2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
May 2010
Report

Openness to Foreign Investment

The Government of Paraguay encourages foreign investment, and there many opportunities, in spite of certain challenges. Paraguay guarantees equal treatment of foreign investors, and most sectors are open for private investment. There are no formal restrictions on foreign investment in Paraguay. National treatment of foreign investors is guaranteed by law 117/91, as is full repatriation of capital and profits by law 60/90. The fiscal incentive package includes an exemption from certain taxes on the establishment of operations and an important reduction of customs duties on imports of capital goods. According to the Heritage Foundation Economic Freedom report, Paraguay’s economic freedom ranks 79 out of 179 countries worldwide, and 16 out of 29 countries in Latin America. Paraguay has historically maintained the lowest tax burden in MERCOSUR. The basic corporate income tax rate is currently 10 percent, and there is a 10 percent value added tax on most goods and services.

Efforts to attract foreign investment through privatization have stalled because of political opposition. From 1994 to 1997 four state-owned companies were privatized: the airline in 1994; the state-owned liquor producer bought by its workers in 1995; the state merchant marine, split into five separate entities, three of which were sold in 1996; and the state steel company, sold in late 1997. The government reversed two of the four privatizations: the liquor producer is now owned by the state after a refinancing in 2000, and the GOP rescinded the contract with the owners of the privatized steel company in 2009 citing the need to rectify anomalies of a controversial privatization deal. The government plans to resell the steel company once the noted irregularities are addressed.

Political realities render further outright privatizations unlikely in the medium-term. The large state-run companies most attractive to foreign buyers (such as the telecom and electricity distribution companies) employ thousands and are outlets for political patronage. The GOP is exploring concessions to improve the road and rail network and upgrade the international airport, but the legal framework for these concessions is pending congressional approval. An opaque and contradictory legal framework for oil and gas concessions has generated contractual disputes with investors, including U.S. investors. In the case of a U.S. investor, a congressionally approved contract was rescinded by Presidential decree citing anomalies that occurred before the contract was approved by Congress. The dispute reached the courts and it is winding its way through the judicial system.

Paraguay has a legal framework for maquila operations – businesses that process goods or services for export. The value-added in the process is subject to a tax rate of one percent. In most cases, inputs are allowed to enter Paraguay tax free, and up to 10 percent of production is allowed for local consumption albeit after paying import taxes and duties. Maquila operations are not restricted geographically or by industry. Existing operations include software design and other services as well as manufacturing. The Ministry of Industry and Commerce has a special office for promoting maquila investments (http://www.maquila.gov.py).

Paraguay is the world’s largest generator and exporter of hydroelectricity. With two of the largest hydroelectric dams in the Latin America, Brazil-Paraguay Itaipu and Argentina-Paraguay Yacyreta, Paraguay generates more than 106 million mega watts hour (MW/h) a year. Itaipu alone generates more than 90 million MW/h per year, and half of the electricity produced is owned by Paraguay. Paraguay consumes roughly 9 percent of its total production and exports the rest. Paraguay’s electricity distribution infrastructure is in need of investment and upgrades. Paraguay has limited air connectivity, though it is looking to improve its international airport. Only a handful of carriers service Asuncion, and there are no U.S. air carriers in Paraguay.

A 2005 law prohibits citizens of neighboring countries Brazil, Bolivia and Argentina from owning land within 50 kilometers of Paraguay’s borders. Paraguay has no other restrictions for land ownership by foreigners.

A biased, corrupt, and inefficient judicial system hinders Paraguay’s investment climate. Many investors find it difficult to adequately enforce contracts, and get frustrated by lengthy bureaucratic procedures. Regulations are enforced by a bureaucracy with limited transparency and accountability. Corruption and impunity are widespread. Politically connected business and individuals are seldom prosecuted. Paraguay ranks at the bottom tier of Transparency International Corruption Index with a 2009 rank of 154 out 180 countries, a drop from position 138th in 2008.

Paraguay has a rigid labor market and property rights are poorly protected. Confidential data concerning regulatory approvals lack adequate protection. An underground economy is at least as large as the formal economy, and companies in the formal economy face direct competitive threats from illegal businesses. The World Bank’s Doing Business 2009 ranks Paraguay 124 out of 183 countries for the ease of doing business.

