industry/Business
CPl weighs impact of Andean investment code New and highly restrictive rules on foreign spending in five Andean countries may dampen U.S. investment plans for Latin America "We don't believe that its basic provisions are likely to encourage many companies to invest in that market. Investment goes where it is wanted and some of its provisions aren't the kind of incentive that encourages foreign investment." That's Du Pont's reaction to a new and highly restrictive set of rules on foreign investment that five South American countries agreed to observe jointly starting this month. The five, all members of the Andean group, a subregion of the Latin American Free Trade Association, are Bolivia, Chile, Colombia, Ecuador, and Peru. What these countries have agreed to is a long, complex, and controversial document known officially as decision No. 24—the common regime of treatment of foreign capital and of trademarks, patents, licenses, and royalties. Better known simply as the Andean Foreign Investment Code, the highly restrictive rules have companies in the U.S. and other industrialized nations wondering just how they will handle present and planned investments within the Andean subregion. Most U.S. chemical companies contacted by C&EN's senior editor Earl Anderson share Du Pont's attitude toward the code. And little wonder. The code requires foreign investors to relinquish majority control of their investments to local interests in 15 or 20 years, depending upon which country the investment is located in. It also restricts the amount of earnings that can be repatriated, blackballs certain industries entirely from investing in these countries, and regulates transfer of technology. Although no U.S. company likes the idea of committing capital to a foreign project under such tight restrictions, some nevertheless are resigned 14
C&EN JULY 12, 1971
Foreign Investment Code is long and complex. Its 55 articles, its several temporary provisions, and two annexes are difficult to summarize. In addition to the fade-out provisions, however, the most important of them stipulate that: • The state or state enterprises have a preferential option to buy shares offered by foreign investors under the fade-out provisions. • Foreign investors may buy shares or property rights held by national investors, but only if certain specific conditions are met. • The net profits that foreign investors may transfer annually out of these countries can not exceed 14% of their direct investment. • Mining and petroleum industries, including oil and gas pipelines, are basic industries. During the first 10 years of the code, concessions can be authorized, provided the contract doesn't run for more than 20 years. Tax credits for depletion allowance will not be permitted, but profit transfers may exceed 14%. Preference will be given to foreign petroleum companies if they have a state-owned enterprise as a partner. • No new foreign direct investment may be made in commercial banking, insurance, other financial institutions, domestic transportation, communications, advertising, or marketing. Foreign firms with existing operations in these areas must sell at least 80% of their shares to national investors. • Foreign companies will have ac-
to it. Monsanto, for instance, says that, although it prefers not to see such restrictive codes, "it is the sort of thing that is becoming a fact of life and it is something that we will have to live with." The code itself won't be the main factor in its foreign investment decisions, says Monsanto. The real key is to find good partners and to find a country where the investment climate is to its liking. "A small, profitable interest is better than a large, unprofitable interest," says a Monsanto spokesman. Toughest pill. Whether a company can live with the code or not, most of them agree that the toughest of its pills to swallow are its "fade-out" provisions. Under these rules, new investment in Chile, Colombia, and Peru must have 15% national ownership when operations begin. This national share of the investment must increase to 45% within 10 years and to 51% within 15 years. Foreign investors in Bolivia and Ecuador, the least developed of the five Andean countries, have an additional five years to make the transformation. Foreign companies with investments already existing in these countries must transfer at least 51% ownership to local interests if they want to enjoy the benefits of the internal trade liberalization that the Andean countries are undertaking among themselves. The countries plan to eliminate all internal tariff and nontariff barriers on a wide range of products. Like its official name, the Andean
Chemical spending by U.S. firms in Latin America will be up this year World
Latin America
Chemical· 1
Per cent of world chemical spending
Total·'
Per cent of world total spending
Chemical 8
Total·*
$143
13.8%
$1092
12.6%
$1040
$8,640
1967
150
12.4
1282
13.8
1210
9,267
1968
179
14.8
1656
17.7
1208
9,387
198
17.7
1856
17.2
1118
10,788
176
13.0
2072
15.5
1354
13,350
2156
13.6
1570
15,796
1966
1969 1970
b
1
1971 >
196
12.5
a Plant and equipment spending in millions of dollars by U.S. foreign affiliates, Source:
Office of Business Economics, U.S. Department of Commerce
b Estimates.
