ࡱ> @ bjbjFF &,,?: !!!4!FxFxFxhx$z<!.^xxxx  MOOOOOO$"Rtsu!xxs!!xx!!!!x!xM!M!!` !!x 0%b@Fx T]0.ݧp p!!!!!!p!0-@ ! ss!$!b "!!btrade policies by sector overview Agriculture has reinforced its position as one of Paraguay's key economic sectors, notably by extending the area under cultivation. There is a wide variety of types of production, ranging from small family farms up to medium-sized and large export-oriented operations. Exports of agricultural products have risen and account for some 84per cent of total exports (TableAI.1); they consist of a small number of goods, especially soya beans and other related products. Up to March 2005, an export tax was imposed on some agricultural products (see ChapterIII). Government intervention in this sector includes public loan schemes. Paraguay's manufacturing sector is small and the major industries engage directly in the processing of agricultural products or in textiles, clothing, beverages and tobacco. Overall, value added in the manufacturing sector has declined, partly because the sector has only to a limited extent taken advantage of the opportunities afforded by the establishment of MERCOSUR. Paraguay has several schemes providing government aid for manufacturing, in particular, a special programme for the automotive industry. A State-owned petroleum company has a de facto monopoly of imports of crude petroleum. Partly in order to protect the domestic sugar industry, petrol of up to 95octane must contain ethanol and petrol importers must mix their product with ethanol in Paraguay. Paraguay has abundant hydroelectric energy resources; the largest hydroelectric power station in the world is on the border between Paraguay and Brazil and it has allowed Paraguay to become one of the world's leading exporters of electricity. Electricity costs in Paraguay appear to be relatively low for the region, but not in global terms. The domestic electricity market is dominated by a State-owned company. Since 1995, there have been plans to restructure the electricity sector. The services sector accounts for approximately 55per cent of Paraguay's GDP and provides some 40per cent of total employment. Paraguay made few commitments under the General Agreement on Trade in Services (GATS) and these are confined to some financial and tourism services. Paraguay did not take part in the negotiations subsequent to the Uruguay Round on telecommunications or financial services. Development of Paraguay's basic telecommunications subsector has fallen behind and mobile telephony has moved in to fill the gap. The telecommunications law lays down the principle of free access to all telecommunications services, with a small number of specific exceptions. Nevertheless, the State-owned operator enjoys a de facto monopoly of basic telephony. In 2000, the Government started to privatize the operator, but the process came to a halt, partly owing to a lack of confidence on the part of the public but also to concerns regarding the constitutionality of the bidding process. The authorities are currently reviewing their policy objectives in this subsector. The banking subsector appears to be highly concentrated and restrictions on the availability of loans and the high rates of interest seem to be hampering growth in other sectors. During the period under review, there was a crisis in the banking subsector, although in early 2005 it appeared to have been overcome. The Central Bank had to take over the debts of several banks involved. Banking legislation draws no distinction between domestic and foreign capital. In the insurance subsector, branches of foreign companies are authorized to operate in the same way as companies domiciled in Paraguay. In early 2005, Congress was considering a draft law regulating the operation of public banks. International trade-related transport costs in Paraguay are some of the highest in the western hemisphere, largely owing to Paraguay's situation as a landlocked country. Under Paraguayan law, all maritime and river transport of imports and exports is reserved for Paraguayan-registered vessels. This restriction is eased for cargo transport to and from LAIA member countries provided there is the capacity, and has been eliminated for river transport in vessels registered in the countries party to the Hidrova (Paraguay-Paran River Waterway) Treaty. Cabotage river transport is reserved for Paraguayan-registered vessels, and cabotage air services are restricted to companies domiciled in Paraguay. The private sector may build and manage river ports in order to provide commercial services, but airports providing similar services must be managed by a government body. The tourism subsector is the second largest foreign currency earner in Paraguay, while soya bean exports occupy first place. Tourist arrivals fell sharply after 1997, but started to recover in 2003; the majority of tourists are from Argentina and Brazil. agriculture, livestock and forestry Features Over the past decade, agriculture has become a key sector in Paraguay's economy, particularly in terms of exports. Agricultural trade accounted for some 11per cent of GDP in 1993, 17per cent in 1998 and 21per cent in 2003. The Paraguay River divides the country into two distinct geographic zones: the western region or Chaco, which occupies 61per cent of western Paraguay, has broad flatlands and xerophytic woodland. The eastern region, which has large areas suitable for subtropical agriculture, has seen rapid growth in the production of soya beans and in fattening livestock. The trend in land use in eastern Paraguay has been affected by the expansion of human settlements and of the agricultural limits, initially at the expense of lands where there were natural pastures and subsequently to the detriment of woodlands (TableIV.1). This process intensified particularly during the 1960s and 1990s. The Government estimates that Paraguay has 40,675,200hectares, broken down as follows: (i)the eastern region, where 97per cent of the population lives, covers 15,863,328hectares, of which 15per cent are under cultivation, 47per cent are occupied by livestock, 22per cent are woodland and 16per cent are used for other purposes; and (ii)the western region covers 24,811,872hectares, of which 2per cent are cultivated and 35per cent are cattle ranches, with 64per cent consisting of xerophytic woodland. Various factors have contributed to the significant loss of forests, for example, agriculture, population pressure on access to and use of land, land ownership problems and a legal framework that viewed forests as unproductive land and land cleared of trees as productive land. Table IV.1 Trends in land use by subsector, 1998/99 to 2002/03 VariationSubsectors (in hectares)1998/992002/03Absolute (hectares)Relative (%)Area cultivated2,509,8153,117,252607,43724.2Fallow or uncultivated as a result of over-farminga 600,000300,000-300,000-50.0Forestsb 2,637,2182,250,000-387,218-14.7Land for livestock usec25,682,97323,197,493-2,485,480-9.7Other landd9,245,19411,810,455-2,565,26127.7Total40,675,20040,675,200a Estimates of the Agricultural Census and Statistical Department on the basis of the 1991 National Census. b Only includes woodland in agricultural and livestock farms. c Total area of livestock farms, including grasslands (natural and cultivated). d Land occupied by towns and cities, mountains, ranges, hills, lakes, rivers, estuaries, military settlements, national parks, forest reserves, other protected areas and unused land. Source: Agricultural Census and Statistical Department. Estimates of secondary sources subject to variation. According to official data, 27per cent of the economically active population (EAP) works in the agricultural sector. Despite agriculture's dynamism, the sector is affected by problems of income distribution and poverty, access to land use and rural migration to cities. The EAP working in agriculture decreased from almost 50per cent in 1972 to 27per cent in 2002. Despite this decrease, the EAP working in agriculture has increased in absolute terms. Moreover, as a number of services activities are related to agriculture, the latter continues to play an important role as far as jobs are concerned. Over the past decade, fluctuations in international agricultural prices (soya beans, timber, cotton) and changing climate conditions have led to instability in the sector and in the rest of the economy. Their impact is even greater in Paraguay because of the small size of its economy and the low level of diversification of its export offer. In addition, during the period 1995-2002, the agricultural sector suffered the impact of banking crises, droughts and monetary devaluation in Brazil and Argentina (Paraguay's major agricultural trading partners). Despite this situation, the agricultural sector has continued to grow, largely as a result of the production and export of soya beans and meat. Paraguay's major crops are soya beans, cassava, sugar cane, maize, wheat and cotton (TableIV.2). The majority of processed goods produced consist of soya bean by-products. The south, east and north-east subregions in the eastern part of Paraguay are the most dynamic agricultural areas as these are where the production of soya beans and cereals is concentrated. The agricultural sector in Paraguay comprises two types of production. The first consists of small producers (less than 20hectares), who follow traditional methods to produce crops for home consumption and/or one or more cash crops such as cotton, sugar cane, sesame, tomatoes, peppers, groundnuts, physic nuts, tobacco, fruit and vegetables. The second is industrial farming, which uses medium or high level technology mainly to produce soya beans and cereals. Table IV.2 Production of commodities, 1993-2003 (Tonnes) Average annual growthVariation1998199920002001200220031993-981998-20031993-2003Soya beans2,855,7423,053,0052,980,0603,511,0503,300,0004,204,8659.7%8.0%134%Yucca (Cassava)3,300,0003,694,4002,719,4103,568,0104,008,1714,668,8044.4%7.2%76%Sugar cane2,800,0002,872,2712,244,9002,396,1802,976,2903,260,475-0.1%3.1%16%Maize873,904817,233647,270947,167931,7221,055,53614.8%3.8%140%Wheat180,088231,119220,055532,156536,754360,000-13.7%14.9%-4%Oranges208,009230,632201,799209,247207,155207,1553.1%-0.1%16%Unginned cotton222,000202,283246,594294,444123,667172,760-12.0%-4.9%-59%Source: Ministry of Agriculture and Livestock, Agricultural Census and Statistical Department. October, 2004. In terms of agricultural trade, exports are limited to a few products (12products corresponding to three chains of production and representing on average 70per cent of the value of exports between 1993 and 2003) (TableAIV.1), mainly unprocessed products. The high cost of transport (the highest among countries in the region) is cited as a factor constraining growth and the competitiveness of processed products. It has been estimated that the fact that Paraguay does not have a coastline implies an additional cost of between US$30-40 per tonne for export of soya beans. Despite this disadvantage, some agri-industrial exports derived from soya beans have increased significantly in recent years, which implies that there is considerable export potential in this sector. Exports therefore consist of raw materials and products derived from soya beans, maize, cotton (not carded or combed) and bovine meat. Between 1993 and 2003, agricultural exports increased by 83per cent, notably as a result of exports of soya bean products. Exports of tobacco products rose rapidly between 1993 and 2003 and, together with wheat, sugar and sesame, accounted for a small but growing percentage of agricultural exports. The MERCOSUR countries are the main destination for Paraguay's agricultural exports (TableAIV.2). Nevertheless, many of these exports are re-exported to other countries because there are no ports where goods can be exported directly. Because of re-exports, there are wide differences between the statistics on exports and imports of agricultural products originating in Paraguay. In 2003, Brazil took 38per cent of Paraguay's agricultural exports, which was a decrease in comparison with the average of 45per cent over the period 1993-1998. Uruguay's importance as an importer grew and it took 23per cent of Paraguay's agricultural exports in 2003, with an average figure of 15per cent for the period 1998-2003. Argentina took an average of 5per cent of agricultural exports over the same period. In 2003, MERCOSUR countries therefore imported 64per cent of Paraguay's agricultural exports. Some of the principal factors explaining this concentration are the MERCOSUR tariff preferences, the size of the Brazilian market and re-exports through MERCOSUR. In 2003, the Cayman Islands were the third source of imports of Paraguayan agricultural products, principally soya beans, owing to their role as a reshipment port. Some exporters, particularly companies that have distribution centres, declare the reshipment port as the port of destination and then add the final destination at the distribution and reshipment point, otherwise cargo, especially that from landlocked countries, takes longer to ship. The main destinations for Paraguay's soya beans, after they have been through the reshipment ports, are the Andean community, the Middle East and the European Union. Among Paraguay's other agricultural exports, only exports of meat to Chile, Brazil and Russia (as of 2004), cotton fibre to Brazil, sugar to the United States and sesame to Japan are of any importance in addition to the soya bean subsector. Paraguay's agricultural imports consist of only a few products (TableAIV.3). There was strong growth in imports during the period 1993-1997, but a decline between 1998 and 2003 as a result of the economic downturn, especially in the case of non-essential goods, which played an important role as re-exports outside formal channels in trade with Brazil and Argentina. This activity has also declined following the harmonization of MERCOSUR tariffs and more stringent border controls. Within MERCOSUR, the institution responsible for agriculture is Sub-Working Group (SGT)8 Agriculture, which has standing and ad hoc working groups that include plant health, animal health and seed commissions. Another regional body is the Southern Agricultural Council (CAS), which acts as a forum for ministers of agriculture from MERCOSUR, Bolivia and Chile (although it is not a formal MERCOSUR body). The CAS has technical support bodies such as the Standing Veterinary Committee (CVP), the Southern Cone Plant Health Committee (COSAVE), the Agricultural Policies Coordination Network (REDPA) and the Informal Group of Agricultural Negotiators (Gina-sur). One of the key objectives of the CAS is to eradicate foot-and-mouth disease in the region by 2007. Policy objectives in the sector The Ministry of Agriculture and Livestock (MAG) is responsible for Paraguay's agricultural and forestry policy. Within the MAG, the Special Commission on International Trade and Integration has been given the task of participating in agricultural negotiations under agreements and it reports directly to the Minister's Office in the MAG. The overall regulatory framework comprises laws, the majority of which deal with the institutional structure determined for the agricultural sector. The most recent legislation includes three laws on the institutional reorganization of the agricultural public sector. As regards policies in this sector, there appears to be little government intervention, as can be seen from the green box notification made to the ϲʹ by Paraguay (see TableAII.1). State aid covers the supply of extension and research services, animal and plant health and food aid programmes to assist small producers in emergency situations or in cases of extreme poverty. Paraguay has notified the ϲʹ that it does not give export subsidies for agricultural products (seeChapterIII (3)(iv)(d)). The authorities have stated that there are no price-fixing mechanisms for agricultural products and that reference prices are used for information purposes under special conditions. Paraguay only imposes import tariffs on products from outside the zone, whereas products from MERCOSUR countries enter at a rate of zero. Paraguay does not impose tariff quotas, special safeguards or countervailing measures on exports subsidized by other countries. The MAG is implementing the 2004-2008 Agricultural and Rural Development Plan, and is responsible for drawing up and putting into effect: (i)the National Plan to Revive Family-based Agriculture for 2003-2008; and (ii)nine programmes to promote exports, industrialization and domestic consumption of cotton, sesame, ka'a he'e, fruit/vegetables, cassava, physic nuts and sugar cane, milk and sericulture. The MAG was also responsible for drawing up the National Agricultural Sector Development Programme, which calls for the organization of cooperative associations of agricultural producers. Law No.2.157/03 was enacted to regulate the operation of the National Cooperative Institute. The MAG's development and transfer of technology activities include research and testing of rice, sugar cane, maize, soya beans, wheat and cotton. Other research activities relate to beekeeping, breeding of poultry, swine, sheep and goats, pastures and fodder, bovine cattle for meat and milk. In addition, it conducts activities related to food security, competitiveness, growing of fruit and oilseeds and soil management and rehabilitation. The main programme currently implemented with a view to improving methods of cultivation covers the use, conservation and rehabilitation of soil including direct sowing, rotation of crops, green mulches and the use of agrochemicals. According to the authorities, some 80per cent of the area under soya beans is cultivated using these methods. Crop rotation and green mulches are increasingly being introduced by small producers. As regards seeds, the MAG applies Law No.385/94 (on seeds and the protection of cultivars) and Resolution No.290/2000 (regulations on the production and marketing of certified and/or inspected seeds), which seek to ensure proper distribution, marketing and quality control of seeds, guarantee their identity and quality and protect the rights of breeders of new varieties. Concerning land grants and expropriation, since the mid-1980s, no more State-owned land has been available for settlement. Under the Paraguayan Constitution, large estates not being used are to be expropriated for the purpose of agrarian reform. Expropriations are determined on a case-by-case basis. The taxes affecting the agricultural sector are the following: (i)the Rural Property Tax, representing between 0.5 to 1per cent of the land's fiscal value; and (ii)the IMAGRO, based on the presumed amount of income, although owners of less than 20hectares are exempt. As of 2005, the IMAGRO will be replaced (Law No.2.421/04) by the Income Tax on Agricultural Activities. Up to August 2004, there was a tax on the domestic marketing of cattle (1per