VII. INVESTMENT CLIMATE STATEMENT - COSTA RICA A. ECONOMIC OVERVIEW 1. INCOME, EMPLOYMENT AND POVERTY: The economy of Costa Rica continued to grow at a healthy rate during 1993. Gross Domestic Product (GDP) in constant terms (1966 colones) grew 6.1 percent - - less than the 7.7 percent rate of GDP growth during 1992, but still exceeding the 2.4 percent population increase, allowing for a real per capita GDP increase of 3.7 percent. The growth of GDP in recent years has been fueled by large capital investment in tourist facilities, as a result of renewed interest in Costa Rica following the conclusion of regional conflicts in Nicaragua, Panama and El Salvador. In addition, Costa Rica, with 1/4 of its land dedicated to national forests, parks and reserves, has benefited from growth in eco-tourism. Unemployment remained at 4.1 percent of the labor force during 1993, the same as in 1992. Real wages increased about 8%, reversing a downward trend since 1979, and regained 1980 real income levels. Poverty, an issue in the recent political campaign, seems to have decreased slightly. The previous government claimed poverty decreased from 22 percent to 17 percent from 1990 to 1994. However, about 27 percent of the population is at the poverty level as defined by the the United Nations Economic Commission for Latin America (ECLA), a third of which (9 percent) is said to be in extreme poverty. 2. MAJOR ECONOMIC RESOURCES: Costa Rica's major economic resources are its fertile land and frequent rainfall, its location in the Central American isthmus, providing it with easy access to North and South American markets and suppliers, proximity to the Panama Canal, and direct ocean access to the European and Asian continents. The country has not discovered sources of fossil fuels (apart from miniscule coal deposits). However, its mountainous terrain and abundant rainfall have permitted the construction of a dozen hydro-electric power plants, making it self-sufficient in all energy needs except oil for transportation. Two planned 20MW wind-driven electric plants will tap Costa Rica's steady breezes, which are particularly strong during the dry season, providing a complementary source of power to the country's hydro-electric system. Costa Rica's mild climate makes neither heating nor cooling necessary, particularly in the highland cities and towns where more than ninety percent of the population live. 3. INFRASTRUCTURE: A. Roads: Costa Rica enjoys a well-developed road system of more than 30,000 Km, although much of it is in disrepair. All parts of the country are accessible by road. The main highland cities in the center of the country are connected by paved all- weather roads with the Atlantic and Pacific coasts and, through the Pan-American Highway, with Nicaragua and Panama, the neighboring countries to the North and the South. On May 1, 1994, President Calderon, in his last address to the Legislative Assembly, stated that during his 4-year administration, 10,000 Km of roads were repaired, 950 Km of new roads were built, as well as 120 new bridges. He also claimed that 1,075 Km of existing roads were rehabilitated. Still, Costa Rica needs to complete the Pacific coastal highway (and repair large sections of existing sections), build a new road along the Atlantic coast, and possibly a coast-to-coast highway (about 300 Km) across the Northern plains of the country. Construction and repair of roads are probably the most pressing infrastructure needs of the country. B. Railroads: There are two major railroads: the railroad from San Jose to the Pacific ports of Caldera and Puntarenas (102 Km.) and the railroad from San Jose to the Caribbean port of Limon (180 Km.). The two railroads join in San Jose, making coast-to- coast rail transportation possible. The section to the Caribbean coast was seriously damaged by an earthquake of 7.4 degrees on the Richter scale on April 23, 1991 and has not been repaired. The Government decided it was not worth repairing (it was losing money when the earthquake struck) because better and cheaper transportation was already being provided by a new road between San Jos and the Port of Limon. C. Airports: There are two international airports, the Juan Santamaria Airport near San Jose, and the airport at Liberia, about 270 Km north of San Jose, both of which are being modernized. The Juan Santamaria Airport is in serious need of replacement. However, no decision has been made for the construction of a much-needed new international airport. Several companies including American Airlines and United Airlines have expressed interest in building a new airport under a long-term concession from the Government of Costa Rica, but no action has been taken. A Japanese study -- quoted by local authorities -- claims that no new airports are needed before the year 2010. However, even with the construction of a new terminal at the Juan Santamaria Airport, a new airport is necessary in part because there is no room to build additional runways. There are small airports in San Jose, Limon, and Puntarenas, capable of receiving small jets, and there are landing strips in other coastal resorts and inland cities and towns, some of which are regularly serviced by SANSA, a local airline and by several airplane and helicopter taxi services, among other cities. Costa Rica has two international airlines. LACSA, the oldest, flies to Miami, Orlando, Dallas, Los Angeles, New York, Cartagena and Lima. AERO COSTA RICA flies to Miami, Orlando and Atlanta. Both airlines have recently received permission to fly to Tampa. American Airlines, United Airlines and Continental fly regularly to San Jose. There are also cargo services provided by several American companies (e.g. Challenge Cargo). TACA, MEXICANA, IBERIA, KLM, SAM and COPA also have regular scheduled flights to San Jose. D. Seaports and ocean transportation: On the Pacific coast lies the port of Puntarenas, the largest coastal city and oldest port in the country. Its pier, the Pacific Railroad terminus, was closed three years ago, reportedly in order to undergo renovation to permit it to receive cruise-ships. However, government budget problems have delayed the start of the repairs. Caldera, ten miles from Puntarenas is the newest port in the country, with container and roll-on, roll-off cargo facilities as well as general cargo facilities. Caldera has become important as a cruise-ship landing point. On the Pacific Coast is also Punta Morales, a port specializing in bulk loading and unloading of sugar, grain and cement. These facilities constitute ample import and export infrastructure to handle shipments to and from the West Coast of North and South America, the Pacific terminus of the Panama Canal and the Far East. The Port of Caldera has a sedimentation problem which requires periodic dredging. It was recently dredged and the port is presently fully operational. On the Caribbean coast, the ports of Limon and Moin can handle container and roll-on, roll-off cargo. The port at Moin also handles crude oil imports. Limon, Moin and Caldera ports are in need of expansion, especially the two Caribbean ports that must handle banana exports to Europe and the East coast of the U.S. Two smaller ports, Quepos and Golfito on the Pacific Coast, are used mainly as fishing and tourist facilities, but can handle small international cargo. Ten major shipping lines provide regular transport services to and from Costa Rica. E. Energy and telecommunications: The state-owned Instituto Costarricense de Electricidad ("ICE"), has a monopoly on most electric and telecommunications services in Costa Rica. ICE generates sufficient electricity with modern hydro-electric plants for its own needs and for export to other countries of Central America and to Panama. Total installed capacity is approximately 1000 MW, 93 percent of which is hydro. The Miravalles I 55-MW geothermal electric power project came on stream in 1994. Costa Rican telecommunications provide direct dialling telephone services world-wide, as well as telex, telegram, facsimile and data transmission services. ICE and a U.S. company currently provide cellular telephone service, and fifteen other companies have received permits to provide two-way mobile phone services. 