2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012

The investment climate in Bolivia receives a low ranking in independent international indices, including those shown in the "Openness to, and Restrictions Upon, Foreign Investment" section below, and in general can be described as in transition pending full implementation of the more than 100 laws and regulations needed to bring the country's legal framework into agreement with the nation's new Constitution (passed in 2009), which stipulates that:

• Bolivian investment will be prioritized over foreign investment (Article 320);

• economic activity cannot damage the collective good (Article 47);

• the right to private property -- as long as it serves a social function and is not against the collective interest (Article 56);

• transferring national resources that are the "social property of the Bolivian people" in favor of companies, people, or foreign States can be considered an act of treason (Article 125); and

• Bolivian Constitutional law supersedes international law and treaties (Article 410) (the exception is in the case of human rights treaties).

During 2010 and 2011, the Government of Bolivia (GOB) passed a telecommunication law, transportation law, pension law, reformed the country's customs law, and passed a new anti-corruption law.The pension law increased employer contributions from 1.76% of salary payments to 4.76%.The customs law increased the penalties for smuggling.The anti-corruption law placed additional emphasis on identifying cases and created a new investigative unit focused on identifying cases of money laundering.

The Bolivian government has signaled that its upcoming legislative agenda will include new labor, investment, and commerce laws, as well as laws defining how hydrocarbon, electricity, and mining operations will be conducted now that the state officially owns all natural resources.

Openness To, and Restrictions Upon, Foreign Investment

International Indicators of Investment Climate

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Measure

Year

Index/Ranking

Year

Index/Ranking

Transparency International Corruption Index

2010

110th of 178

2011

118th of 182

Heritage Economic Freedom Index

2011

147th of 179

2012

146th of 179

World Bank Doing Business

2011

153rdof 183

2012

153rdof 183

WEF Global Competitiveness Index

2010

108th of 139

2011

108th of 133

MCC Government Effectiveness

2011

65%

2012

88%

MCC Rule of Law

2011

24%

2012

36%

MCC Control of Corruption

2011

61%

2012

81%

MCC Fiscal Policy

2011

65%

2012

91%

MCC Trade Policy

2011

81%

2012

77%

MCC Regulatory Quality

2011

35%

2012

42%

MCC Business Start Up

2011

32%

2012

25%

MCC Land Rights Access

2011

53%

2012

69%

MCC Natural Resource Mgmt

2011

85%

2012

83%

For the MCC performance scorecard ratings, the above percentile rankings are based on comparison to Bolivia's "income peer group." According to the Millennium Challenge Corporation, country performance is evaluated relative to the peer group median, meaning that scores above 50% meet the performance standard, while those below 50% fall below scores of countries considered peers of Bolivia. For more information, see,http://www.mcc.gov/pages/selection/scorecards.

Bolivia remains generally open to foreign direct investment.The current Investment Law (Law 1182, Year 1990) provides equal treatment for national and foreign firms.However, legaluncertainty in Bolivia concerning investment and business makes some hesitant to invest. This legal uncertainty includes the regulatory changes called for in the 2009 Bolivian Constitution (Constitution), the expected creation of a new Investment Law, as well as the abrogation and possible re-negotiation of the Bilateral Investment Treaties (BITs) signed with 23 countriesthat may be contrary to the Constitution.

An important change in the Constitution that directly affects possible foreign investments, besides the creation of a new set of laws, is that Bolivia no longer recognizes international arbitration forums (Article 320).In case of controversy, the parties cannot settle the dispute in an international court.However, the legal standard of implementation is still uncertain because there is no implementing law.

The Constitution (Article 320) states the following regarding foreign investments in Bolivia:

I. Bolivian investment takes priority over foreign investment.

II. Every foreign investment will be subject to Bolivian jurisdiction, laws, and authorities, and no one may invoke a situation for exception, nor appeal to diplomatic claims to obtain more favorable treatment.

III. Economic relations with foreign states or enterprises shall be conducted under conditions of independence, mutual respect and equity. More favorable conditions may not be granted to foreign states or enterprises than those established for Bolivians.

IV. The state acts independently in all decisions on internal economic policy, and will not accept demands or conditions imposed on this policy by states, banks or Bolivian or foreign financial institutions, multilateral entities or transnational enterprises.

V. Public policies will promote internal consumption of products made in Bolivia.

The Constitution (Article 262) states the following regarding foreign investments near the border:

"The fifty kilometers from the borderline constitute the zone of border security.No foreign person, individual, or company, may acquire property in this space, directly or indirectly, nor possess any property right in the waters, soil or subsoil, except in the case of state necessity declared by express law approved by two thirds of the Plurinational Legislative Assembly.The property or the possession affected in case of non-compliance with this prohibition will pass to the benefit of the state, without any indemnity."

Part of the stated purpose of the Bolivian judicial system is to uphold the sanctity of contracts. In practice, however, the judicial system is slow, cumbersome, and challenged by corruption. Also, the Marcela Quiroga Anti-Corruption law of 2010 makes companies and their signatories criminally liable for breach of contract with the GOB, and can be applied retroactively. Authorities can use this threat of criminal prosecution to force settlement of disputes.