Conversion and Transfer Policies

There are no restrictions on the conversion or transfer of foreign currency. In late 1994, the government permitted foreign currency contracts, legitimizing a long-standing practice. Law 60/90 permits the repatriation of capital and profits. There are no controls on foreign exchange transactions, apart from reporting requirements to banking authorities 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 of expropriations of land without prompt and fair compensation in recent years. In 2005, Paraguay’s Congress approved the expropriation of a large chunk of foreign-owned land in Chaco region in the western half of Paraguay. The government compensated the landowners after lengthy negotiations. Over the last two years, groups of “landless” peasants, calling on the government to give them land for farming, occupied several large farms. Most of the occupied properties are owned by Brazilians or Paraguayans of Brazilian descent, and are in Eastern Paraguay. The new government announced its agrarian reform objectives in early 2009, and authorized the military to support the police in removing the peasants from some of the occupied properties. Land invasions declined, but organized public protests from civil society groups in rural areas making demands to the government increased, but are generally non-violent.

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 government. Paraguay became a member of the International Center for the Settlement of Investment Disputes (ICSID), also known as the Washington Convention, (http://icsid.worldbank.org/ICSID/Index.jsp), in October 1982 (Law 944/82). The Inter-American Development Bank financed the creation of a center for alternative dispute resolution.

Improvements to the legal system have been incremental at best. There are two Supreme Court vacancies, and judicial reform, as well and the appointment of new Supreme Court judges is highly politicized. A Council of Magistrates appoints appellate and lower court justices as well as prosecutors and public defense attorneys.

A new Penal Code with tougher provisions on money laundering, trafficking in persons, and intellectual property rights became effective July 16, 2009. However, current criminal procedures such as time limits on investigations and disclosure requirements hinder the investigation and prosecution of complex crimes. Both the commercial and civil codes cover bankruptcy and give priority for claims first to employees, then to the state, and finally to private creditors.

While efforts are underway to strengthen the rule of law and make the judicial process more transparent, impunity, corruption, patronage, and bias are features of the current judicial system, from the police to the judges.

Performance Requirements and Incentives

A number of fiscal incentives (mainly tax breaks), contained in aw 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.

Another potential roadblock is Paraguay's law protecting agents and distributors (law 194/93). The law features strong penalties for severing relations with a local distributor or agent. This has on occasion led to expensive out-of-court settlements since just cause must be proven for severing the relationship and indemnification must be paid. However, courts have ruled against distributors in a few cases when just cause has been established.

Paraguay’s import tariffs range from 0 percent to 20 percent, with an average applied tariff rate of 8.7 percent in 2009. Paraguay is a member of the MERCOSUR common market, formed in 1991 and comprised of Argentina, Brazil, Paraguay, and Uruguay. MERCOSUR’s Common External Tariff (CET) averages 11.7 percent and ranges from 0 to 35 percent ad valorem, with a limited number of country-specific exceptions. Currently, Paraguay maintains over 2,600 exceptions to the CET. Tariffs may be imposed by each MERCOSUR member on products imported from outside the region which transit at least one MERCOSUR member before reaching their final destination. Full CET product coverage, which would result in duty free movement within MERCOSUR, was originally scheduled for implementation in 2006, but has been deferred until 2010. In addition, both Paraguay and Uruguay are permitted to maintain national lists of 100 country-specific exceptions until December 31, 2015.

Paraguay has a temporary entry system, which allows duty free admission of capital goods such as machinery, tools, equipment, and vehicles to carry out public and private construction work. The government also allows temporary entry of equipment for scientific research, exhibitions, training or testing, competitive sports, and traveler or tourist items. Merchandise introduced into the country under the temporary entry system may be nationalized in Paraguay by paying the requisite duties. The temporary admission system, to be phased out under MERCOSUR in 2010, allows entry of certain goods for subsequent re-export for a period of up to 12 months, which can be renewed once. Temporary entry for 10 days for merchandise in transit is also permitted.

