2009 Investment Climate Statement -Bolivia
Social unrest, weak judicial security, arbitrary regulatory decisions, widespread corruption, and cumbersome bureaucratic procedures may adversely affect companies, operations and ventures.
Investments may also be affected by policy changes proposed by the Evo Morales administration. During the 2005 presidential campaign, Morales pledged to nationalize natural resources, move away from market-oriented economic policies, and empower Bolivia's indigenous population. Since his January 2006 inauguration, Morales has "nationalized" the hydrocarbons industry (forcing companies to negotiate new contracts and offering the state-owned oil company majority share of five firms), the telecommunications industry, and threatened the mining and forestry sectors with similar action. In 2009 he has mentioned other sectors such as electricity and transportation as possible nationalization targets. Resulting political and economic uncertainty presents challenges for potential investors.
Companies considering doing business in Bolivia should carefully weigh the advantages and risks of potential investments, conduct extensive due diligence before committing funds, and retain competent Bolivian legal and other counsel. Bolivia's new draft constitution, which will go to the voters for approval on January 25, 2009, mandates significant change to Bolivia's investment regime, including an end to international arbitration and reservation of exploration of natural resources to the state.
Openness to Foreign Investment
Bolivia's legal framework, at the present, remains generally open to foreign investment. Foreign firms are not subject to special registration requirements. However, they may be adversely affected by inconsistent and arbitrary regulatory decisions, unfavorable interpretations of laws, and an easily corrupted judicial system that may deny due process.
The Investment Law (Law 1182, 1990) provides for national treatment of foreign firms and guarantees the unimpeded repatriation of profits, the free convertibility of currency, and the right to international arbitration (limited to contractual rights) in all sectors. Laws governing activities in the mining (Law 1777, 1997) and hydrocarbons (Law 3058, 2005) sectors authorize joint ventures, and association or provision of services to state-owned corporations.
Investors should note recent changes in hydrocarbons legislation. Hydrocarbons Law 3058 (issued in May 2005) required investors to migrate to new contracts within 180 days, imposed an additional 32 percent tax on revenues, and forced producers to relinquish all hydrocarbons to the state. The law also required companies to sell all hydrocarbons through YPFB and to satisfy the domestic market (at artificially prices set by the hydrocarbons regulator) before exporting.
The government's May 1, 2006 Supreme Decree "nationalizing" the hydrocarbons sector generally restated the provisions of the 2005 statute, giving companies six months to negotiate new operating contracts, transferring control over the entire production chain to the state, and offering state-run Yacimientos Petroliferos Fiscales Bolivianos (YPBF) majority share of five companies. Although private upstream operators and YPFB have been negotiating these new provisions, as of December 2008 terms and conditions for delivery agreements have still not been settled for most operators.
All production companies signed new contracts in October 2006, just days before the negotiation deadline, and agreed to pay 50 percent in taxes and royalties, plus a varying take for YPFB. In late November 2007, the Bolivian Congress approved the new contracts. Separate negotiations between the Bolivian government and the five companies destined for YPFB takeover are ongoing. As of December 2008, YPFB has been able to settle with most international operators in the sector.
Conversion and Transfer Policies
Currency is freely convertible at Bolivian banks and exchange houses. The official exchange rate is determined by the Central Bank's daily auction of dollars, where the bank offers a given amount of dollars and sets a minimum price. The parallel rate has tracked the official rate closely, which suggests the market finds the Central Bank's policy acceptable.
The Banking Law (Law 1488, 1993) establishes regulations for foreign currency hedging and authorizes banks to maintain accounts in foreign currencies. This accommodates the steady demand for U.S. dollars. There are no restrictions of any kind on currency transfers or remittances. However, the Central Bank established during the last quarter of 2007 a one percent fee for all money transfers larger than one thousand US dollars. Also, since November 2008, any hard-currency cash larger than ten thousand U.S. dollars entering or leaving the country must be registered with and authorized by the Central Bank and Ministry of Finance.
Expropriation and Compensation
Article 22 of the Bolivian Constitution allows the government to expropriate property for the public good or when the property does not fulfill a "social purpose." It also stipulates that individuals and firms be awarded just compensation.
The Mining and Hydrocarbons Laws outline procedures for expropriating land to develop underlying concessions. In 2007, the Bolivian government nationalized the Vinto smelter belonging to Swiss company Glencore; requests from Glencore for negotiations were ignored, and the smelter is now run by the state mining company COMIBOL. COMIBOL also regained control of the Huanuni tin deposit, evicting small cooperative mining operations that had previously been given rights to exploit portions of the deposit and returning all Huanuni mining to state control.