4. PRINCIPAL GROWTH SECTORS: Sectors directly involved in servicing tourists grew considerably during 1993, continuing the trend of recent years. Unfortunately, there is no statistical information on the growth of sectors directly involved with visitors to Costa Rica. However, the importance of tourism can be deduced indirectly. According to the tourist board (ICT), 690,000 visitors came to Costa Rica during 1993, in comparison with 376,000 in 1989. At the same time, the number of available rooms increased from 5,456 in 1989, to 13,000 in 1993. Income from tourism is estimated at over $500 million in 1993, two and one-half times the amount in 1989. Employment in the tourist sector is estimated to be about 62,000, with a similar number of workers employed in jobs indirectly connected to tourism. The growth rates for construction (4.7 percent), commerce, hotels and restaurants (8.2 percent), transportation, storage and communications (11.3 percent), and financial intermediation (12.4 percent) indicate continued growth of tourist activities -- the most dynamic sector of the economy. The traditional sector of agriculture, which employs about 24 percent of the labor force, grew only 2.2 percent in 1993 (3.9 percent in 1992 and 6.3 percent in 1991), despite some increase in banana exports. Industry, the largest contributor to GDP and employer of 19 percent of the labor force, grew 6.5 percent in 1993 (10.3 percent in 1992 and 2.1 percent in 1991). The public sector grew 2.0 percent in 1993 (1 percent in 1992 and 1991) -- which is understandable considering that 1993 was a political campaign year. 5. MAJOR EXPORTS AND IMPORTS: In 1993, Costa Rica exported USD 1,944.6 million and imported USD 2,869.2 million. Thus the trade balance in goods and services worsened from a USD 611.0 million deficit in 1992 to USD 924.6 deficit in 1993. The principal exports were USD 533 million in bananas and USD 203 million in coffee. Non-traditional exports (exports other than bananas, coffee, meat and sugar) increased 25 percent, for a total of USD 1133 million. Although comprehensive data for 1993 imports is not yet available, Costa Rica's principal imports are raw materials for industry and agriculture, machinery and other capital goods, consumer goods and fuel and lubricants. In 1993, about 44.7 percent of all Costa Rican imports came from the United States, while about 41.0 percent of its exports went to the U.S. 6. ECONOMIC OUTLOOK: During the quarter century ending in the mid-1970's, Costa Rica appeared to be a model developing country. Its gross domestic product (GDP) grew by an average of 7 percent per year between 1966 - 1970 and 6 percent per year between 1976 and 1980. However, economic growth slowed significantly beginning in 1980, with declines in real GDP during 1981 (-2.3 percent) and 1982 (-9.1 percent). This occurred due to a combination of several factors, including accelerated and poorly structured external borrowing in the period 1978-1981, the global debt crisis of 1982, a sharp decrease in both the terms and level of foreign trade, and increasingly larger public sector deficits. A gradual recovery has been taking place since 1984, with particularly good rates of growth occurring in 1986 (GDP up by 5.1 percent), 1987 (GDP up by 4.9 percent), and 1989 (GDP up by 5.6 percent). GDP growth slowed to 3.6 percent in 1990 and 2.3 percent in 1991, mostly due to increased taxation, interest rates and exchange rate devaluation, measures designed to improve the balance of payments situation. From 1991 through 1993, GDP in real terms grew by an average of 5.4 percent -- moderate compared to previous periods of high growth, but still exceeding the average population growth of 2.3 percent per year. The combined public sector budget deficit as a share of GDP remained at 1.4 percent of GDP in 1993, the same as in 1992. The outlook for the next few years remains uncertain. This is due to uncertainty in the international coffee market, the burden of foreign debt obligations, the rising internal debt level and by the need to reduce public sector spending to match modest increases in revenue. The expected increase in the budget deficit in 1994 is putting upward pressure on inflation, which is projected to rise to between 15 and 20 percent in 1994, following several years of consecutive declines (1993: 9.8 percent/1992: 17 percent/1991: 25.3 percent/1990: 27.3 percent). 7. PRINCIPAL ECONOMIC POLICIES: Costa Rica has undertaken an ambitious plan for diversifying exports while maintaining the traditional exports of coffee, bananas, beef and sugar. Non- traditional exports during 1989 exceeded the level of traditional exports for the first time in history. As part of its efforts to integrate itself into the world economy, Costa Rica joined GATT in 1989. High tariffs were lowered considerably, with the exception of a few items such as private automobiles. Export incentives have been offered to companies which export non-traditional products to countries outside of Central America and Panama. Such incentives include the total or partial exoneration of taxes for periods up to twelve years. Specialized government and Central Bank authorities assist exporters in handling their cash flow and their purchases of imported raw materials and capital inputs. The lowering of tariffs has permitted the further growth of U.S. imports to Costa Rica, as well as the growth of a potentially more competitive modern industrial sector. Recognizing the difficulty of public financing of large infrastructure projects, the Legislative Assembly recently passed a law allowing private construction and operation of public projects (e.g. roads, bridges) on a concession basis. The law allows concessionaires to charge tolls and fees for a period long enough to make viable investments which the state would otherwise be unable to fund. B. TRADE AND INVESTMENT ISSUES 1. OPENNESS TO FOREIGN INVESTMENT: The Government of Costa Rica's attitude towards foreign investment has in general been positive. There is widespread recognition in both public and private sectors that increased foreign investment is essential for increased exports and employment. Since mid-1982, the