With the exception of the broadcasting sector, there is no requirement that nationals own shares of companies, or that foreign equity be reduced over time. There are some areas where investors may judge that special treatment is being given to their Bolivian competitors, for example in key sectors where private companies compete with state owned enterprises. Additionally, foreign investment is not allowed in matters relating directly to national security, and only the GOB can own natural resources.

The Constitution specifies that all hydrocarbon resources are the property of the Bolivian people and that the state will assume control over their exploration, exploitation, industrialization, transport, and marketing (Articles 348 and 351).The state-owned and operated company, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB), manages hydrocarbons transport and sales and is responsible for ensuring that the domestic market demand is satisfied at prices set by the hydrocarbons regulator before allowing any hydrocarbon exports.YPFB benefitted from government action in 2005 that required operators to turn over all of their production to it and to sign new contracts that gave YPFB control over the distribution of gasoline, diesel, and LPG to gas stations.The law allows YPFB to enter into joint venture contracts for limited periods with national or foreign individuals or companies wishing to exploit or trade hydrocarbons or their derivatives. For companies working in the industry, contracts are negotiated on a service contract basis, and there are no restrictions on percentage of ownership of the companies providing the services.

The Constitution (Article 366) also specifies that every foreign enterprise that conducts activities in the hydrocarbons production chain in name and representation of the state will submit to the sovereignty of the state, and to the laws and authority of the state.No foreign court case or foreign jurisdiction will be recognized, and foreign investors may not invoke any exceptional situation for international arbitration, nor appeal to diplomatic claims.

As stated above, according to the Constitution, no concessions or contracts may transfer the ownership of natural resources or other strategic industries to private interests.The GOB needs to renegotiate more than 10,500 commercial agreements related to forestry, mining, telecommunications, electricity, and water services in order to comply with these regulations.Since the new mining law and other sector laws that would outline the associated requirements have not yet been approved, the government issued Supreme Decree 726 in December 2010, which allows private companies temporary authorization to exploit natural resources under the old regulations until new laws are enacted.

The Telecommunications, Technology and Communications General Law (Law 164, Article 28) stipulates that the licenses for radio broadcasts will not be given to foreign persons or entities.Further, in the case of broadcasting associations, the share of foreign investors cannot exceed 25% of the total investment, except in those cases approved by the state or by international treaties.

Conversion and Transfer Policies

Currency is freely convertible at Bolivian banks and exchange houses.The official exchange system is described as an “incomplete crawling peg."Under this system, the exchange rate is fixed, but undergoes micro-readjustments, which are not pre-announced to the public.There is a spread of ten basis points between the exchange rate for buying and selling US dollars.The Boliviano (Bs) has remained fixed, at 6.96 Bs/$1 for selling and 6.86 Bs/$1 for buying, since October 2011.The parallel rate closely tracks the official rate, suggesting the market finds the Central Bank’s policy acceptable.In order to avoid distortions in the exchange rate market, the Central Bank requires all currency exchange to occur at the official rate ±1 basis point.

The banking law (#1488, 1993) establishes regulations for foreign currency hedging and authorizes banks to maintain accounts in foreign currencies.A significant, but dropping, percentage of deposits are denominated in U.S. dollars (currently less than 50% of total deposits).Bolivian law currently allows repatriation of profits, with a 12.5% withholding tax.However, a provision of the 2009 Constitution (Article 351.2) requires reinvestment within Bolivia of private profits from natural resources.Until specific implementing legislation is passed, it is unclear how this provision will be applied.In addition, all bank transfers in U.S. dollars within the financial system and leaving the country must pay a Financial Transaction Tax (ITF) of .03%. This tax applies to foreign transactions for U.S. dollars leaving Bolivia, not to money transferred internally.A new banking law is expected during the first half of 2012 that may change these regulations.

Any banking transaction above $10,000, in one operation or in total in three consecutive days, requires a form stating the source of funds.In addition, any hard currency cash transfer from or to Bolivia equal to or greater than $10,000 must be registered with the customs office.Amounts between $50,000 and $500,000 require authorization by the Central Bank and quantities above $500,000 require authorization by the Ministry of the Economy and Public Finance.The fine for underreporting any cash transaction is equal to 30% of the difference between the declared amount and the quantity of money found. The reporting standard is international, but many private companies in Bolivia find the application cumbersome due to the requirement of the GOB for detailed transaction breakdowns rather than allowing for blanket transaction reporting.

Administrative Resolution 398/10 approved in June 2010 forces Bolivian banks to reduce their investments and/or assets outside the country to an amount that does not exceed 50% of the value of their net equity.

The Central Bank charges a fee for different kinds of international transactions related to banking and trade. The current list of fees and the details can be found at http://www.bcb.gob.bo/webdocs/normativa/resoluciones/2010/resolucion144.pdf.

Of the less favorable laws for foreign investments, the Tax Reform (Law 843) is the one that directly affects the transfer of all money to foreign countries.All companies are charged 25% tax on profits under the Tax Reform Law, but when a company sends money abroad, the presumption of the Bolivian Tax Authority is that 50% of all money transmitted is profit.Under this presumption, the 25% tax is applied to half of all money transferred abroad, whether actual or only presumed profit. In practical terms it means there is a payment of 12.5% as a transfer tax.

