VII. INVESTMENT CLIMATE The Syrian government has adopted a hesitantly positive attitude toward foreign investment in recent years. However, most representatives of foreign firms find Syria's business environment a difficult one in which to work. Most foreign investment in Syria is in the energy sector. Beginning in the late 1980s, the government actively courted international oil companies to sign concession agreements to explore for oil. In 1990, eleven foreign firms had operations in Syria, but by mid-1994, only four remained. Western firms departed because of disappointments over dry wells, rising costs, and increasing frictions with the Syrian government over contractual terms. Foreign oil company representatives have mentioned several difficult aspects of doing business in Syria, citing both Syrian and American government policies and restrictions. Among the most important disincentives mentioned were: - The SARG policy that foreign companies must use the official rate of 11.2 Syrian pounds/USD (versus the official parallel rate of 42 SP/USD, and the offshore rate of 49-51 SP/USD) for all business transactions with Syrian individuals and companies. This requirement has had the effect of dramatically increasing local business costs, discouraging local investment, and encouraging foreign companies to import materials and services whenever possible. - Cost recovery of expenses: Foreign firms have experienced difficulty in receiving timely and complete recovery of normal business and exploration costs incurred, especially expatriate salaries and related costs. Negotiations to resolve disputed costs can be lengthy, sometimes lasting several years. These disputes can occur despite clearly written language in the signed agreements. - SARG requirements to obtain export licenses for every single item imported and then re-exported, regardless of value. Several company representatives recalled that documentation for even minor items, such as paint cans and used spark plugs, had to be kept to prove to customs officials that they had not been illegally re-exported. - Temporary permits for equipment: Foreign companies must obtain temporary permits from the SARG for each item of equipment intended for temporary use and subsequent re-export, such as drilling rigs, in order to avoid paying import duties. These permits can be difficult to extend if the company's service contract has expired and if it wants to keep the equipment in-country on standby for future work. If the equipment is re-exported after the permit expires, the company will face a heavy fine. - USG foreign policy sanctions and individual validated licensing requirements imposed on "dual use items," such as computer equipment and oil exploration technology, including global positioning indicators. Also mentioned was the "Grassley Amendment," another USG sanction on Syria, that prevents U.S. companies from taking advantage of foreign tax credits on royalties paid to the SARG. - The absence of adequate infrastructure in Syria, especially in telecommunications. To maintain contact with field crews in-country, companies must lease, at great expense, dedicated lines from the Syrian Telecommunications Establishment, again at the official exchange rate. The government has passed three key pieces of legislation since 1985 to encourage foreign investment. In 1985, the SARG issued "Decision 186" to encourage investment in tourism. In 1986, the government issued "Decree 10" to encourage the establishment of joint-venture agricultural companies. In June 1991, as part of its overall reform program to encourage the private sector, the government passed a new investment law --"Law Number 10"-- to promote investment in all sectors of the economy. The new law offers the same incentives to local and foreign investors. Specifically, companies that receive licenses under the new law are accorded duty free privileges for the import of capital goods and materials necessary for the project, including vehicles, and a tax holiday for the first five years of operation. Companies that export over 50 percent of their products, and joint-venture projects with the government --where government ownership is at least 25 percent-- enjoy a seven year tax holiday. All applications for investment under the law must be vetted through the Higher Council for Investment. The council meets at least once every two months. Membership includes the Prime Minister, and the Ministers of Economy, Agriculture, Transportation, Supply, Industry, Planning, Finance, and the Director of the Investment Bureau. Although no definitive criteria for approving investment is spelled out under the new law, the council is more likely to approve a project if it: - Maximizes the use of local resources - Creates jobs - Boosts exports - Utilizes advanced technologies - Advances the government's development plans CONVERSION AND TRANSFER POLICIES The new investment law sets no limits on the inflow of funds. Beneficiaries under the law are permitted to open foreign exchange accounts with the Commercial Bank of Syria. An investor must deposit 100 percent of all foreign exchange capital and hard currency loans secured by the project, and 75 percent of export earnings. Outward capital transfers and profit remittances are prohibited, unless approved by the Prime Minister or sanctioned under the new investment law or a specific arrangement, as in the case of production sharing concluded with oil exploration companies. Under "Law Number 10," capital may be repatriated after five years from the project