government has placed considerable emphasis on improving the investment climate, including the creation of the Ministry of Foreign Trade (COMEX), which is coordinating government efforts in the trade and investment areas. The Center for Export and Investment Promotion (CENPRO), has assisted prospective investors during the past 18 years with information- gathering and in completing formalities required to set up an investment. The Costa Rican Coalition for Development Initiatives (CINDE), a private non-profit association, operates a very active investment promotion program through several regional offices in the United States, Europe and the Far East. Costa Rica is a beneficiary country of the U.S. Caribbean Basin Initiative (CBI) and Generalized System of Preferences (GSP), which gives duty-free treatment to some 4,000 products from beneficiary countries including Costa Rica. The two programs have played a significant role in helping Costa Rica diversify its exports and increase two-way trade. In February 1984, Costa Rica's Legislative Assembly passed the Financial Equilibrium Act to improve public finances, which includes a whole chapter on export incentives. Those companies which choose to enter into an "export contract" with the Government of Costa Rica receive benefits that include 100 percent deductions on income tax, up to 50 percent tax credits on the purchase of an export company's stock, and almost total exemption on duties for imported raw materials and capital goods that are not produced in the country and are necessary for the operation of the export companies. The same act includes provisions to encourage draw-back activities. With the recent lowering of protective tariffs and the range of benefits enjoyed by exporting companies, industries with the following characteristics are considered to have good development potential in Costa Rica: those which are labor intensive, have low capital costs, require medium skill complexity, and produce CBI-eligible goods which have high U.S. duties or quotas that impede imports from outside the Caribbean area. The products produced by such industries include electronic components, electronics assembly, electronic consumer goods, mechanical engineering assembly, small electrical appliances, up-scale apparel products, toys, sporting goods, selected leather products (most leather products do not benefit from CBI), health care products, and natural resource-based products, including food processing and agro-industry. With the GOCR's emphasis on exports, enterprises meant to supply or service local consumers tend to be overlooked. However, recent foreign investments include such varied activities as fast food (Burger King, Taco Bell, McDonalds, Pizza Hut, etc.), video rentals, hotels (Sheraton), computer products and services. The Government of Costa Rica has also actively sought investment in hotels and other tourist facilities. Laws governing private investment: The laws affecting nationals and foreigners are identical, and discrimination between these two groups is constitutionally prohibited. Costa Rican law requires approval by an elected, one-chamber, 57-member, national legislature called the Legislative Assembly and signature by the President. Some of the laws dealing specifically with investment are the Civil and Commerce Codes, the Export Promotion Law, the Financial Stabilization Act of 1984, and the Income Tax Law of October 1988, as well as banking and other laws dealing with specific topics such as property registration, taxation, mining and industrial contracts. According to Costa Rican law, the Constitution of Costa Rica takes foremost precedence, followed by international treaties, Acts of the Legislature, and regulations dictated by the different government entities. Custom, precedent, foreign laws and learned opinions (jurisprudence), serve only as tools of interpretation and do not bind judges who are bound to observe the letter of the statute as closely as possible. Foreign companies and persons may legally own equity in Costa Rican companies, including real estate, manufacturing plants and equipment, hotels, restaurants, and all kinds of commercial establishments. However, several activities are reserved to the state, including public utilities, insurance, demand deposits (checking and savings accounts), the production and distribution of electricity, the operation of ports and airports, and hydrocarbons and radioactive minerals extraction and refining. In May 1994, the Hydrocarbons Act was enacted, allowing the state to award concessions to private parties, including foreign companies, for the exploitation of petroleum (were it to be found). Participation in some service industries by foreign individuals can be so rigorously controlled that in practical terms it may be impossible: for example, medical practitioners, lawyers, certified public accountants, engineers, architects, teachers and other professionals must be members of one of the guilds or "colegios" which stipulate residency, exams and apprenticeship requirements that can only be met by long-time residents of Costa Rica, whether citizens or foreigners. Investment in such private sector activities as newspapers, radio and television stations, and customs brokerage firms are limited to Costa Rican citizens. Foreign companies may operate legally in several ways, including as a branch, a joint venture or wholly-owned subsidiary, or by incorporating as a local, foreign-owned company. Individual foreign persons or partnerships can also legally own and operate individual enterprises of limited liability, a partnership company, or a stock or charter company. Trusts and cooperatives can be established. Regardless of how they operate, all enterprises, owners and company officers must be registered by the National Registry, thus becoming "Costa Rican" enterprises regardless of the nationality of the owners or officers. Acquisitions and company takeovers are governed by regulations similar to those in the United States. Foreigners can be officers, directors, partners or trustees of companies, negotiate commercial documents, or execute any kind of contract. In general, the laws controlling investment by foreigners are fairly transparent. However, investment in real estate requires particular care due to the possibility of squatter invasions. This is especially true for absentee owners of undeveloped farm land. Investment in beachfront property can be problematic since all beachfronts are public property for a distance of 200 meters from the high tide mark and are strictly regulated in accordance with Maritime Zone laws. Potential investors should be aware that within the first 50 meters of this public beach zone, nothing can be constructed and the public cannot be denied the right of access. The next 150 meters are restricted, but concessions for a certain period of time may be obtained from the appropriate municipality. Potential investors in land in Costa Rica should also be advised that the right of crossing through traditional paths is an ancient custom protected by laws derived from Roman law (servidumbres). In general, investing in land in Costa Rica requires constant vigilance and expert legal