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Paraguay's Place in the Sun
Latin Trade / November 1995

By Larry Luxner

In the 1980s comedy "Moon Over Parador," Richard Dreyfuss plays an actor forced at gunpoint to impersonate the dictator of a fictitious South American country.

That country, as any astute moviegoer could figure out, was really Paraguay -- with its oppressive bureaucracy, widespread corruption and slave-like devotion to Gen. Alfredo Stroessner, who seized power in 1954 and held onto the presidency for 35 years, longer than any caudillo in the country's sad and violent history.

Today's Paraguay, however, bears little resemblance to Hollywood's Parador. No longer shackled by repression, this California-sized nation of 4.5 million has evolved from South America's last military dictatorship into a budding democracy eager to face the world.

"We've seen extraordinary changes since 1992," says Miguel Angel Britos, who heads economic integration efforts at the Paraguayan Foreign Ministry: "We have a new constitution with democratic roots, a freely elected president and a multiparty parliament. Decisions are now taken by consensus and dialogue, not unilaterally. Economically, we have low inflation, a reasonable rate of growth, no fiscal deficit and the lowest external debt in Latin America."

On the other hand, Paraguayan officials acknowledge their country has a serious money-laundering problem. Paraguay's Chamber of Deputies in mid-September approved a law that punishes money launderes with three to six-year prison terms, confiscation of drug-trafficking money and the expropriation of goods acquired with "narco-dollars." The Paraguayan Senate is now being urged to approve similar legislation.

All of this is good news for foreign investors, who for years avoided Paraguay because it was small, impoverished, inaccessible and corrupt. Indeed, this was one of the few Latin countries without a major U.S. fast-food presence -- but even that's changing. McDonald's is currently scouting around for Paraguayans willing to invest at least $1 million in local franchises, and Burger King plans to establish as many as five restaurants in the Asunción area, starting with an outlet at Silvio Pettirossi (formerly Presidente Stroessner) International Airport.

Clearly, much of the newfound interest in Paraguay stems from its membership in Mercosur -- a customs union that took effect Jan. 1, 1995, uniting Argentina, Brazil, Paraguay and Uruguay into a trading bloc of 200 million people. The pact allows duty-free movement of products and services between the four countries, allowing Paraguay, for instance, to export value-added products such as cotton fibers or finished garments to Brazil, without having to pay customs duties or tariffs.

Officials of Pro-Paraguay, an export promotion agency funded by the government, say their office is being flooded by investor inquiries from both Mercosur and non-Mercosur countries. In a recent interview at his Asunción office, Francisco R. Gutierrez, Pro-Paraguay's youthful director, was quick to point out his country's advantages.

"We have a lot of potential: cheap manpower, very low electricity costs, abundant natural resources and a strategic geographic position," he said in a recent interview. "From Asunción, you can be in all three other Mercosur capitals in less than two hours."

Statistics bear him out. According to the World Bank, average factory wages here come to only $242 a month, compared to $626 in Brazil, $825 in Chile, $901 in Uruguay and $1,005 in Argentina. In addition, electricity is quite cheap, given Paraguay's half-ownership (with Brazil) of the Itaipú Dam, the world's largest hydroelectric project. And Paraguay's external debt of $1.25 billion works out to only $285 per inhabitant, the lowest in Latin America.

Furthermore, Paraguay's new president, Juan Carlos Wasmosy, is a no-nonsense leader who welcomes foreign investment. As minister of integration in the transition government of Andres Rodríguez, Wasmosy directed Paraguay's incorporation into Mercosur. As president, he continues to push pro-business policies.

"Wasmosy has been traveling a lot, telling people Paraguay has changed," says Gerald McCulloch, deputy chief of mission at the U.S. Embassy in Asunción. The diplomat praised Wasmosy's recent decision to appoint a new nine-member Supreme Court independent of the executive branch and the long-ruling Colorado Party. "It showed real political savvy on the part of the president, and it certainly follows Wasmosy's efforts to attract foreign investment."

Adds Daniel O. Elicetche, senior partner at Coopers & Lybrand: "The question investors have always asked about Paraguay was, is there justice or not? Now I can say yes. This will give investors -- through an honest, independent judiciary system -- the possibility of contacting an arbiter who will impartially rule on problems they may have in the country."

