counterfeit medicines, enforcement mechanisms remain weak. Peru has stayed on USTR's Section 301 "Watch List" since 2001 because of continued high piracy rates inadequate enforcement of IP laws, and weak or unenforced penalties for IP violators.

Under the PTPA, Peruvian law should treat U.S. companies at least as well as Peruvian companies in all IP categories. On paper, the PTPA provides for improved IP protection on a broad range of intellectual property rights. Such improvements include protections for digital products such as U.S. software, music, text, and video; protection for U.S. patents, trademarks and pharmaceutical and agrochemical test data; legal penalties to deter piracy; and an electronic system to register and maintain trademarks.

Despite PTPA implementation and recent legal code amendments creating stricter penalties for some types of IP theft, the judicial branch has failed to impose sentences that adequately deter future IP theft. Prosecutors have not increased the number of piracy cases they pursue through the entire process to final judgment. Furthermore, the Peruvian public lacks motivation to change perceptions regarding IP theft. The public continues to purchase pirated software, CDs, DVDs, pharmaceutical products, and books from vendors in public. The purchases continue openly since most Peruvians realize their government will not prosecute this theft.

Some Peruvian Government institutions, sometimes with the support of the U.S. Embassy in Lima, sponsor public awareness campaigns to raise awareness about the damage that IP theft causes the Peruvian economy and Peruvians consumers. Peruvian newspapers complain about piracy, including pirated versions of Peru’s Nobel Laureate Mario Vargas Llosa’s books. While the Peruvian government occasionally has carried out raids against vendors of pirated goods, piracy remains a significant problem for legitimate owners of copyrights in Peru.

The International Intellectual Property Alliance (IIPA) most recently estimated in February 2010 that the piracy level in Peru for recorded music is at 98 percent, with trade losses estimated at US$57.2 million annually. The Business Software Alliance estimates that software piracy levels resulted in a loss of US$209 million in 2011, while the prevalence of software piracy decreased from 68% in 2010 to 67% in 2011. The majority of individually-owned motion pictures in Peru are pirated.

The U.S. pharmaceutical industry advises that the Peruvian Government fails to provide data exclusivity protection for all pharmaceutical products and does not provide patent linkage or “second use” medical patents. The pharmaceutical industry also advises that the Peruvian Government does not offer any extension of the patent term for pharmaceutical products to compensate for processing delays at the patent office.

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, www.indecopi.gob.pe), established in 1992. 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).

Pursuant to the terms of the PTPA, Peru has ratified or acceded to the following agreements: the Convention Relating to the Distribution of Programme-Carrying Signals Transmitted by Satellite; the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure; the WIPO Copyright Treaty; the WIPO Performances and Phonograms Treaty; the Patent Cooperation Treaty; the Trademark Law Treaty; and, the International Convention for the Protection of New Varieties of Plants (UPOV Convention). Although Peru has ratified or acceded to several of the above agreements as part of its implementation of the PTPA, it has not yet fulfilled its PTPA commitments by ratifying or acceding to the following agreements: the Patent Law Treaty; the Hague Agreement Concerning the International Registration of Industrial Designs; and, the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks.

Transparency of the Regulatory System

Regulatory transparency and independence have become central issues for foreign investors in Peru. Although many of the central government regulators related to foreign investment have relatively transparent and predictable procedures, delays and the lack of predictability in the rulings of these institutions, have been impediments to doing business in Peru.

The Securities Market Superintendency (SMV) maintains the company registry and supervises the securities market. ProInversion handles privatization and investment issues. INDECOPI handles competition policy and intellectual property matters. The Superintendency of Banking and Insurance (SBS) regulates banks, insurance companies, and private pension funds, including determination of whether potential market entrants qualify to operate in Peru.

When the Peruvian Government privatized state-owned monopolies in the areas of telecommunications, energy, and the hydrocarbons sector in the late 1990s, it also established regulatory institutions to oversee the new private sectors – OSIPTEL for telecom, and OSINERGMIN for energy, mining and hydrocarbons.

