2009 INVESTMENT CLIMATE STATEMENT - COSTA RICA

Código Fecha Clasificación Origen
09SANJOSE34 21 January 2009 No clasificado Embassy San José

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VZCZCXYZ0000
OO RUEHWEB

DE RUEHSJ #0034/01 0211903
ZNR UUUUU ZZH
O 211903Z JAN 09 ZDK
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0424
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE

UNCLAS SAN JOSE 000034

SIPDIS
TREASURY FOR SSENICH AND DO/JMACLAUGHLIN, USDOC FOR ITA/JKOZLOWICKI
USTR FOR JKALLMER, OPIC FOR RO’SULLIVAN

E.O. 12958
TAGS: EINV, EFIN, ETRD, ELAB, KTDB PGOV
SUBJECT: 2009 INVESTMENT CLIMATE STATEMENT - COSTA RICA

REF: A) 08 SECSTATE 123907 B) 08 SAN JOSE 37

1. Costa Rica’s investment climate is generally favorable and has
been for many years. Consequently, foreign direct investment is
high and has been a significant contributor to Costa Rica’s economic
growth. Nevertheless, the country continues to present stumbling
blocks to investors. The January 1, 2009 entry-into-force of
CAFTA-DR in Costa Rica unambiguously improves Costa Rica’s
investment climate. In response to Ref A, Post prepared the
following report:


Openness to Foreign Investment


2. Costa Rica actively courts foreign direct investment. The
four-year administration of President Oscar Arias, (which will end
in May 2010), places a high priority on attracting and retaining
high-quality foreign investment in Costa Rica. The Foreign Trade
Promotion Corporation (PROCOMER) as well as the Costa Rican
Investment and Development Board (CINDE) lead Costa Rica’s
investment promotion efforts. Investment in Industry has been the
single largest category of FDI in recent years. However, the
sectors of Real Estate and Tourism have grown tremendously and, in
combination, surpassed Industry in 2007. (See "Foreign Direct
Investment Statistics" below.)
3. Costa Rica, together with El Salvador, Guatemala, Honduras,
Nicaragua, and the Dominican Republic, is a signatory to the U.S. -
Central America - Dominican Republic Free Trade Agreement
(CAFTA-DR). Costa Rica is the last country for which the treaty
entered into force (EIF), on January 1 2009. Costa Rica spent the
previous two years meeting a series of legal and implementation
requirements for EIF, and during the first part of 2009 is expected
to fully implement the remaining measures. CAFTA-DR improves Costa
Rica’s investment climate by strengthening the protection of
intellectual property rights, providing a mechanism for arbitration,
opening key sectors to competition, and assuring access to markets
in other CAFTA-DR economies. With CAFTA-DR successfully concluded,
Arias administration trade policy is now focused on the negotiation
of similar agreements, most notably with the European Community and
China.
4. State enterprises have enjoyed monopolies in the sectors of
wireless and data telecommunications and insurance; however,
CAFTA-DR opens these specific sectors up to market competition. On
the telecommunications side, the newly formed telecommunications
regulation board "SUTEL" was constituted in late 2008 and is
expected to initiate operations during the first part of 2009.
Semi-official pronouncements indicate late 2009 or early 2010 as the
likely launch date for one or more cellular phone competitors to the
state monopoly "National Electrical (and telecommunications)
Institute" ("ICE"). Satellite television and new internet service
providers will most likely enter the market during 2009. Unlike
wireless, internet, and server services, fixed-line
telecommunications as well as energy generation and distribution
remain firmly in the control of state enterprises. On the insurance
side, alternatives to products offered by the state monopoly
"National Insurance Institute" ("INS") should be available by early
2009. Press reports indicate interest from other, non-Costa Rican,
insurance companies, while INS is attempting to consolidate its
position as market leader. Transport infrastructure (airports,
ports, roads) is likewise controlled by the state, although attempts
are underway to cede concessions to private operators in select
cases. Petroleum imports are monopolized by the state petroleum
company "RECOPE". Beyond these sectors, the country has a generally
open international trade and investment regime.
5. The country’s commercial code details all business requirements
necessary to operate in Costa Rica. The laws of public
administration and public finance contain most requirements for
contracting with the state. All businesses must be registered in the
national registry, thereby becoming national companies that may have
national or foreign owners. The investment requirements for foreign
and national persons and companies are identical. Businesses may be
established starting from nothing, acquired, merged with, or taken
over in much the same way as is done in the U.S. Foreign
partnerships with local businesses are quite common.
6. The judicial system generally upholds contracts, but caution
should be exercised when making investments in sectors reserved or
protected by the constitution or by laws for public operation.
Investments in state-protected sectors under concession mechanisms
can be especially complex due to regular challenges in the
constitutional court of contracts permitting private participation
in state enterprise activities. Furthermore, independent government
agencies can issue permits or requirements that may contradict the
decisions of other independent agencies, causing significant project
delays.
7. The Arias administration is moving ahead with efforts to build
infrastructure and manage public works projects by using the 1998
concessions law, modified in June of 2008. The timing of that
action, during the busy CAFTA-DR legislative agenda, is indicative
of the high priority that the Arias Administration places on the
concessions process. Two concession agreements are currently
functioning. Operations at the Port of Caldera, the country’s
principal Pacific port, began successfully in the latter half of
2006. The other concession agreement is for the San
Jose-to-Caldera highway. After literally decades of delays, the
Ministry of Public Transit is now managing major construction along
the highway right-of way. The recent modifications to the
concessions law were designed to streamline related processes.
8. Investors must exercise "caveat emptor," as with any business
transaction, since many firms operate in the informal sector of the
economy. Appropriate due diligence should confirm a company’s
registry and formal participation in the Costa Rican economy such as
paying taxes.
9. While the government focuses on promoting foreign investment in
export industries, foreign franchises have prospered in the domestic
market over the past thirty years. Both foreigners and nationals
have invested in bringing U.S. brands from a wide array of business
sectors to Costa Rica, including fast food (such as Taco Bell,
Kentucky Fried Chicken, Pizza Hut, Domino’s Pizza, Papa John’s
Pizza, McDonald’s, Burger King, Wendy’s, Subway, Quiznos and TCBY
Yogurt), car rentals (including Hertz, Avis, Dollar, and Budget),
hotels (such as Marriott, Doubletree by Hilton, Intercontinental,
Regents, Hampton Inn, and Best Western), and designer clothing
boutiques (including Tommy Hilfiger, Liz Claiborne, and athletic
wear brands such as New Balance). Price Smart (owned and managed by
the founders of Price Club in the U.S.) has opened four Costa Rican
stores since mid-1999. Wal-Mart Central America acquired a
controlling share in a local grocery-store holding company in 2006
which operates 146 stores under the Pali, Maxibodegas, Mas x Menos,
and Hipermas brands.