One area of particular interest is Paraguay's petroleum potential. Two companies plan to drill exploratory oil wells. The first, Guaraní Exploration S.A., has invested $11 million so far in two concessions of eight million acres each, taking over from where former joint-venture partner Texaco left off. Guaraní's Alto Paraná block is located 60 kilometers from Ciudad del Este, while the San Pedro Block parallels the Río Paraguay north of Asunción. The second firm, Phillips Petroleum, owns the 1.6-millioni-acre Curupayty concession in northern Paraguay's Chaco Desert, not far from a planned pipeline that will carry natural gas from Bolivia to Brazil.

Meanwhile, a generous new hydrocarbons law approved by the Paraguayan Senate lowers maximum royalties from 22% to 14%. Sponsored by Sen. Alfredo Jaegli, the measure aims to revive a sector largely ignored by foreigners. "This law should encourage more companies to come," says Guaraní's president, Richard Kent. Only 46 wells have been drilled in the last 60 years, though studies by Brazil's Petrobras indicate Paraguay may have reserves of a billion barrels.

Another interesting sector is the textile industry. Already a major cotton grower, Paraguay currently exports $300 million a year worth of fibers, most of it going to Brazil. Up until now, however, 90% of the country's cotton has been exported as raw material, without any value added.

"This is nonsense," says Fernando Villalba, president of Hilandería Central S.A., a newly inaugurated $10 million factory near Asunción that produces 6,000 kilograms a day of finished fibers using computer-aided spinning machines. "We are so far behind. You don't always get a niche market in the world. We have one, and we should take advantage of the situation."

Last year, the Brazilian firm Teka S.A. acquired a Paraguayan textile plant for $19 million and spent another $25 million to increase installed capacity, while the Hering industrial group of São Paulo plans to build a factory with an installed capacity of 20,000 articles of clothing per day, mainly to export T-shirts to Argentina and other markets.

In fact, Brazil is the largest foreign investor in Paraguay, with cumulative investments of $251.2 million in 63 projects since the enactment of Law 60/90, which guarantees tax exemptions on the importation of capital goods and raw materials, and provides a 95% exemption on corporate income tax during the first five years of investment. In second place is Argentina, with $131.4 million and 112 projects, followed by Ecuador ($36.5 million in one project) and Italy ($32.7 million in 37 projects).

Taiwan, which enjoys particularly warm relations with Paraguay, could leapfrog them all with a planned 40-hectare industrial park near the town of Ciudad del Este, along Paraguay's border with Brazil. Britos, who has been negotiating with the Taiwanese, says the mammoth project involves 7,000 jobs, 70 factories and a $100 million investment. Paraguay -- the only South American nation with ties to the Republic of China -- says the general idea is to replace Ciudad del Este's dependence on contraband by turning it into a manufacturing center for all four Mercosur countries. (According to Brazil's tax office, smuggling moves more than $110 million a week -- $5.73 billion a year -- from Ciudad del Este over the Friendship Bridge to Brazil's Foz do Iguaçu.)

Argentina is another important investor in Paraguay. Earlier this year, Buenos Aires-based Grupo Bemberg opened a $50 million brewery in Ypané, just south of Asunción. The Cervepar factory, with 150 employees and annual production of 1 million hectoliters, more than doubles installed beer capacity in a country that boasts consumption of 37 liters per-capita, one of South America's highest. Bemberg already brews the country's most popular beers under the Bremen, Pilsen and Baviera labels. It also owns an Asunción glass factory as well as Paraguay's largest Coca-Cola bottling plant.

By comparison, direct U.S. investment in Paraguay is relatively limited, with only $17.6 million in 31 projects. Citibank is the only U.S. financial institution in the country; even the Paraguayan-American Chamber of Commerce has only 20 U.S. companies among its 180 members. In 1994, Paraguay exported $35 million worth of leather, wood products, clothing and handicrafts to the United States, according to the Paraguayan Embassy in Washington. At the same time, the U.S. sold Paraguay luxury goods and machinery worth $172 million, though most of that total was immediately re-exported to Brazil through Ciudad del Este and other border towns.