cent of the value of the live animal), but this was abolished when the Income Tax on Agricultural Activities came into effect. In the regulations on "transfer bills" (guas de traslado) for the movement and marketing of cattle, however, there is still a 1per cent tax as an advance on income tax. Trade measures and other policy instruments In 2004, Paraguay's nominal average rate of tariff protection for agricultural goods (ISIC definition) was 7.1per cent, which is below the average of 8.9per cent for all products. Nevertheless, tariff protection for agricultural goods defined under the ϲʹ Agreement on Agriculture is above the overall average (see ChapterIII (2)). In accordance with its Uruguay Round commitments, Paraguay converted its non-tariff restrictions into tariffs on bovine meat, sugar and wheat, inter alia. As shown in TableAIV.4, in 2004, Paraguay's average MFN tariff protection ranged from 4to 10per cent on soya bean products, cereals and cotton, 12per cent on bovine meat products and 30per cent on unrefined sugar. In 2003, for the six groups of products that constituted the major imports (around 50per cent of all agricultural imports), the simple tariff average was 18per cent. Regarding the tariff protection affecting Paraguay's agricultural goods in foreign markets, TableAIV.5 shows tariff treatment in the United States. In 2002, a zero MFN rate applied to 42per cent of agricultural imports from Paraguay and the zero rate under the GSP to 37 per cent, so 79per cent of Paraguay's agricultural exports entered the market free of duty. In 2002, the EU imported over 86per cent of agricultural goods from Paraguay at an MFN rate of zero. The remaining 14per cent were at reduced preferential tariff rates under the GSP. The authorities have indicated that, as a net exporter of agricultural products, Paraguay faces various restrictions in foreign markets, including tariff measures (peaks, tariff escalation and seasonal tariffs) and non-tariff measures (quotas, licensing, technical regulations, sanitary and phytosanitary restrictions, special safeguards), as well as production and export subsidies. Moreover, some foreign markets have concerns regarding the limited capacity of Paraguay's official plant health and veterinary services to meet health and quality certification requirements properly and efficiently. Under the agreement negotiated between MERCOSUR and Peru, Paraguay and Uruguay are excluded from the special agricultural safeguard mechanism that applies to 129agricultural items. Nevertheless, the price bands applied by Peru to 34agricultural products are still in force and seven sugar subheadings have been excluded from the trade liberalization programme. Trade in agricultural commodities is exempt from VAT (ChapterIII (2)(v)). In May 1996, the IMF suggested that Paraguayan authorities extend VAT to all agricultural products. The Government mainly intervenes in the agricultural sector by granting loans and technical assistance. Article115 of the Constitution (Bases for Agrarian Reform and Rural Development) provides that agrarian reform and rural development shall be subject to certain conditions including "the granting of agricultural loans at low cost and without intermediaries". A number of public bodies have been set up for this purpose, for example, the National Development Bank (BNF), the Agricultural Equipment Credit Bank (CAH), the Livestock Fund (FG) and the Farmers' Development Fund (FDC). The authorities have pointed out that official support for this sector in the form of loans is modest both in terms of coverage and in the amount of the loans granted. With the exception of cotton, soya beans, sugar cane, maize, rice and wheat, few government loans are available for other subsectors. In Paraguay, there are no State-owned enterprises involved in the purchase, sale or marketing of agricultural products. Regarding the Livestock Fund, the Government pointed out that during the first quarter of 2004 a large number of loans were pending and this is the result of livestock production cycles, which mean that loans are mainly granted during the last quarter of the year. At the end of 2004, the default rate was 18.2per cent. The unfavourable conditions prior to 2004 (drought, outbreaks of foot-and- mouth disease, closure of international markets) had an effect on repayment but as of 2004 the sector started to recover and there was an improvement in the loan repayment situation. At the end of 2004, 81.1 per cent of loans had been repaid. As part of the reform of the public banking sector, the Government has stated that it is considering changing the Livestock Fund into a specialized semi-public bank. In 2003, the Farmers' Development Fund granted loans amounting to G/ 19,285million to 41financial institutions (IFIs), which went to 5,199producers. In 2004, technical assistance to IFIs increased to G/ 40,144million. At 31December2004, loans amounting to G/ 33,032million had been granted to 45IFIs, benefiting 3,584producers. In 2003, the FDC's rate of default was 17per cent, compared with 20per cent at 30November2004. Law No.1.418 of 15April 1999 wrote off outstanding debts with the BNF, the CAH and the FDC by small agricultural producers and authorized the institutions to renegotiate production loans on special terms. The Law exempts borrowers from paying their financial commitments of up to G/6million in initial capital plus interest for any type of loan granted up to 1October1998, provided that the original capital did not exceed G/ 15million. The State takes over payment of the balances under this exemption and refunds the amount to loan institutions in the form of national treasury bonds. Key subsectors Cotton Cotton production plays an important social and economic role in Paraguay and is one of the main crops in rural communities. Some 58per cent of cotton-producing farms cover an area of less than 10hectares. In 1997, 18 to 20per cent of the rural population depended on cotton production on small family farms. Traditional methods of cultivation are used involving manual technology and animal traction. Average yields, at 1,200kg/ha, are generally low taking into account the genetic potential of the varieties grown and the yields obtained at the experimental level. TableAIV.6 represents an estimate as there are no official statistics on mechanized production. Since the beginning of 1990, cotton production has suffered the impact of adverse climate conditions, low prices and disease. Between 1990 and 1994, the volume and value of exports fell by 60 and 56per cent respectively. Production continued to decline over the period 1997-2003 as a result of continued low prices and the refocusing of production on crops such as rice, beans, maize and sesame. The decline in area under cultivation and yields was more marked for cotton than for any other commodity during the period 1998-2003 (TableAIV.6). Starting with the 2003-2004 agricultural season, however, higher prices for cotton fibre and production support measures led to an increase of 51per cent in raw cotton production in June 2004. The average value of cotton exports came second to exports of soya beans over the period 1993-2003 and was the fourth largest export in value terms in 2003. Brazil was the largest importer of Paraguayan cotton between 1993 and 2003 and on average took over 70per cent of exports. Nevertheless Brazil's share of total exports has fallen. Other alternative markets are Argentina, Venezuela, Chile, India and Chinese Taipei (TableAIV.6). The Government participates in this subsector through crop diversification programmes and, since 1997, through other measures such as loans, debt forgiveness and free distribution of seeds to small producers. In 1999, debts contracted up to that date by small farmers were written off because of unfavourable climate conditions. The implementation of such policies has been limited because of the resulting decapitalization, which restricts other types of aid. The 2004/5-2008/9 National Cotton Programme gives the general outline for prioritizing and implementing competitiveness in this subsector. Among the promotion activities carried out by the MAG in 2003 were, for example, training in standardization of raw cotton and in post-harvest handling; advice on verifying the movement of bags of cottonseed; implementation of the proposal on eliminating and/or using remaining cottonseeds; and experimental testing of insecticide residues in soil. Soya beans Soya beans are Paraguay's main export crop and in 2003 Paraguay was the world's fifth largest producer with an output of over 4.5milliontonnes. The adverse climate conditions up to the end of 2004 and in early 2005 had an impact on the area under cultivation and the expected yield per hectare, which may mean that the harvest remains at levels similar to those in previous years. It is estimated that soya beans accounted for close to 38per cent of the agricultural sector's GDP in 2003. The private sector's objective is still to increase production and international market share using technology to provide various qualities. The area under soya bean cultivation increased to a greater extent (152per cent) than any other heading during the period 1993-2003 and, even though yields per surface unit have fallen slightly, production has increased more rapidly than in any other agricultural subsector, with an average annual growth rate exceeding 9per cent over the period 1993-2003 (TableAIV.7). Data on production of processed products also show rapid growth in soya bean products. In terms of exports, in 2003 Paraguay was the world's fourth largest exporter of soya beans, with 3.1million tonnes. Soya beans are exported not only in the form of beans, but also as oil and flour. Some 60per cent of total production is exported in the form of beans, 34per cent as flour or oil, and the remaining 6per cent of the industrial product is for domestic consumption. It is estimated that Paraguay exports around 23per cent of its potential oil production. During the 2003-2004 season, soya bean exports were subject to an export tax (ChapterIII (3)). As already indicated, Brazil and European countries were the largest markets for soya beans, particularly during the period 1998-2003 (TableAIV.7). In 2003, Brazil imported 39per cent of soya beans, 41per cent of soya bean cake and 2per cent of soya bean oil produced in Paraguay. The Andean region is the main destination for Paraguay's exports of oil and flour as a whole, especially Venezuela. Outside the western hemisphere, Asian countries are important markets and are increasing their share. Sugar cane Growth in sugar cane production has recovered, exceeding 3per cent between 1998 and 2003 (TableAIV.8). As stated in the last Review of Paraguay's trade policy in 1997, sugar has been excluded from intra-MERCOSUR trade liberalization and also constitutes an exception to MERCOSUR's common external tariff. Consequently, sugar is subject to the highest MFN tariff imposed by Paraguay amounting to 30per cent. The State fuel plant takes part of the domestic sugar cane harvest (see ChapterIV (4) below). Since 1995, sugar exports to the United States have been subject to tariff quotas. This regime allows sugar to be exported to the United States at prices that are considerably higher than those on global markets. The annual quota is some 8,500tonnes and is shared among exporters according to each one's percentage of Paraguayan production. Over the period 1993-2003, the United States imported 70per cent of Paraguay's unrefined sugar exports in value terms, and the value of these exports increased by around 20per cent. The EU imports less Paraguayan sugar and its value has decreased sharply (TableAIV.8). Paraguay is the major exporter of organic sugar to the United States. According to the Paraguayan Sugar Centre, 30per cent of total sugar production was organic in 2003/2004. Other crops In recent years, maize has played an important role in Paraguay's agricultural production and exports. Production has increased as a result of planting maize in the context of crop rotation with soya beans as the main crop and also through the use of high-yield commercial hybrids, mechanization and chemical inputs. Traditional small producers, using basic technology, have recently devoted more resources to producing maize because of problems encountered in the cotton subsector. Between 1993 and 2003, therefore, the area under cultivation increased by 49per cent and yields per surface unit rose by 33per cent, one of the best results for commodities (TableAIV.9). The average annual increase in maize production was therefore some 15per cent between 1993 and 1997. Brazil imported an average of 81.5per cent of Paraguayan maize exports during the period 1993-2003 (TableAIV.9). In the south-east, wheat is grown as a winter crop in rotation with soya beans. Improvements in production technology and an increase in the area under cultivation have led to increased volumes of production and exports. Wheat therefore became Paraguay's eighth largest agricultural export in 2003 (TableAIV.10). Brazil takes almost all Paraguay's wheat exports with an average of 95per cent since 1993. The authorities have stated that two loan programmes apply to the cultivation of wheat. One line is specifically for wheat and is open in the winter from April to December each year. The other line will open in 2005 in the form of a loan programme for development that includes wheat and soya beans. As regards the production of sunflower, exports are modest and have declined since the 1997/1998 harvest, when they reached a peak of 35,982tonnes. The 2002/2003 harvest recorded exports of 5,796tonnes, much less than exports in 1997/1998 but still twice the volume during the two previous seasons, when they amounted to 2,505tonnes annually. Production of cassava (yucca) rose by over 3per cent between 1998 and 2003 (TableAIV.10) and cassava was Paraguay's eleventh largest agricultural export in 2003. Brazil imported 86per cent of these exports over the period 1998-2003. Concerning sesame, the area under cultivation, yields per hectare, production and exports although modest have been increasing rapidly (TableAIV.10). Livestock The main heading in this subsector is bovine cattle, which comprised some 9,500,000head in 2004. Meat is produced both for domestic consumption and for export and accounted for an average of 8.5per cent of GDP between 1991 and 2001. The total amount of bovine meat in cold store for export was 337,832head in 2003. Meat exports suffered the impact of trade restrictions following outbreaks of foot-and-mouth disease in 2002 (October) and 2003 (July) and problems caused by the lack of capacity to impose hygiene measures in the industry. During the period 1998-2003, the major importers of Paraguay's bovine meat products were, in order of importance, Chile, Brazil, the European Union and Russia. Over this period, Chile took 72per cent of Paraguayan exports of boneless fresh or refrigerated meat (TableAIV.11). In 2001, Chile imported some US$45million of bovine meat from Paraguay, imposing an MFN tariff of 9per cent. Under the Chile-MERCOSUR Economic Complementarity Agreement, Chile has implemented a ten-year tariff reduction programme for bovine meat from Paraguay and since 1997 has given a 75per cent preferential discount on the MFN tariff applicable to 3,500tonnes of fresh/refrigerated bovine meat and 3,500tonnes of frozen bovine meat. In 2003, Saudi Arabia, Angola and Israel became importers of boneless frozen meat. Other important products in this subsector such as live bovine animals and fresh or chilled beef with bone were virtually all exported to Brazil. At the end of 1998, meat exports to the United States were suspended because of the failure to implement special hygiene and health measures, including the Hazard Analysis Critical Control Point (HACCP) and problems related to the control of foot-and-mouth disease. Exports to Chile and the EU have also been suspended on a number of occasions recently. In August 2002, the EU gave Paraguay a meat quota of 1,000tonnes (Hilton quota), but exports under this quota were suspended in February 2003 as a result of problems relating to the health control of foot-and-mouth disease. The authorities have stated that combating foot-and-mouth disease is a national priority. The objective of regaining status as a country free of foot-and-mouth disease with vaccination was granted by the OIE on 19January 2005. Reopening of the European market is subject to verification of compliance with the requirements laid down in a technical audit carried out by the EU. In July 2004, Chile once again opened up its market to meat imports from Paraguay. Forestry In 2001, the forestry subsector accounted for approximately 2.7per cent of GDP. The policy instrument for this subsector is Forestry Law No.422 of 23November 1973. Forests are mainly exploited to provide roundwood and firewood for the domestic market. Approximately threequarters of production is for agricultural and industrial use, including the production of charcoal. Timber constitutes the second largest group of exports after agricultural products. Production mainly consists of sawn wood, laminated wood, firewood, charcoal and poles, with some production of plywood, flooring, furniture and parts thereof. Exports reached a maximum level of some US$100million in 1997, but declined by 3.2per cent between 1998 and 2003 (TableAIV.12). Exports of indigenous timber (excluding coniferous wood) comprised over half the total exports of timber in 2003 and around 38per cent on average during the period 1993-2003. In 2003, the most important markets for these products were Hong Kong, China, Chinese Taipei, Italy and Argentina. As already mentioned, the amount of native woodland cover in eastern Paraguay has fallen drastically. In 1994, the export of all unprocessed species was banned (roundwood, trunks and beams) (see Chapter III (3)(iii)). Nevertheless, illegal felling and burning of woodland and the illegal export of roundwood to Brazil have continued. As stated in the Review of Paraguay's trade policy in 1997, the World Bank has estimated that if the rate of deforestation remains unchanged, primary forest cover in eastern Paraguay will disappear by 2018. Data published by the SEAM ("National Strategy for the Conservation of Biodiversity in Paraguay 2004-2009") in 2002 show that there is 22per cent of native woodland in the eastern region and a rate of change (deforestation) of 2.8per cent over the period 1992-1997. Law No. 2.524 of 13 December 2004 banned the transformation or conversion of areas with woodland cover in the eastern region for the purpose of agriculture or human settlement for an initial period of two years. According to the authorities, however, Law No. 422/73 still allows exploitation. The forestry policy came into effect in 1975 under Decree No.11.681 implementing Law No.422/73 on the management and exploitation of native and