A number of new procedures and requirements imposed by the Government of Paraguay in 2009 could make importing of U.S. products more difficult. Since March, the government of Paraguay has required non-automatic licenses on personal hygiene products, cosmetics, perfumes and toiletries, textiles and clothing, insecticides, agrochemicals and poultry. Obtaining a license requires review by the Ministry of Industry and Commerce and sometimes the Ministry of Public Health, and the process is slow. Once issued, the certificates are valid for only 30 days.

Paraguay requires specific documentation, such as the commercial receipt, certificate of origin, and cargo manifest, for exports to be certified by the Paraguayan consulate in the country of origin. Paraguayan regulations require that the country of origin be labeled on imported products. Expiration dates are required on medical products and some consumer goods. Health warnings on hazardous products, such as cigarettes, must be labeled in a visible place.

Paraguay 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 also restricted the ports-of-entry for numerous goods.

Paraguay is not a signatory to the WTO Agreement on Government Procurement. In March 2009, in an effort to encourage local production, the government of Paraguay changed its procurement rules. Government procurements must be awarded to Paraguayan producers, except for material and services not produced in Paraguay. The Paraguayan government 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 Paraguayan government fails to award a contract to a domestic supplier. The government can 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. Acquiring title documents for land can take two years or more.

Paraguay is recognized as a regional distribution and manufacturing center for counterfeit merchandise. The re-export trade to Brazil, catering to consumer demand for electronics, CDs/DVDs, and designer clothing/footwear is rife with piracy. Based on the seriousness of industry concerns, Paraguay was designated as a Priority Foreign Country in January 1998 by the U.S. Trade Representative. Paraguay and the United States signed in 2009 the latest Memorandum of Understanding (MOU) detailing a plan to combat Intellectual Property Rights (IPR) violations, and placing Paraguay under Section 301 monitoring.

Under the new penal code, IPR offenders will face stiffer penalties (two to eight years jail time and/or fines) and, a fraudulent imitation of a product is separately recognized as an offense. Paraguay ratified all the Uruguay Round accords, including TRIPS, in late 1994 and has ratified two WIPO copyright treaties.

The government has worked with local and international industry groups to fight piracy, counterfeiting, and contraband. However, IPR violations remain a serious concern as it generates a large percentage of the illicit income for Paraguayan working in the underground economy. Paraguay does not have a framework for safeguarding confidential data associated with regulatory approvals. As a result, some companies have decided not to market certain products, such as the latest pharmaceuticals, in Paraguay.

Transparency of the Regulatory System

The Civil Code and Law 1.034/83 regulate business and industrial activities in the country. Under the existing framework, the Ministry of Industry and Commerce (http://www.mic.gov.py) is charged with overall industrial policy coordination; the Ministry of Finance (http://www.hacienda.gov.py) handles tax and fiscal policy; and the Central Bank (http://www.bcp.gov.py) is the principal coordinator of monetary policy.

The business registration process was modified in late 2006 with USG assistance. The government instituted a coordinated system among all the offices involved (http://www.suae.gov.py), reducing the number of steps and the time to 35 days, and lowering the cost to approximately USD $ 250.00.

The Ministry of Health (http://www.inan.gov.py) and the Municipality of Asuncion (http://www.mca.gov.py) both regulate food safety issues, which can include processed food imports and imports for fast food franchises.

The rigidity of Paraguay’s labor market hinders employment and productivity, severely distorting the investment climate. Paraguay’s job security regulations make it very difficult to lay-off a full-time employee. Firms often opt for periodical renewals of “temporary” work contracts. The World Bank’s Doing Business 2009 ranks Paraguay 179 out of 183 countries.

Regulatory agencies for sectors such as telecommunications, energy, potable water, and the environment are inefficient and opaque. Constant politically motivated changes in the leadership of regulating agencies negatively impacts firms and investors. Labor intensive, time consuming compliance processes generate “rent-seeking” opportunities for the public servants to “facilitate” the paperwork. According to the World Bank’s Doing Business 2009, it can take on average up to 291 days to get a permit or a license, compared to the Latin America average of 225 days. Draft laws are often introduced into Congress by special interest groups with few limited opportunities for public comment. Public participation often requires direct lobbying and press campaigns in a system set up to benefit politically connected special interest groups.