Property and contractual rights may be enforced in Bolivian courts, but the legal process is time-consuming and may be subject to political influence and corruption.
Efforts to improve Bolivia's justice system have generated results in some regional courts. Past decisions by the Supreme Court and Constitutional Tribunal have occasionally been influenced by outside factors, but both have generally rendered fair decisions. However, neither Bolivian nor foreign firms can rely on the judicial system to effectively enforce contracts.
The Bolivian government currently accepts binding international arbitration. The Investment Law provides for arbitration in accordance with the Bolivian Constitution and international norms, while the Arbitration and Conciliation Law (Law 1770, 1997) outlines arbitration procedures and enforcement mechanisms. The law 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 mandates the recognition of foreign decisions and awards and establishes procedures for the Supreme Court's execution of decisions. In October 2007, however, Bolivia became the first country ever to withdraw from the International Center for the Settlement of Investment Disputes (ICSID), a World Bank referee for investment disputes. The draft constitution, which will go to referendum on January 25, 2009, contains language that seems to limit the ability of international companies to apply for international arbitration or diplomatic intervention in disputes.
Bolivia's Commercial Code (Decree Law 14379, 1977) has roots dating from 1939. Although many of its provisions have been modified and supplanted by more specific legislation, it continues to provide general guidance for commercial activities.
Performance Requirements and Incentives
The Bolivian government does not impose performance requirements as conditions for establishing, maintaining, or expanding businesses. It does not generally provide tax or investment incentives for foreign investors, but some municipalities have established property tax exemptions for businesses located in their areas.
Foreign firms are allowed to participate in government-sponsored research and development programs, but few, if any, such programs exist.
Work permit, visa, and residence requirements are non-discriminatory. The government sets a minimum monthly wage each year, but many workers in the formal private sector earn more. In 2007, Bolivia began requiring tourist visas for American citizens. Work visas have not been affected by the change.
Right to Private Ownership and Establishment
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.
Protection of Property Rights
Bolivian law guarantees property rights, but rights are not always effectively enforced. The Agrarian Law (Law 1715, 1996) outlines the rights and obligations of land ownership and establishes an independent Agrarian Superintendent to administer the law's provisions, while the Office of Property Registry oversees the acquisition and disposition of land, real estate, and mortgages. In November 2006, the Agrarian Law was modified by Law 3545, which provides that property deemed unproductive in biannual reviews will revert to the state and places limits on landowners, legal recourse.
Despite efforts to reform the National Agrarian Reform Service (INRA) and related entities, challenges to land titles are common, and Bolivia lacks an adequate system of title verification. Competing claims to land titles and the absence of a reliable dispute resolution process create risk and uncertainty in real property acquisition. Illegal squatting on rural private property is an ongoing problem.
Efforts to protect intellectual property rights (IPR) are insufficient, despite the government's 1999 creation of the National Intellectual Property Service (SENAPI). The organization oversees all IPR-related activities, but its reach is limited.
The Copyright Law (Law 1322, 1992) protects literary, artistic, and scientific works for the lifetime of the author plus 50 years. It 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. Bolivian copyright protection 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 Bolivian Film and Video Law (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.
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 canceled if not used within three years of the date of grant.
Bolivia has no laws protecting trade secrets.
Despite existing legal provisions )- the Copyright Law recognizes copyright infringement as a public offense, and the 2001 Bolivian Criminal Procedures Code provides for the criminal prosecution of IPR violations )- 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 percent for motion pictures and over 90 percent for recorded music. The new draft constitution explicitly states that "the right to access to medicines may not be restricted by intellectual property rights." It is unclear how this statement will be interpreted, should the draft constitution pass.
Bolivia belongs to the World Intellectual Property Organization and is a signatory to the Nice Agreement and the Paris, Bern, and Geneva Conventions.
Transparency of the Regulatory System
The Bolivian regulatory system is generally transparent and consistent. Bolivia has no laws directly regulating competition. Instead, related articles are incorporated into laws governing activity in specific sectors.
The Sectoral Regulatory System (SIRESE) Law (Law 1600, 1994) establishes general principles governing anti-competitive practices, expressly prohibiting companies engaging in regulated activities from participating in agreements, contracts, decisions, or practices whose purpose or effect is to hinder, restrict, or distort competition.