planted forests. The Decree requires owners of over 20hectares to leave 25per cent as native forest reserves. Through the National Forest Service, the MAG is responsible for approving plans for managing forests and soil use, including forestation and reforestation by the private sector. Law No.536 of 16January 1995 provides incentives (financial support and exemption from certain taxes) for investment in forestation or reforestation. During the period 1997-2004, a total of G/39.8billion was disbursed for reforestation. Since 1995, planting and reforestation have been boosted through subsidies (see ChapterIII (4)). The support consists of covering 75per cent of the cost of planting (once only) in priority areas as well as maintenance costs (for three years), for which the National Forest Service determines the costs annually. Since 1994, it has been prohibited to set up and operate processing industries for roundwood (sawmills) within 20kilometres of the border with Brazil in order to prevent smuggling of unprocessed roundwood, logs, trunks and beams (Law No.515/94). Subsequently, a transitional period of five years was allowed for the relocation of existing processing plants. manufacturing sector The manufacturing sector in Paraguay is relatively small and contributed an average of 17.3per cent of Paraguay's GDP between 1977 and 2002, the last year for which data are available. This figure shows a slight decline in comparison with the 17.7per cent recorded during the period 1991-1996. As can be seen from TableIV.3, the major manufacturing activities in terms of generating value added have been meat production, textiles and clothing, and the beverages and tobacco industry. Growth in the manufacturing sector is affected by the performance of a few products and sectors, especially the agri-food sector (see also section(2) above). Small enterprises focusing on the domestic market predominate in the manufacturing sector. Of the 3,745firms surveyed in the 2002 industrial survey, around 75per cent had 10 or fewer employees and only 6per cent had more than 50. Among the latter, around twothirds stated that they have no foreign capital participation and only 10per cent have participation of over 50per cent. Table IV.3 Value added in manufactures, 1991-2002 (Average for the period) ActivityCNPPaPercentage of the manu- facturing sectorAnnual average rate of growthPercentage of value ofproduction1991-961997-021991-961997-021991-961997-02Meat production615.715.22.2-1.525.323.3Oil production74.12.711.71.216.97.4Dairy production81.31.11.2-1.416.012.5Milling and breadmaking93.74.0-0.3-1.619.518.2Sugar101.21.3-3.41.515.316.0Other foods111.82.1-1.21.114.916.2Beverages and tobacco129.312.54.42.428.726.7Textiles and clothing1316.314.60.50.331.732.5Leather and footwear143.93.91.7-0.535.430.5Timber industries156.05.94.4-4.629.731.9Paper and paper products163.54.57.60.733.728.4Petroleum refining176.66.80.2-4.646.448.4Chemicals183.74.04.7-0.418.319.9Manufacture of non-metallic products199.97.24.2-4.347.243.9Manufacture of base metals203.43.66.8-4.036.136.9Manufacture of machinery and equipment213.33.82.2-0.225.221.6Other manufactured products226.26.72.4-0.343.936.1Manufacturing sector6-22100.0100.02.7-1.028.525.6a Paraguayan National Classification of Products. Source: ϲʹ Secretariat calculations based on the BCP, "National Accounts of Paraguay, 1991-2002". During a large part of the period under review, performance in the manufacturing sector followed the same sluggish trend as that in the economy as a whole (see ChapterI). Value added in the sector fell to a real annual rate of 1per cent between 1997 and 2002. On the other hand, the manufacturing sector managed to achieve a real rate of 2.7per cent over the period 1991-1996 even though, as mentioned in the Secretariat's report for the Review of Paraguay's trade policy in 1997, its growth was less than in the economy as a whole. Over the period 1997-2002, the highest rate of expansion (2.4per cent) was in the beverages and tobacco industry, whereas the majority of other manufacturing industries experienced a downturn, especially the timber industry, petroleum refining, manufacture of non-metallic products and manufacture of base metals (TableIV.3). The decline in value added in the manufacturing sector was accompanied by growth in the value of production, which in real terms grew at an average annual rate of 1per cent between 1977 and 2002. As a result, on average, value added as a proportion of the value of production in the sector fell from just over 28per cent during the period 1991-1996 to close to 26per cent during the period 1997-2002 (TableIV.3). The decline in value added in the manufacturing sector was thus caused by wage reductions and lower profits for the firms, or a combination of the two, and not by reduced sales. The data available appear to indicate that wage reductions and/or lower profits were particularly marked in the leather and footwear, paper and paper products industries, but above all in the manufacture of oils. In the latter industry, value added as a proportion of value of production fell from 16.9per cent over the period 1991-1996 to 7.4per cent from 1997-2002, possibly as a result of the increase in exports of the raw material for manufacturing oils, especially soya beans, and the ensuing rise in the cost of inputs for oil producers. In Paraguay, as is generally the case, value added in relation to value of production is much lower in the manufacturing sector than in other activities: over the period 1997-2002, the ratio was less than half for manufactures compared with the primary sector (65.6per cent) or services (58.9per cent). Taking into account the number of jobs generated in each sector (see ChapterI (2)(i)), the value added per worker is also probably less in the manufacturing sector than in the primary or services sectors. This would suggest that each job created in the manufacturing sector generates less growth in GDP than jobs in other sectors, especially the primary sector, which is dominated by agriculture in Paraguay. International trade in manufactures is highly important for Paraguay's economy, both in terms of the importance of exports of goods processed from agricultural products and the marked dependence on imported products in order to meet domestic demand for products such as machinery, chemicals and refined petroleum products. Although it is difficult to analyse the relationship between the manufacturing sector and international trade because of problems relating to trade statistics (see ChapterI (3)), the data available show that the manufacturing sector continued to increase the value of its exports between 1997 and 2002, even though the average annual rate of 0.8per cent was much lower than the rate of 14.3per cent achieved during the period 1991-1996. Exports were dominated by three industries, firstly, the manufacture of oils, followed by the timber and meat production industries (TableAIV.13). In addition, even though they remain important, exports of timber products fell and that could be a source of concern in view of the large share of domestic production exported (around 34per cent, TableAIV.13). Exports also represent a large proportion of domestic production in the oil production, leather and footwear industries and, to a lesser extent, in chemicals and the manufacture of base metals. The authorities have pointed out that the relatively small share of exports by the Paraguayan oil production industry could be explained by the tariff escalation imposed by some trade partners; for example, the simple average tariff applied by all countries on soya beans is around 4.9per cent, whereas the equivalent tariff for crude soya bean oil is 12.2per cent (TableAIV.4). In relation to the modest increase in exports of manufactures, Argentina, Brazil and Uruguay, as a group, have become an essential market for Paraguay's manufacturing sector (as explained in section(2) above, some of the trade in agri-industrial products may consist of re-exports). The implementation of MERCOSUR appears initially to have had a positive impact, although this subsequently changed to some extent: while MERCOSUR's share of Paraguay's total exports of manufactures increased from an average of 43per cent during the period 1991-1994 to 60per cent between 1995 and 1998, it fell to 47per cent during the period 1999-2002 (TableAIV.13). Consequently, the data available intimate that, with few exceptions (for example, leather and footwear), Paraguay's manufacturing sector has been able to take advantage of the opportunities afforded by MERCOSUR only to a limited extent. The specialization and growth required to supply the large markets in the MERCOSUR countries do not appear to have been achieved, mainly because of the low level of investment, the macroeconomic instability in the region, the limited infrastructure, and a general framework that is not particularly favourable to growth in production. In such a situation, the sector's modernization and conversion have been less rapid or widespread than the authorities had hoped. After having increased by an average of some 16per cent over the period 1991-1996, the value of imports of manufactures into Paraguay decreased to an annual average of 14per cent between 1997 and 2002. Reflecting to a large extent the scope of the economic stagnation during the latter period, imports by the manufacturing industry decreased in almost all instances (TableAIV.14). imports play a decisive role in the domestic market for manufactures, accounting for approximately half of the value of domestic production during the period 1997-2002 (TableAIV.14); this was also the figure recorded between 1991 and 1996. Between 1997 and 2002, imports largely exceeded the value of domestic production of machinery and equipment. The value of imports also exceeded the value of domestic production in the case of petroleum refining and chemicals, whereas the ratio between the value of imports and domestic production was some 50per cent in the beverages and tobacco industry and 40per cent for paper and paper products. The average MFN tariff in the manufacturing sector is 9per cent (based on the ISIC), slightly above the overall average of 8.9per cent (Table III.2). Five manufacturing industries are protected by MFN tariffs that are substantially higher than the overall average: sugar, beverages and tobacco, textiles and clothing and, to a lesser extent, dairy products, leather and footwear (TableAIV.15). There is marked tariff escalation in the majority of manufacturing industries (Chart III.2). The MFN tariff appears to have had only a limited effect on the entry of imports into the Paraguayan market for manufactures. As indicated above, the available data show that, although they benefit from tariff protection that is higher than the mean, the average value of imports of beverages and tobacco corresponded to 50per cent of the value of domestic production from 1997 to 2002. This was partly because of the volume of imports that were totally or partly exempt from MFN tariffs under preferential trade agreements, especially MERCOSUR (ChapterII(4)). The MFN tariff protection scheme does not appear either to have boosted the generation of value added in Paraguay's manufacturing sector, as can be seen from the negative correlation between the average MFN tariff by industry and the corresponding value added as a proportion of value of production (TablesAIV.15 and IV.3). This situation can be explained to a large extent by looking at the assessment made by the authorities during the previous Review of Paraguay's trade policy to the effect that adapting to MERCOSUR's duty-free regime could have a negative impact on the manufacturing sector. Other contributing factors are the significant role played by smuggling and under-invoicing (ChapterI(2)(v)) and trends in exchange rates (ChapterI (2)(iv)). Regarding MERCOSUR's impact on development of the manufacturing sector, it should be noted that the average share of MERCOSUR products in the total volume of imports of manufactures increased from some 35per cent during the period 1991-1994 to 46per cent from 1995 to 1998 and close to 51per cent during the period 1999-2002. This trend can be found in almost all manufacturing activities (TableAIV.14). Between 1999 and 2002, imports of manufactures from MERCOSUR played an important role in almost all market segments, even though the exceptions include the important segment manufacturing machinery and equipment. The combination of limited growth in exports of Paraguayan manufactures to the rest of MERCOSUR and strong growth in imports from the same market can be explained partly by the substantial differences that exist between Paraguay and its MERCOSUR partners as regards levels of development in their manufacturing sectors, as well as the differences in the programmes provided by each partner to its producers giving support in addition to tariffs. For example, the Secretariat's report during the last review of a member of MERCOSUR, namely Brazil, stated that Brazil's manufacturing sector was highly diversified and had been one of the most dynamic activities in the economy, having benefited from support under an industrial policy that laid emphasis on expanding exports and providing substantial support programmes. One aspect that needs further analysis is the impact which the application of a common external tariff may have had on Paraguay's manufacturing sector. The tariff is designed to promote manufacturing, but its impact on Paraguay may have been distorted because, in comparison with other members of MERCOSUR, Paraguay would appear to have less manufacturing potential. The cost to Paraguay's manufacturing sector of any such distortion would need to be more than offset by gains in efficiency resulting from better allocation of resources within an integrated regional market, but this would mean eliminating the various shortcomings that MERCOSUR still has as a customs union and, to an even greater extent, as a common market (ChapterII(4)(ii)(a)). The manufacturing sector in Paraguay benefits from a number of government support programmes, including tax exemptions under Law No.60, loans for investment granted by the Industrial Development Fund, while there are special incentives for investment in the automobile industry (ChapterIII(4)(iii)). The manufacturing sector can take advantage of tax concessions to promote exports (ChapterIII(3)(iv)), as well as restrictions on the export of raw materials (ChapterIII(3)(ii) and (iii)). There is also an industrial policy component in government bidding procedures when they are used to give preference to Paraguayan suppliers (ChapterIII(4)(v)). There have not been any studies on the advantages of the support programmes available to the manufacturing sector for the Paraguayan economy as a whole, but these could cause significant distortions because of the narrow goals they pursue, their fiscal cost and the additional burden for the government administration. energy sector Paraguay has abundant reserves of energy in the form of hydraulic power. This makes it one of the major producers of electricity per capita in the world and a large exporter of electricity. Nevertheless, in 2003, consumption of electricity accounted for barely 11per cent of domestic energy consumption. Firewood and charcoal are the most widely used (56per cent of the total) together with petroleum by-products (32per cent). According to data furnished by the authorities, in 2003 the electricity coverage index rose to 83per cent (some 4.7million inhabitants) with an average increase of 2.4per cent over the previous five years. Paraguay produces no petroleum or natural gas. In 2002, fuel imports accounted for around 17per cent of total imports. The energy sector represents 5.7per cent of GDP and 1per cent of the total number of jobs (ChapterI(2)(i)). The Office of the Under-Secretary for Mines and Energy, which is part of the Ministry of Public Works and Communication, is responsible for drawing up policies on the use and management of energy resources. The energy sector is dominated by two State-owned companies, Petrleos Paraguayos (PETROPAR) and the Administracin Nacional de Electricidad (ANDE). Although the hydrocarbons subsector has been subject to reforms aimed at increasing the share of private investment, the electricity subsector remains a public service operated by the ANDE. Hydrocarbons and other fuels Paraguay depends on imports to meet all domestic demand for hydrocarbons. It neither produces nor consumes natural gas. In March 2004, however, the existence of a natural gas deposit in Paraguay with "vast potential for exploitation" was confirmed. According to the Ministry of Public Works and Communication, private investors have also shown growing interest in exploration following the discovery of productive fields in neighbouring countries. The State-owned company Petrleos Paraguayos (PETROPAR) has a de facto monopoly of imports of crude petroleum; import of hydrocarbons in general has been liberalized. At the end of 2004, private companies could import other fuels directly or through distributors authorized by the Ministry of Industry and Trade. The authorization is given automatically to companies that meet the requirements laid down in Decree No.10.911 of 25October 2000. PETROPAR refines imported petroleum at its refinery in Villa Elisa, which has nominal capacity of 7,500barrels/day for the production of fuel oil, gas oil, kerosene, virgin naphtha and LPG. It also operates a plant that produces alcohol from sugar cane with an average capacity of 150,000litres/day, and imports refined products. PETROPAR markets its products through distributors, which sell them to the final consumer. PETROPAR's share of the domestic market for petrol and liquefied petroleum gas has been declining since 2000. The authorities have indicated that the company's performance has been affected by an onerous regulatory framework that is sometimes not compatible with the oil business, fixed price controls based on political criteria and the charges imposed by the Government. PETROPAR has had to face serious cash flow problems and at the end of 2003 these prevented the enterprise from meeting some of its tax obligations. The only fuel whose final consumer price is controlled by the Government is gas oil (diesel fuel); all types of naphtha were liberalized under Decree No.10.183/00. Even though the Government increased its price in early 2004, PETROPAR still loses US$0.05 on each litre of gas oil imported and sold to distributors. The authorities have pointed out that PETROPAR receives no Government subsidies. The Government's programme for 2003-2008 states that it is necessary for PETROPAR to enter the market selling fuel to final consumers so as to "boost competition in the sector and ensure that the oligopolies dominated by distributors do not prejudice consumers". The privatization of PETROPAR is not envisaged (ChapterIII(4)(iv)). The amendments to the Hydrocarbons Law (Law No.779/95 of 12December 1995) introduced in 1995 are intended to increase private investment in the hydrocarbons subsector. In particular, the Law allows public and private national and foreign companies to conduct hydrocarbons prospection, exploration and exploitation activities under concessions granted by the State. In order to obtain a permit or concession, foreign companies must be domiciled in Paraguay. Concession agreements between the State and private companies must be authorized by the National Congress. The Law allows any disputes related to such agreements to be brought before international arbitration. By mid-2004, four private companies, including one foreign company, were prospecting for hydrocarbons in Paraguay. Exploitation is subject to income tax, royalties and taxes paid in proportion to the area exploited. Any concessionaire exploiting hydrocarbons must sell to the State (at market prices) a specified volume of production, determined each year by the Ministry of Public Works and Communication and the Ministry of Industry and Trade. The rest of the output may be refined, stored, transported or exported. Refining and storing of fuel must be authorized by the Ministry of Industry and Trade. Authorizations are given automatically to companies that meet the requirements laid down in Decree No.10.911/00. According to Decree No.2.162 of 15March 1999 and Decree No.2.266 of 26March 1999, petrol of up to 95octane marketed in Paraguay may contain up to 20per cent of undenatured ethanol; the MIC resolution lays down a limit of 18 0.5per cent undenatured ethanol. Distributors are responsible for meeting this requirement. Decree No.2.162/99 states that one of the objectives of the policy on mixing ethanol and petrol is to implement measures that help to protect the environment and public health by reducing the emission of gases and other substances harmful to health and to encourage production of traditional agricultural products of economic and social importance in Paraguay such as sugar cane. Distributors marketing petrol must mix it with undenatured ethanol in Paraguay. A prior non-automatic licence issued by the Ministry of Industry and Trade is required for the import of undenatured ethanol. Import licences are granted only for products under tariff heading 2207.1000, namely undenatured ethyl alcohol of an alcoholic strength by volume of 80per cent volume or higher, only undenatured ethanol (not less than 99.5oGL) intended to be mixed with petrol. Before a licence can be granted, there must also be "reliable proof of supply shortages in the country" and import must be deemed to be of "national interest". Distillation, storage, distribution and marketing of fuel alcohol are regulated by Decree No.10.911/00. In 2001, the Government decided to set up the Commission for the Coordination and Promotion of Natural Gas and Related Investments (COMIGAS). COMIGAS is entrusted with studying, developing and promoting opportunities for regional energy integration as regards the production, transport and use of natural gas. The results of the Commission's work led to approval of Law No.1.948, "Transport of natural gas by pipeline" of 22July 2002, which seeks to promote private investment in the subsector. In order to achieve this, the Law liberalized the import and export of natural gas and laid down regulations on the granting of concessions to private firms for the transport of natural gas by pipeline. Both domestic and foreign firms may apply for concessions under the Law, but foreign firms must be domiciled in Paraguay. Both the creation of COMIGAS and the adoption of Law No.1.948/02 form part of a policy that seeks to encourage the construction of a gas pipeline from Bolivia to Brazil going through Paraguay. It is estimated that the gas pipeline will cost some US$920million. It is not envisaged that the State will have any financial participation in the project. At the XXXVth Meeting of Ministers of the Latin American Energy Organization, held in Venezuela in October 2004, the President of PETROPAR announced that Paraguay intended to sign an agreement with Venezuela under which it would obtain fuel in accordance with the terms laid down in the Caracas Agreement on Energy Cooperation. Electricity Paraguay's installed capacity is 8,116.1MW. In 2003, gross electricity generation amounted to 51,659GWh, of which 86per cent came from the Itaip hydroelectric power station on the border with Brazil. Itaip is the largest such project in the world. Its installed capacity is expected to increase from 12,600MW to 14,000MW by the end of 2005 when two new generators come on-line. Some 12per cent of electricity comes from the Yacyret hydroelectric power station on the Argentine border and the remainder from the Acaray hydroelectric power station and various small thermal stations. Paraguay is one of the largest exporters of electricity in the world. In 2002, it exported around 41,770GWh, a figure that represents some 87per cent of gross electricity generated that year. Royalties, compensation bonuses and other items related to the sale of electricity generated in the Itaip and Yacyret power stations accounted for onefifth of the State's total earnings between 1997 and 2002 (ChapterI(2)(iii)). In Paraguay, the ANDE has been given a monopoly of the supply (generation, transmission, distribution and marketing) to the public of electric power and light throughout the Republic. Law No.966/64 provides that existing concessions for the supply of electric power services given to individuals or other entities will be respected until their legal expiry date. The ANDE owns 50per cent of the capital of the binational entities which operate the Itaip and Yacyret power stations (the remaining capital belongs to Brazil and Argentina respectively). The ANDE also transmits and distributes electricity almost all over Paraguay. There are two private companies (the Compaa de Luz y Fuerza de Villarrica and the Asociacin de Colonias Menonitas) which sell energy in their respective markets. The prices applied by these companies are subject to the ANDE's tariff rates and their impact on the domestic electricity market is marginal. Law No. 966 gives the ANDE authority to regulate aspects related to the generation, transmission and distribution of electricity. It also lays down the principles for setting electricity rates for final consumers without defining the separate cost of generating, transmitting and distributing electricity. The ANDE must fix its rates in such a way as to cover "all operating costs and earn a reasonable return on the investment made in supplying electricity so as to ensure that the company has the necessary resources to pay off its debts and expand its services as required". In particular, the rates must ensure that ANDE's net income amounts to between 8 and 10per cent of the value of its tangible and intangible assets plus its working capital. After they have been approved by the ANDE's Governing Board, electricity rates are subject to approval by the "Economic Team" (see ChapterII(2)(i)), which must ensure that they comply with the legal provisions on fixing rates. In 2003, the mean domestic rate imposed by ANDE was G.317.04/kWh, corresponding to US$0.0493. The rates per kWh for various types of consumers were the following: G/348.43 (residential); G/353.11 (commercial); G/219.98 (industrial); and G/299.95 (general), for customers that use electric power to supply installations in places not covered by the other groups of consumers (i.e.residential, commercial, industrial or governmental). Although there is no energy market for independent customers nor a competitive wholesale market, Decree No.2.109 of 24January 1994 allows the ANDE to give certain large consumers special rates, including the metal and electrochemical industries. The average rates applied by the ANDE since 1994 have been below the marginal long-term cost. Between 1994 and 2003, the rates covered between 40 and 70per cent of this marginal cost. For example, in 2003 an average rate of around US$0.07/kWh would have been needed to cover the long-term marginal cost. This means that the abundance of hydroelectric resources has not sufficed to give Paraguay access to energy at very low cost because of the significant impact that capital costs have on the cost of production in the Itaip and Yacyret power stations, which are the main sources of energy in Paraguay. Half of the installed capacity in both the Itaip and Yacyret power stations belongs to Paraguay. According to the Itaip Treaty, the two parties undertake to acquire the total power installed (either together or separately), and they may do this through Paraguayan or Brazilian firms or entities; when one party decides not to use part of the agreed power (or the corresponding energy), within the limits set, it may authorize Itaip to cede the part that becomes available to the other entity either in the form of power or energy. The Yacyret Treaty contains a similar provision. The Itaip Treaty provides that the cost of electricity services provided by the hydroelectric power station must cover the following elements, inter alia: annual profits of 12per cent on the capital participation by the ANDE and ELETROBRAS (the Brazilian operator); financial charges and amortization of loans granted for Itaip; royalties; administrative and inspection costs paid by Itaip to the ANDE and ELETROBRAS; and operating costs. Nevertheless, Itaip has accumulated debts amounting to US$17billion (the majority of them with Brazil), partly as a result of the sale of electricity at rates that do not cover capital costs. According to the President of Paraguay's Government programme for 2003-2008, Brazil has had more access than Paraguay to "subsidized electricity". It therefore considers that the ANDE should receive the same volume of subsidized electricity as Brazil was given. In November 2004, the Paraguayan and Brazilian authorities met to discuss alternatives designed to reduce the payment of interest to Brazil by Itaip. Since the latest machinery installed came into operation, the Yacyret hydroelectric power station has generated around 60per cent of its projected capacity, the level in the Paran River reservoir being lower than originally planned. Between the end of 2003 and August 2004, Paraguay and Argentina concluded several instruments through which the Yacyret Termination Plan was approved, defining the work required to raise the level of the reservoir. The total amount of investment needed for this purpose is some US$650million. Since it was set up in 1973, the Yacyret Binational Entity has accumulated debts amounting to US$10.9billion, mainly loans granted by the Government of Argentina (US$9,859million) and multilateral credit organizations. The Paraguayan authorities have indicated that the debt is the result of events such as delays in completing works and changes in the cost of the electricity service envisaged in the Treaty, with a fixed rate of US$30/MWh, below the amount needed to cover the debts. The electricity policy is to maintain the electricity service "as a public service provided by the ANDE" and to ensure that "generation for domestic consumption, transmission and distribution [remain] solely in the hands of the ANDE, together with the fulfilment of responsibilities and foreign trade in electricity". It is not planned to privatize the ANDE (ChapterIII(4)(iv)). The electricity policy envisages future private investment in thermal power stations operating with gas imported from Bolivia in order to export electricity to Brazil. Restructuring of the electricity subsector has been under consideration since 1995. Between 1998 and 2001, several preliminary draft laws on reform of the subsector were prepared but none of them were adopted. In early 2005, the National Congress was considering a draft law, supplementing Law No.966/64, which envisages independent production of electric power, including cogeneration or self-generation of electricity. SERVICES Overview The services sector's share of the gross domestic product (GDP) during the period 1998-2003 remained stable at around 55per cent, amounting to G/21.1trillion in 2003 (US$3.3billion at the average rate of exchange). The financial and trade subsectors are the largest in terms of value added (an average of 25per cent of GDP, see TableI.1). Nevertheless, these were also the subsectors which experienced the greatest decline from 1997 to 2003 (an annual average of 3.1per cent). In 2003, the financial and trade subsectors made the greatest contribution to real growth in the services sector with 0.5per cent. In real terms, the sector declined slightly during the period 1997-2003 (0.3per cent annually on average). Employment in the services sector (including electricity and water) remained essentially unchanged between 1997 and 2003, generating an average of 39per cent of total jobs during the period, most of which were in finance and trade. During the Uruguay Round, Paraguay accepted few commitments, limited to financial services and tourism (see TableIV.4). It undertook to allow commercial presence for specialists or senior personnel (financial services and tourist guides) or personnel providing training services (hotels, restaurants and travel agencies). The specific commitments provide access to markets and national treatment for commercial presence in Paraguay in sectors that appear in the new schedule of commitments with the exception of travel agency services. Paraguay did not take part in any of the negotiations on services subsequent to the Uruguay Round, but at the end of 2004 it presented a services offer in the context of the Doha Development Round. Paraguay did not specify any list of MFN exemptions under ArticleII of the GATS. Table IV.4 Summary of specific commitments under the GATS Market accessNational treatmentModes of supply: Cross-border supply11 Consumption abroad22 Commercial presence33 Presence of natural persons44Horizontal limitationsa""""""""Commitments (% full; %partial; % no commitment; - does not appear in the Schedule)Commitments on specific sectors1. Business services""""""""2. Communications services""""""""3. Construction services """"""""4. Distribution services """"""""5. Education services""""""""6. Environmental servicesb""""""""7. Financial services A. Insurance (Excluding reinsurance and retrocession)%%%%%%%% Reinsurance and retrocession%%%%%%%% B. Banking  Acceptance of deposits and other repayable funds from the public %%%%%%%% Lending of all types, including consumer credits, mortgage credit, etc.%%%%%%%% Other services auxiliary to financial intermediation%%%%%%%%8. Social and health services""""""""9. Tourism services and travel-related services  A. Hotels and restaurants%%%%%%%% B. Travel agencies and tour operators' services%%%%%%%% C. Tourist guide services%%%%%%%%Table IV.4 (cont'd) Market accessNational treatmentModes of supply: Cross-border supply11 Consumption abroad22 Commercial presence33 Presence of natural persons4410. Recreational and sporting services""""""""11. Transport services""""""""12. Other services""""""""a The sole authentic source of information on these commitments is Paraguay's Schedule of Specific Commitments, contained in document GATS/SC/68. b Only applicable to services included in Paraguay's Schedule of Specific Commitments. Source: ϲʹ Secretariat. The objective of the Montevideo Protocol, adopted by MERCOSUR's Common Market Council in 1997, is to promote free trade in services among member countries. The Protocol includes four modes of supply and lays down the bases for negotiations on national treatment, disclosure of confidential information, transparency of the regulatory framework, notifications, protecting competition and exemptions. The authorities indicated that, in early 2005, the Protocol was being considered by Congress. Paraguay has not signed any other agreements on trade in services. Telecommunications Features The telecommunications subsector accounted for 3.9per cent of GDP in 2002, a slight increase on its 1997 level. In 2003, the subsector employed 13,588 workers, corresponding to an average increase of 4.1per cent annually in comparison with 1997. Paraguay had approximately 273,000 fixed lines in operation in 2003 and 2,000 public pay phones. In 2002, investment and gross earnings in the subsector were US$81.5 and US$308.6million respectively. The level of development in the fixed telephone market infrastructure in Paraguay continues to be low. In 2003, the telephone line density was still one of the lowest on the American continent, having remained at essentially the same level as in 1997, even though there have been slight improvements in recent years. Consumers had to wait a long time for a line as demand remained unsatisfied in some areas, reaching a maximum of 200,000lines (in early 2002), with a connection cost of around US$125 in 2003 (TableIV.5). Table IV.5 Selected telecommunication indicators, 1997-2003 1997199819992000200120022003Main telephone lines per 100 inh.4.35.05.05.05.14.74.6Mobile telephone subscribers per 100 inh.1.64.48.114.920.428.829.9Total subscribersa ('000)302.2492.3703.71,103.71,438.81,940.22,043.6Cost of connecting a residential telephone line (US $)916.0731.7561.1502.0341.0136.3125.0Percentage of digital main lines87.488.089.689.187.997.099.0Public pay phones1,4681,3001,9334,6668,0499,00011,000Cost of a three-minute local call (US $)0.10.10.10.10.10.0140.014Cable television subscribers50,00080,60095,400..120,000....Telecommunications earnings (US$ millions)205.3225.7332.6324.3308.6134.5141.6Estimated number of Internet users..10,00020,000,,60,000100,000120,000Computers connected to the Internet2981,1471,1601,2962,7044,3519,243.. Not available. a Main telephone lines plus mobile telephone subscribers. Source: ITU (2004), Telecommunication indicators. Data available on-line at: http://www.itu.net, and information provided by the authorities. Mobile phones to a large extent met the unsatisfied demand and the market grew significantly from 1997 onwards. As a result, in 2003, there were 30subscribers per 100inhabitants in Paraguay, the highest density among MERCOSUR members. In March 2004, there were four suppliers of mobile telephone services operating in Paraguay (Telecel, Ncleo, Hola Paraguay/Vox and Hutchison Telecommunications Paraguay) serving a market of over 1.5million subscribers. Two further companies with licences had not yet started operating by October 2004. The companies operating provide services largely in rural and urban areas not covered by the Paraguayan Communications Company (COPACO). The latter is licensed to supply various value added services. Up to December 2003, mobile telephone companies paid a fee to COPACO corresponding to 14per cent of the amount fixed as the cost of access to the mobile network in order to use the fixed telephony network. At January 2005, there was a charge for connecting