In 2010, OSIPTEL established a “glide path” plan to continuously lower the mobile termination rates for all carriers by October 2013. This created a more favorable competitive environment for the smaller carriers. While a company may be pleased that its final rate in 2013 will be more competitive with the other carriers than before, concerns remain that the planned 2013 rates are based on the cost structure from 2010. Historically, telecommunication companies have experienced a downward trend in cost per call. Therefore, the telecommunications sector may face an outdated cost structure in 2013.

U.S. firms and investors have complained about the reinterpretation of rules and the imposition of disproportionate fines by the Peruvian tax agency, SUNAT. U.S. firms and other investors allege SUNAT's aggressive behavior and reinterpretation of tax 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 partially determined by the theoretical tax liability they uncover in audits. The U.S. Embassy continues to hear that this perverse incentive leads to overzealous tax collection practices.

Businesses point out that SUNAT's retroactive reinterpretation of regulations and laws, levying of disproportionate fines, usurious interest rates on the alleged assessments, lengthy resolution processes, 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, by clerical mistake, an improper drawback of US$1,345, only to face SUNAT fines of US$645,000. Although the case was resolved, new legislation was needed to correct the problem. To correct such problems, an independent tax tribunal acts to check any abuses by SUNAT. However, SUNAT normally appeals the tax tribunal’s rulings, thereby extending indefinitely both the resolution of disputed assessments and liabilities on companies’ balance sheets. As a balance to this tendency, a tax ombudsman must approve SUNAT's request to appeal adverse tax tribunal decisions. At times, the ombudsman has also acted to end unwarranted litigation of disputed assessments. For example, in 2005, a U.S. company won long-standing tax cases against SUNAT as a result of these improvements. Nevertheless, the U.S. Embassy has heard of cases of companies deciding to pay long-disputed assessments in order to eliminate continually-increasing potential liabilities from their books.

Businesses also have complained about the 18 percent value added tax on goods (which is partially reimbursable for businesses), high social security tax rates, and certain labor laws. Businesses state these tax and labor policies increase investment and production costs and hinder investment capital flows.

Efficient Capital Markets and Portfolio Investment

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 locally by companies and the Peruvian Government. These entities compete because the supply of securities is insufficient given the small size of the market. Foreign investors are increasingly making use of the local market conditions by obtaining credit and floating bonds. Under the PTPA, U.S. financial service suppliers have full rights to establish subsidiaries or branches for banks and insurance companies.

The private sector has access to a variety of credit instruments. From January through October 2012, firms placed US$1.48 billion on the local bond market, 62.2% above the same period a year earlier. Mutual funds managed US$6.54 billion in October 2012, a 32.2% increase from the October 2011 level. By October 2012, private pension funds managed a total of US$35.7 billion.

The Securities Market Superintendency (SMV) is the Peruvian Government entity charged with regulating the securities and commodities markets. Following the IMF’s recommendations, then-President Garcia signed a bill into law on July 27, 2011 as one of his final Presidential acts, for SMV to replace its predecessor, CONASEV (the National Commission for the Supervision of Companies, Securities and Exchanges). SMV’s mandate includes controlling securities market participants, maintaining a transparent and orderly market, setting accounting standards, and publishing financial information about covered companies. SMV requires stock issuers to report events that may affect the stock, the company, or any public offerings. This requirement promotes market transparency, seeks to prevent monopolies, and aims to prevent fraud. Trading on insider information is technically a crime, although there have been few cases prosecuted in past years. One case at the end of 2010 involved three ESSALUD employees, a stock brokerage firm and an employee of the stock brokerage firm. CONASEV fined these individuals and the stock brokerage firm, and their cases are moving through the Peruvian court system. SMV must vet all firms listed on the Lima Stock Exchange (Bolsa de Valores de Lima) or the Public Registry of Securities. SMV also maintains the Public Registry of Securities and Stock Brokers. SMV is studying ways to improve the regulatory system to encourage and facilitate portfolio investment.