The law created an autonomous regulatory body comprised of a general superintendent and five specific superintendents to oversee the water, electricity, telecommunications, transportation, and hydrocarbons sectors. However, the current administration has overruled and limited regulators, administrative decisions. Market forces largely determine public utility prices, but most are periodically reviewed and approved by the relevant superintendent, with regulated prices occasionally established through relatively transparent procedures and formulas. An exception is potable water and garbage collection, for which municipalities set local rates.
The Electricity Law (Law 1604, 1994), the Telecommunications Law (Law 1632, 1995), and the Hydrocarbons Law (Law 1689, 1996) define the characteristics and functions of their respective superintendents.
The Morales administration stated in 2007 that it planned to modify the regulatory structure by placing the superintendents under the control of relevant ministries, potentially decreasing the regulators, freedom from political interference. As of December 2008, some regulatory bodies (superintendencies) have been preserved as before, but subject to open political pressure and discretionary decisions.
A similar regulatory system governs the financial sector, but several laws have changed its structure over the last five years. Commercial banking is regulated by a different regulator from pension and stocks.
Efficient Capital Markets and Portfolio Investment
Bolivian commercial banks were once closely held operations lending only to well known individuals or firms, but foreign and national institutions now play a role in the banking system. Bolivian banks have developed the capacity to adjudicate credit risk and evaluate expected rates of return in line with international norms. Over time, they have directed their services to small and micro enterprises around the country.
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) and have received a large share of credits over the last four years. In 2007, the government created a Productive Development Bank (PDB) designed to support SMEs and other entities.
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. The Securities Law (Law 1834, 1998) laid the groundwork for creating a truly modern securities exchange, but social unrest and economic disruptions have slowed its development. Over the last few years, several Bolivian companies and some foreign firms have been able to raise funding through local capital markets.
Although most accounting regulations follow international principles, Bolivian accounting and reporting procedures do not fully conform to world standards. Bolivian firms commonly maintain several accounting books: one for tax authorities, one for bankers, and another for management. Financial sector regulations restrict extraordinary compensations and financial transactions for managers and senior executives.
Bolivia is prone to social unrest that can quickly become violent and disrupt the transportation of goods and people. In March and April 2000, protests against foreign investment in the Cochabamba municipal water system led to roadblocks and demonstrations across the country.
Roadblocks were even more serious in September and October 2000, when rural indigenous groups, coca growers, and a variety of labor and social movements united in opposition to various government policies. Concessions by the Bolivian government ended these and subsequent protests, but not before the roadblocks caused serious economic hardship and interrupted Bolivian exports.
Disruptive and violent social protests occur regularly in La Paz and El Alto. In February 2003, units of the National Police mutinied against the Sanchez de Lozada administration. Spurred by a misunderstood government proposal to introduce income taxes, mutinous police units fought loyal military units, and, with the police absent, rioters looted and burned government buildings and private businesses. Although order was restored within 36 hours with minimal damage to U.S. firms, the death toll in La Paz was over 30.
Violence was even worse during the October 2003 gas war, a social and political dispute that resulted in the deaths of over 60 people and ended with the resignation of President Sanchez de Lozada. His successor, Carlos Mesa, resigned after similarly violent protests in El Alto in June 2005.
More recently, various groups have staged large-scale protests and blockaded roads. On numerous occasions, major airports have been completely shut down and in September of 2008, American Airlines canceled their flights in and out of the country for over 20 days due to the takeover of the Santa Cruz airport. Political unrest will likely continue in the near future.
Corruption in the public sector and in many non-governmental institutions is endemic. Officials accused of corruption are rarely prosecuted or convicted.
In 2005, the Bolivian government introduced a series of reforms to modernize its operations, improve existing legislation, and increase citizen participation in politics, adopting the Financial Administration and Control (SAFCO) Law, the State Employees Statute Act, and the Sworn Declaration of Property and Income Law. The government also created a Judiciary Council, a Human Rights Ombudsman, a Constitutional Court, and a Civil Service Superintendent. A cabinet-level presidential appointee is empowered to investigate corruption at any level in any branch of government. As of year-end 2006, congress was still considering an anti-corruption bill proposed by the Morales administration. In January 2009, congress re-announced their plan to pass a corruption law, however it has not yet been formally proposed.
Bolivia's National Integrity Plan outlines proposals for judicial reform and state modernization. Under the government's Institutional Reform Project (PRI), the Customs Service, the National Revenue Service, and the Ministries of Housing, Education, and Agriculture have been reformed and professionalized. The National Road Service was disbanded for corruption in 2006 and replaced by another government entity, the Bolivian Highway Association.