Goal of Andean group is workal e regional trade bloc In the past dozen years, regional trade blocs have blossomed out as a popu lar way to stimulate the economy of many world areas. Sometimes they work, as they did in the European Common Market and the European Free Trade Association. Sometimes they don't. Among the ones that haven't is the Latin American Free Trade Association. Partly because they became impatient with LAFTA's progress, and partly be cause they were reluctant to try to com pete separately with the Latin American economic giants such as Mexico, Bra zil, and Argentina, five of the less-de veloped LAFTA members combined to form the Andean group, a LAFTA subregion. On May 26, 1969, Bolivia, Chile, Co lombia, Ecuador, and Peru signed the Andean subregional integration pact, hoping that they could achieve jointly the industrial development that none of them seemed able to achieve separately. Under the pact's trade liberalization
cess to domestic credit only in excep tional cases and on a short-term basis. The government must authorize for eign credits in advance and the gov ernments will guarantee funds bor rowed abroad only when the state it self is a partner in the venture. • Contracts covering imported tech nology must be approved by the host country, which will determine and ne gotiate cost and duration of the con tracts. Contracts calling for purchase options or royalties paid to foreign parent companies and affiliates are prohibited. So, too, are contracts with production, price, and export re strictions. Similar regulations will be applied to agreements covering li censes, patents, and trademarks. Minimum requirements. As tough as the Andean code is toward foreign in vestors, it really only prescribes min imum requirements for its member countries. Each of them is free to im pose stricter requirements if it chooses. Peru, for instance, under the ultranationalistic industrial decree law that was passed last year, has even tougher restrictions on foreign inves tors than those contained in the code. The Andean code, in fact, is a compro mise, a watered-down version of the original draft submitted by the junta, the Andean group's technical body. Although attitudes toward the code among American companies vary from outright repulsion to reluctant acceptance, uncertainty is unani mous. Until companies see exactly how each country handles its foreign
program, Chile, Peru, and Colombia will eliminate tariff and nontariff barriers among themselves on a wide range of products. Tariff reductions began on July 1 and will continue for 10 years, in an nual increments of 10%. Some prod ucts have an accelerated tariff reduction schedule. Ecuador and Bolivia, the least developed of the Andean nations, won't have to start reducing their tariffs until 1974. Meanwhile some of their products have been granted duty-free entry into Chile, Colombia, and Ecuador. All five countries will have a com mon external tariff against outside imports. The Cartagena agreement, birth cer tificate of the Andean subregion, also required the countries to formulate a common code to regulate foreign direct investment by Dec. 31, 1970. After a lot of disagreement, the five countries met the deadline with the Andean For eign Investment Code. The code be came effective on the first of this month.
investment regulations, they can't be completely certain of their invest ment position in the Andean countries. As a result, many U.S. investment projects slated for the Andean group have been put on the shelf, at least temporarily. One U.S. chemical com pany admits privately that it is holding back on one plant-building project, but says that "it would kill us down there if they knew it." In the anonymity of a large sur vey, this reluctance to commit cap ital to the Andean countries becomes more apparent. In its survey, the Council of the Americas finds that 84 private investment projects or plans earmarked for those five South American countries are being held in abeyance by 56 companies that re sponded to the questionnaire. The postponements fall most heavily on Colombia, where 37 actual or planned ventures are being delayed. Peru is next with 22, and there are 12 in Chile, nine in Ecuador, and four in Bolivia. Most of the companies cited the fadeout provisions as the reason why they were balking. Although the council survey shows that most U.S. companies don't want to "go into business to go out of busi ness," another survey, this one by the Organization of American States, indicates that many American com panies may be willing to turn over a majority interest in their Andean in vestments to nationals. Of the 90 companies surveyed, OAS says that about a third of them do not reject
ι the fade-out provisions and possibly up to 70% of them might be willing to accept the prospects of losing majority interest in their business. Maintaining a minority share is bet ter, says OAS, than having the in vestment expropriated or national ized completely. Important segment. In any event, investments in Latin America are an important segment of U.S. compa nies' overseas business. The Depart ment of Commerce doesn't break out direct chemical investment statistics for Latin American countries, but estimates of U.S. direct chemical in vestment in the Andean subregion range from $170 to $220 million. Commerce's Office of Business Eco nomics does, however, break out plant and equipment expenditures by foreign chemical affiliates. This year, OBE estimates that foreign chemical affiliates will spend $196 million— 12.5% of the world total—in all of Latin America, 11% higher than last year's estimates figure. Since the Andean countries aren't as prominent in these spending plans as, for instance, Mexico, Brazil, and Argentina, the new Andean code may not influence these spending plans. On the other hand, it may. National ism has been gaining strength throughout Latin America and U.S. companies may become gun-shy if they think that the Andean code might become the model for other Latin American countries. The Latin American investment de cisions of U.S. companies may be in fluenced by the reaction of other foreign companies to the Andean in vestment code. The code applies to all foreign investment, not just Ameri can, although the overwhelming pres ence of the Yankee dollar in some of these countries may make it seem that way. Some Latin American ex perts think that, if American com panies cancel, or even delay,, their in vestment plans in the Andean subre gion, other foreign companies will rush in to fill the void. Others say that European and Japanese compa nies share the same reluctance to act quickly in the face of the uncertain ties presented by the code. In the end, it may be the Andean countries themselves that take some of the rocks out of the investment path. They desperately need for eign capital to develop their indus tries and they may find that, by fol lowing the investment code to the letter or worse, they are cutting off their nose to spite their face. JULY 12, 1971 C&EN 15