The banking system is considered generally sound, thanks to lessons learned during the 1997-1998 Asian crisis, and is progressively revamping operations, increasing capitalization, and reducing costs. Under the SBS's conservative criteria, 2.3% of total loans were assessed as non-performing as of October 2012, down from a high of 11% in early 2001. Able bank supervision and strong GDP growth over the last decade through 2012 also helped banks weather the 2008-2009 global financial crisis with little trouble.

Economic opening since the 1990s, coupled with competition, has led to banking sector consolidation. Sixteen commercial banks comprise the system, although three banks account for 73 percent of loans and deposits among traditional banks. Of US$84.9 billion in total banking assets at the end of October 2012, assets of the three largest commercial banks amounted to US$62.1 billion. As of November 2012, foreigners had significant shares in thirteen banks, of which they were majority owners of eleven (including two of the country's largest ones, and operator of one large commercial bank).

Peru’s financial system has 11 specialized institutions ("financieras"), 34 thriving micro-lenders and savings banks (although several large banks also lend to micro-enterprises), two leasing institutions, two state-owned banks, and one state-owned development bank. In 2012, the Economist Intelligence Unit again ranked Peru number one worldwide for microfinance for the fifth consecutive year because of its sophisticated legal and regulatory framework and competitive microfinance sector. Nevertheless, Peru also has its financial regulatory challenges. In addition to the above-listed institutions, the country has over 150 savings and loan cooperatives that operate in an environment almost devoid of government oversight.

Peruvian law and regulations do not authorize or encourage private firms to adopt articles of incorporation or association to limit or restrict foreign participation. There are no private or public sector efforts to restrict foreign participation in industry standards-setting organizations. However, 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.

Competition from State-Owned Enterprises (SOEs)

The Peruvian government initiated an extensive privatization program in 1991 in which foreign investors were encouraged to participate. Since 2000, the Peruvian government has promoted multi-year concessions as a means of attracting investment in major projects. In 2000, the government granted a 30-year concession to a private group (Lima Airport Partners) to operate the Lima airport. In 2006, the government granted a 30-year concession to Dubai Ports to build and operate a new container terminal in the Port of Callao. The terminal’s first phase became operational in May 2010. In 2006, the Swiss-Spanish-Peruvian consortium Swissport received a 25-year concession to manage nine of Peru's northern airports. In 2011, the Peruvian Government awarded the Argentine-Peruvian consortium Aeropuertos Andinos a 25-year concession to manage six of Peru’s southern airports. Also in 2011, the government granted a 30-year concession to a Danish-Peruvian consortium led by the Danish-based A.P. Moller-Maersk Group to operate and modernize the multipurpose northern terminal at the Port of Callao. The Peruvian Government continues to award multi-year concessions for various energy, natural gas, hydro-energy and irrigation, telecommunications, ports, sanitation, land transport, trains, and tourism projects.

Several electricity, water, sewage, bank, and oil companies remain state-owned and state-operated. The most notable area of SOE activity pertains to the petroleum sector, especially Peru’s state-owned petroleum company PetroPeru. Congress passed three laws in 2004, 2006, and 2007 that allowed PetroPeru to enter into all stages of the petroleum and petrochemical sectors. In 2008, PetroPeru took center stage in a corruption scandal related to oil and gas concessions. The scandal led to the resignation of the Minister of Energy and Mines and the PetroPeru President. The scandal forced the Peruvian Government to implement a number of changes in PetroPeru’s management. With varying authorities over the last decade, PetroPeru has experienced significant attrition in expertise. Its limited financial resources and lack of expertise cast into doubt the company’s ability to implement its long-held plans to expand and upgrade its aging Talara refinery. Limited resources and expertise also mitigate expectations following repeated announcements from its leadership regarding upstream expansion, and participation in a proposed gas pipeline and petrochemical complex in southern Peru. One of PetroPeru’s leadership’s latest plans is to return to oil production through participation in tenders of eight oil producing blocks that the GOP will auction in 2013, and whose winners will be required to partner with PetroPeru.