Expropriation and Compensation

The Bolivian Constitution allows the government to expropriate property for the public good or when the property does not fulfill a “social purpose" (Article 57).In the case of land, this social purpose is understood as"sustainable land use to develop productive activities, according to its best use capacity, for the benefit of society, the collective interest and its owner." In all other cases where applied, the GOB has no official definition and makes decisions on a case-by-cases basis. Noncompliance with the social function of land, tax evasion, or the holding of large acreage is cause for reversion, at which point the land passes to "the Bolivian people" (Article 401).In cases where the expropriation of land is deemed the necessity of the state or for the public good, such as when building road or laying electricity lines, payment of just indemnification is required, and the GOB has paid for the land taken in such cases. However, in cases where there is non-compliance, or accusations of such, the GOB is not required to pay for the land because the land title reverts to the state.For example, in December 2010, the Agrarian Court expropriated 23,947 hectares of land in the region of Alto Parapetí, 15,000 hectares of which belonged to a U.S. citizen who was accused of not fulfilling the social purpose of the land by allowing conditions of servitude among his employees.The U.S. citizen denies all charges but has not received any compensation for the land thus far due to the accusations.

The Constitution also gives workers the right to reactivate and reorganize companies in the process of bankruptcy, insolvency, or liquidation, or those closed in an unjust manner, into employee-owned cooperatives (Article 54).The current mining and hydrocarbons laws outline procedures for expropriating land to develop underlying concessions.

The Bolivian government has signaled its intent to nationalize all companies that were previously privatized in the 1990s under the process of capitalization. In this process, state-owned companies were privatized up to a 50% interest (the state controlled the other 50% interest).Thus far, the government nationalized all of hydrocarbons transport and sales (private and foreign state owned firms remain in production and services), part of the electricity industry, the biggest telecommunications company, a tin smelting plant, and a cement plant.To take control of these companies the government forced private entities to sell shares to the government, but often at below market prices. Some of the affected companies have cases pending with international arbitration bodies.

The future of new nationalizations is not clear, as there are still some capitalized companies that are under private control, including the railroad, airport services, and electricity transport and distribution companies.Thus far, there have been no nationalizations of companies that were, from their start, privately owned. The nationalization process has not discriminated by country; some of the countries affected were the United States, France, the UK, Spain, Argentina, and Chile, amongst others.

Dispute Settlement

Bolivia is organized into nine departments, one region (the Chaco), 112 provinces, and 337 municipalities.The Constitution established a new political division, that of indigenous autonomy.This status confers aspects of self-government upon groups of indigenous people that share territory, culture, history, language, and their own judicial, political, social, and economic organizations or institutions.With passage of the "Andres Ibañez" autonomy law on July 19, 2010, indigenous autonomies were given two years to self identify and draft governing statutes.

Property and contractual rights are enforced in Bolivian courts, but the legal process is time consuming and may be subject to political influence and corruption.Although many of its provisions have been modified and supplanted by more specific legislation, Bolivia’s Commercial Code (Law 14379, 1977) continues to provide general guidance for commercial activities.However, during 2012 a new Commercial Code maybe drafted that could significantly change the business environment in Bolivia.The Constitution gives national law precedence over international law and treaties (Article 410), and stipulates that the state will be directly involved in resolving conflicts between employers and employees (Article 50).

The status of international arbitration is unclear due to conflicting Bolivian law.Current investment law grants international companies the right to pursue international arbitration in all sectors and states that international agreements, such as the Convention on the Settlement of Investment Disputes between States and Nationals of Other States and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards, must be honored.It also mandates the recognition of foreign decisions and awards and establishes procedures for the Supreme Court’s execution of decisions.However, these rights conflict with the Constitution, which states (Article 366) that arbitration is not recognized in any case and cannot proceed under any diplomatic claim, and specifically limits foreign companies' access to international arbitration in the case of conflicts with the government.It also states that all bilateral investment treaties must be renegotiated to incorporate relevant provisions of the new Constitution.

In November 2007, Bolivia became the first country ever to withdraw from the International Center for the Settlement of Investment Disputes (ICSID).In August 2010, Bolivian Minister of Legal Defense of the State said that the Bolivian government would not accept ICSID rulings in the cases brought against them by the Chilean company Quiborax and Italian company Euro Telcom.However, the government of Bolivia agreed to pay $100 million to Euro Telecom as result of a negotiation due to the nationalization of the Italian company, and this agreement was ratified by a Supreme Decree 692 on November 3, 2010.Additionally,a British company that owned the biggest electric generation plant in Bolivia (Guaracachi), has a pending arbitration claim against the government of Bolivia for $75 million due to the nationalization that took place in 2010.

In another case, a Canadian mining company with significant U.S. interests failed to complete an investment required by its contract with the state-owned mining company.The foreign company asserts it could not complete the project because the state mining company did not deliver required property rights.The foreign company entered into national arbitration (their contract does not allow for international arbitration) and in January 2011, the parties announced a settlement of $750,000, which the company says will be used to pay taxes, employee benefits, and pending debts -- essentially leaving them without compensation for the $5 million investment they had made.They also retained responsibility for future liabilities.