counsel given the risk of squatter invasions and expropriations and the strict regulation of beachfront property. Other than to provide the incentives described above, there are no investment screening mechanisms. There are no limitations or conditions imposed on transfers of technology. Any available technology is acceptable, and can be imported. Geographically determined preferential areas of investment, set up as industrial investment and duty-free zones, are designed to facilitate access to export incentives. The Stock Exchange conducts securities transactions with reference to the norms existing in the Civil and Mercantile Codes and the Central Bank and other banking Acts. The Auditor of the Banking System, an officer of the Central Bank, is the supervisor of commercial banks and all securities and stock transactions. Foreign investors with some experience in Costa Rica have identified several problems which face prospective investors. Most of the difficulties are due to a cumbersome bureaucracy which slows approval of documents for all types of transactions, but especially those concerned with Customs and the banking systems including the Central Bank. For example, in the past, delays in receiving dollars for imports could be quite lengthy depending on the ready availability of dollars to the banking system. These delays sometimes added considerably to an investor's operating expenses. The GOCR has made serious efforts to reduce these inefficiencies, including the establishment of a "one-stop" office to assist investors in obtaining necessary approvals from government agencies. In addition, there are no longer controls on foreign exchange transactions which are conducted by commercial banks, and the exchange rate is market- determined with the central bank influencing the exchange rate through open market operations. 2. TRANSFER POLICIES: There are no limitations on transferring funds associated with investments abroad, in any available currency, and at a legal market-clearing rate. There is no queueing for foreign exchange, but the availability of dollars is dependent on market conditions. No restrictions are imposed on reinvestments or in the repatriation of earnings, royalties, or capital except when these rights are covered in agreements with the Government of Costa Rica. Royalties are taxed in accordance with Title IV of the Income Tax Law, No. 7092, extensively reformed in October 1988, and the amounts vary from 10 to 25 percent. 3. EXPROPRIATION AND COMPENSATION: Government of Costa Rica expropriation of land owned by U.S. citizens and corporations and the government's failure to provide prompt, adequate and effective compensation for these expropriations have been a significant bilateral irritant for several years. While Article 45 of the Constitution of Costa Rica stipulates that no property can be expropriated, from a Costa Rican or foreigner, without previous, prompt and fair payment, and for a demonstrable reason of public interest, several U.S. claimants are involved in expropriation disputes which began 15 to 20 years ago. There are seven major property disputes involving U.S. citizens which are pending in the courts or being negotiated with the government, including three properties owned by U.S. citizens that had been expropriated in order to be merged into an Indian reservation and a National Park. There are several additional major expropriation cases and about 18 smaller cases involving squatter invasions and expropriations. In 1990 the Government of Costa Rica created a special Expropriation Commission to negotiate with the U.S. Government and U.S. claimants and/or their representatives to resolve the disputes. To date, only one of the seven major cases that has been negotiated has been partially resolved -- by the government's returning the land to the owner. Three of the claimants sought resolution through Costa Rica's domestic arbitration procedures, using Costa Rican lawyers as arbitrators, but the claimants continue to await full payment of the arbitral awards. In one of the cases, the arbitral award was clearly inadequate as the arbitral panel used non-market interest and exchange rates to compute the award -- in violation of a ruling by the Costa Rican Constitutional Court (Sala Cuarta). 4. DISPUTE SETTLEMENT: In general, the Civil and Commercial codes provide for arbitration of commercial disputes. The law does not generally recognize any arbitration other than that provided by local courts. Some investment agreements have included provisos that investment disputes be submitted to international arbitration (e.g. by ICSID -- the World Bank forum for dispute settlement). While it is theoretically possible to obtain redress through the legal system, in practice litigating against the Government of Costa Rica can take so long and be so costly that the system is unworkable. As yet, none of the pending expropriation conflicts has been submitted to international arbitration. The majority of investment disputes center on American-owned farms, which have been the targets of squatters in part as a result of the more general problem of scarcity of land for rural Costa Ricans. The American landowner must frequently bear the cost of having the police remove the squatters in order to have his property rights enforced; if the squatters remain on the land for extended periods, removal may prove difficult. In some cases, the government may expropriate land in order to give it to the squatters. There are a number of land disputes pending resolution before Costa Rican courts that involve squatters on land owned by U.S. citizens and/or corporations. In general, the process to resolve squatter cases is long and costly, and the legal owner (particularly if foreign) is at a significant disadvantage in a system that favors squatters, especially on land not being actively worked. It is prudent therefore, that investments in land be limited to land actively farmed or occupied by the owner and that a thorough investigation regarding the possible presence or threat of squatters be made prior to purchasing the property. Costa Rica has not joined the United Nations Protocol for the Compulsory Settlement of Disputes between countries, nor the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards, but the country became a member of the International Center for the Settlement of Investment Disputes (Washington Convention) in 1993. Costa Rica has also joined the U. N. Multilateral Investment Guarantee Agency (MIGA), which provides a forum for international arbitration in investment disputes, as well as investment guarantees. 