Corporate Social Responsibility

Peruvian businesses participate in Corporate Social Responsibility (CSR) programs, primarily on a voluntary basis. For the energy and mining sector, certain regulations do exist to promote social responsibility. Supreme Decree No. 042-2003-EM promotes social responsibility within the mining sector, encouraging dialogue with the local communities, local employment, development activities, and purchase of local goods and services. The norm requires the mining companies to provide an annual report on sustainable development activities. The Ministry of Energy and Mines offers the public a guidebook for community relations, as well as public information on social measures related to the mining and energy sectors. In February 2011, INDECOPI adopted the Peruvian Technical Regulation of Social Responsibility ISO 26000 that serves as a voluntary guide to CSR activities.

On February 15, 2012, Peru was listed as a compliant country under the Extractive Industries Transparency Initiative (EITI), under which the GOP and extractive industries agree to openly publish all company payments and government revenues from oil, gas, and mining. Peru is the only EITI-compliant country in Latin America.

At the 2012 International Labor Organization conference, Peru was recognized for its national strategy to combat forced labor. Its plan emphasizes the state’s role to protect and promote labor rights. Simultaneously, it strives to build capacity and empower vulnerable groups to transform their environment and enforce their rights. The plan addresses both medium and long-term multi-sector plans to eliminate or reduce conditions that enable forced labor. Despite these efforts, the government did not effectively enforce labor law in all cases. The exploitation of child labor, particularly in informal sectors, forced labor, and employers engaging in antiunion practices remained significant problems.

Political Violence

Although political violence against investors is rare, protests, sometimes violent, have taken place in or near communities with extractive industry operations. Environmental concerns were often the cited pretext, with protestors objecting to the fact that environmental impact assessments are reviewed by the Ministry of Energy and Mines, rather than the Ministry of Environment, when in fact, the Ministry of Environment along with other national agencies do participate in assessment reviews. In many cases, protestors sought public services not provided by the government. Ideological opposition to foreign mining firms, not opposition to mining itself, often leads to protest in communities incited by NGOs, bringing in protestors from outside the local community to foment protests against the companies. In several 2012 incidents, local authorities led strikes against large foreign mining companies in an effort to secure additional funds or development promises from the companies.

During the last few years, groups blocked roads in protest of extractive industry operations, hydroelectric projects, restrictions on informal gold mining, gas exports, and the Government's coca eradication policies. In several of these protests, police and civilians were killed. Although there are still more than 200 listed conflicts in Peru, the government has reported a decline in the number of conflicts during the last half of 2012, from a June high of 247 registered conflicts. More than half of these conflicts involve extractive industries.

Politically-motivated movements at times have opposed large extractive projects. In some cases, these movements have been successful in delaying large foreign investments, as occurred in the US$4.8 billion Conga mine project in Cajamarca in August 2012. In other cases, protests have stopped such investments entirely.

In August 2012, the Peruvian government restructured its conflict management office, and renamed it the National Office of Dialogue and Sustainability. Under the direction of a charismatic former regional president, this office addresses conflict in a broader community development context, rather than only responding to social conflicts after they have already erupted. To this end, the government is providing more education and health care services in areas with infrastructure projects, which will rapidly increase state presence and reduce potential for conflict in those frequently remote areas. Peru’s Prior Consultation Law was signed in 2011 and implemented in April 2012. The law requires the Peruvian government to consult with indigenous communities before enacting any legislation, administrative measures, or development projects that could affect communities’ rights of territorial demarcation. However, many remain skeptical about whether the law will fulfill its purposes, or simply create further problems and delays. The National Society of Mining and Petroleum (SNMPE) and the government have become involved in assisting local communities to access the extractive industry “canon” (funding for public works projects) as a way to both stimulate local development and prevent conflicts. Although these efforts have been effective in some mining regions, in others, conflicts have continued or expanded.