Performance Requirements and Incentives

The Bolivian regulatory framework regarding investments does not consider performance requirements or incentives that differentiate between national and foreign investments.The Bolivian government maintains few performance requirements and no performance incentives. With regard to requirements:

· Bolivian labor law requires businesses to limit foreign employees to 15% of their total work force and requires that such foreign hires be part of the technical staff.These workers require a work visa that can be obtained in any Bolivian consulate, and in the case that they work for a Bolivian company, they should also contribute to the Bolivian Pension System (Pension Law Article 104.1)

· Supreme Decree 27328 regulates national and local level government procurements, which give priority to national sourcing.If anitem required is not produced in Bolivia, buying decisions are made based on price.Supreme Decree 28271 (Article 10), establishes the following preference margins for sourcing with Bolivian products:

o Except for national tenders, 10% preference margin for Bolivian products regardless of the origin of materials.

o For national public tenders, if the cost of Bolivian materials represents more than 50% of the total cost of the product, the producers receive a 10% preference margin over other sellers.

o In national and international public tenders, if Bolivian inputs and labor represent more than the 50% of the total cost of the product, the seller receives a 25% preference margin over other sellers. If the Bolivian inputs and labor represent between 30% and 50% of the total cost of the product, the seller receives a 15% preference margin over other sellers.

Under the Bolivian Criminal Code (Article 226), it is a crime punishable by six months to three years in prison to raise or lower the price of a product based on false information, interests, or actions.It is also a crime to hoard or conceal products in order to raise prices.The Bolivian government has aggressively applied these provisions in a number of cases, applying regulations that allow them to request accounting records and audit companies' financial actions looking for evidence of speculation.The most recent case concerns sugar, in part due to market shortages caused by an imbalance between locally regulated prices and prices in neighboring countries.In this case, the Bolivian government announced in January 2011 that intended to audit and fine four soft drink companies (Embol, La Cascada, Del Valle,andLa Cascada del Sur) and one milk company (Pil) for hoarding sugar and increasing the prices of their products. The only company audited was Embol (the Coca-cola representative in Bolivia) but the auditing process was never completed after a scandal involving the Director of the Autoridad de Fiscalización y Control Social de Empresas (the authority of financial and social control of businesses, or AEMP). The director was forced to resign after being accused by several companies of corruption and extortion. In the end, none of the companies were fined and the investigations were discontinued.

The Constitution (Art. 41) states that the Bolivian state will guarantee access to prescription drugs and that property and commercial rights cannot restrict this right.Although this provision has not yet been written into law, it is likely to affect Intellectual Property Rights.At present, registration of prescription drugs is regulated by Law (#1737), which establishes control over the production, importation, commercialization, quality control, selection, purchase, distribution, prescription, and sale of medicines through an obligatory sanitary registry, which is valid for five years.After five years, renewed registration of a drug can be requested from the Ministry of Health through DINAMED (the Dirección de Medicamentos y Tecnología en Salud).The registry can be canceled or suspended if the requirements and technical standards mentioned above are not fulfilled.

Right to Private Ownership and Establishment

The Constitution recognizes the right for both foreign and domestic private entities to establish and own business enterprises.Article 52, Paragraphs1-2 state: "I. The right to free business association is recognized and guaranteed. II. The state guarantees the acknowledgement of the legal personality of business associations, as well as of the democratic organizational business forms, in accordance with their own by-laws."The article does not differentiate between local and foreign companies regarding this topic.Apart from what is mentioned in section on "Openness To, and Restrictions Upon, Foreign Investment," companies can participate in all forms of remunerative activities.

The right of private entities to freely establish, acquire, and dispose of interest in business enterprises is recognized by the Bolivian Commercial Code (Article 6.3) that states that the purchase or sale of a mercantile company or commercial establishment of shares, quotas, or any parts of interest of equity are considered part of the commercial process.

Starting a business takes an average of 50 days and 15 procedures according to the World Bank Doing Business report.Foreign and domestic private entities have equal right to establish, acquire, and dispose of business interests and to engage in remunerative activity.Private and public entities enjoy equal access to markets, credit, licenses, and supplies.

Closing a business in Bolivia is a relatively easy procedure compared with other countries in the region.In the 2011 World Bank's Doing Business Report, Bolivia ranked 58 of 183 countries in the category "Closing a Business."The average time to complete the procedures to close a business in Bolivia is 20 months.The Bolivian Commercial Code includes (Article 1654) three different categories of bankruptcy:

1. No Fault Bankruptcy - when the owner of the company is not directly responsible for its inability to pay its obligations.

2. At- Fault Bankruptcy - when the owner is guilty or liable due to the lack of due diligence to avoid harm to the company.

3. Bankruptcy due to Fraud - when the owner intentionally tries to cause harm to the company.

If a company declares bankruptcy, the company must pay employee benefits before other obligations.

