VII. INVESTMENT CLIMATE - OPENNESS TO FOREIGN INVESTMENT The administration of President Violeta Barrios de Chamorro, which assumed office in February 1990, following 11 years of Sandinista rule, has made significant progress in opening Nicaragua to foreign investment. President Chamorro and the top levels of the Nicaraguan government have a decidedly pro-foreign investment attitude. On certain limited occasions, some mid-level officials have caused complications for foreign investors. The Foreign Investment Law guarantees foreign investors the right to remit 100% of profits through the official exchange market and, 3 years after the initial investment, repatriation of original capital. The law also allows 100% foreign ownership in most sectors of the economy. To benefit from the law, investments must be approved by a Foreign Investment Committee of the Ministry of Economy and Development. Foreign investment which does not receive such prior approval is permitted, but does not enjoy the repatriation guarantees of the law. Telecommunications, insurance, power generation/transmission, and the importation of petroleum remain the exclusive preserves of the state, although changes are anticipated in the near future. The Government of Nicaragua has announced plans to privatize 40% of the telephone operations of the state telecommunications agency by October 1994. INE (the energy institute) is in the process of negotiating power purchase arrangements with potential investors in the electricity generation sector. De-monopolization of the insurance sector is also planned, but no specific date has been set as draft legislation is still pending in the National Assembly. The petroleum sector is highly regulated, but other than the importation of crude and derivatives, there are no legal prohibitions to private investment. Foreign investors receive national treatment with respect to export/import policies and privatization proceedings. There are no onerous visa, residence, or work permit requirements which inhibit foreign investment. - CONVERSION AND TRANSFER POLICIES Dollars are freely available through a legal parallel exchange market which in 1993 operated with an average spread of 2 percent over the official market. The Central Bank monitors exchange house activity through a reporting requirement, but in all other respects the exchange houses operate free from government controls. The relative small size of the dollar market may be a limiting factor for large transactions. In 1993 the exchange houses engaged in trades of $261 million, a 45 percent increase over 1992. We are aware of no instances where a major company or investor is currently unable to obtain dollars or repatriate earnings or capital. Transactions at exchange houses are completed instantly in most instances. Transactions at the Central Bank for the purchase of official market dollars generally take 2 weeks to finalize, but there have been isolated instances during periods of low international reserves when delays of 30-60 days were encountered. The U.S. Embassy has local currency expenditures of approximately $2 million per annum. Local currency is purchased for the Embassy through a broker in New York at a rate slightly better than the preferential rates available on the local parallel market. The cordoba oro is presently on a monthly crawling-peg devaluation schedule at the rate of 1 percent per month. That rate is anticipated to remain steady through 1994. - EXPROPRIATION AND COMPENSATION The Embassy is aware of no confiscations of private property which have taken place during the Chamorro Administration. However, more than 5,000 individuals and corporations (including some 450 U.S. citizens) have outstanding, unresolved property claims against the Government of Nicaragua dating back to the Sandinista era. A property compensation mechanism is in place, but it has proven inadequate to date in resolving the majority of cases. In those cases in which property cannot be returned to original owners, compensation is provided in the form of issuance of 15-year Government of Nicaragua bonds carrying interest of 3 to 5 percent pegged to the dollar. There is a secondary market for sale of the bonds, although at this writing they are transacted at approximately 25 percent of face value. - DISPUTE SETTLEMENT The resolution of investment disputes in Nicaragua is unpredictable. There is a Commercial Code and Bankruptcy Law, though both are in need of revision. Mortgages and secured property interests are now recognized and becoming more common as the private financial system is re-established, but as yet there have been insufficient attempts at judicial enforcement to evaluate their effectiveness. On the whole, the legal system is cumbersome, and enforcement of judicial determinations is uncertain and often subject to political considerations. Nicaragua is a party to the Inter-American Convention on Arbitration and a member of the International Center for the Settlement of Investment Disputes (ICSID). Arbitration clauses are recommended as a means to avoid the uncertainty of the judicial system. - PERFORMANCE REQUIREMENTS/INCENTIVES Investors are generally not required to export specific amounts, incorporate minimum percentages of local content, agree to transfer specific technologies, or meet other performance criteria. Nevertheless, each foreign investor who chooses to register under the Foreign Investment Law must negotiate an individual "investment contract" with the Foreign Investment Committee. These individual contracts might contain performance criteria. In addition, certain sectoral laws -- the fisheries law requires all local catch to be processed in Nicaragua -- may contain certain performance requirements. - RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT Both foreign and domestic private entities may establish and own business enterprises and profit-making activities. Local law grants the right to freely establish, acquire, and dispose of virtually any type of business interest or property, with the exception of those