to the mobile network through the fixed network paid in full to the mobile network; at the same time, there is a charge for connecting to the fixed network, which is paid in full by the mobile networks to the fixed network. In 2000, the Paraguayan Government launched a new privatization process for what was formerly the National Telecommunications Authority (renamed COPACO in 2001), which had been suspended by Congress in 2002 (see also ChaptersII(3) and III(4)(iv)). The criteria for taking part in the bidding for COPACO required that the prospective bidders should control net assets equivalent to US$100million. The volume of capital in banks operating in Paraguay and the statutory limit on the amount of loans (20per cent of the capital) made it impossible to obtain security or a loan from banks operating in Paraguay for the amount required for the bidding process. Consequently, the criteria for bidding might have violated the provisions of Article111 of the Constitution, which guarantees the workers a preferential right to buy out a company to be privatized. During this process, the National Telecommunications Authority was valued by the World Bank at US$229million. Law No.1.932 of 5June 2002 suspended indefinitely the effects of Law No.1.615 and thus put an end to the privatization of COPACO, citing problems of public confidence in the process. In general, COPACO is perceived to be an inefficient company (as in 1997), with a low level of investment and poor profitability from its basic telephony operations. The authorities stated that, despite this perception, COPACO was never in deficit and the results of its operations were always satisfactory from an economic point of view. In 2003, COPACO drew up a development plan that envisaged investment of US$250 to 300million and included the city of Filadelfia in the digital network as well as the digitization of telephone exchanges in 65provincial cities. At October 2004, there was foreign participation in the offer of telecommunications services in almost all telecommunications markets with the exception of basic telephony. Regulatory framework Paraguay's Constitution guarantees free access to the electromagnetic spectrum, without restrictions other than those imposed by the international regulations and technical standards (Article30). In particular, since the end of 1995 the objectives of the policy have been to make telecommunications services available in those areas that are "the most isolated" from Paraguay's urban centres, guarantee equality of opportunity in access to use of the radioelectric spectrum, ensure the development, control and regulation of telecommunications, promote the emission and propagation of electromagnetic communication signals and comply with the technical specifications for the installation, operation and exploitation of telecommunications services. The Ministry of Public Works and Communication (MOPC) is responsible for framing public policy on the telecommunications subsector. The authorities have pointed out that a series of basic technical plans, implementation of which began in 1996 make up the National Telecommunications Plan, which was still being formulated at the end of 2004. These basic technical plans lay down objectives for regulating the subsector. The authorities hope that all the components of the National Telecommunications Plan will be prepared and put into effect during 2005. The National Telecommunications Commission (CONATEL), an autonomous body within the MOPC, is responsible, inter alia, for administering the spectrum, drawing up and approving technical regulations, overseeing the granting of concessions, licences and authorizations for supplying services, proposing tariff regimes to the Executive, advising the Executive on telecommunications, supervising the introduction of new technologies, approving the equipment used, regulating the interconnection of networks and preventing anti-competitive or discriminatory conduct in the subsector. The CONATEL body responsible for taking decisions is the Governing Board, which comprises five members appointed by the Executive. By means of an Executive Decree, the President of the Republic may dismiss any member of CONATEL for duly substantiated serious misconduct, subject to administrative proceedings (Law No.642/95, Article12). The organization of the subsector is covered by Law No. 642 of 29December 1995 (Telecommunications Law, LTC), which is implemented through Decree No.14.135 of 15July 1996, as amended by Decrees No.15.963 of 31December 1996 and No.10.022 of 16August 2000. The former amended the provisions on payment for the right to provide services while the latter modified some regulatory aspects concerning applications, renewal and approval for permits to provide telecommunications services. The LTC lays down general guidelines with regard to hiring tariffs and interconnection. It also provides for free access to all telecommunications markets, with the exception of those reserved for the State (radioelectric services for meteorology, air, river, maritime and space navigation, radio astronomy, and emergency and safety). The LTC allows the Executive to reserve any telecommunications service for the State for reasons of public interest (Article60). The following are the value added services defined in the LTC: facsimile, videotex, teletext, remote control, telecommand, telealarm, storage and retransmission of data, teleprocessing and mobile telephony. Pursuant to the LTC, telecommunications services in Paraguay can be offered under three types of permit: concessions, licences or authorizations. Concessions are granted for basic services, defined as local fixed telephony, trunk and international services. At October 2004, COPACO had a de facto monopoly of local fixed telephony services and trunk and international services. Broadcasting and value added services are provided under a licensing regime and the other services (for example, amateur radio, local and emergency broadcasting services) require an authorization. Concessions, licences and authorizations may be renewed in accordance with the provisions set out in the respective instruments and may not be assigned without the authorization of CONATEL. Concessions granted under a written contract approved by the National Congress are for a maximum term of 20years and are subject to public bidding procedures or applications. The authorities explained that, at January 2005, there were no explicit criteria determining when a concession is granted through a public bidding procedure or at the request of an applicant. At October2004, COPACO held the only concession granted for the supply of basic services. Licences and authorizations are granted by CONATEL. Licences for broadcasting services are issued for a maximum term of 10years, renewable once only for a further ten-year period; licences for other services, including mobile telephony, are granted for a maximum period of five years, renewable at the request of the interested party. Authorizations are issued for a maximum of five years. In order to obtain a licence, the applicant must possess the necessary technical capacity and be economically solvent and may not have any partner or associated legal person who has been penalized by annulment of a licence within the previous two years. Foreign companies providing telecommunications services in Paraguay must be domiciled in Paraguay or appoint a legal representative domiciled in Paraguay (Article64). The LTC guarantees interconnection among public telecommunications service networks on the basis of principles of neutrality, non-discrimination and equality of access. Interconnection contracts are negotiated between the interested parties, and where they fail to reach agreement the matter is settled by CONATEL. Interconnection contracts must take into account the cost of the service and a "reasonable margin of profit". Interconnection charges are calculated according to a long-term incremental cost methodology, which defines incremental costs as the average of the cost related to changes in production and is calculated "where all production factors have variable costs". Resolution No.496 of 30April 2004 lays down maximum charges for interconnection to basic service networks at the national level, mobile telephony networks and PCS networks. Providers of telecommunications services holding concessions, licences or authorizations granted following an application by the parties are subject to a single payment for each period of the contract amounting to between 1 and 5per cent of the investment planned when commencing operations. In cases where they are granted through a public bidding procedure, the amount paid for the concession, licence or authorization is determined in the terms and conditions of the bid. Holders of licences and authorizations must pay an annual fee for using the radioelectric spectrum (with some exceptions): the amount is determined by CONATEL and depends, inter alia, on demand for the service and the minimum wage at the time of determining the fee. All the fees mentioned above are administered by CONATEL and form part of its resources. The LTC grants CONATEL the right to fix the tariff regime. Tariff ceilings are determined for public services and other telecommunications services provided in markets that are not "sufficiently competitive" (Article95). For public services, for example, fixed telephony services, (which include local, trunk and international calls) the maximum price applies, and CONATEL fixes it for each type of service. The maximum price for local telephony services for COPACO is G/120 per minute. These maximum prices are determined in the concession contract and are reviewed every five years. For other telecommunications services, for example, mobile telephony, the system used for the purposes of control is "reasonableness" under which there are no price controls except when CONATEL considers that the services are having a harmful effect on competition, in which case it has the right to intervene to remedy the situation. For cellular telephony, the General Tariff Regulations (RGT), approved under Decree No.16.761 of 26March 2002, abolished the tariff ceilings. The authorities have pointed out that, in early 2005, the prices for these services were below the maximum values in effect up until 2002 because of the competition and the freeing of tariffs under the RGT. In the case of fixed telephony services, CONATEL may determine tariffs and differential rates with temporary reductions in geographical areas where there are no efficient public telecommunications services, for reasons of public interest or to encourage or promote services at the regional level. The determination of these tariffs may involve subsidization. CONATEL administers a universal services fund set up under the LTC in order to develop public telecommunications services. The fund's objectives are: to promote the expansion of public services in rural areas and places of public and social interest by financing and developing access to public telecommunications services and by maximizing the economic benefits of telecommunications services by providing other services. Fortyper cent of the fund's resources are derived from 40 per cent of the receipts from operating fees, which are mandatory, and from voluntary contributions by Paraguayan or foreign natural or legal persons. Universal services are provided through a licensing regime under which licences are granted following a bidding procedure for a renewable period of five years. The major part of the fund's resources has been used to grant financial support for the development of a public telephone network throughout Paraguay. The universal services fund's annual resources are US$1million and it has disbursed US$16million of assistance since 1997. Paraguay has made no telecommunications commitments under the GATS. Financial services In terms of share of GDP (without including indirect taxes), financial intermediation services (banking and insurance) accounted for 2.8per cent in 2003, lower than the 4.6per cent in 1997. In real terms, the value added of the financial intermediation subsector fell by an annual average of 8.1per cent during the period 1997-2003, dropping to G/933billion in 2003. In October 2004, the financial services subsector comprised 14commercial banks, one development bank, 13financial companies, 503cooperative associations, 36insurance companies, and 30businesses in the form of brokers, trusts, savings and loan associations and general deposit warehouses. The financial subsector provided 0.82per cent of total jobs in 2003. Banking services Market structure In October 2004, assets and deposits in banks amounted to G/13,330 and G/11,192billion respectively (US$2,197 and US$1,849million respectively at the exchange rate prevailing in July2004). In 2002, a study noted that the banking services market was highly concentrated. The authorities have pointed out that this is because some financial institutions withdrew from the market, mainly those with Paraguayan capital, following the banking crises from 1995 to 1997. The banking classification used in Paraguay is based on the origin of the bank's capital. Direct foreign subsidiaries are fully foreign-owned (Citibank, N.A., Lloyds TSB Bank, ABN Amro Bank, Banco do Brasil, Banco de la Nacin Argentina and Chinatrust Commercial Bank). Branches with majority foreign participation are institutions in which the majority of the capital is foreign-owned (InterbancoS.A., Banco Sudameris SAECA, BBVA Argentaria Paraguaya S.A. and Banco Integracin S.A.). Banks with local majority participation are called majority locally-owned (Banco Regional S.A., Banco Amambay S.A. and Banco Continental SAECA), and the public bank is classified as State-owned (Banco Nacional de Fomento, BNF). In terms of assets, in October 2004 the largest bank was ABN Amro (with 14.8per cent of the total), followed by Interbanco S.A. (13.9per cent of the total) and BBVA (13.8per cent of the total). In August 2004, subsidiaries and branches controlled 76.6per cent of the market's assets and 77.8per cent of deposits. The BNF is an economic development bank set up in 1961 and is wholly State-controlled. In August 2004, it controlled 9.4per cent of the system's assets and had the most extensive network of branches throughout Paraguay. Using resources from the Industrial Development Fund, the BNF finances 70per cent of a project through short- and long-term loans (up to 48months and 10years for paying off a loan respectively), taking into account the production schedules and the income generated by the project. The authorities have pointed out that the loans granted by the BNF are at market interest rates. In August 2004, the BNF's loan portfolio focused essentially on wholesale trade (33per cent), agriculture (29per cent) and industry (15per cent). In 2003, the authorities imposed limits on the loans granted by the BNF in order to adapt its portfolio to the reform of public first-tier banks. In August 2004, loans written off by the BNF amounted to 57.6per cent of its total portfolio in Guaranes and 96.1per cent in foreign currency. In 2003, cooperative associations had a high level of liquidity and controlled around 20per cent of financial assets in Paraguay. They provide services such as micro-loans and financing. The 25largest cooperatives control some 80per cent of all the financial assets of cooperative associations. In 2003, their assets had more than doubled since 1998 and amounted to US$82million, with loans totalling US$100million. Finance companies are another important part of the Paraguayan banking subsector. At August 2004, they had G/1,272.8billion in assets and G/948.2billion in deposits. At that time, there was a high level of concentration and the four largest finance companies controlled 60per cent of assets and 65per cent of deposits. Since 1997, the financial subsector has continued to suffer from the effects of the 1995 financial crisis. During the period 1995-1998, 50per cent of banks and finance companies were subjected to controls and the number of financial entities was considerably reduced. These upheavals led to a readjustment of the market and a high level of concentration. During the period under review, the BCP took over the debts which the finance companies audited (including those that went bankrupt) had with depositors. In 2003, the Deposit Guarantee Fund (FGD) was set up, financed through contributions from finance companies and the BCP (see below). The first deposits with the fund were made by private financial entities in October 2004. The finance system went through a crisis in 2002 and this led to a temporary fall in banking deposits. The financial situation has improved and the authorities have pointed out that loans in Guaranes started to recover in mid-2004. The Ministry of Finance (MH), together with the BCP, signed an agreement with the Association of Paraguayan Banks to increase the loan portfolios for the production sector by a total of G/600billion. Likewise, the MH and the BCP signed an agreement with the Association of Finance Companies to authorize lines of credit for G/300billion at a reduced interest rate of 15per cent annually. Regulatory framework The BCP is responsible for determining policy for the financial intermediation subsector. The Superintendency of Banks (SB) supervises all the regulatory aspects of the subsector (with the exception of cooperative associations) and is part of the BCP. The activities of cooperative associations providing financial intermediation services are overseen by the National Cooperative Institute (INCOOP) and, in early 2005, they were not subject to the provisions of Law No.861 of 24June 1996 (see below). The financial subsector is structured according to Law No.861/96, which lays down the guidelines for the organization and establishment of financial entities, protection of the financial system and procedures for ending operations within the system. Law No.861/96 incorporates the Basel Provisions on the supervision of banks and capital requirements. The organization and commencement of operations by all firms providing financial intermediation services must be approved by the BCP Board of Directors, subject to a favourable opinion on the part of the SB. Firms that form part of the financial system are set up as public limited companies, except in the case of those set up under a special law or subsidiaries of foreign banks (Article10). Financial institutions must be founded on foreign or Paraguayan owned capital. The Law does not impose any criteria regarding nationality of the members of the board of directors or the shareholders of financial institutions operating in Paraguay. After an application to commence operations has been submitted to the BCP, the latter has three months in which to take a decision; if the application is rejected, the applicant may present another application after two years. Law