Violence remains a concern in coca-growing regions. The Sendero Luminoso (Shining Path) terrorist organization continues to operate in these areas, financing its activities with drug trafficking proceeds. Sendero Luminoso killed at least 1 civilian, 13 members of the military and 5 police officers, and committed at least 87 acts of violence in coca-growing areas during 2012. On two occasions in 2012, Shining Path kidnapped contractors of a natural gas pipeline, and attacked helicopters supporting the pipeline. The Humala government continues the longstanding practice of authorizing separate 60-day states of emergency in two areas where the Shining Path operates – the Apurimac, Ene, and Mantaro River Valleys (VRAEM) and the Upper Huallaga Valley. The state of emergency authorization suspends some civil liberties and gives the security forces additional authority to maintain public order.

There is little government presence in the remote coca-growing zones of the VRAEM and Upper Huallaga Valley, although significant ramp-up of government presence and programs is underway. The U.S. Embassy in Lima restricts visits by official personnel to these areas because of the threat of violence by narcotics traffickers and columns of the Shining Path. Information about insecure areas and recommended personal security practices can be found at http://www.osac.gov or http://travel.state.gov.

Corruption

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 (OECD). It has not signed the OECD Convention on Combating Bribery, although it has participated as an observer in the Working Group. The Controlaría General is the responsible government agency for combating corruption.

U.S. firms have reported problems directly resulting from corruption, usually in government procurement processes and in the judicial sector, with defense and police procurement generally considered among the most problematic. Transparency International ranked Peru 83rd out of 174 countries in its 2012 Corruption Perceptions Index, down from 80th (out of 183 countries) in its 2011 Corruption Perceptions Index, and 78th out of 178 countries in 2010. While anti-corruption efforts have been a stated priority of both the Garcia and Humala governments, in practice most resources to date have been directed at investigating extensive corruption during the Fujimori era (1990-2000). In 2008, a kickback scandal involving a member of the ruling party and a foreign oil company led to the replacement of then-President Garcia’s prime minister and the changing of five other cabinet members, although investigators have not established that the prime minister was involved in the scandal. Dozens of sitting members of Congress currently are under investigation for corrupt practices.

Bilateral Investment Agreements

The PTPA eliminated the need for a bilateral investment agreement between the United States and Peru. Peru also has free trade agreements with Canada, Chile, China, the European Free Trade Association (which includes Iceland, Leichtenstein, Norway and Switzerland), Japan, Mexico, Panama, Singapore, South Korea, and Thailand. It has Framework Agreements with MERCOSUR countries (Argentina, Brazil, Paraguay, Uruguay, and Venezuela). It has a partial preferential agreement with Cuba. More agreements have been signed and are awaiting implementation, including with Costa Rica, Guatemala, and the European Union.

Peru has bilateral investment agreements in force with Argentina, Bolivia, Canada, Chile, China, Colombia, Czech Republic, Denmark, Ecuador, El Salvador, Finland, Italy, Korea, Netherlands, Norway, Paraguay, Portugal, Romania, Spain, Sweden, Switzerland, Thailand, United Kingdom, and Venezuela.

OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC), an independent U.S. Government agency, offers medium-to-long-term financing and political risk insurance. From 2010 thru 2012, OPIC supported solar power plants, consumer lending, operation and expansion of retail stores, microfinance, installation/operation of stereotactic radiosurgery equipment, consulting services, export services, import-export logistical services, and portfolio expansion of SME, micro-credit and consumer loans, in the form of commitments totaling US$21 million.

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 U.S dollar averaged 2.64 Nuevos Soles per dollar in 2012, after averaging 2.75 Nuevos Soles in 2011. Peru is a member of the Multilateral Investment Guarantee Agency.

It is unlikely that the Peruvian government would either devalue or revalue the Nuevo Sol. The foreign exchange market mostly operates freely. However, the Peruvian Central Bank intervenes in the foreign exchange market occasionally to prevent significant exchange rate variations – currently on an almost weekly basis. To many observers, this regime has succeeded in avoiding traumatic foreign exchange adjustments to the economy. From its December 31, 2012 exchange rate of 2.549, the Economist Intelligence Unit estimates the Nuevo Sol will appreciate slightly to 2.556 by the end of 2013.