sectors where government monopoly is established by law. The Embassy is aware of no instances where private enterprises were not treated on an equal footing with public enterprises with respect to access to markets, credit, and other business operations. - PROTECTION OF PROPERTY RIGHTS Protection of rights to both tangible and intangible (intellectual) property is inadequate in Nicaragua. - Tangible Property Although there has been no unlawful seizure of private property during the Chamorro Administration, Nicaragua has yet to resolve the cases of numerous property claimants whose properties were seized during the Sandinista era. Judicial enforcement of property interests remains problematic. - Intellectual Property Patents: Nicaragua's Patent Law is antiquated and in need of revision to include protection for computer programs, bio-patents (living organisms), films, music, etc. Protection is limited by short patent terms (10 years). In October 1992, Nicaragua committed, along with its Central American neighbors, to accede to the Paris Convention for the Protection of Industrial Property. It has yet to do so. New patent legislation may be taken up by the National Assembly during 1994. Copyrights: Copyright protection dates from the 1904 Civil Code and is deficient in many respects, including failure to protect sound recordings, computer programs and databases. Video piracy is common and not controlled. New copyright legislation has languished in the National Assembly since late 1991, but may be re-introduced during 1994. Nicaragua is a signatory to the following copyright conventions: -- Mexico Convention on Literary and Artistic Copyrights (1902) -- Buenos Aires Convention on Literary and Artistic Copyrights (1910) -- InterAmerican Copyright Convention (1946) -- Universal Copyright Convention (Geneva 1952 and Paris 1971) -- Brussels Satellite Convention (1974) Trademarks: Trademark infringement remains a potential problem area for Nicaragua. Although few instances of infringement involving U.S. companies have been reported, current Nicaraguan procedures allow individuals to register a trademark without restriction, at a low fee, for a period of 15 years. The Central American Common Market countries are currently negotiating a new regional trademark convention. Trade Secrets: There is no trade secret protection. Semi-conductor Chip Layout Design: There is no protection for these works. - REGULATORY SYSTEM: LAWS AND PROCEDURES Despite significant streamlining during the past 4 years, Nicaragua's legal and regulatory framework remains cumbersome and an impediment to investment. The rules are not transparent, and much business is still conducted on a "who you know" basis. Lack of reliable dispute resolution mechanisms -- whether judicial or administrative -- complicates even relatively minor disputes with the authorities or Nicaraguan business contacts. Tax policy has been simplified. The Central Government imposes the following taxes: tariffs and stamp taxes for imports, a consumption tax for 900 domestic and imported products, a temporary protective tariff on 750 imported items, a general sales tax on all goods and services (except essential consumer goods), and a corporate and personal income tax. The Municipality of Managua also imposes a 2 percent ad valorem tax on all goods and services whether or not the sale is consummated in Managua. Employers must make a contribution to social security and worker training funds for each employee. Many businessmen regard these as additional taxes in that the paid-for services are rarely provided. The Labor Code contains many provisions concerning hiring/firing of the workforce and benefits. It is presently undergoing revision before the National Assembly. We recommend that potential investors consult the new law prior to initiating business activities. - EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT One of the significant achievements of the Chamorro Administration has been the re-establishment of the private financial sector, which was nationalized under Sandinista rule. In 1991, the National Assembly passed legislation creating the Superintendency of Banks and paving the way for the creation of private banks. There are presently seven private banks in operation, with two additional private banks in the organizational stage. All of the private institutions initiated operations with capital of $2 million; they remain small, but growing. During calendar year 1993, the private banks captured 83 percent of all new deposits and increased their share of total deposits in the financial system from 37 percent to 51 percent. During the same period, the private banks made 35 percent of new loans and increased their share of outstanding loans from 18 percent to 24 percent. All banks accept dollar deposits and often tie cordoba-denominated deposits and loans to the dollar ("maintenance-of-value" clauses). International financial institutions and the donor community have worked closely with the Government of Nicaragua during the last 4 years to reform the three state banks and make them subject to market conditions. The state banks were recapitalized in mid-1992. The Government has pledged to end Central Bank net credit flows of the state banks in 1994, and loan recovery rates have increased from 20 percent to approximately 70 percent during this period. Still, restructuring and further reform of the state banks may be necessary to make them totally independent commercial institutions. The five largest banks and their estimated total assets as of December 31, 1993, are the following: Bank Total Assets (USD) National Development Bank (BANADES - State) 275,567,400 Nicaraguan Bank of Industry and Commerce (BANIC - State) 151,888,620 Bank of Popular Credit (Banco Popular - State) 46,838,055 Bank of Central America (BAC - Private) 42,794,400 Bank of Central American Credit (BANCENTRO - Private) 38,818,637 The Nicaraguan Stock Exchange opened on January 31, 1994. As of June 9, 1994, it has conducted 35 sessions and engaged in transactions valued at USD 