No. 861/96 provides that the requirements applicable to banks and finance companies (see below) before commencing operations are determined by the BCP (Article13). They must include the following: draft articles of incorporation, a programme of activities to be conducted, an internal system of control and auditing and a report to shareholders of the public limited company regarding participation in the registered capital and the moral and economic solvency of the members of the board of directors and administrative bodies. It prescribes that, in order to be able to administer assets, act as securities brokers or general deposit warehouses, a separate financial institution must be set up, defined as a subsidiary under Law No.861/96 (Article18). These firms must also be set up as public limited companies and their activities must be approved by the BCP subject to a favourable opinion by the SB (Article18). Law No. 861/96 places limits on the control of shares by individuals. No finance company may hand over more than 20per cent of its net assets to one shareholder. Any person owning shares in a bank that allow it to gain decisive control over the bank's social determination may not own more than 20per cent of the shares of another bank, finance or loan company. No bank may allow a natural or legal person to own more than 20per cent of its tangible assets in loans and contingent instruments, in the case of persons resident in Paraguay, or 5per cent in the case of persons resident outside Paraguay. The SB may, however, increase these limits to 30 and 20per cent respectively if it can be shown that the operation is guaranteed. No bank may allow more than 30per cent of its net assets to be owned by another bank or finance company in the form of loans or deposits, together with securities, bonds and other guarantees. Banks may not give security or guarantees or any backing for the obligations of third parties for an undefined or indeterminate amount or time. The minimum paid-up capital to be maintained is adjusted annually according to the consumer price index and in October 2004 it was established by the SB as follows: banks (G/19,242million), finance companies (financial institutions proposing various services, including savings and loans, buying and selling of precious metals and financial leasing, inter alia) (G/9,621million), building societies (G/9,621million), general deposit warehouses (G/1,925million), foreign exchange bureaux (G/1,782million) and trusts (G/9,621million). Companies with foreign capital must maintain the minimum capital required of companies with Paraguayan capital and it must be paid up before commencing operations in Paraguay (Law No.861/96, Article 11). Law No. 861/96 provides that foreign investment in financial institutions is subject to the same treatment as investment of Paraguayan capital (Article7). In addition, the Law prescribes that public banks may not receive preferential treatment from the BCP. All financial institutions must maintain a legal reserve equivalent to 100per cent of their total paid-up capital (Article27). The reserve is built up through annual allocations of 20per cent of net profits and is used to cover any potential operating losses. Pursuant to Law No.2.334, financial institutions that fail to meet certain criteria must put forward a plan to regularize or close the firm. The procedure for closing companies laid down in the Law is based on a system of transfer of active and passive portfolios, which is intended to ensure the rapid and efficient closure of a firm. Law No. 861/96 set up a Risk Register as part of the SB in order to evaluate risk information on clients. All financial institutions are obliged to disclose the necessary information to the SB in order to keep the Register up to date. In addition, in order to protect the financial system, Law No.2.334 established the FGD. This Fund is used to guarantee savers' deposits in financial institutions that have been liquidated. The guarantee is for a maximum of 75minimum wages per person. The FGD is administered by the BCP and has the following resources: US$50million contributed by the State (which may be totally or partially in the form of bonds), quarterly mandatory contributions by financial intermediation companies in proportion to the average balance of their deposits, and additional State bonds where necessary. Contributions to the Fund by private financial entities amounted to approximately US$2million in November 2004. Paraguay has legislation to combat money laundering. Law No.1.015 of 3December 1996, implemented by BCP Resolution No.2 of 2May 1997, lays down the general provisions against money laundering. It set up the Secretariat for the Prevention of Money or Asset Laundering, whose functions are regulated by Decree No.16.570 of 18March 1997. The Secretariat compiles and analyses information concerning possible money laundering, keeps statistics and investigates possible instances of money laundering. At the beginning of 2005, Congress was considering a draft law to regulate the functioning of public banks. This draft envisages the creation of a financial agency to act as a second-tier bank and the dissolution of several public credit agencies. Paraguay undertook specific commitments on the financial subsector under the GATS. These allow commercial presence for savings and loan banks. The commitments also guarantee modes of supply1, 2 and 3 for financial consultancy services, loan intermediation, foreign exchange and the packaging of bank notes and coins. In the latter case, the presence of natural persons is restricted to specialists. Insurance and securities Market structure The insurance subsector's contribution to GDP in 2003 and 2004 was 0.98 and 0.96per cent respectively. Direct premiums collected during the period 1997-2002 increased by an annual average of 7.7per cent, reaching G/371,653million (US$56.7million at the current rate of exchange). As regards the breakdown in the total value of premiums in 2003 (for life and other types of insurance), life insurance premiums accounted for 6per cent while premiums for all other contracts represented 94per cent, and this ratio continued in 2004. During the period 1997-2002, the value of capital insured and reinsured increased substantially, especially in 2000 (57 and 151per cent respectively). Direct premiums per capita amounted to US$9.6 and US$11.5in 2003 and 2004 respectively. In early 2005, 36companies provided insurance services in Paraguay and 32 offered reinsurance services from outside Paraguay. None of the reinsurance companies is domiciled in Paraguay. The average assets of insurance firms in 2003 and 2004 were US$994,168 and US$1,125,115 respectively. In June 2003, the largest insurance companies in terms of net premiums (both those withheld and ceded) were Mapfre Paraguay S.A. (12per cent), La Consolidada S.A. (11per cent) and Real Paraguaya (11per cent). Regulatory framework The Superintendency of Insurance (SS) reports to the BCP's Board of Directors but is autonomous. It is responsible for framing policy for the insurance and reinsurance subsector as well as for supervising, regulating and ensuring compliance with all the legal provisions affecting the subsector. In particular, the SS classifies companies according to their margins of solvency and intervenes in those companies in which serious irregularities have been detected irrespective of their financial situation. There is a Consultative Insurance Council, composed of members of associations of insurance companies, loss adjusters and insurance brokers, who give the SS their opinion on draft laws, accounting system standards and general issues relating to the subsector. The subsector is organized on the basis of Law No.827 of 12February 1996, which lays down the general statutes governing the subsector, the responsibilities and obligations of the SS, procedures for adjusting claims, and divides insurance into two types (life insurance and asset insurance). Resolution No.17 of 1July 1996 defines the margins of solvency and the guarantee fund for the subsector. At the end of 2004, all insurance companies in Paraguay provided asset insurance, but only two offered life insurance. Law No. 827/96 defines the requirements for obtaining an authorization to commence supplying insurance services as follows: (i)the company providing insurance services must be legally established; (ii)it must be exclusively devoted to providing insurance; (iii)it must maintain the minimum capital required (see below); (iv)the persons in charge and those legally responsible must not have been legally disqualified; (v)the insurance plans must meet the technical requirements; and (vi)in the case of foreign companies, the balances for the previous five years must show margins of solvency at least equal to those required of Paraguayan companies (Article8). Any firm seeking to offer insurance in Paraguay must be set up as a public limited company or be a subsidiary of a foreign company. Law No.827/96 specifies that subsidiaries of foreign companies are authorized to operate under the same conditions as public limited companies set up in Paraguay (Article6). Insurance companies may provide only insurance services, which include the issue of securities and guaranteeing bonds to third parties (Article8). Minimum capital of US$500,000 is required in order to engage in the insurance business in Paraguay. Law No.827/96 does not lay down any requirements as to the nationality of the members of the board of directors of the insurance company. All insurance companies must keep a guarantee fund equivalent to 30per cent of their own uncommitted assets. Even though Law No.827/96 provides that insurance companies should preferably invest their capital and reserves in Paraguay (Article22), the authorities have indicated that this provision is not regulated and does not apply in practice. Law No.827/96 allows the establishment of reinsurance companies in Paraguay for the two types of insurance defined in the Law. It states that reinsurance of risks on the basis of premiums may be carried out in Paraguay only by enterprises authorized by the SS unless otherwise provided in international agreements and treaties (Article125). Reinsurance companies established in Paraguay must constitute and maintain assets of not less than US$2.5million for each of the branches in which they operate. They must also be registered with the SS. For foreign reinsurers, registration requires an official certificate of operations from the country in which the headquarters are located and annual balances and reports for the previous three years, duly authenticated in the country of origin. Paraguay undertook commitments on insurance and reinsurance under the GATS (see TableIV.4). These allow the presence of insurance and reinsurance specialists and the commercial presence of insurance and reinsurance companies (see above). Paraguay's commitments under the GATS guarantee national treatment and market access for modes of supply1, 2 and 3 for reinsurance services. Law No.1.284 of 29July 1998 organizes and regulates the operation of the securities market in Paraguay. It prescribes the general provisions on the activities of the stock market; it also defines the functions of the National Securities Commission, which is responsible for supervising and regulating the market's activities. Public offer of foreign securities is allowed and must have prior approval by the Commission. Approval is subject to reciprocal treatment in the foreign country in relation to national securities or is given where, in the opinion of the Commission, it is in the interests of Paraguay. The issue of foreign securities in Paraguay by companies issuing securities in MERCOSUR countries or countries associated with MERCOSUR is governed by the guidelines laid down in the Colonia Protocol. Law No.2.421 of 11June 2004 exempts from payment of the IRACIS income earned from interest or profits in the form of capital gains obtained from the sale of bonds or debt instruments issued by the State or municipalities on the stock exchange. This Law also provides that interest, commission or profits obtained from investment, deposits or placing capital in finance companies covered by Law No.861/96 are also temporarily exempt from income tax (Article15). River transport Features In real terms, activities and supply of services in the river transport subsector (cabotage and merchant marine, not including port activities) amounted to 0.3per cent of the GDP in 2003, having remained at the same level throughout the period 1997-2003. Over the same period, river transport, measured in real terms, increased its share of the overall transport sector slightly, reaching 9.5per cent in 2003. The subsector employed approximately 1,400people in 2003. Paraguay has ports and wharfs on the Paraguay River(31) and the Paran River(51), of which Asuncin, Petropar/Villa Elisa, San Antonio/Villeta and Concepcin on the Paraguay River and Encarnacin, Paloma/Triunfo, Tres Fronteras and Don Joaqun/Paredn, on the Paran River have the largest flow of commercial traffic. The majority of domestic river traffic in the public ports, controlled by the National Shipping and Ports Authority (ANNP), is in Asuncin. Traffic in the private ports (not including the PAKSA port) was 1.8million tonnes in 2002 and 2.9million tonnes in 2003. During the period 2002-2004, river traffic amounted to 3.2, 4.4 and 5.9million tonnes respectively. In 2003 the Paraguayan fleet registered with the General Merchant Marine Directorate (DGMM) consisted of 1,189vessels, 52.4per cent of which were lighters. During the same year, 1,021vessels were registered with the DGMM for international transport of goods, with bulk carriers being the most numerous and carrying the highest tonnage. The State-owned enterprise Flota Mercante del Estado S.A. (FLOMERES) was privatized in 1996. According to the United Nations Conference on Trade and Development, the cost of transporting goods per tonne (freight and insurance) to and from Paraguay is high in comparison with other countries in the Americas. This is because Paraguay, as a landlocked country, uses ports in Argentina, Brazil and Uruguay to ship its exports and imports, which are transported along the Paran or Paraguay Rivers in smaller vessels (mostly convoys of lighters) to and from Paraguayan ports. Paraguay has free ports and in-bond warehouses in various maritime ports in the region for the purpose of receiving, storing, handling and transhipping goods. These are in Argentina (BuenosAires and Rosario), Brazil (Paranagu, Santos and Rio Grande do Sul), Chile (Antofagasta and Iquique); and Uruguay (Montevideo and Nueva Palmira). In early 2005, Paraguay was negotiating the use of the port of Ilo with Peru. Regulatory framework In November 2004, Government policy objectives for this subsector were to improve the capacity and security of the control and use of port facilities, promote the expansion of the lighter fleet and lower the cost of river transport. The agency responsible for regulating the subsector is the DGMM, which is part of the Ministry of Public Works and Communications (MOPC) and was set up under Law No.429 of 15June 1957. The DGMM is responsible for supervising and coordinating all activities relating to the national merchant marine and associated industries and for giving the Executive technical advice on river and maritime transport policies, in particular, proposing legislation, making the administrative regime more flexible and promoting the general development of the subsector. It also keeps a register of national and foreign vessels operating in Paraguay, establishes the labour regulations for those working on the vessels and keeps a register of all professionals engaged in merchant marine activities in Paraguay. The DGMM is also the body that hears appeals against sanctions imposed by the General Port Inspectorate when they involve cessation of activities for over six months. Activities in the subsector are organized in accordance with a number of treaties, agreements, conventions and laws. These are the following: Law No.476 of 15October 1957 (River and Maritime Navigation Code, CNFM), implemented by Decree No.6.984 of 30September 1959 and amended by Law No.205 of 28August 1959 and Law No.1.448 of 13July 1999; Law No.295 of 24November 1971 (Law on the Reservation of Cargoes), implemented by Decree No.27.371 of 19August 1981 and Law No.928/27 (Harbour Regulations), supplemented by Law No.1.158 of 14November 1985. The CNFM lays down the rules and regulations for the Paraguayan merchant marine while Law No.295 reserves part of the goods transported by river and by sea to vessels flying the Paraguayan flag. The CNFM classifies vessels into Paraguayan and foreign vessels (Article7). In order to be considered Paraguayan, vessels must comply with the regulations in force, the ship's master or owners must be Paraguayan, as must a minimum number of the crew specified by the DGMM (Article10); the authorities have stated that, pursuant to Decree No.2.785/59, twothirds of the crew must be Paraguayan nationals. Foreign vessels that wish to be registered in Paraguay must be certified by an international ship classification company to ensure that the safety requirements for operating have been met. The ship's master and owners, as well as twothirds of the crew, in the Paraguayan merchant marine must be Paraguayan citizens (either by birth or naturalized). Ratings need not be Paraguayan. Foreigners working in the merchant marine may have their professional qualifications endorsed in accordance with the provisions contained in international treaties, reciprocity or Law No.1.158/95. Foreign vessels must take on a pilot of Paraguayan nationality when entering Paraguayan waters and when entering or leaving a port. Paraguayan legislation reserves all maritime and river transport of imports and exports to Paraguayan-registered vessels. If the cargo is coming from or going to LAIA member countries, provided that the capacity exists, the requirement for maritime transport is up to 50per cent and for river transport at least 50per cent. While not abolishing the restrictions on volumes of imports and exports transported by sea, the Hydrova Treaty did remove the restrictions in respect of river transport by vessels registered in the Treaty's member countries (Bolivia, Brazil, Paraguay and Uruguay) (Law No. 269 of 13 December 1993, Article II). The cargo restrictions concerning river transport under the Hidrova Treaty laid down in the original legislation remain in force for vessels registered in countries that are not party to the Hidrova Treaty. Paraguay does not engage in maritime transport so, in practice, these restrictions do not apply. The authorities have pointed out that this provision is observed through export and import certificates and, in 2005, the SOFIA System in the General Customs Directorate and the Simplified Export Programme in the