2007 Investment Climate Statement - Bolivia
Bolivia remains a difficult place to do business. Economic activity is often disrupted by social unrest resulting from centuries of economic, political, and social inequality, and indigenous, labor, and anti-globalization organizations have recently targeted private investment –- particularly foreign investment –- as the cause of many of the country’s ills. Political violence, while rare, can escalate quickly.
Social unrest, weak judicial security, arbitrary regulatory decisions, widespread corruption, cumbersome bureaucratic procedures, and political pressure to abrogate contracts may adversely affect companies’ operations.
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) and threatened the mining and forestry sectors with similar action. He has also convened a Constituent Assembly to rewrite the country’s constitution. Resulting political and economic uncertainty has presented 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.
Openness to Foreign Investment
Bolivia is generally open to foreign investment. Foreign firms are not subject to special registration requirements and are neither screened nor officially treated in a discriminatory fashion. That said, 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 1689, 1996) sectors authorize joint ventures with 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 low 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 to the state control over the entire production chain, and offering YPFB majority share of five companies.
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 ranging from zero to 32 percent. In late November, the Bolivian Congress approved the new contracts. Separate negotiations between the Bolivian government and the five companies destined for YPFB takeover are ongoing.
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 an undisclosed minimum floor 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, clearly accommodating popular activity, as a large percentage of deposits are denominated in U.S. dollars or held in dollar-linked accounts. There are no restrictions of any kind on currency transfers or remittances.
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.
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 accepts binding international arbitration in all sectors. 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.
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.
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 cancelled 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 90 percent 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.
Transparency of the Regulatory System
The Bolivian regulatory system is generally transparent and consistent with international norms. 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. 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 has stated that it plans to modify the regulatory structure in 2007 by placing the superintendents under the control of relevant ministries, potentially decreasing the regulators’ freedom from political interference.
A similar regulatory system governs the financial sector, but several laws have changed its structure over the last five years.
Efficient Capital Markets and Portfolio Investment
Bolivian commercial banks were once closely held operations lending only to well known individuals or firms, but foreign 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.
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. On January 1, 2007, the government announced the creation of a Productive Development Bank 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 sets of books: one for tax authorities, one for bankers, and another for management. Financial sector regulations restrict 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, cooperative miners, coca growers, labor organizations, and social sector groups have blockaded roads and staged large-scale protests in La Paz, Santa Cruz, and other cities, disrupting normal economic activity and adding to the difficulties of doing business. 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 considering an anti-corruption bill proposed by the Morales administration.
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.
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 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.
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.
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’s (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 8.3 million 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.
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 and other basic infrastructure.
Foreign Direct Investment Statistics
U.S. investments accounted for approximately one-third of net foreign direct investment (FDI) inflows of USD 1.4 billion between 2001 and 2005, followed by Brazil, Argentina, Italy, and Spain (each with about 10 percent) and France and the United Kingdom (each with about five percent). Total net FDI for the first three quarters of 2006 reached USD 166 million.
In late 2006, U.S. companies had invested an estimated USD 610 million in the mining sector, USD 380 million in the hydrocarbons sector, USD 220 million in energy production and distribution, and USD 145 million in telecommunications.