1.3 million. To date, all trades have involved government bonds and debt instruments. No equity issues or corporate paper has been traded. Although liquidity is tight, the private sector enjoys full access to credit from both state and private banks. According to Nicaragua's Foreign Investment Law, availability of domestic credit to foreign investors is limited to short-term working capital. - POLITICAL VIOLENCE Scattered incidents of political violence continue to occur in Nicaragua as the country completes its transition from civil war to peace and from an authoritarian government to a democracy. However, we are aware of no recent instances of political violence directly targeted at foreigners or foreign business operations. The rural mountainous zones, particularly those areas bordering Honduras, continue to experience the greatest levels of violence. This has had its most significant economic impact on the cattle and coffee sectors. The roots of the violence are a mixture of political and socio- economic factors. In general, remnants of once-ideologically motivated para-military units have degenerated to committing only acts of criminal violence. The fisheries sector in the region of the Atlantic Coast has also been subject to isolated violent acts. Sandinista influence in labor unions remains strong. Incidents of labor protests have occurred in recent memory, particularly in the transport sector, and on occasion isolated acts of violence accompany the protests. - BILATERAL INVESTMENT AGREEMENTS Nicaragua has signed bilateral investment agreements with Spain and Taiwan. The Government is currently discussing similar agreements with the United Kingdom, the United States, Mexico, Venezuela, Sweden, and South Korea. - OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS The U.S. Overseas Private Investment Corporation offers financing for U.S. investments in Nicaragua. It also can provide political risk, expropriation, and inconvertibility insurance. Nicaragua is a member of the Multilateral Investment Guarantee Agency (MIGA). - LABOR Nicaragua has the lowest population density in Central America. The country's labor force is largely rural-based and unskilled. There is a shortage of skilled technicians and managerial personnel, although the situation is improving as members of the business and professional classes return from exile. The high unemployment and underemployment rates have eroded the strength of the trade union movement. Nevertheless, approximately 50 percent of Nicaragua's labor force is unionized, with a significant portion belonging to militant Sandinista unions. Workers freely exercise their right to strike. Under the present Labor Code (presently under revision by the National Assembly), workers may strike only after they have exhausted other methods of dispute resolution, including mediation by the Ministry of Labor. Nevertheless, labor strife does on occasion take place and can be politically motivated. Since President Chamorro came into office in April 1990, a number of independent (or "democratic") unions have been formed. Domestic and foreign investors generally prefer working with these unions. - FREE TRADE ZONES Free trade zones are permitted in Nicaragua pursuant to a Presidential decree issued in 1991. Companies operating in these zones are eligible for exemptions in income tax, value-added tax, tariffs, export taxes, and other fiscal measures. Free zone firms must comply with Nicaraguan labor law. Private free trade zones are authorized, but none currently operates. Free trade zone benefits apply equally to foreign and national firms. At present, one Government-owned free trade zone (Las Mercedes) is in operation near the Sandino International Airport in Managua. Forty-five percent of the zone has been developed, with a dozen firms (Nicaraguan, U.S., Asian, and European) presently operating there. Free zone firms currently manufacture apparel, shoes, gold jewelry, and aluminum frames. The free trade zone currently employs 3,400 individuals, with plans to increase to 6,000 employees by year-end 1994. 80 percent of the exports are to the U.S., with the remainder to Central America. In calendar year 1993 valued-added exports from the free trade zone totalled USD 14.2 million, up from USD 2.9 million in 1992. Free trade zone authorities estimate 1994 exports will double to USD 28.4 million. - CAPITAL OUTFLOW POLICY Repatriation of original capital of foreign investments through the official market is governed by the Foreign Investment Law. The Embassy is aware of no restrictions on the export of capital by Nicaraguan citizens and businesses. Foreign exchange is readily available as well on Nicaragua's parallel foreign exchange market. - FOREIGN DIRECT INVESTMENT STATISTICS There are no reliable local statistics concerning foreign direct investment in Nicaragua. According to U.S. Department of Commerce estimates, as of year-end 1993, U.S. direct investment in Nicaragua amounted to $108-116 million. We believe U.S. capital represents at least half of all foreign direct investment. - MAJOR FOREIGN INVESTORS - ESSO STANDARD OIL, petroleum refiner and a major distributor of petroleum derivatives. - INDUSTRIAS KATIVO and H.B. FULLER, paint and paint- related preparations manufacturer and distributor. - ACEITERA CORONA, S.A., vegetable oil manufacturer, and SUPERMERCADOS CORONA, consumer goods retailer; parent company: United Brands Co. - TEXACO CARIBBEAN, sales of petroleum derivatives; parent company: Texaco Inc. - HOTEL INTERCONTINENTAL, acquired by Taiwanese investors. - HOTEL MONTELIMAR, acquired by the Spanish Barcelo Group. - BAYER QUIMICAS UNIDAS with German, Salvadoran, and Guatemalan investment; production of agro-chemical products primarily for domestic consumption. - PEPSI-COLA, soft drink manufacturer (majority of capital is foreign but not PEPSICO, INC.). - TANIC, S.A., Nicaragua's tobacco company, with majority British investment; controls 99 percent of cigarette sales in Nicaragua. - TRITON, a Canadian-owned mining company with gold mining interests.