Ministry of Industry and Trade were to be linked. Cabotage traffic is restricted to Paraguayan-registered vessels. Any vessel used for international maritime or river transport must be registered with the DGMM. The cost of registration varies according to the vessel's tonnage and ranges from 0.5 to 2minimum daily wages. Vessels carrying imports or exports subject to the cargo restrictions must pay an annual certification fee, which also varies according to the tonnage and ranges from 0.5 to 2minimum daily wages. Decree No. 7.692 of 23 February 2000 incorporated a river transport subsector into the investment incentives regime established by Law No.60 (see ChapterIII(4)(iii)). In the International Maritime Organization, Paraguay has signed the 1948 IMO Convention, the SOLAS Convention (Safety of Life at Sea) of 1974 and the SOLAS Protocol of 1988. These Conventions have been ratified and incorporated into Paraguay's domestic legislation. Paraguay has also signed the Inter-American Convention on Facilitation of International Waterborne Transportation (Convention of Mar del Plata) of 7June 1963, which has likewise been incorporated into domestic legislation. Law No. 269 of 13 December 1993 ratified the Agreement on the Paraguay-Paran River Waterway, including the six additional protocols. The objective of this agreement is to facilitate commercial river navigation and transport along the Paran-Paraguay Waterway (Hidrova) and to lay down provisions applicable to navigation, trade and transport of goods and passengers including use of the Waterway. Paraguay has also signed bilateral agreements with Argentina, namely, the Navigation Treaty (incorporated into Paraguayan legislation under Law No.1.202/67) and the Convention on Cross-Border River Transport of Passengers, Vehicles and Cargo of 31July 1972 (incorporated under Law No.368/72), as well as the Convention of 25October 1996 on avoiding double taxation relating to international air, river and land transport, which has been incorporated into domestic legislation under Law No.1.105 of 14August 1997. There are no bilateral agreements on river transport between Paraguay and Brazil other than the Hidrova Treaty. Ports and auxiliary services All State ports are managed and operated by the National Shipping and Ports Authority (ANNP), established by Law No.1.066 of 23August 1965, and the Ministry of Public Works and Communications is responsible for relations with the Executive. The ANNP is also responsible for keeping the rivers navigable. In order to meet its objectives, the ANNP may, inter alia, plan, design, expand and build ports, exploit the port services under its responsibility, conduct technical studies into navigability conditions in rivers and collect the revenue from fees paid for use of ports. The DGMM is responsible for compliance with dock labour regulations. The authorities have indicated that, in February 2005, there was no private or foreign participation in State-owned port operations, even though there are agreements and strategic associations for this purpose. Decree No. 16.217 of 23 January 2002 sets the rates imposed by the ANNP for various services in State-owned ports. The maximum charge for using a wharf is G/1,000 and the maximum cost of towing is G/450,000. There are also additional costs for the use of public ports depending on the type of goods: 0.65per cent of the taxable customs value for some goods and 0.90per cent for others, with some taxes reaching 1.75per cent. Exports pay 0.325per cent of the taxable customs value on an advalorem basis for products exported through these ports. The authorities have stated that all ports in Paraguay impose charges for storage, in the form of a percentage of the taxable customs value of the goods, and storage is charged according to the length of time the goods remain in the port area. At the beginning of 2005, the ANNP was preparing a draft to amend, update and modernize its charges, which should be approved during the first half of 2005. Law No. 419 of 1September 1994 established a regime for the building and operation of private ports on navigable rivers. Decree No.14.402 of 23August 2001 gave the DGMM responsibility for implementing Law No.419 and established the Port Department for that purpose, under the DGMM. Authorizations to build and operate private ports are given only to companies registered in Paraguay, in accordance with the procedures laid down for each company (see ChapterIII(4)(i)). All investment in building private ports is eligible for the benefits under Law No.117 of 7January 1992, which provides that both Paraguayan and foreign investors have the same rights, guarantees and obligations. The management of each port has the authority to fix fees and charges for use of its facilities, which are collected and paid in accordance with the banking regulations in force (Law No.419, Article8). Air transport Features In real terms, air transport's contribution to GDP decreased slightly during the period 19972003, reaching a figure of 0.2per cent in 2003. Air transport's share of the total value of transport services measured in real terms fell by an annual average of 4per cent and amounted to 6.1per cent in 2003. Total passenger movement in the two most important airports in Paraguay (Silvio Pettirossi in Asuncin and Guaran in Ciudad del Este) fell sharply by an annual average of 6.5per cent during the period 1997-2003. The largest reduction in passenger movement was for passengers of international flights to Guaran airport. The average number of passengers on international flights was 81per cent of the total number of passengers during this period. From 1997 to 2003, the total number of flights to Paraguay's two main airports fell by an annual average of 6.7per cent to arrive at a total of 28,113 in 2003. Paraguay has four international airports (in Asuncin, Ciudad del Este, Mariscal Estigarribia and Pedro Juan Caballero), as well as nine airfields throughout Paraguay. The Itaip and Yacyret Binational enterprises (see section(5) above) operate private airfields with limited public use. In November 2004, four airlines had regular international flights to Paraguay, none of which were Paraguayan-owned. Regulatory framework In November 2004, the public policy objective for the subsector was to lower the cost of air transport. Public policy in the air transport subsector is formulated by the National Civil Aviation Department (DINAC), established by Decree-Law No.25 of 1990 approved (with amendments) by Law No.73 of 8November 1990, as amended by Law No.2.199 of 8September 2003. DINAC is an autonomous body and is also responsible for regulating the subsector. Its objective is to oversee all the regulatory aspects of the subsector; in particular, to review and propose policies for the subsector, to manage and maintain air transit services (including the air safety systems) and to coordinate national and international plans with other State agencies. DINAC has the following components: (i)the President of DINAC, who is the highest authority and is appointed by the Executive, which also has the power to dismiss him; and (ii)the services directorates, including the Directorate of Aviation, the Directorate of Airports, and the Directorate of Meteorology and Hydrology. The air transport subsector is organized on the basis of Law No.1.860 of 7January 2002 (Aviation Code, CA), supplemented by regulations concerning, inter alia, air navigation, licences for aviation personnel, investigation and prevention of accidents, technical regulations, issuing of certificates to operate services (DINAC Manual 600, approved by DINAC Resolution No.860 of 13December 2004). The CA also governs the operation of DINAC. Aircraft that are listed and registered in the National Aviation Register (RAN) are of Paraguayan nationality. All aircraft must be listed in the RAN, which requires certification that the president, general manager and twothirds of the board of directors of the company owning the aircraft are Paraguayan nationals (DINAC600, Article5.1.6). Licences and approval certificates issued to Paraguayan personnel and licences issued outside Paraguay and previously endorsed by DINAC must be registered in the Administrative Aviation Register (RAA). Failing any agreements regarding the procedures, endorsement is subject to the same conditions applied to Paraguayan licences abroad. Operation of international air transport services must be authorized by the Executive, while within Paraguay services only require authorization by DINAC (Article113). The procedure for obtaining authorization from the Executive is set out in the DINAC600 manual. All applications must meet the legal, economic and technical requirements. Cabotage services are restricted to aircraft listed and registered in the RAN or foreign aircraft leased by Paraguayan enterprises. The operation of cabotage services is carried out by Paraguayan natural persons or legal persons established in Paraguay. All goods imported and delivered to DINAC which are collected before storage pay a fixed fee amounting to 1per cent of the taxable value indicated on the customs document. Goods kept in storage pay a fee according to the time they remain in the warehouse (1per cent of the taxable customs value for the first 10days, 2per cent for the next 12 days, 3per cent for the following 30days and 4per cent for each additional period of 30days), plus an additional US$1 per cubic metre or fraction thereof occupied. All goods exported and stored pay to DINAC 50per cent of the rate applicable to import cargoes and 80per cent of the rate for special storage. All export cargoes directly transported onto the aircraft pay a fee equivalent to 0.5per cent of the taxable value shown on the final customs clearance or record. If the customs technical units do not determine the taxable value of the export shipments, the latter are subject to payment of US$0.2 for each gross kg of freight to be loaded. The authorities have indicated that if the freight is defined as special cargo, the cost is US$0.4 per gross kg of cargo to be shipped. Paraguay is party to several international agreements and conventions on air transport services. Law No.9 of 22July 1948 ratified the 1944 Chicago Convention, as well as all its annexes. Law No. 1.114 of 8September 1997 ratified the Agreement on Subregional Air Services (Fortaleza Agreement) among member countries of the MERCOSUR, Bolivia and Chile. Its goal is to open up new scheduled subregional air services on routes other than those existing in 1996 in order to promote the development of new markets. Paraguay has signed 18bilateral agreements on air transport with: Argentina, Belgium, Bolivia, Brazil, Chile, Chinese Taipei, Costa Rica, Ecuador, Germany, Mexico, Netherlands, Peru, Senegal, Spain, Switzerland, the United States, Uruguay and Venezuela. It has also signed four treaties on double taxation, with Germany (enacted in 1984), Belgium (enacted in 1987), Chile (adopted in 1993) and Uruguay (enacted in 1991). Airports and auxiliary services The CA divides airfields into public and private airports, the former being intended for "use by any aircraft authorized to fly" and the latter "for private use by natural or legal persons" (Article68). The authorities have stated that the former are used for passenger transport, whereas the latter are used for agricultural, livestock, and industrial activities. Law No.73 provides that public airports, airfields, heliports and hydroports in Paraguay shall be managed by DINAC. The latter manages the four international airports and the main domestic airports. The building and operation of airfields is subject to DINAC's provisions. The provisions laid down in international agreements apply to the building and operation of airports as there is no relevant domestic legislation. In early 2005, regulations based on Annex14 to the ICAO Convention were being drawn up. Decree No. 10.131 of 23August 2000 authorizes the establishment and operation of duty-free shops in Paraguay's international airports. They may be managed by any natural or legal persons subject to twice-yearly payment to the Ministry of Finance of 5per cent of the value of gross sales. There are no provisions regulating the supply of other services in airports. Decree No. 14.229 of 8August 2001, as amended by Decree No.17.735 of 3July 2002, lays down the charges for aviation services and the fees to be paid to DINAC in airports and airfields. The charges and fees laid down in Law No.14.229 form part of the resources of DINAC. Land transport In real terms, the contribution of the transport sector to the GDP remained basically unchanged during the period 1997-2003 at an average level of 2.9per cent. The share of land transport in the total real value of transport services was the largest with an average of 83per cent during the period 1997-2003. Paraguay's highway network is composed of 15,097kilometres, of which 23.5per cent is paved. In 2003, the majority of international freight controlled at land border posts left Paraguay through Ciudad del Este (66per cent). The Directorate of National Transport (DINATRAN) is a decentralized body with its own legal status established under Law No.1.590 of 16September 2000. It formulates and implements public policy for the subsector. The DINATRAN Council, which is its highest authority, is composed of representatives of regional governments, the central Government in Asuncin, entrepreneurs and employees in the subsector, a representative of the Ministry of Justice and Labour, and the National Director of Transport, who is appointed by the Executive. DINATRAN communicates with the Executive through the Ministry of Public Works and Communications (MOPC) (Law No.1.590, Article12). DINATRAN has regulated several aspects relating to land transport services such as fines, loads and tariffs. Paraguay has signed the International Land Transport Convention with Argentina, Bolivia, Brazil, Chile, Peru and Uruguay. Tourism In terms of share of GDP, the contribution of the tourism sector, which essentially includes restaurants and accommodation, fell from 1.3per cent in 1997 to 1.1per cent in 2003. During the period 1997-2003, earnings from tourism decreased by an annual average of 11per cent and in 2003 amounted to US$63.6million. Over the same period, tourism generated US$588.3million in foreign currency, which in 2003 corresponded to approximately 20per cent of total exports of goods and services. Tourist arrivals in Paraguay experienced a marked decline between 1997 and 2003 (an annual average of 32.1per cent), amounting to 268,175 in 2003, when there was a slight recovery. The number of day visitors (persons who do not spend the night in Paraguay and remain less than 24hours) also decreased significantly and steadily throughout the period 1997-2003 by an annual average of 21per cent, giving a total of 2.6million in 2003. From January to October 2004, 64.2per cent of all tourists (excluding day visitors) came from Argentina, 16.1per cent from Brazil, while those from Europe and North America amounted to 6 and 4.7per cent respectively. The public policy objectives in this subsector are the following: to encourage collaboration with businesses, chambers of commerce and other organizations in the services sector, to promote tourist services, to draw up a new classification of existing services, and to quantify services. The Government of Paraguay is also seeking to attract private sector investment in the subsector in order to boost its development. The National Tourism Secretariat (SENATUR), established by Law No.1.388 of 30December 1998 and regulated by Decree No.8.327 of 14April 2000, formulates public policy for the subsector. The authorities have indicated that, early in 2005, a draft law extending SENATUR's functions under Law No. 1.388 was under consideration. SENATUR is also responsible for drawing up regulations for the subsector and for implementing public policy. It keeps a register of tourism businesses for companies that reserve and sell tickets, hotels, guest houses, inns and companies which organize travel and/or excursions. Listing in the register is free of charge. Resolution No.126 of 11December 2003 covers the operation of tourism companies. It divides tourist services into two types: those provided by travel and tourist agencies (direct contact with consumers) and wholesale tour operators. Both types of operator must be registered with SENATUR. No business with operations in the banking, financial or cooperative sector may provide tourism services. Persons operating travel and tourist agencies must be authorized by SENATUR. Branches of foreign travel and tourist agencies and wholesale tour operators wishing to become established in Paraguay must be registered as wholesale tour operators with SENATUR. The authorities have indicated that, in early 2005, legislation to regulate the tariff regime for the subsector was being prepared and would be implemented through SENATUR. At that time, Resolution No.126 only specified the tariff ceiling below which suppliers of services could fix a profit margin of up to 10per cent above the rates fixed by travel and tourist agencies (which are commissioned by SENATUR) if the tariffs were "net prices" (Article30). Investment in tourist hotels and hostels is covered by the provisions of Law No.60 of 26March 1991 (see ChapterIII(4)(iii)). The authorities have indicated that there are no other legal provisions promoting investment in this subsector. Law No. 125 of 9 January 1992 replaced the special import regime for goods sold in the border cities of Ciudad del Este, Pedro Juan Caballero and Encarnacin, which was superseded by a regime based on reductions in the taxable bases for the value-added tax on each product (see ChapterIII(2)(v)). Paraguay is a member of the World Tourism Organization. It is a signatory to the Agreement for the Promotion of Tourism in South America signed on 4May 1992 by the MERCOSUR countries and Bolivia, Colombia, Chile, Ecuador, Peru and Venezuela. This Agreement lays down the bases for policy coordination by the signatory countries in order to promote South America as a tourist destination. Law No.341 of 23May 1994 ratifies the Agreement for the Promotion of Tourism in South America, as well as the Tourism Cooperation Agreement between Paraguay and Argentina, concluded on 12August 1991. The latter Agreement sets out the general principles for cooperation between the two countries and provides for reciprocal treatment in the tourism subsector. Paraguay undertook tourism commitments under the GATS. These allow modes of supply1, 2 and 3, without limitations on market access or MFN treatment for hotels and restaurants and for tourist guide services. The presence of natural persons, in both cases, is limited to specialists. Modes of supply1 and 2 are also guaranteed for travel and tourist agencies without limitations on market access or MFN treatment. Mode of supply3, in this case, only allows market access for tourist operators dealing with travellers from abroad and no commitment on MFN treatment has been bound. The physical presence of persons in the travel and tourism subsector is limited solely to specialists. 