5. PERFORMANCE REQUIREMENTS AND INVESTMENT INCENTIVES: There are no performance requirements that foreign investors must meet. Investment incentives are included in three recent laws governing investment in Costa Rica: the Export Processing Zones Law of 1981, the Financial Stabilization Act of 1984, and the Income Tax Law No. 7092, last revised in October of 1988. The Export Processing Law established publicly operated free-trade zone industrial parks in Santa Rosa (Puntarenas) on the Pacific Coast, and Moin (Limon) on the Caribbean seaboard. Coto Sur, near the Panamanian border is engaged in the export of African oil palm seed. Cartago Industrial Park, 15 miles from San Jose, was the first privately-managed free trade zone to be established. The Free Zone Corporation has authorized several new private projects in Alajuela and Heredia provinces, in order to take advantage of the proximity to the Juan Santamaria Airport. The Corporation has recently decided to divest itself of the actual ownership and running of free-zone parks, preferring to encourage the establishment of privately-run parks throughout the country. The benefits available under the provisions of the free zone legislation include the following: - Total exemption from imported duties on raw materials, processed or semi-processed products, parts or components; - Total exemption from all export taxes associated with the export or re-export of products. The same exemption is granted for the re-export of equipment and machinery used in the productive process; - Total exemption from sales and consumer taxes; - Total exemption from taxes levied on remittances abroad; - Total exemption from all taxes on profits for a period of six years from the beginning of operations, and 50 percent exemption for the following four years. In addition to these tax benefits, companies operating in free trade zones enjoy free currency conversion (no restrictions), a benefit not available to companies with export contracts. However, companies operating in free trade zones are not qualified to receive tax credit certificates. The Financial Stabilization Act creates the export contract and consolidates legislation governing drawback operations, to include: - Total income tax deductions on profits from non-traditional exports to third (non-Central American Common Market countries); - Reduced port charges - Simplification of procedures - Bank financing at preferential rates - Tax deductions - Accelerated depreciation - A fifty percent tax credit on the purchase of stocks of firms that produce entirely for export - Duty-free import of inputs for production of non-traditional products to be exported to third countries - Duty-free temporary entry for inputs used in assembly operations, samples and other inputs - The creation of a National Investment Council, comprised of two ministers from the economic sector (which in practice are the Ministers of Finance and Foreign Trade), by the Director of CENPRO, and by two representatives of the private sector chosen by the President of Costa Rica. At present, some incentives included in the Financial Stabilization Act (and reiterated in Articles 60 and 61 of the Income Tax Law of October of 1988) listed above are not being offered to new investors. These are reduced port charges, preferential interest rates, and certificates of increased exports (CIEXES). The Central Bank, upon recommendation from the National Investment Council, awards Tax Credit Certificates (CATs) and Export Increment Certificates (CIEXES) -- two investment incentives which were established under the 1972 Export Promotion Law that also created CENPRO. CATs and CIEXES have been determined to be countervailable subsidies in recent investigations by the U.S. Commerce Department; consequently, the government of Costa Rica is considering alternative incentives more consistent with international trading rules. The Financial Stabilization Act of 1984 and the Income Tax Law of October 1988 allow for complete exoneration of income taxes for 12 years, thereby providing alternative benefits. However, many existing companies still receive CATs, the abolition of which have proven legally and politically difficult. Under the terms of the Central American Common Market (CACM) Treaty of 1960, industry products produced in Costa Rica enter duty-free into the other four Central American countries. There are no discriminatory import policies on goods from outside Central America (except for some non-tariff barriers to agricultural products), and most goods imported from outside of Central America pay duties ranging from 5 to 20 percent (although holders of export contracts can avoid these duties). Special benefits, including the duty-free importation of a car and household appliances, are afforded those who establish residence in Costa Rica, such as foreign retirees and resident investors, as well as Costa Ricans who retire here on incomes received from abroad. Information on the requirements and benefits established for such residents can be obtained from the Instituto Costarricense de Turismo (ICT), Apartado 777, San Jose 1000, Costa Rica. 6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT: Apart from fields reserved for the state or that require Costa Rican citizenship or residency, all private entities and persons, domestic or foreign, may establish and own business enterprises and engage in all forms of remunerative activity. Generally, but with important exceptions, competitive equality is the standard for the private sector to compete with public enterprises with respect to access to markets, credit, and other business operations, such as licenses and supplies. The exceptions occur in sectors reserved wholly or primarily for the state (bank demand deposits, insurance, education, medical services, police services, etc.), but where the private sector may participate as a concessionaire. Thus, the private sector may provide all banking services except for offering checking and savings deposits; provide only reinsurance services to the state insurance monopoly, as well as foreign trade insurance (mainly foreign companies that insure imports from Costa Rica); and offer educational, medical and security services, closely supervised by the corresponding state institution. The limitations apply to domestic as well as to foreign private enterprises. Current negotiations with international financial institutions about a possible third structural adjustment loan for Costa Rica has, in part, focused on the need to open up the banking and insurance sectors to competition. The Costa Rican Legislative Assembly is studying the possibility of allowing private banks to offer checking and savings accounts, but a final decision regarding this issue has not yet been made. In fields where private enterprises provide the same goods or services to the public that state enterprises provide, open competition has generally led to either the sale to the public or the closing of the state company (food retailing, sugar production, road building and repairs, aluminum processing). In some cases (road building and repairs), the state has switched from providing the service directly, to purchasing it through open bidding. 