Protection of Property Rights

The Constitution stipulates the right to private property as long as it serves a social function and is not against the collective interest (Articles 56 and 57).The Constitution specifically allows expropriation in cases of public necessity, or where property is not serving a public function.Revisions that were made to the Agrarian Law (#1715, 1996) in November 2006 reflect this concept.The law was modified (#3545) to stipulate that property deemed unproductive in bi-annual reviews by the National Institute of Agrarian Reform (El Instituto Nacional de Reforma Agraria, or INRA) will revert to the state; the modification placed limits on landowners’ legal recourse in such cases.This modification has limited banking interest in long term agricultural investments due to uncertainty over possible future confiscation. The Constitution also grants formal, collective land titles to indigenous communities (Article 394.3) that originally owned those lands and states that public land will be granted to indigenous farmers, intercultural indigenous communities, afro-Bolivians, and farmer communities which do not possess them or for whom landsare insufficient (Article 395).

The Office of Property Registry oversees the acquisition and disposition of land, real estate, and mortgages.Mortgages are easy to obtain.It takes at most 60 days to obtain a standard loan.However, Bolivia lacks an adequate system of title verification and challenges to land titles are common.Competing claims to land titles and the absence of a reliable dispute resolution process create risk and uncertainty in real property acquisition.Illegal occupation of rural private property is an ongoing problem and a number of land invasions were reported in 2011.

Bolivian copyright law (#1322, 1992) protects the rights of Bolivian authors, foreign authors domiciled in Bolivia, and foreign authors published for the first time in Bolivia. Foreigners not domiciled in Bolivia enjoy protection to the extent provided in international conventions and treaties to which Bolivia is a party. International copyrights are respected even when they have not been registered in Bolivia. Protection extends to literary, artistic, and scientific works for the lifetime of the author plus 50 years and includes the exclusive right to copy or reproduce works; to revise, adapt, or prepare derivative works; to distribute copies of works; and to publicly communicate works.Although the exclusive right to translate works is not explicitly granted, the law does prevent unauthorized adaptation, transformation, modification, and editing.The law also provides protection for software and databases.The film and video law (#1302, 1991) contains elements of IPR protection, establishing a National Movie Council (CONACINE) to oversee the domestic film industry and requiring that all films and videos shown or distributed in Bolivia be registered with the organization.

Additionally, as a member of the Andean Community (CAN), a customs union comprising Bolivia, Colombia, Ecuador and Peru, Bolivia is also party to several legally binding agreements signed by the customs union, called "Decisions". In Bolivia, only the Constitution takes supremacy to CAN Decisions. CAN Decision 351 grants copyright protection to "the authors of and other owners of rights in intellectual works in the literary, artistic or scientific field, whatever their nature or form of expression and regardless of their literary or artistic merit or purpose."

While the Constitution specifies that the state will register and protect intellectual property, including "collective intellectual property rights," it also explicitly states that "the right to access to medicines may not be restricted by intellectual property rights" (Article 41.2). International patents are not respected in Bolivia unless the patent is separately registered locally. However,The National Intellectual Property Service(SENAPI) takes international patents into consideration during the registration process.

The existing copyright law recognizes copyright infringement as a public offense and the Bolivian Criminal Code provides for the criminal prosecution of IPR violations.However, the enforcement of intellectual property rights remains insufficient, and Bolivia remains on the U.S. Trade Representative’s Special 301 Watch List.Video, music, and software piracy rates are among the highest in Latin America, with the International Intellectual Property Alliance estimating that piracy levels have reached 100% for motion pictures and over 90% for recorded music.

Bolivia belongs to the World Intellectual Property Organization and is a signatory to the Nice Agreement and the Paris, Bern, and Geneva Conventions.SENAPI reviews patent registrations for form and substance and publishes notices of proposed registrations in the Official Gazette.If there are no objections within 30 working days, the organization grants patents for a period of 20 years.The registration of trademarks parallels that of patents.Once obtained, a trademark is valid for a 10-year renewable period.It can be cancelled if not used within three years of the date of grant.

Bolivia has no laws protecting trade secrets. However, Bolivia respects international conventions and they are still in effect and protect foreigners. Additionally, it has signed a CAN agreement, Decision 486, which deals with industrial property (trade secrets) and is legally binding in Bolivia. It's most relevant sections are:

Decision 486:

I. Each Member Country shall accord the nationals of other members of the Andean Community, the World Trade Organization, and the Paris Convention for the Protection of Industrial Property, treatment no less favorable than it accords to its own nationals with regard to the protection of intellectual property, subject to the exceptions already provided in articles 3 and 5 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and in article 2 of the Paris Convention for the Protection of Industrial Property.

Member Countries may also accord such treatment to the nationals of a third country under the terms of their respective domestic legislation.

IV. The protection granted by this Decision shall accrue to all literary, artistic and scientific works that may be reproduced or disclosed by any known or future means.

Transparency of the Regulatory System

A general investment law, antitrust and disloyal competitions regulations,and regulations for each economic sector such as hydrocarbon, mining, electricity and others, have not been updated or enacted since the signing of the constitution in 2009.There have also been complaints by the private sector of unfair competition from the state owned enterprises (SOEs) in the absence of an SOE law.The lack of new implementing laws createslegal discrepancies between constitutional guarantees and the dated policies currently enforced.

The tax code has not changed, and will probably not change in the near future; however, the government may establish new taxes for what it considers strategic sectors.The government is also in discussions regarding atax increase on profits, focusing on financial institutions that generate very high profits.