 Labor

Labor is abundant and trainable, although there are shortages of highly skilled workers in some fields. Mining sector contacts praise the technical knowledge and professional dedication of Peruvian engineering graduates. However, there is a high percentage of informality as 60 percent of the 15.9 million-member labor force worked in the informal sector in 2010, according to a World Bank report released in October 2012.

The Peruvian government increased the statutory monthly minimum wage in May 2012, from 675 Nuevos Soles (approximately US$255) to 750 Nuevos Soles (approximately US$284). The government estimated the poverty line in 2011 to be 272 soles (approximately US$99) a month per person, although it varied widely by region due to different living costs. The Ministry of Labor (MOL) enforces the minimum wage only in the formal sector. Many workers in the unregulated informal sector, most of whom were self-employed, make less than the minimum wage. Wages are sometimes higher than U.S. wages in the mining sector for management positions and consulting services. Professional workers in Peru are paid by the month, not by the year. Some workers, like miners, are highly paid and also (per statute) receive a share of company profits up to a maximum total annual amount of 18 times their base monthly salary. Current labor law provides for a 48-hour work week 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. Noncompliance with the law is a punishable infraction. There is no prohibition on excessive compulsory overtime.

A 2008 law reduced severance pay and bonuses by 50%, and paid annual vacation to 15 days for small business workers. Workers readily sacrifice these and other benefits in exchange for regular employment. Another 2008 law gave micro-enterprise workers social security and pensions.

Peruvian labor law requires that employees provide advance notice to the MOL before holding a strike. According to the MOL, 60 strikes took place in 2012. According to labor leaders, permission to strike was difficult to obtain, in part because the MOL feared harming the economy. The MOL justified its decisions by citing failure of unions to fulfill the legal requirements necessary to strike.

On January 15, 2010, Congress adopted a new labor procedure law (No. 29497) to improve the efficiency of resolving labor disputes. The law requires that labor conflicts be resolved in less than six months, allows unions or their representatives to appear in court on behalf of workers, requires proceedings to be conducted orally and video-recorded, and relieves the employee from the burden of proving an employer-employee relationship. On November 5, 2012, the Lima Judicial District began implementing the labor procedure law. At year’s end, it was in effect in at least 15 of the 31 judicial districts in Peru.

Four percent of the labor force was organized in 2011, with unionization higher in large companies (more than 500 workers, about 38%). Unemployment in Lima officially stood at 6.2% during the third quarter of 2012. A government survey showed that 38.9% of Lima's economically active population was underemployed in the same period (versus 37.8% in the same period of 2011), mostly self-employed in the informal sector for below subsistence income. The ILO’s Global Wage Report 2012/2013 released in December 2012 stated that average real wages in Peru grew at over 3% per annum between 2004 and 2011.

Labor laws have become more inflexible in the last ten years, making labor relatively more expensive. A law passed in 2008 created more restrictions on outsourcing and subcontracting, made the contracting company more responsible for the actions of its subcontracted company, and created a national registry of contracting companies. The PTPA requires Peru to respect the ILO-defined core labor rights of its workers. In January 2010, the Peruvian Government and U.S. Government established the bilateral Labor Affairs Council as mandated in Article 17.5 of the PTPA.

According to labor leaders, the current labor law has weakened unions because companies create competing unions that are seen as more favorable to management. 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 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. Labor leaders argue that these labor laws erode labor protections and encourage outsourcing in ways that undercut union activity.

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.

The National Work Council (Consejo Nacional del Trabajo) presented a draft bill of a General Labor Law to the Peruvian Congress in September 2011, and the new Labor Minister was optimistic in January 2012 that it would be adopted. However, at the close of 2012, Congressional debate on the bill continued. The bill is a comprehensive labor law reform which would unify the myriad labor regimes that exist in Peru. It would enable Peruvian workers to better understand their rights, and would provide investors with a clear set of rules for doing business in Peru. The Labor Minister also plans to reform Peru’s poorly managed labor inspection system so that inspectors help employers conform to the law rather than simply issue fines. If passed, these initiatives would help Peru meet its PTPA labor commitments.