To boost exports to the U.S. and other countries, Gutierrez says his agency wants to promote six industrial sectors: meat, agribusiness, textiles, wood products, electronics and leather goods. Within agribusiness, yerba mate, a traditional drink popular in Argentina, Uruguay and the Middle East, has major export potential, though coffee -- once an important industry here -- does not.

"We are not working very hard in that sector," he said. "We have to make priorities, and we work only in those sectors where we have the most opportunities."

One such sector is poultry. Nelson Ciciolli, manager of Granja Avicola La Blanca -- Paraguay's largest chicken processor -- says Mercosur will allow his company to export fresh chicken to nearby Argentina, where production costs are much higher. Ciciolli's firm already enjoys a monopoly on the domestic poultry market, which it supplies with 40,000 chickens a day from its slaughterhouse in Capiatá, outside Asunción.

Along with Mercosur, another buzzword is energizing the Paraguayan economy: privatization. The idea of selling off inefficient state enterprises -- a practice well underway in the rest of Latin America -- has finally taken off in Paraguay, with the successful sale of once-bankrupt Lineas Areas Paraguayas S.A. (LAPSA) to Ecuador's Saeta for $22 million.

Rafael Schwarzman, LAPSA's 34-year-old president, says the government fired the airline's entire 480-member workforce in preparation for the takeover. Since then, 55% of those workers have been hired back.

"We encountered a lot of problems throughout the process," he said. "We still are having things cleared up. The government, on one side, has a promise to privatize state-owned companies, while on the other side, many people are dragging their feet."

Nevertheless, the reborn airline is now flying with four planes between Asunción, Buenos Aires, Santiago and Miami. In its first year, says Schwarzman, LAPSA hopes to score $28 million in sales, and profits of $2 million. By the second year, he expects sales of $50 million. All revenues from the sale will be used to cancel LAPSA's outstanding labor and corporate debts.

Elicetche, whose firm, Coopers & Lybrand, advised LAPSA on the deal, said at least three more state-owned companies are up for privatization: rum distiller Cañas Paraguayas S.A.; Flota Mercante Paraguaya (FMP), the national merchant marine fleet, and Aceros del Paraguay, a steel plant.

José Maria Espinola Manzoni, director of Paraguay's Privatization Committee, says bids for Cañas Paraguayas will be closed very soon, with Argentine, Brazilian and Paraguayan firms all showing interest in the company, worth an estimated $15 million.

FMP, valued at $20 million, has 460 employees and is being pursued by Greek and South American interests. Likewise, Brazilian and Argentine firms have their eye on Aceros del Paraguay, a $70 million operation that employs 1,000 people. Bids for FMP will close November, and for Aceros del Paraguay by March 1996.

But the big prize is Antelco, Paraguay's overstaffed, mismanaged telecommunications monopoly. Espinola says Antelco could easily fetch $500 million, once the Paraguayan government passes a law authorizing its privatization and actually puts the company up for sale.

Sen. Armando Vicente Espinola of the opposition Liberal Party, which is now sponsoring legislation to privatize Antelco, says that only 30% of domestic long-distance calls go through on the first try, and that no new phone lines are available in Asunción -- even for large, multinational companies willing to pay for them. At the moment, Paraguay has only 150,000 lines in service, giving it a teledensity of only 3.3 per 100 inhabitants -- the lowest in South America.

"We have the market to develop the telecom sector, but almost nothing is done," said Espinola. "Paraguay is the only country in Latin America that has no access to Internet."

At least four global telecom firms -- including Telefonica de España, EntelChile, AT&T and BellSouth International -- have expressed interest in buying the company, according to Antelco spokesman Pedro M. Duarte. Under terms of Espinola's proposed legislation, 45% of Antelco would be sold to an international firm, 45% to local investors and 10% to the employees.

Regardless of how the deal is structured, concedes Duarte, 99% of Antelco's 7,000 employees oppose a sell-off. Nevertheless, he predicts -- perhaps a bit optimistically -- "if we do it cleanly and transparently, and we present it to the workers that way, I don't think we'll have any problems."

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