completion date (six months, if the project fails due to events beyond the control of the investor) and profits remitted on an annual basis. Expatriate employees are permitted to transfer abroad 50 percent of their salaries, and 100 percent of severance pay. In the case of foreign oil companies, "cost recovery" of exploration and development expenditures is governed by formulas specifically negotiated in the applicable concession agreement. Foreign oil partners in production sharing joint-ventures with the state oil company report delays in the recognition of "cost recovery" claims, although such payments are approved eventually. After several years delay, one management company was able to settle a contract dispute in 1993 for the remittance of profits and loans involving the Ministry of Tourism. The private sector has had no access to official foreign reserves since 1984. Under the new investment law, all foreign exchange operations must be generated from company operations and transacted through the investor's foreign exchange account at the Commercial Bank of Syria. No mechanism exists in the parallel "gray" foreign exchange market, funded from permitted private sector retained export earnings, for the repatriation of capital and profits. EXPROPRIATION AND COMPENSATION There are no confirmed expropriations of private property for public use since the 1960's. Although protection against expropriation is not explicitly stated in the new investment law, older investment laws include such clauses, which presumably remain valid and applicable under the new investment law. DISPUTE SETTLEMENT Few investment disputes have occurred during the past several years. When they occur, they are usually settled (often after long delays) through negotiations or via arbitration clauses in the contracts. A number of American suppliers continue to assert claims against state enterprises for non-payment on goods delivered, for which the Commercial Bank of Syria has not allocated foreign exchange. Property and contractual rights are protected by the constitution and enforced by law. The government accepts binding international arbitration of investment disputes between foreign investors and the state in cases where the investment agreement or contract includes such a clause. Otherwise, local courts have jurisdiction. Syria is not a member of the International Center for the Settlement of Investment Disputes nor of the New York Convention of 1958 on the recognition and enforcement of foreign arbitral awards. PERFORMANCE REQUIREMENTS/INCENTIVES Apart from specifying a minimum investment of ten million Syrian Pounds, the new investment law has no formal performance requirements. For example, foreign investors are not required to employ a fixed proportion of local labor, although there are reports that informal guidelines are negotiated on a case-by-case basis during the licensing process. The Ministry of Supply has the authority to set prices and/or profit margins for products destined for the local market, but so far foreign investors have not encountered problems as a result of this practice. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT In practice, all major private investment projects must be licensed. Although no formal demarcation of areas open to private investment exists, the Prime Minister has stated publically that the Higher Council of Investment, which he chairs, is open to any and all proposals for investment, in any industry and on any scale. Nevertheless, state enterprises with a competing interest in a proposed project are routinely consulted by the Investment Council. In all likelihood, "strategic" industries, such as petroleum production (outside production sharing agreements) and banking, will remain the exclusive province of the public sector. The standard of competitive equality is not applied to private enterprises competing with state enterprises in a number of important areas. For example, although a number of state banks, such as the real estate and industrial bank, are authorized to loan local currency to help finance private sector projects, state enterprises continue to have privileged access to local credit and exclusive access to official foreign exchange loans from the Commercial Bank of Syria, which continues to monopolize all foreign exchange transactions. Likewise, according to local business sources, state enterprises get priority in allocations of commodities and material produced by other state enterprises. Public sector firms also appear to have greater access to public services, such as telecommunications and electricity. For the time being, the government has rejected "privatization" of state enterprises as a viable strategy, because of unmarketability of most state enterprises and the continued dependence of the national workforce on public sector employment. PROTECTION OF PROPERTY RIGHTS Syria's legal system recognizes and facilitates the transfer of property rights, including intellectual property rights. Syria is a member of the Paris Union for the International Protection of Industrial Property. Prior registration of intellectual property is required to bring infringement suits. Patents: These are issued for fifteen year periods, provided the invention has been utilized within two years after the patent was granted. Copyrights: Most books printed in Syria are in Arabic and by Arab authors. The publishing industry is not well developed. Despite the lack of legal protection, major commercial infringements do not appear to be a problem. There are, however, individual