7. PROTECTION OF PROPERTY RIGHTS: The status of patent and trademark protection is similar under Costa Rican law to that provided by the Lanham Act, and U.S. patents can be registered in Costa Rica in the Patents Office of the National Registry. Costa Rica law stipulates 12 years patent protection for inventions, except in the case of medicines and agricultural inputs, for which the period of protection is limited to one year. Models and trademarks are effectively protected by branches of the National Registry, which keep permanent files on foreign models and trademarks and allow foreign registration. Any trademark registered abroad can be registered in Costa Rica, and in practice, the trademark is protected from copy even if not registered in Costa Rica upon showing proof of registration abroad. Costa Rica is a signatory of all major international agreements and conventions on intellectual property, trademarks, copyrights, and patent protection. Costa Rica became a member of the World Intellectual Property Organization (WIPO) in 1980. Adherence to GATT and the possibility of obtaining desired foreign investment has caused the Government of Costa Rica to contemplate extending patents on inventions, medicines and agricultural chemicals to 20 years. In May 1994, Costa Rica amended its copyright law to provide explicit protection of computer programs. Prior to this amendment, although computer programs were protected in practice, this form of intellectual property was not explicitly protected by Costa Rican law. An appeal before the Supreme Court has suspended sentencing by the Courts for the infringement of the Central American Agreement for the Protection of Industrial Property, but the law is being applied with regards to stopping unauthorized artistic performances, to allow for the seizure of unauthorized reproductions and the closing of establishments dedicated to pirating cassettes. Notwithstanding the foregoing, gross violations of intellectual property continue in Costa Rica's video cassette market, where, according to U.S. industry sources, nearly all tapes are unauthorized. The five Central American countries have agreed to eliminate an article in the aforementioned agreement that precludes the possibility of Costa Rica's depositing its 1975 adherence to the Universal Copyright Convention (Paris, 1971). However, the Convention is law in Costa Rica and therefore its stipulations are applicable. Costa Rica is a signatory of the the 1886 Bern Convention for the protection of literary and artistic works, the Universal Copyright Convention (Geneva) of 1952, the 1961 Rome Convention for the protection of artists and performers of artistic works, and the 1971 Geneva Convention for the protection of phonograms against unauthorized reproduction. Costa Rica has not adhered to the 1974 Brussels satellite transmission convention. Copyrights can be registered with the National Registy, but their protection is guaranteed under international treaties. Trade secrets are specifically protected in the Constitution and in the Civil, Mercantile, and Criminal Codes. Article 24 of the Constitution protects the confidentiality of communications, and Article 203 of the Penal Code stipulates jail terms as punishment for divulging trade, employment, and other secrets. The punishment is double for public servants. The patents, models and trademark protection laws stipulate criminal as well as civil liabilities for divulging certain types of trade secrets. The laws are generally enforced, but only at the initiative of the affected party. However, the main deficiency in Costa Rica's intellectual property protection regime is its one-year patent protection for pharmaceuticals and agricultural chemicals. 8. REGULATORY SYSTEM - LAWS AND PROCEDURES: Costa Rican laws, regulations and practices generally foster competition. Tax, labor, health and safety laws generally do not block the efficient mobilization and allocation of investment. However, bureaucratic procedures are frequently long and involved and tend to be discouraging to newcomers. Nevertheless, long-time foreign resident companies and individuals appear to thrive despite (or perhaps because of) the red tape that might discourage some newcomers. Judging by new construction and investment, as well as by the growth of the Costa Rican-American Chamber of Commerce, the regulations and red tape are not sufficient to block healthy growth. On the other hand, much work is necessary to eliminate crucial bottlenecks in public offices such as the customs service, the state-owned banks and the postal service. The administration of justice should be improved in several areas that are of particular importance to investors. Bankrupcy procedures, land tenure conflict resolutions, torts, etc., are complicated and require highly specialized professional assistance. Supplying goods and services to the Government requires such expertise that frequently public bidding proceedings are annulled because the would-be supplier or contractor is unable to understand or comply with all the regulations. However, the government has proposed changes to simplify and make more efficient the procedures for appealing government procurement contract awards. 9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT: The four state-owned banks supply about 80 percent of domestic credit, mainly because of their monopoly of demand deposits. Private banks, however, are increasing their share of credit by employing innovative ways of borrowing funds and by operating in a more business-like manner, free of political considerations imposed on the state-owned banks. The private sector has access to a variety of credit instruments. Long-term capital is very scarce, primarily because of economic reasons (high inflation and currency devaluation rates) that cannot be controlled by the banks. The stock exchange is very small; only about twenty companies are listed. This is due primarily to the size of the economy and to the fact that most enterprises are owned and controlled by a limited number of persons who wish to retain control. Therefore, the stock exchange is not a viable source of new investment capital. Stock exchange regulations are meant primarily to protect the public, rather than to encourage and facilitate portfolio investment. Credit is allocated on market terms, although the state-owned banks are sometimes obliged to finance high-risk or unprofitable activities deemed by the Government or the Legislature to be of public interest. Foreign investors are able to borrow in the local market, but the small scale of the economy and closed nature of the society generally means foreign borrowers must form joint ventures with well known local persons or meet stricter credit criteria. Generally, the legal, regulatory and accounting systems are transparent and consistent with international norms. The major international accounting firms have local offices to service international, as well as local, enterprises. 