All labor in the export processing zones (EPZs) is subcontracted. With the exception of enjoying greater flexibility in hiring temporary labor, there are no special laws or exemptions from regular labor laws in EPZs.

Foreign employees may not comprise more than 20 percent of the total number of employees of a local company (whether owned by foreign or Peruvian persons) or more than 30 percent of the total company payroll. However, under the PTPA, Peru has agreed not to apply most of its nationality-based hiring requirements to U.S. professionals and specialty personnel. Peru also has bilateral agreements with Spain and Argentina, for example, so that Spaniards and Argentines working in Peru do not count as foreigners and vice versa.

Foreign-Trade Zones/Free Trade Zones

Peruvian law currently covers two types of 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. These zones have failed to attract any sizeable investment and their importance for Peru’s economy is negligible.

CETICOS exist at Ilo, Matarani and Paita. One CETICO is authorized in Loreto department, but is not operational. There is 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. The Ministry of Transportation and Communications has said it will ban the importation of right-hand drive vehicles in 2013, citing environmental and safety concerns. Imports of used cars more than five years old and used buses and trucks more than two years old are prohibited.

Foreign Direct Investment Statistics

The stock of foreign direct investment in Peru stood at US$59.49 billion in September 2012, according to the Peruvian Central Bank, versus US$51.21 billion at the end of 2011. According to the most recent data from the Peruvian Central Bank, the largest investors in Peru are the United States, Canada, Spain, and Chile. By industry, the main investment destinations are mining (29%), services (24%), oil and gas (17%), manufacturing (10%), finance (13%), and energy (6%).

U.S. foreign direct investment in Peru amounted to US$7.75 billion in 2011, a 21.8% increase from 2010, according to the U.S. Department of Commerce Bureau of Economic Analysis. Of that sum, US$515 million was invested in manufacturing, and US$421 million in wholesale trade. In its 2011 reporting, the U.S. Department of Commerce suppressed data on extractive industries in order to avoid disclosure of data of individual companies.

Major foreign direct investments included Xstrata (Switzerland), Hunt Oil (U.S.), Newmont Mining Corporation (U.S.), BHP Billiton (Australia), Cencosud Internacional Limitada (Chile), Endesa Latinoamericana (Spain), Freeport-McMoRan (U.S.), Golds Fields Corona (South Africa), SN Power Peru (Norway), Compania Minera Latino-Americana (Chile), Sempra Energy (U.S.), Citibank (U.S.), Southern Peru Copper (Mexico), Pluspetrol (Argentina), Scotiabank (Canada), Telefonica (Spain), Repsol (Spain), Gerdau (Brazil), Anglo American (United Kingdom), Invercale (Chile), Asa Iberoamerica (Spain), Fraport AG Frankfurt Airport Services Worldwide (Germany), Aeropuertos Andinos del Peru (Argentina), and the Falabella Group (Chile). Newmont Mining’s US$4.8 billion Conga gold mine project in Cajamarca and Xstrata’s US$4.2 billion Las Bambas copper mine project in Apurimac rank as Peru’s largest foreign direct investments ever. The multi-year Hunt Oil-led investment is part of a consortium that invested US$3.8 billion to develop a natural gas liquefaction plant, maritime terminal, and pipeline in southern Peru.

Peru’s direct investment abroad amounts to US$1.29 billion, according to Peru’s Central Bank. Peruvian investment in Chile, Brazil, the United States, and Bolivia comprised the vast majority of Peru’s direct investment abroad. The Peruvian media did not miss a small yet symbolic US$5.5 million investment in November 2011 when Peruvian celebrity chef Gaston Acurio opened La Mar Cebicheria Peruana restaurant in New York, which billed itself as Peru’s culinary embassy in New York. In addition to the United States and Peru, Acurio’s various chains of Peruvian and Peruvian fusion restaurants are located in Brazil, China, Colombia, Mexico, Panama, Spain and Venezuela.



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