Environmental regulations can slow projects due to the constitutional requirement of "prior consultation" for any projects that could affect local communities.This has affected projects related to the exploitation of natural recourses, both renewable and nonrenewable, as well as public works projects.Issuance of environmental licenses has been slow and subject to corruption.

In 2010, the new pension fund was enacted; it increased the contributions that companies have to pay by 3% of payroll, to 4.71% total.

Important pending legal frameworks like hydrocarbon, mining, electricity and other laws have yet to be adopted.This creates an uncertain investment climate. Adding to the uncertainty, the political agenda can determine what laws will be issued according to the needs of the moment.

Formal bureaucratic procedures are lengthy, difficult to manage and navigate, and considered by some debilitating.Many firms complain that a lack of administrative infrastructure, corruption, and political motives impede theirability to perform easily.

There is no established public comment process allowing social, political, and economic interests to provide advice and comment on new laws and decrees.However, the government generally -- but not always --discusses the draft of a law with the relevant sector.For example, for the new mining code the government set up a committee, which includes representatives of the Ministry of Mining, the private sector and representatives of the state companies.By contrast, laws such as the enacted pension law were not public until the government issued a final version.This has also happened with the new banking law, currently being drafted with no participation from the banks thus far.

Most accounting regulations follow international principles, but they do not always fully conform with international standards.Only the biggest private companies and a few government institutions such as the Central Bank and the Banking Supervision Authority have transparent and consistent accounting systems.

Article 308 of the Constitution establishes that the state recognizes, respects, and protects private initiatives that contribute to economic and social development and the strengthening of the economic independence of the country.In addition, as mentioned in the section on "Right to Private Ownership and Establishment,"the Constitution guarantees free enterprise and full exercise of business activities as regulated by law.

Efficient Capital Markets and Portfolio Investment

Bolivian banks have developed the capacity to adjudicate credit risk and evaluate expected rates of return in line with international norms.The banking sector is stable with delinquency rates at less than 2%.

Credit is allocated on market terms, but foreign investors may find it difficult to qualify for loans from local banks due to the requirement that domestic loans be issued exclusively against domestic collateral.Since commercial credit is generally extended on a short-term basis at high interest rates, most foreign investors prefer to obtain credit abroad.Most Bolivian borrowers are small- and medium-sized enterprises (SMEs).

Established Bolivian firms may issue short- or medium-term debt in local capital markets, which act primarily as secondary markets for fixed-return securities.Bolivian capital markets have sought to expand their handling of local corporate bond issues and equity instruments.Over the last few years, several Bolivian companies and some foreign firms have been able to raise funding through local capital markets.However, the stock exchange is small and is highly concentrated in bonds and debt instruments (more than 95% of transactions).The amount of total transactions a year hovers around one-third of the GDP.

Since 2008, the financial markets show a high level of liquidity, which has led to historically low interest rates.This situation is expected to continue for the near future.

The Bolivian banking system is small, composed of 12 banks, 5 private financial funds, and 33 savings and credit cooperatives.The banking sector accounts for 83% of total deposits ($10.6 billion) and 80% of total credits ($8.6 billion).The current estimated total assets of the country's largest bank are Bs 12 billion (approximately $1.7 billion).This bank alone accounts for 20% of total credits and 18% of total deposits.In September 2010, the GOB bought a local private bank (Banco Union) in order to participate in the financial market.Banco Union is medium-sized, with a share of 4% in the national credit portfolio and 6.7% the portfolio of deposits; its principal activity is managing the public accounts.In 2007, the government created a Productive Development Bank (PDB) to boost the production of small, medium-sized and family-run businesses.Soft loans are offered by this bank.

There is no strong evidence of "cross-shareholding" and "stable shareholding" arrangements used by private firms to restrict foreign investment, and the new Constitution forbids monopolies and supports antitrust.In addition, there is no evidence of hostile takeovers.

Competition from State-Owned Enterprises (SOEs)

The current Bolivian government is actively increasing the state's role in the economy.Actions include re-nationalization in key sectors, establishment of state-owned enterprises (SOEs), and passage of laws and regulations that stipulate state ownership of natural resources.

In recent years, the Bolivian government has re-nationalized, by obtaining a controlling stake and therefore management control, a number of private entities that were formerly public enterprises prior to the 1990s.These include Bolivia's largest tin mine, a smelting plant, the largest telecommunications company, the gas production and transport industry, hydroelectric and thermoelectric plants, and a cement company.The Minister of Finance has said publicly that the government intends to regain ownership of all the public companies that were privatized, which would include more than 65 businesses involved in areas such as water distribution, dairy product production, and transportation.The GOB also stated that it will set up companies in every sector where there is a lack of competition (monopoly or oligopoly), such as the cement industry, banking sector, and road construction; where company actions could affect social well-being, such as agriculture; and other sectors not currently attended by the private sector, such as paper and cardboard industries.

At present, the Bolivian government owns and operates more than fifty businesses including a sugar factory, an airline, a supermarket chain, a packaging plant, a cement plant, a construction company, paper and cardboard factories, and milk and nut factories.In 2005, income from state-owned business in Bolivia represented only a fraction of a percent of the Gross Domestic Product (GDP).As of 2011,public sectorcontribution to GDP (including SOEs, investments, and consumption of goods and services) has risen to more than 34%.The GOB announced this year that it intends to invest more than $30 million over the next five years in order to develop these and additional public enterprises.