Efficient Capital Markets and Portfolio Investment

Paraguay has a relatively small Asuncion capital market that began operating in 1993. As of 2009, the Asuncion capital market handled USD $ 99.2 million in transactions, compared to a volume of USD $79.6 million transactions in 2008. The number of companies traded is 87. The high cost of capital makes the market an attractive alternative, but the fear by family enterprises of losing control has tempered enthusiasm for public offerings. Most of the exchange’s volume occurs in fixed income securities.

Credit is available through numerous sources. High collateral requirements are generally imposed. 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. The USG is supporting the mobilization of long term financing with credit guarantees.

As of 2009, Paraguay’s banking system was comprised of 14 banks with USD $7.9 billion in assets and USD $6.3 billion in deposits. The largest seven banks accounted for almost 75 percent of total assets and deposits. Non-performing loans in the banking sector totaled just 1.6 percent of total loans in 2009. Eleven non-bank financial institutions held USD $426 million in assets and USD $312 million deposits in 2009, with a non-performing loan ratio of 4.74 percent. Independent audits of financial statements are not legally mandatory. Paraguay’s institute of accountants has adopted the international audit guidelines issued by the International Federation of Accountants.

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, but in some sectors, such as retail fuel distribution, electricity, and telecommunications the private sector indirectly competes with SOEs. 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. With the exception of the bi-nationals hydroelectric dams (Brazil-Paraguay Itaipu, and Argentina-Paraguay Yacyreta ) few SOEs have a working board of directors, and most operate with a council of “trusted” advisors appointed by the SOE chief executive. All SOEs top executives are political appointments by presidential decree. Excluding the bi-national dams, SOEs are not required to have an independent audit. The Controller General annually reviews the SOEs. The SOEs employ many people and are an outlet for patronage, and as a result, the provision of basic services is poor. The SOEs burden the country’s fiscal position, running huge loses with limited capacity to recover. The SOE in the fuel distribution business alone has a deficit that exceeds USD $300 million.

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 a handful of high profiles cases in recent years – all the victims were Paraguayans nationals. The 2009 kidnapping of cattle rancher Fidel Zavala again heightened security concerns as a so called Paraguayan Popular Army (EPP) claimed responsibility for the abduction. The EPP made several demands to the Zavala family, including a ransom of about USD $550,000 and a meat “donation” to poor communities. The Zavala family complied with the demands, and Zavala was released unharmed in early 2010. The GOP has aggressively responded to the EPP threat with combined military and policy operations aimed at eliminating the EPP. The last two years have been characterized by civil protests in the form of land invasions, marches, and organized events in Asuncion from civil society organizations, namely peasants, rural and indigenous communities, making demands on the government. Though most of the demands are specific to the groups’ interest, there has been a growing number of instances were organized civil society groups are making political demands, such as congressional and judicial sector reform.

Corruption

After decades of dictatorship, Paraguay has a legacy of weak institutions, endemic corruption, patronage, and cronyism. This legacy undermines the credibility and capacity of government institutions to formulate policy and provide services, and it perpetuates distortions in the business environment that inhibit trade and investment.

The government 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 some key posts; and, increased civil society input and oversight. Some of the most important challenges Paraguay is facing include an entrenched political and economic elite, a compromised judicial system, a bloated and inefficient cadre of civil servants, and limited budget execution capacity. The slow pace of judicial reform and continued impunity are barriers to development and foreign investment.

With a focus on implementing internal controls in key public offices, including the judiciary and the public ministry, the U.S. is assisting Paraguay’s efforts in fighting corruption and promoting the rule of law. The cornerstone of U.S. anti-corruption assistance 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 measures to prevent corruption and hold corrupt individuals accountable. It seeks to strengthen prosecutors’ investigative capacity, the judiciary’s disciplinary and internal control systems, the public administration’s internal control mechanisms (including in the health sector), control over contraband and smuggling, intellectual property rights protection, and anti-corruption controls in the Paraguayan National Police.

Bribery is a crime in Paraguay, but one that is rarely prosecuted. Paraguay has signed the UN Convention against Corruption, but is not a party to the OECD Convention on Combating Bribery.

