The Washington Diplomat / June 1999
By Larry Luxner
The historic peace treaty signed last October between Peruvian President Alberto Fujimori and his Ecuadoran counterpart, Jamil Mahuad, not only ends over 150 years of border hostilities, but also opens up a wide range of economic benefits for the two Andean neighbors.
Small and medium-sized U.S. businesses -- particularly importers and exporters of agricultural goods, farm machinery, fertilizers and pesticides -- could benefit as well from new developments, say speakers at a recent conference in Washington entitled "Forum on Investment and Trade with the Amazon Region of Peru."
For Peru, peace with Ecuador coincides with passage of a new law encouraging investment in the Amazon region, an area representing 62% of Peru's 496,000 square miles.
At the conference, held at the Ronald Reagan International Building, potential U.S. investors were urged to consider the possibilities Peru offers in coffee, cocoa, forestry products, hydrocarbons and exotic crops like achiote -- a natural coloring used in everything from rice to paint.
"This area of Peru is not developed at all," said Alfonso E. Bartra, president of the American-Peruvian Chamber of Commerce in Damascus, Md. "The area is very rich in natural products, and potentially it has the capacity to feed the world. The fact that Amazonia hasn't been promoted is because Peru's economic policy was centralized in Lima and its environs. But this new law focuses on products we can export."
Under Law No. 27037, passed Dec. 30, 1998, companies that invest in a specified geographical area of the Peruvian Amazon are entitled to various income-tax incentives, as well as exemptions from duties on imports of capital goods or machinery used in the export of agricultural or value-added products.
The main reason for the law, says Peruvian Vice President Ricardo Marquez, is to get the region's inhabitants to stop growing coca -- the main ingredient in cocaine.
"Peru has many advantages for investment, joint ventures and business operations, among them the new Amazon promotion law and OPIC guarantees for private and public investment," said Marquez, who also heads Prompex, a government-sponsored investment promotion agency. "In our country, incentives and tax benefits are granted for a 50-year term on investments made in the Amazon region. These are related to income tax, general sales tax and taxes on natural gas, oil and its byproducts, to mention a few. This will stimulate the region's development, avoiding the dependence of the Amazon's inhabitants on illicit drug traffic."
Interestingly, U.S. investments in the sectors being promoted at the Washington conference -- such agriculture, construction, fishing, forestry, tourism and housing -- are relatively insignificant.
"U.S. investment in Peru has been and continues to be highly diversified," said John Youle, president of the Lima-based American Chamber of Commerce. "Agriculture and agro-industry would appear to offer enormous investment -- not only in sugar properties on the coast which are being privatized, but also in mid-sized and large companies now exporting to the U.S. market and looking for joint-venture partners."
Yet while U.S. companies continue to invest in Peru, their share of total foreign investment has declined from 57.4% in 1980 to just 20.4% by the end of 1998. Likewise, U.S. investment in the Lima Stock Exchange slipped from 73.9% in 1996 to 65.3% in 1998. By the end of 1998, according to government statistics, U.S. companies were responsible for $1.6 billion out of a total $7.829 billion invested by foreign firms in Peru. That's up from $619.6 million out of a total $1.3 billion in 1990, and $436.5 million out of a total $760 million in 1980.
Of the $1.6 billion in cumulative U.S. investment in Peru, the leading sectors were mining ($510 million); energy ($481 million); manufacturing ($224.2 million); commerce ($120.5 million); finance ($82.7 million); petroleum ($63.9 million) and transportation ($50.4 million).
"The Peruvian investment climate remains very positive. There are political and economic uncertainties, but in the wake of the Asian, Russian and Brazilian crises, and El Nino, the country has come out very well," said Youle. "I would think there's a great deal to be done. If you go along the coast, the area is completely undeveloped. But it's going to take time to exploit the mining potential, because mineral prices stink."
At the Washington conference, at least 25 specific projects -- big and small -- were presented to investors. Among the largest is El Gran Chaparral, a 14,000-hectare sugar refinery in the province of Ucayali. One or more investors are needed to put up $65.3 million, which represents a 72.1% share of the entire $90.6 million project.
Backers say the project "would not only generate jobs for field laborers and mill workers -- granting them sufficient income to dissuade them from cultivating coca leaf -- but would also reduce the current transportation costs of bringing sugar from the coastal region to the Amazon region. The final selling price of locally produced sugar would subsequently be lower than that of transported sugar."
Another project, known as Villa Rica Highland S.A., hopes to export gourmet coffee from the Villa Rica jungle area of the department of Pasco, about 250 miles east of Lima. Proponents say they need an investment of only $350,000 to procure machinery and equipment for starting a coffee-processing plant.
Still another, Desarrollo Forestal S.A., seeks a strategic partner to invest in expanding installed plant capacity at its sawmill in Iquitos -- the largest in Peru -- to produce value-added products for the furniture industry. An investment of $2.5 million is required.
Meanwhile, Peru's privatization commission, known as Copri, has created the Biabo Special Committee to oversee 50-year logging concessions in the Biabo Blue Range National Forest. Of the forest's total area of 2.12 million hectares, 631,000 hectares have been set aside for this concession, which is further divided into 18 lots (in sizes varying from 22,200 to 40,000 hectares).
Total production of mahogany, cedro, balsam and other woods is projected to reach 200,000 cubic meters a year -- equivalent to 22% of Peru's 1996 timber production. The total expected value of cylindrical wood is $14 million; the value of sawed or processed wood is $21 million. Once this wood is transformed into finished products, it would be worth $130 million.
For more information on any of the Amazon investment projects being promoted by the Peruvian government, please contact Kenneth D. Weiss of Plans & Solutions Inc. by phone at (301) 947-8150, by fax at (301) 869-8992, or by e-mail at email@example.com.