With international assistance, the last several governments have also worked to overhaul the Customs Service. Corruption has reportedly fallen since the August 1999 Customs Reform Law, but contraband continues to flow into and out of Bolivia. The Minister of Finance heads a multi-agency council on contraband issues.
Bilateral Investment Agreements
Bolivia has signed bilateral investment treaties (BITs) with Argentina, Belgium/Luxembourg, China, France, Germany, Italy, Mexico, the Netherlands, Peru, Romania, Spain, Switzerland, the United Kingdom, and the United States. In 2006, however, the new Bolivian administration announced that it intends to renegotiate all its bilateral investment treaties. As of January 2009, the Morales administration is awaiting the January 25 referendum on the draft constitution, which if passed will allow it to renegotiate all international treaties. Officials suggest that some Bilateral Investment Treaties will be rejected because they were illegally passed while others may be renegotiated because they treat Bolivian interest inequitably. It is uncertain how enthusiastically foreign governments will pursue renegotiating such agreements.
The U.S.-Bolivia BIT entered into force in June 2001. Investors are entitled to the better of national treatment or most favored nation (MFN) treatment when they initiate an investment and while they maintain that investment, subject to certain limited and specifically described exceptions listed in annexes and protocols.
Expropriation can occur only in accordance with international law, e.g., for a public purpose, in a nondiscriminatory manner, under due process of law, and in a manner accompanied by prompt, adequate, and effective compensation.
Investors have the right to promptly transfer funds into and out of either country using market exchange rates. This covers all investment-related transfers, including interest, liquidation proceeds, repatriated profits, and infusions of additional financial resources after initial investments.
The ability of either government to require investors to adopt inefficient and trade-distorting practices is limited, and performance requirements such as local content and export quotas are prohibited.
Investors have the right to submit an investment dispute with the treaty partner's government to international arbitration, with no obligation to use the host country's domestic courts. Several cases have been brought against the Bolivian government relating to their nationalization efforts, however, no court decisions have yet been reached.
Investors also have the right to employ the top managerial personnel of their choice, regardless of nationality.
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 (IBRD) Multilateral Investment Guarantee Agency (MIGA) has offered a complete line of investment guarantees to foreign investors in Bolivia since October 1991.
Approximately two-thirds of Bolivia's population of 9.8 million as of 2007 is considered economically active, a figure that includes teenagers and children legally prohibited from working. Overall, between 60 and 65 percent of laborers participate in the informal economy, where no contractual employer-employee relationships exist.
Foreign investors generally find the labor force stable, with low turnover rates and high levels of manual dexterity. Relatively low education and literacy levels tend to limit labor productivity, a fact reflected in the low cost of labor. Unskilled labor is readily available, but skilled workers are often harder to find. Many workers - both skilled and unskilled have migrated to other countries to look for work, mainly Chile, Argentina and Spain.
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). Despite international perceptions, extensive labor unrest in the private sector is uncommon, and most foreign firms enjoy positive labor-management relations.
Bolivian labor law also restricts child labor and provides for worker safety, but enforcement is often ineffective.
Free Trade Zones
The Bolivian government created free trade zones (FTZs) under Supreme Decrees 22410 and 22526. The National Council on Free Trade Zones (CONZOF) oversees all industrial and commercial FTZs and authorizes operations. Free trade zones exist in the cities of El Alto, Cochabamba, Santa Cruz, Oruro, Puerto Aguirre (on the Brazilian border), and Desaguadero (on the Peruvian border).
A proposed FTZ in Guayaramerin in the Beni Department is not yet fully operational. The FTZ in Cobija, meanwhile, has proven unattractive to investors due to a lack of roads, limited basic infrastructure and corruption scandals.
Foreign Direct Investment Statistics
U.S. investments accounted for approximately one-third of net foreign direct investment (FDI) inflows of USD 1.7 billion between 2001 and 2006, followed by Brazil, Argentina, Italy, and Spain (each with about 10 percent) and France and the United Kingdom (each with about five percent).
Over last six years, U.S. companies have invested an estimated USD 750 million in the mining sector, USD 420 million in the hydrocarbons sector, USD 290 million in energy production and distribution, and USD 230 million in telecommunications.
According to the Bolivian Central Bank, or its Balance of payments statistics, FDI was approximately USD 278 million in 2006, USD 200 million in 2007, and USD 370 million as of September 2008. The Bolivian government has not released a breakdown of FDI by country since 2006.