entrepreneurs who copy records, cassettes and videos, and sell them. These operations are not sanctioned by the Syrian government. The amount of lost revenue is probably minimal. In any event, enforcement and the associated litigation would be, if not impossible, extremely costly compared to any positive benefits which might result. The motion picture industry estimates the home video market in Syria is 100 percent pirated, and is also concerned with unauthorized hotel video performances, which are said to be common. However, only a few hotels have internal video systems. Given the lack of technical sophistication of Syrian industry and strict government control of communications and data processing, infringements on new technologies are not a problem. Trademarks: These may be registered for ten year periods. The first applicant is always entitled to registration. REGULATORY SYSTEM: LAWS AND PROCEDURES The regulatory system is not oriented to promoting competition either among private firms or between private and state enterprises. Regulations enforced by the Ministry of Supply are aimed at promoting consumer protection by preventing withholding and price gouging. Nevertheless, to foster competition, the government has put public sector enterprises on notice that they will no longer be permitted to monopolize whole sectors, particularly if private capital, whether foreign or domestic, can be attracted to finance needed projects. As for fiscal and welfare regulations, such as tax, labor, safety, and health laws, these appear to be enforced without discrimination. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT The absence of organized capital, foreign exchange, and financial markets continues to be an important impediment to private investment, both domestic and foreign. The government is currently studying a number of proposals for the formation of a stock market for the benefit of firms operating under the new investment law, but no decision has been taken. As noted, the government continues to impose strict foreign exchange controls on private sector operations outside the specific concession granted under the new investment law to operate self-funding foreign exchange accounts at the Commercial Bank of Syria. BILATERAL INVESTMENT AGREEMENTS An investment guarantee agreement exists between the U.S. And Syria. Although, since the Gulf War, a number of bi-national committees have been established with Gulf Arab countries to explore private and mixed joint-ventures, Embassy is not aware of bilateral investment agreements with other countries. Investments in Syria may not be given OPIC coverage because of Syria's presence on the terrorism list. USAID assistance was terminated in 1983. Embassy is not aware of any other investment insurance programs, although we understand that private investment guarantee programs have been discussed in bi-national economic commissions with the Gulf Arab countries. LABOR In the current post-Gulf war environment, the private sector has been able to recruit both skilled and professional labor. However, state enterprises have difficulty attracting qualified personnel, due to the low salaries paid. To resign their positions, public sector employees must obtain permission, which is often difficult to obtain. Under Syria's corporate system, the government- controlled Syrian General Federation of Trade Unions (GFTU) superintends all aspects of union activity. The GFTU is affiliated with the International Confederation of Arab Trade Unions. In the public sector, unions do not normally bargain collectively on wage issues, but there is some evidence that union representatives participate with the representatives of the employer and Ministry of Labor in establishing sectoral minimum wages. In a country whose major industries are state-owned, workers make up the majority of each board of directors and union representatives are always included on those boards. They also monitor and enforce compliance with the labor law. In the private sector, unions are active in monitoring compliance with the laws and ensuring workers' health and safety. The unions, under the law, can undertake negotiations for collective contracts with employers, but there is no information available on whether such contracts envision that unions can also sue and be represented in court. CAPITAL OUTFLOW POLICY Strict foreign exchange restrictions are enforced, outside the concessions granted under the new investment law. The export of capital requires the approval of the Central Bank, as does overseas borrowing. Foreign companies operating outside the new investment law may transfer capital only in accordance with the special agreements, usually in the form of presidential decree, under which they operate in Syria. FOREIGN DIRECT INVESTMENT STATISTICS Official foreign investment statistics by country are not available. According to press stories, some 400 projects valued at 70 billion Syrian pounds (approx. USD 1.4 billion at the offshore rate centered in Beirut) have been approved under the new investment law. MAJOR FOREIGN INVESTORS Major foreign investors are all oil companies operating under exploration concessions granted by the Syrian government. Royal Dutch Shell and several foreign partners operate a production company in joint-venture with the Syrian Petroleum Company (SPC), a Syrian parastatal. A French oil company "Elf Acquitane" has also formed a joint-venture with SPC to produce and market petroleum. In addition, several exploration companies continue to operate in Syria.