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, Benelux, Costa Rica, Ecuador, El Salvador, Germany, Hungary, Korea, Netherlands, Peru, Romania, Spain, Switzerland, and Venezuela.

Paraguay has signed the following agreements with the United States: Agreement relating to investment guaranties (OPIC), 1955; Agreement relating to investment guaranties (OPIC), 1992. A complete listing of bilateral agreements can be found via the following link: http://www.state.gov/documents/treaties.

Paraguay and the U.S. discuss investment and trade priorities in the annual Joint Commission on Trade and Investment (JCTI). JCTI is the bilateral mechanism to advance common investment and trade objectives.

OPIC and Other Investment Insurance Programs

The United States and Paraguay signed a 1992 investment guaranties agreement, allowing OPIC (http://www.opic.gov) to begin full operations in Paraguay. OPIC has financed telecommunications and forestry projects, and is now involved in several transactions with local banks to expand access to credit for SMEs. OPIC is also looking to support renewable energy projects in Paraguay.

Paraguay is a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA), (http://www.miga.org), which offers foreign investment guarantees against non-commercial risks, such as inconvertibility of foreign currency, discriminatory expropriations, contract non-fulfillment, civil uprisings, and war. Paraguay also ratified the agreement creating the International Center for the Settlement of Investment Disputes (ICSID), (http://icsid.worldbank.org/ICSID/Index.jsp), between states and nationals, and nationals of other states, in order to access a mechanism of international arbitration and conciliation.

Labor

According to the latest 2008 employment statistics from the Paraguayan government, the labor force was estimated at 4.83 million workers. The Paraguayan labor force data includes persons 10 years of age and older. About 100,000 people enter the workforce each year. Total open unemployment for 2008 officially stood at 5.7 percent, and total underemployment at 26.5 percent.

With a population growth rate above 3 percent per annum, job creation to meet the increasing demand is one of the most pressing issues of the current administration. While the supply of workers is relatively large and growing, a weak education system limits the supply of well-educated workers. Local businesspeople cite the lack of a skilled work force as a major obstacle to growth.

Foreign Trade Zones/Free Ports

Paraguay is a landlocked country with no seaports. However, it has been granted free trade ports and warehouses in neighboring countries' seaports for the reception, storage, handling, and transshipment of merchandise transported to and from Paraguay.

About three-fourths of goods are transported by barge on the large river system that connects Paraguay with Buenos Aires (Argentina) and Montevideo (Uruguay). The Paraguayan port authority manages the free trade ports and warehouses. Paraguayan free trade ports are located in Argentina (Buenos Aires and Rosario), Brazil (Paranagua, Santos, and Rio Grande do Sul), Chile (Antofagasta and Mejillones), and Uruguay (Montevideo and Nueva Palmira). To date, six of the nine free ports are in full operation: the three Brazilian free trade ports, Nueva Palmira in Uruguay, and the two Chilean free trade ports.

Foreign Direct Investment Statistics

According to the latest figures from the Central Bank of Paraguay, the total stock of foreign direct investment stood at USD $2.15 billion in 2008, up from USD $2.0 billion in 2007. In 2008, services accounted for roughly 70 percent of foreign investment, and the remaining 30 percent was in manufacturing. The three largest service sectors recipients of foreign direct invest include financial sector (24 percent), commerce/retail (19 percent), and telecommunications (15 percent). The food and beverage sector accounted for 17 percent of investments in manufacturing in 2008.

The 2008 Central Bank data shows that the United States is the largest foreign investor in Paraguay with USD $889.7 million, followed by Brazil’s USD $295.9 million, the Netherlands’ USD $151.2 million, and Argentina’s USD $150.6 million.

Large U.S. investments include USD $37 million invested by Mastec to develop a wireless communication network (this network was later sold to Hutchison Communications Ltd. of Hong Kong, and resold in 2005 to America Movil of Mexico). Other investments include the USD $25 million purchase of a grain crushing facility by Cargill; approximately USD $60 million invested in a river transportation company; USD $27 million invested by Exxon; and several million dollars worth of investments by fast food companies (Pizza Hut, Burger King, McDonald's). An expression of interest from Rio Tinto was signed with the Paraguayan government in late 2009 for a USD $2 billion aluminum smelter plant.

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