A government-appointed Board of Directors runs state-owned companies.Each director represents a ministry, and some are informally obligated to consult with government officials for decision-making.The general manager is usually appointed by Supreme Resolution.Private sector entities complain that public companies generate subsidized, unfair competition with the existing private sector.There is currently no law specifying preferential treatment for state-owned businesses.However, industry experts anticipate a law on public enterprises that clarifies roles within the coming year.

Due to the lack of a specific law defining how state-owned companies are managed, some nationalized companies in key sectors like hydrocarbons, electricity, and communications, continue to function as private companies.This allows these firms to pay higher salaries to technicians and executives and to avoid bureaucracy in the procurement process.

The largest SOEs are able to acquire credit from the Central Bank at very low interest rates and convenient terms.Some private companies complain that it is impossible for them to compete with this financial subsidy.Moreover, SOEs appear to benefit from easier access to licenses, supplies, materials and land; however, there is no law specifically providing SOEs with preferential treatment in this regard.

Budget constraints have not been a problem for SOEs.GOB budget surpluses over the past five years, as well as financing from the Central Bank, have enabled public companies to have large budgets.Many SOEs have difficulty implementing their budgets, with the implementation rate around 67% for 2011.According to the Constitution, all SOEs are required to publish an annual report and are subject to financial audits.Additionally, every year SOEs are required to present an annual testimony in front of civil society and social movements, a practice known as social control.

Bolivia does not have a sovereign wealth fund.

Corporate Social Responsibility (CSR)

While there is a general awareness of corporate social responsibility amongst both producers and consumers in Bolivia, consumer decisions are rarely made based on corporate practices or social benefits.In part because the Bolivian Constitution stipulates that economic activity cannot damage the collective good (Article 47), CSR activities are generally looked upon favorably by the GOB.

Though Bolivia is not part of the OECD, it has participated in several Latin American Corporate Governance Roundtables since 2000.Neither the Government of Bolivia nor its organizations use the OECD Guidelines for CSR.Instead, Bolivian companies and organizations are focused on trying to accomplish the UN's Millennium Development Goals, and they use the Global Reporting Initiative (GRI) methodology in order to show economic, social and environmental results.While the GOB, private companies, and non-profits are focused on the UN's Millennium Development Goals, only private organizations and NGOs are focused on obtaining the UN standard ISO 26000 certification and applying its methodologies. Another methodology with wide acceptance in Bolivia is the one developed by ETHOS Institute, which provides measurable indicators accepted by PLARSE (Programa Latinoamericano de Responsabilidad Social Corporativa, the Latin American Program for CSR).

There are a large number of organizations working in the field, ranging from those focusing on education and training, to clean technology promotion, to fair labor practices.Additionally, individual sectors have undertaken CSR initiatives, most notably in mining and forestry.For example, miners developed a working partnership focused in education, infrastructure, and environmental issues with local communities, which now exhibit a relatively higher level of awareness than in the past.Since 1996, the forestry sector has been a world leader in promoting sustainable forestry, with almost2 million hectares of certified forest.Although the GOB has an aversion to carbon credits and other programs considered by then to be the "commoditization of nature", the forestry certification program remains one of the strongest in the region. The Forestry Association (Cámara Forestal de Bolivia) supports a certification fund that provides economic assistance to any forestry operator that wishes to certify.

Additionally, a leading trade think tank, the Instituto Boliviano de Comercio Exterior (IBCE) developed a certification called the "Triple Sello" (triple stamp), that certifies businesses who receive the stamp are free from child labor, discriminatory practices, and forced labor.The "Triple Sello" certification is independently audited, and IBCE expects to certify their first Bolivian company in 2012.

Political Violence

Bolivia is prone to social unrest that includes violence and disrupts transportation and distribution networks.The majority of civil disturbances were related to domestic issues, usually workers pressuring the government for concessions by marching or closing major thoroughfares.Over the past year, there has been little to no political violence targeted towards foreigners.

The rate of conflict grew substantially as various protestors pressedthe government for resources, or to stop certain infrastructure projects in 2011.There were on average 15 strikes, protests or demonstrations each month in La Paz.While protests and blockades are frequent, they only periodically affect commerce.Less than a half-dozen conflicts in La Paz directly affected distribution of essential services or travel in and out of the city for periods greater than 24 hours during 2011.

The dependence of commerce on a few key thoroughfares in the country makes interdepartmental commerce vulnerable to protests and blockades.During the last quarter, several major interdepartmental thoroughfares were blockaded for a total of 15 days.

Corruption

Corruption continues to be a serious problem in Bolivia.Transparency International ranked Bolivia 118 out of 183 countries in its 2011 Corruption Perceptions Index.Thirty percent of Bolivians surveyed by Transparency International reported paying at least one bribe in 2010.The Ministry of Institutional Transparency and Counter Corruption, created in 2009 by Supreme Decree (#29894), is in charge of promoting policies against corruption and is empowered to investigate corruption cases at any level in any branch of government.In March 2010, the Bolivian Congress approved a "Fight Against Corruption, Illicit Enrichment, and Fortune Investigation" law (#004).This law gives the Bolivian government wide-ranging authority to investigate possible cases of corruption in the private and public sectors, including retroactively.