10. POLITICAL VIOLENCE: With the political settlement in Nicaragua, Costa Rica no longer is feeling the effects of civil war spilling across the border, although internal problems in Nicaragua present some slight potential for disturbances on Costa Rica's northern frontier. The only serious violent incidents in the past 18 months involved two hostage-takings of Costa Rican government officials and a series of very violent bank robberies, which appear to have had financial, rather than political, motives. There are no indigenous or external movements that might lead to increased political or social instability. While Costa Rica is a highly politicized country, that politicization is entirely directed towards the practice of democratic politics. A common practice of groups seeking a hearing for their cause is to block roads or highways and these demonstrations occasionally escalate into violent confrontations with the police. Violent confrontations have also occurred during conflicts over private property seized by squatters. C. BILATERAL INVESTMENT TREATIES: Costa Rica has bilateral investment treaties with several European countries, ranging from a long-standing one with Switzerland, to more recent ones with Great Britain, France and the Federal Republic of Germany. Negotiations of a bilateral investment treaty with the United States were suspended in 1990, given Costa Rica's reluctance at that time to negotiate a bilateral IPR agreement. D. OPIC PROGRAMS: The Overseas Private Investment Corporation (OPIC) offers both financing and insurance coverage against expropriation, war, revolution, insurrection and inconvertibility for eligible U. S. investors in Costa Rica. Financing is available to U.S. companies for a maximum of fifty percent of the initial investment in the range of USD 250,000 to USD 6 million. Currently OPIC insures about 3 to 5 projects per year in Costa Rica. U. S. investors should be aware that OPIC, per statutory requirements, may not be able to offer insurance if the project would have a detrimental effect on the U.S. balance of payments or employment. These statutory requirements have led OPIC to offer only limited insurance coverage for textiles and citrus investments. Similarly, all prospective OPIC insured projects must be approved by the government of Costa Rica for possible balance of payments or labor problems. In addition to its regular insurance programs, OPIC has a computerized Opportunity Bank which seeks to identify and match potential foreign investment projects with U. S. investors seeking investment opportunities abroad. Further information regarding the Opportunity Bank, as well as OPIC programs in project financing and feasibility studies can be directed to OPIC, 1615 M. Street, N. W., Washington, D.C., 20527, telephone (202) 457-7200. The Senior Insurance Officer can be reached directly at (202) 872-9306 or by facsimile at (202) 872-9306. The Business Development Officer can be contacted by phone at (202) 457-7116 or by facsimile at (202) 331-4234. E. LABOR: The Costa Rican labor force can be characterized as relatively well-educated, skilled and easily trainable, largely the result of a historical emphasis on significant state support of education. This effort has resulted in a literacy rate of about 94 percent. The average worker has demostrated a willingness to seek, and an ability to absorb, additional specialized training. Technical and vocational training is available through the Government of Costa Rica National Training Institute (INA) or other private sector organizations. INA vocational training centers provide training on industrial applications in textile machinery repair, electronic assembly and repair, electricity, refrigeration and air conditioning assembly and repair, general mechanics, gasoline and diesel engine maintenance and repair, and industrial maintenance. Additional training is available for fishing, agribusiness and hotel and tourism services. However, while this training is good in a general sense, more specialized on-the-job training has been required in the past. Efforts to improve vocational training are underway in both the public and private sectors. Professional manpower, educated in local and foreign universities, is ample, the largest in Central America, and among the best in Latin America and the Caribbean. There are 5,500 registered engineers and 630 registered architects, many of whom have earned higher degrees, professional qualifications and valuable experience abroad. There are 3,900 registered medical doctors, about one for every 770 persons; and 1,250 dentists and oral surgeons, about one for every 2,400 persons. Perhaps the statistic of which the country is most proud is that of university trained teachers: ANDE, the National Association of Educators, has a membership of 33,000, and the approximately 20,000 retired teachers constitute the most powerful and respected lobby in the country. Other professions which are well-represented in Costa Rica include: 5,800 registered lawyers and notaries, and about 3,000 business and public administration graduates, many working in the civil service. The four state universities, five provincial colleges and twelve private institutions of higher education produce highly qualified professionals at a rate unequaled in Latin America. Open unemployment in Costa Rica has dropped steadily since 1982, from 9.5 percent to 4.1 percent in 1993. These figures reflect only persons working or actively seeking work, and do not include the self-employed or "discouraged" workers who have ceased looking for work. Underemployment (in seasonal or casual work) is estimated to hover around 20 percent. Absenteeism is typically low, with an average attrition rate estimated at 15 percent. Sick leave per person averages about four days annually. Labor-management relations are governed principally by the 1943 Labor Code, which addresses salaries, working hours and conditions, separation of workers, and resolution of labor disputes in the various labor courts, among others. The minimum wage is established periodically (at present twice a year) by the National Wage Council, comprised of representatives from the GOCR, management and labor. The current average daily wage for the manufacturing sector is about USD 12 including all social benefits. Mandatory payroll taxes paid by the employer total 25.75 percent of wages and cover contributions toward INA vocational training, social security (health, maternity, disability, old age and death benefits), workers' savings and other social assistance-type programs. All workers are entitled to both a two-week paid vacation and a Christmas bonus equal to one month salary upon completion of one year's service. Christmas bonuses for workers with less than one year's service are prorated. Women workers are entitled to four months paid maternity leave. These benefits, coupled with other outlays for severance pay, insurance and holiday pay, add approximately 40 percent to company base salary payrolls. The Labor Code limits the number of foreign employees in a company -- 90 percent of the total must be Costa Rican employees. These limits are allowed to vary by 10 percent under certain conditions during a five-year period, as determined by the Ministry of Labor. Similarly, an employer legally cannot pay less than 85 percent of total annual company salaries to Costa Ricans in his employ. Additionally, foreigners cannot occupy jobs for which Costa Rican labor is available without the express permission of the Ministry of Labor. The latest figures available from the Labor Ministry are from December, 1992 and put unionization at about 15 percent of the total Costa Rican workforce. This percentage has stayed relatively constant for years. According to best current estimates, there are some 420 unions containing about 167,000 workers. A large majority of union members are found in the public sector. While public sector strikes remain technically illegal (the labor code forbids them), articles 