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Insfrn Pelozo, J.A. (2001), "Privatization in Paraguay: Some Lessons", The Quarterly Review of Economics and Finance, Vol. 41, pp. 737-753. Insfrn Pelozo, J.A. (2003), "El Sector Financiero Paraguayo. Evaluando 10 Aos de Transicin (Liberalizacin y Crisis)" (The Paraguayan financial sector. An assessment of 10 years of transition. (Liberalization and crisis)), Asuncin, available on-line at http://www.bcp.gov.py/gee/investman/anib/lasa-columnas.pdf. International Telecommunication Union, ITU (no date), "Telecommunication Indicators", available on-line at http://www.itu.int/ITU-D/ict/publications/. MERCOSUR (2004), "Protocolo de Montevideo sobre el Comercio de Servicios del MERCOSUR" (Montevideo Protocol on Trade in Services within MERCOSUR), available on-line at http://www.mercosur.org.uy/espanol/sinf/varios/SERVICIOS.HTM (Spanish) and http://www.cvm.gov.br/ingl/inter/mercosul/montv-e.asp?orig=dp (English translation). Ministerio de Hacienda (Ministry of Finance) (2004), "Administracin Tributaria: Recaudacin por Principales Impuestos 1998-2003" (Tax administration: revenue from the main taxes 1998-2003), available on-line at http://www.hacienda.gov.py/sset/estadisticas/principales%20impuestos.pdf. Ministerio de Industria y Comercio, MIC (Ministry of Industry and Trade) (2002): "En cooperacin entre MIC, Hacienda y BID: Euclides Acevedo firma acuerdo para Ventanilla nica del Exportador" (Co-operation between the Ministry of Industry and Trade, the Ministry of Finance and the Inter-American Development Bank (IDB): Euclides Acevedo signs agreement on exporters' single window), available on-line at http://www.mic.gov.py/noticias/noti85.htm. Ministry of Industry and Trade (no date): "Metas Anuales (2004-2008)" (Annual objectives, 2004-2008), available on-line at http://www.mic.gov.py/metas_anuales.pdf. Ministerio de Obras Pblicas y Comunicaciones, MOPC (Ministry of Public Works and Communications) (2004a), "Hidrocarburos" (Hydrocarbons), available on-line at http://www.mopc.gov.py/vmme/introduccion/caminoIHidrocarburo.htm. Ministry of Public Works and Communications (2004b), "Un ao de gestin 2003-2004" (Management report for 2003-2004), available on-line at http://www.mopc.gov.py/www2004/memoria/memoria_mopc.htm. World Trade Organization (ϲʹ) (1997), "Trade Policy Review of Paraguay", Geneva. ϲʹ (2004), "Trade Policy Review of Brazil", Geneva. Petrleos Paraguayos, PETROPAR (Paraguayan State-owned oil company) (2004), "Gasoil: Clculo del Costo de Importacin y del Margen" (Diesel oil: Calculation of import cost and margin), 23 November, available on-line at http://www.petropar.gov.py/Imagenes/Graficos/CostoImportacion.gif. PETROPAR (no date), "Petroleos Paraguayos: Plan de Desarrollo Empresarial" (Petroleos Paraguayos: Business development plan), available on-line at http://www.petropar.gov.py/Documentos/PlanEmpresarial.pdf. Superintendencia de Bancos (Superintendency of Banks) (2004), "Boletn Estadstico" (Statistical Bulletin), August, available on-line at http://www.bcp.gov.py/supban/portales/BOLETINES.htm. The Economist Intelligence Unit (2004), "Country Profile - Paraguay", London. United Nations Conference on Trade and Development, UNCTAD (several years), "Review of Maritime Transport", available on-line at http://www.unctad.org. Office of the United States Trade Representative, USTR (2004), "Special 301 Report Section 306", available on-line at http://www.ustr.gov/Document_Library/Reports_Publications/2004/2004_Special_301/2004_Special_301_Report_Section_306.html.  World Bank (2003c): Comtrade database of the United Nations Statistics Division (exports/imports/GDP).  SEAM/PAR98/G32 National Strategy; Action Plan for the Conservation of Biodiversity in Paraguay, November 2003, p.22. There is no single methodology used to quantify land use in Paraguay. The MAG publishes censuses and agricultural surveys and the SEAM carries out studies using various parameters and timescales on the basis of maps and satellite images.  World Bank (2003a).  World Bank (2003a).  CAPECO (undated).  It has been stated (ϲʹ Committee on Agriculture, 3-4 December 2001) that developing countries without a coastline utilized (1994) 17.7per cent of export earnings for transport services and insurance whereas for developing countries as a whole the percentage was 8.7 per cent. Freight costs accounted for some 4per cent of c.i.f. import value in developed economies, 7.2per cent in developing countries, and 14.7per cent in landlocked developing countries.  World Bank (2003a).  Bouzas (2002).  Archer Daniels Midland (ADM), the largest soya bean exporter in Paraguay, transports soya beans to facilities in the Netherlands and Germany through reshipment points in the Cayman Islands. Paraguayan sources thus reflect exports to the Cayman Islands whereas European Union sources show the flows as imports coming from Paraguay.  The following are the most important laws: Law No. 81/92 (basic and operational structure of the MAG); Law No. 123/91 (regulations on plant health protection); Law No. 385/94 (seeds and protection of cultivars); Law No.494/21 (animal health policy); Law No. 422/73 (National Forest Service); Law No.1.356/88 (fees for providing services).  Law No. 2.157/03 (National Cooperative Institute); Law No. 2.426/04 (National Animal Quality and Health Service); Law No. 2.459/04 (National Plant and Seed Quality and Health).  Article 107 of the current Constitution guarantees competition in markets and does not allow the creation of monopolies or artificial increases or decreases in prices that hinder free competition.  In February 2005, the Government and representatives of the cotton sector reached an agreement on a basic reference price for the raw cotton crop during the 2005 harvest. The Government undertakes no commitment to pay the reference price, which is purely for information purposes.  As explained below, sugar constitutes an exception.  "Ka'a he'e" (or "stevia") is a plant used for sweetening beverages and foods and its natural sugar (steviosidosis) is sweeter than the synthetic products sold on the market such as sugar substitutes (sucrose).  Law No. 438/94, on cooperative associations, also regulates these bodies. The principle of cooperation can be found in Article113 "Promotion of cooperative associations" in the 1992 Constitution.  Title II, Chapter IX, Section II.  The calculation is based on the agricultural area in use (AAU), the soil's natural productivity coefficient (COPNAS) and exploitation of at least 30per cent of the AAU depending on the size. The following are taken into account in defining the size: large properties are those with an AAU exceeding 300hectares in the eastern region and 1,500hectares in the western region, to which a tax of 10per cent of net income applies. In the case of medium-sized properties, the taxable income is calculated on the basis of the COPNAS for each district or region, on which a tax of 2.5per cent of the taxable income is imposed. Properties where the AAU does not exceed 20hectares in the eastern region and 100hectares in the western region are exempt.  Law No. 2.421/04, Article 37 (Advance payments) provides the following: "The amounts paid by cattle owners at the time of issue of transfer bills shall be considered advances on the payment of Income Tax on Agricultural Activities, with the exception of those covered by Law No. 808/96" (Eradication of footand-mouth disease).  ϲʹ Paraguay TPR 1997.  A large share of United States agricultural imports from Paraguay also comprised cigarettes and two tariff lines for sugar with GSP preferences.  Bouzas et al. (2002).  The agricultural safeguards apply only between Peru and Argentina and Brazil.  The Government stated that, at the beginning of 2004, G/ 23,891.4million were available for investment, to which were added a further G/ 14,049.3million, giving a total of G/ 38,030.8million. At the end of 2004, 100per cent of this had been used up and unsatisfied demand amounting to G/ 5 billion would have to be covered in 2005.  Agrarian reform is also covered in Article115, "Objectives of Agrarian Reform" and Article116, "Unproductive Estates".  The forecast for the livestock sector for 2005 shows favourable conditions as a result of an improvement in the health situation and the opening up of new markets (67international markets in 2005).  Report on Government administration over 500 days, 2004. The Livestock Fund was given a 58.8per cent increase in the amount available for investment, but this was all used up in 2004 and unsatisfied demand will have to be dealt with in 2005.  The Government indicates that in 2001 it transferred G/ 2,900,000,000 to the FDC and there is a balance of G/ 1,536,311,793 in State bonds. The CAH wrote off debts (capital and interest) amounting to G/148,228,918,127.  Third Report on Government Administration, 2004.  It is estimated that production using agricultural machinery, including harvesting machinery, is almost exclusively confined to seed enterprises and does not exceed 10per cent of the area under cultivation.  Another programme consists of duty-free entry (temporary admission regime) for processing, which allows certain goods (not only cotton) to enter free of duty for re-export. In the case of cotton, this programme has been applied only sporadically and has been limited to cotton fibre.  Debt cancellation was implemented in 1999 for the benefit of small farmers.  Law No. 997, 3 December 1996; CAH Resolution No.3, 3January 1997.  The Programme is only for guidance with the objective of enhancing competitiveness in the sector.  MAG Resolution 439/03, Environmental licence SEAM 236-04.  There have been discussions with the FAO on technical and financial support for dealing with agrochemical residues.  Statistics of the Paraguayan Chamber of Cereal and Oilseed Exporters (CAPECO).  CAPECO estimated (February 2005) that the 2004 harvest would be 4,968,685 tonnes.  IICA (2004).  CAPECO (undated).  CAPECO (undated).  The minimum amount in the tariff quota for Paraguay is 7,250 tonnes.  The authorities have stated that this line of credit existed prior to the 1990s.  CAPECO (undated).  According to Government figures for 2001, Paraguay exported to Chile meat and offal amounting to US$51,000,281 and by-products of animal origin amounting to US$789,507, making a total of US$51,789,789.  Economic Research Service, USDA, available on-line at: www.ers.usda.gov  FAO (2004).  FAO (2004).  World Bank (1995).  The authorities have pointed out that discrepancies in the data on the extent of forest cover in the eastern region are the result of different methods of measurement used (scales, mapping, satellite imaging). Forests have been exploited at different times and using different methods of felling, which have diminished the stock of timber. Some estimates suggest that the area of high-density woodland could be around 700,000hectares. There are differences regarding the remaining, non-continuous and highly-fragmented woodland ranging from 1,300,000hectares to 2,900,000hectares (MFN-FAO 2002; WWF; Agricultural Census; SFN-JICA 1999; Forestry Round-table).  MAG General Department of Administration and Finance.  DGEEC (2003).  ϲʹ Secretariat calculations, based on the BCP, "National Accounts of Paraguay 1991-2002".  ϲʹ (1997), Chapter IV (4).  ϲʹ (1997), Chapter IV (4).  ϲʹ (2004), Chapter IV (5).  Data provided by the Energy Resources Department, Office of the Under-Secretary for Mines and Energy.  The figures cited include health services.  Law No. 167/93, 25 May 1993.  MOPC (2004).  MOPC (2004).  Article 35, Decree No. 10.911.  Petrleos Paraguayos (2004).  IMF (2004b).  PETROPAR (2004).  ϲʹ (1997), page 74.  Article 3, Law No. 779/95.  Article 5, Law No. 779/95.  The Economist Intelligence Unit (2004).  Article 32, Law No. 779/95.  Resolution No. 704, 30 September 2004, implementing Decree No. 2.162, 15 March 1999.  Article 4 of Resolution No. 153, 19 March 1999.  Article 1 of Resolution No. 154, 19 March 1999.  Article 1 of Resolution No. 154, 19 March 1999.  Decrees Nos. 11.884, 12.108 and 12.820 of 2001.  CadenaGlobal (2004).  For the purposes of installed capacity and drawing up the National Energy Balance, only 50per cent of the capacity and the electricity generated by the Itaip and Yacyret hydroelectric power stations are taken into account. The other 50per cent belongs to Argentina and Brazil respectively.  Article 64 of Law No. 966/64, 12 August 1964.  Article 5, Law No. 966.  Article 85, Law No. 966.  ANDE (2004).  ANDE (2004), page 15.  Article XIII, Itaip Treaty, 26 April 1973.  Article 13, Yacyret Treaty, 27 March 1974.  Annex C, Itaip Treaty, 26 April 1973.  Government programme for 2003-2008. Available on-line at: http://www.presidencia.gov.py  ltima Hora, "Paraguay and Brazil renegotiate the Itaip debt with Eletrobras", 25 November 2004, available on-line at: http://www.ultimahora.com/template.asp?notic=41070  Government programme for 2003-2008. Available on-line at: http://www.presidencia.gov.py  Government programme for 2003-2008. Available on-line at: http://www.presidencia.gov.py  Central Bank of Paraguay (2004b).  Information provided by the BCP and available on-line at: http://www.bcp.gov.py  Information provided by the BCP and available on-line at: http://www.bcp.gov.py  MERCOSUR (2004).  BCP (2004a).  Information provided by the BCP and available on-line at: http://www.bcp.gov.py  BuddeComm (2004).  ITU (2004), Telecommunication indicators. Available on-line at: http://www.itu.net  BuddeComm (2004) and information provided by the authorities.  CONATEL Resolution No. 209, 23 June 1999.  CONATEL Resolution No. 496, 30 April 2004.  Various bidders submitted bids, including Telefnica de Espaa, Brasil Telecom and Telecom Argentina.  BuddeComm (2004), The Economist Intelligence Unit (2004), and the World Bank (1999).  CONATEL (2004), information available on-line at: http://www.conatel.gov.py  Law No. 642, Article 4, and CONATEL (2004). Information available on-line at: http://www.conatel.gov.py  Law No. 167, 27 March 1991.  Law No. 642, Article 73. Decree No. 14.135, Article 89, and Decree No. 9.892, Article 199.  Law No. 642, Article 73.  Decree No. 14.135, Article 139.  Resolution No. 871, 17 July 2002, Articles 5 and 7.  Decree No. 10.002, Article 1, which amends, inter alia, Articles 121 and 122 of Decree No. 14.135.  Resolution No. 856, 1 December 2000.  Decree No. 16.761, 26 March 2002.  Decree No. 16.761, Article 14.  Resolution No. 795, 17 June 2002.  Resolution No. 034, 7 January 2002, Annex, Article 6.  CONATEL (2004). Information available on-line at: http://www.conatel.gov.py  BCP (2004a).  Superintendency of Banks (2004).  Insfrn Pelozo (2003).  Superintendency of Banks (2004).  Decree Law No. 281, 14 March 1961 (Basic Statute of the BNF) and BNF, information available to the public on-line at: http://www.bnf.gov.py  Superintendency of Banks (2004).  Superintendency of Banks (2004).  ϲʹ (1997).  Insfrn Pelozo (2003).  Presidential Report to the Congress of the Nation, July 2004. Available on-line at: http://www.presidencia.gov.py  The National Cooperative Institute, set up under Law No.438 of 21October 1994, oversees the activities of cooperative associations in general.  Resolution of the Banking Superintendency, No. 4, Act No. 87, 17 November 2003.  Resolution of the Superintendency of Banks, SG No.003, 5 January 2004.  Information provided by the authorities.  Information provided by the authorities.  Superintendency of Insurance (2004).  Information provided by the authorities.  Paraguayan Association of Insurance Companies (2003).  Information provided by the authorities.  Resolution No. 112, 9 September 1996.  DINATRAN (2004).  Information provided by the authorities.  Information provided by the authorities.  DINATRAN (2004).  UNCTAD (several years).  ϲʹ document G/C/W/237, 24 October 2000 and information provided by the authorities.  Government programme for 2003-2008. Available on-line at: http://www.presidencia.gov.py  Law No. 295/71 and Decree No. 27.371/81.  Law No. 160, 20 May 1993. The minimum wage specified in Law No. 160/93 means the wage paid for various unspecified activities in Asuncin. In September 2004, the minimum wage in Paraguay was approximately US$200.  The minimum wage specified in Law No. 160/93 means the wage paid for various unspecified activities in Asuncin. In September 2004, the minimum wage in Paraguay was approximately US$200. The minimum daily wage corresponds to the minimum wage divided by 30.  IMO (2004), information on the status of conventions by country. Available on-line at: http://www.imo.org  Information provided by the FTAA and available on-line at: http://www.ftaa-alca-org and information provided by the authorities.  Information available "2<\]u0 1 X Y  ! 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Decree No. 19.260/61.  DINATRAN (2004).  DINATRAN (2004).  Government programme for 2003-2008. Available on-line at: http://www.presidencia.gov.py  Law No. 1.860, Articles 15, 26, 129 and 130.  Decree No. 14.299, 8 August 2001, Article 21.  Information provided by DINAC and available on-line at: http://www.dinac.gov.py  Information provided by DINAC and available on-line at: http://www.dinac.gov.py  Law No. 73.  DINATRAN (2004).  DINATRAN (2004).  Law No. 1.128, 22 April 1997.  Information provided by SENATUR.  Information provided by the authorities and the Economic Report, July 2004.  Information provided by SENATUR.  Information provided by the authorities.  Information provided by SENATUR.  Government programme for 2003-2008. Available on-line at: http://www.presidencia.gov.py  Decree No. 8.327.  Resolution No. 126, Article 41.  Resolution No. 126, Article 16.  Decree No. 1.836, 4 January 1994 was repealed by Decree No.7.303 of 13January 1995. Article2 of Decree No.2.718, 17March 1994 was repealed by Decree No. 15.199, 21October 1996. The latter Article extends the number of products covered in Decree No.1.836. Decree No.15.199/96 was amended by Decree No.16.067, 20 January 1997 and Decree No.10.624, 25 September 2000.  Information provided by the FTAA and available on-line at: http://www.ftaa-alca-org WT/TPR/S/146 Trade Policy Review Page  PAGE 90 Paraguay WT/TPR/S/146 Page  PAGE 89 Page IV. PAGE \* MERGEFORMAT 1 WT/TPR/S/146 Trade Policy Review Page  PAGE 134 Paraguay WT/TPR/S/146 Page  PAGE 133 $%ABovy| *+;<^_MTWZ_wxyEFvw67IJKL|jh?hYU h?hYhXhY hdihYjhdihY0JURKgd?dkd$$IflD#$04 lap $Ifgd?s`sgd1F'()*.TU[\_`abdeغhq]KhXh<mHnHuhYmHnHujhYUhYh?hY5 h?hYhXmHnHujh?hYU-+$If"$If^"`gd?dkd$$IflD#$04 lap +,-.a $Ifgd?kkd-$$IflD#$  04 lap abcde $Ifgd?gd?dkdҰ$$IflD#$04 lap  & Fgdq]Kgd?dkd`$$IflD#$04 lap 8 00&P PY:p<. A!"#n$%n8 00&P P:pRgn. A!"#n$%n+ 0&P . 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