Bribery is a criminal offense in Bolivia.Bolivia signed the UN Anticorruption Convention in December 2003 and ratified it in December 2005.Bolivia is not a signatory of the OECD Convention on Combating Bribery of Foreign Public Officials.Bolivia is also part of the Organization of American States’ Inter-American Convention against Corruption and the Follow-Up Mechanism for its Implementation.There is an Ombudsman appointedby Congress and charged with protecting human rights and guarding against government abuse.According to International Transparency's poll of Bolivian citizens, the most corrupt institutions in Bolivia are the judiciary, political parties, public officials, and the National Bolivian Police.

Bilateral Investment Agreements

The 2009 Constitution mandatedthat all BITs be canceled and renegotiated in order to comply with new Bolivian legislation.The Bolivian government submitted formal letters requesting termination of the BIT agreements to the diplomatic representations of severalBIT signatories, including the United States.

Bolivia was party to 23 bilateral investment treaties (BITs).Twelve of them with European countries (Germany, Austria, Belgium/Luxembourg, Denmark, Spain, France, Italy, Netherlands, United Kingdom, Rumania, Sweden and Switzerland), nine with Latin-American countries (Argentina, Chile, Costa Rica, Cuba, Ecuador, Paraguay, Peru, Uruguay and Venezuela) and two with countries correspondent to other regions (United States and South Korea)

In June 2011, the Bolivian Government gave notice of its intent to terminate the BIT with the United States.Notwithstanding its notice to terminate its BIT with the United States, Bolivia must ensure consistency with the BIT insofar as it remains in force: for all investors and investments until the one-year notice expires (June 2012), and for 10 years thereafter for existing investments at the time of termination.

OPIC and Other Investment Insurance Programs

The 1985 U.S.-Bolivia Investment Insurance Agreement provides for a full range of Overseas Private Investment Corporation (OPIC) programs, including political risk insurance and loan financing.OPIC provides financing assistance to U.S. firms through direct loans and guarantees issued by U.S. financial institutions.The International Bank for Reconstruction and Development’s (IBRD) Multilateral Investment Guarantee Agency (MIGA) has offered a complete line of investment guarantees to foreign investors in Bolivia since October 1991.In the next year, there are two projects being proposed to the MIGA that focus on guarantees and assurances for investments in the Bolivian banking and financial sectors.

Labor

Approximately two-thirds of Bolivia’s population of 10.4 million is considered “economically active.”Bolivian labor law restricts child labor and provides for worker safety.Overall, between 60 and 65% of workers participate in the informal economy, where no contractual employer-employee relationship exists.Relatively low education and literacy levels tend to limit labor productivity, a fact reflected in wage rates.Unskilled labor is readily available, but skilled workers are often harder to find.

The 2009 Constitution specifies that unjustified firing from jobs is forbidden and that the state will resolve conflicts between employers and employees (Articles 49.3 and 50).Bolivian labor law guarantees workers the right of association and the right to organize and bargain collectively.Most companies are unionized, and nearly all unions belong to the Confederation of Bolivian Workers (COB).

Foreign Trade Zones/Free Trade Zones

There are nine Free Trade Zones (FTZs) currently operating in Bolivia.The FTZs were created to facilitate commercial and industrial operations for national and international companies.The FTZs exempt them from tariffs and national taxes as long the transaction takes place inside of one of the zones.Private companies with 40-year contracts administer the FTZs, which are located in the country's nine provinces, including zones in the main cities of ElAlto, Cochabamba, Santa Cruz, Oruro, Puerto Aguirre, and Desaguadero.The National Council on Free Trade Zones (CONZOF) oversees all industrial and commercial FTZs and authorizes operations.

Foreign Direct Investment Statistics

According to Bolivian Central Bank statistics, the stock of FDI in 2010 was $6.87 billion.Total flows of FDI to Bolivia in 2010 were $915 million, 33% higher than 2009 ($687 million).During recent years, the majority of FDI has been directed to hydrocarbons and mining, accounting for 58% of total FDI in 2010.

In 2008, Bolivia changed its Net International Investment Position (NIIP), from being a net debtor to being a net creditor.In 2010, the NIIP reached $3.3 billion or 17% of GDP.

Until 2009, the United States was the biggest investor in Bolivia.In 2010, the United States invested $81 million in Bolivia, making it the 4th largest investor for the year, behind Spain ($268 million), Sweden ($169 million), and France ($89 million).

The information regarding the stock and flow of FDI is collected and processed by the Bolivian Central Bank based on the Foreign Private Capital (FPC) semiannual survey.The information corresponds to effective amounts of investment made by different companies.Although overall FDI by country is accurate, the disaggregated information by sector is an internal Central Bank estimate and not official data.

Bolivian direct investment in the rest of the world is very low and mainly includes banking deposits and small amount of investment in foreign stocks.No detailed information (e.g. by sector, by country) is available.During the last three years, the flows were negative reflecting the repatriation of Bolivian investments due to the international economic crisis.

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