333 and 334 of the penal code, which provide for onerous fines or even imprison- ment for striking public employees, were repealed in June 1993. Strikes hardly ever take place in the private sector, where workers attempting to form or join unions or to organize walkouts can easily lose their jobs. Estimates are that 2-3 percent of the private sector workforce is unionized. Despite efforts to organize in the private sector, there is no indication that this situation will change in the immediate future. Labor disputes have at times led to violence, particularly in the banana industry, but generally there is little activity outside the public sector. In addition, many private sector workers belong to Solidarista Associations, which do not strike. Solidarista Associations registered with the Labor Ministry have over 134,000 members (13 percent of the economically active population) and the Solidarismo movement includes a significant number of unregistered associations as well. Solidarista members probably now outnumber union members and comprise 18-20 percent of the total workforce. The primary recent issue in labor-management relations was the filing in June 1993 of a petition by the AFL-CIO before the U.S. Trade Representative requesting that the U.S. Government withdraw Generalized System of Preferences (GSP) benefits from Costa Rica for violations of internationally recognized norms of workers' rights. In response, Costa Rica made a number of changes to its labor law, including: the repeal of certain sections of the Penal Code; modification of, and additions to, the Labor Code (forbidding Solidarity Associations from acting as collective bargaining agents, reducing the number of affiliates needed to form a union to the same as needed to form a Solidarity association (12), increased protection from unjustified dismissal for union activists during the process of union formation); and commitments to further changes by the Government of Costa Rica. Satisfied that considerable progress had been achieved, the AFL- CIO withdrew the petition in November, 1993, with the proviso that the petition could be reactivated if the AFL-CIO considered further progress insufficient. It is too soon to tell what effect these changes may have on labor-management relations, but they have placed trade unions in a stronger legal position than they had previously enjoyed. Complaints of violations of internationally recognized workers' rights in Costa Rica have centered on two areas: insufficient protection of trade union activists or sympathizers and preferential treatment given to Solidarista associations. The International Labor Organization (ILO) has expressed concern in both areas and Costa Rican labor unions have filed complaints before the ILO. A number of the reforms undertaken in 1993 directly addressed the ILO's concerns, but the ILO has not yet rendered a decision on Costa Rica's case. The Government of Costa Rica has ratified several ILO conventions, including Conventions 87, 98, 102, 122, 135, 138, 147 and 148. It was the ratification of convention 135 that formed the basis of the Constitutional Chamber of the Supreme Court's (Sala IV) October 1993 decision ordering the reinstatement of trade union organizers in the banana industry. At present, 8 ILO conventions (110, 140, 149, 151, 152, 153, 154 and 155) have been presented to the Legislative Assembly for ratification, although passage is not assured. F. FOREIGN-TRADE ZONES/FREE PORTS: (Discussed under B.5: Investment Incentives) G. CAPITAL OUTFLOW POLICY: There are no limitations on capital exports by either local or foreign residents or enterprises. Many Costa Ricans pay for raw materials and capital goods, or simply hedge against devaluation by keeping some funds abroad, mainly in U.S. banks. There are no incentives for investment in other developing countries. H. FOREIGN DIRECT INVESTMENT: Costa Rica continued to experience healthy foreign direct investment in 1993, despite some slowing of new investment and expansion of existing facilities in the textile and apparel sector. The slower investment in the textile/apparel sector reportedly is primarily due to the passage of NAFTA (providing Mexico with an estimated 17 to 20 percent cost advantage in apparel over Costa Rica) and uncertain implications of the interim trade program for the Caribbean Basin. While some companies awaited the details of the CBI Interim Trade Program before locating planned investment, others decided to forego further investment in Costa Rica at this time. According to Costa Rican sources, in 1993, at least three American apparel companies reportedly decided to locate new facilities in Mexico instead of expanding existing facilities in Costa Rica. These decisions reportedly represented more than 1,000 "lost" jobs to Costa Rica and are considered the tangible consequences of the absence of NAFTA parity in textiles. However, the Costa Rican government has recently expressed interest in obtaining the benefits of the U.S. Interim Trade Program for Caribbean Countries (ITP). The ITP would give Costa Rica the same market access that Mexico enjoys for textiles and apparel made in Costa Rica from fabric of U.S. origin. Impressive growth in tourism reflects the increasing importance of this sector for Costa Rica. Not only is this sector now the leading generator of foreign currency, but it is also the object of most new foreign investment. During 1993, nine hotel projects alone attracted USD 22.7 million in new foreign investment with a projected potential investment of USD 160 million during the next three years. Activity in this sector appears to be continuing unabated. In May 1994, Marriott broke ground for a new USD 33 million, 245-room hotel near the Juan Santamaria International Airport in San Jose. The projected completion date is 1996. Marriott is providing the management and 20 percent of the investment, with the balance supplied from an investment group including 3M of Costa Rica, Scott Paper and other local firms. According to CINDE ("Coalicion Costarricense de Iniciativas de Desarrollo"), the Costa Rican institution charged with promoting and facilitating economic development in Costa Rica, foreign direct investment in Costa Rica was made in the following sectors in 1993: USD ------- Agriculture, Fishery and Forestry 14,500,000.00 Consumer Products 4,955,000.00 Electronics 180,517.00 Plastics 1,600,000.00 Tourism 26,665,000.00 Textiles/Apparel 11,911,906.00 ------------- TOTAL 59,812,423.00* *These figures do not reflect total foreign direct investment made in Costa Rica during 1993, but are the most comprehensive data available. The Ministry of Foreign Trade has acknowledged the difficulty of quantifying foreign direct investment in Costa Rica due to the absence of an official foreign investment register, but estimates total foreign investment in Costa Rica at approximately USD 70 million annually, with the U.S. being the main source of investment (other major foreign investors include German, Dutch, Italian, Spanish, Japanese and Korean companies). Comprehensive foreign investment data is not available in Costa Rica, but a list of foreign firms with operations in Costa Rica appears in the Appendix.