Conversion and Transfer Policies


10. There are no restrictions on receiving, holding or transferring
foreign exchange. There are no delays for foreign exchange, which is
readily available at market clearing rates and readily transferable
through the banking system. From 1983 until 2006, Costa Rica
maintained a crawling peg exchange regime with the U.S. dollar.
However, in October 2006, the country transitioned to a crawling
band regime which is in reality a "dirty float" with explicit upper
and lower limits. To date, the result appears to be satisfactory to
the Central Bank, but market participants have been struggling to
adapt to the greater uncertainty. A variety of instruments designed
to insure against exchange rate volatility are under development and
may be obtained through the Securities Exchange ("Bolsa de Valores")
or through banks. Dollar bonds and other dollar instruments may be
traded legally. No restrictions are imposed on reinvestments or on
the repatriation of earnings, royalties, or capital except when
these rights are otherwise stipulated in contractual agreements with
the government of Costa Rica. Royalties are taxed in accordance
with Title IV of the Income Tax Law, No. 7092, extensively reformed
in October 1988, at rates varying from 10 to 25 percent.


Expropriation and Compensation


11. Expropriation of private land by the government without prompt
or adequate compensation has hurt some Costa Rican and foreign
investors in the past. These incidents usually involved land
expropriated to create national parks, indigenous reserves, or
agricultural projects for poor farmers. One long-standing case
required over fourteen years to wind its way through the Costa Rican
court system, only to conclude without providing compensation to the
aggrieved U.S. citizen landowner. Another case involving titled
beach land subject to an expropriation order for a National Park has
highlighted differences of opinion (and conflicting decisions)
between different government entities, and the pitfalls experienced
when law clashes with reality.
12. Article 45 of Costa Rica’s constitution stipulates that no
property can be expropriated from a Costa Rican or foreigner without
prior payment and demonstrable proof of public interest. The 1995
Law 7495 on expropriations further stipulates that expropriations
can take place only after full and prior payment is made.
Foreigners and Costa Ricans are supposed to receive equal treatment.
Provisions include: (a) return of the property to the original
owner if it is not used for the intended purpose within ten years
or, if the owner was compensated, right of first refusal to
repurchase the property back at its current value; (b) a requirement
that the expropriating institution complete registration of the
property within six months; (c) a one-month period during which the
tax office must appraise the affected property; (d) a requirement
that the tax office itemize crops, buildings, rental income,
commercial rights, mineral exploitation rights, and other goods and
rights, separately and in addition to the value of the land itself;
and (e) provisions providing for both local and international
arbitration in the event of a dispute. The expropriations law was
amended in 1998 and then again in 2008 to expedite some procedures,
particularly those necessary for acquiring land for the construction
of new roads.
13. Invasion and occupation of private property by squatters, who
are often organized and sometimes violent, occurs in Costa Rica.
The squatters seek to take advantage of adverse possession devices
in laws permitting occupant to receive title to unused farmland.
Under Cost Rica’s legal system, squatters enjoy a minimum leel of
legal protection after occupying a parcel f unimproved land after
three months. If a landoner has failed to take action to evict
squattersafter ten years of occupation, the squatters can fle a
legal claim and be recognized as the lawfulowners of the land. The
Costa Rican police and udicial system have at times failed to deter
or t peacefully resolve such invasions. It is not uncmmon for
squatters to return to the parcels of lnd from which they have been
evicted, requiring xpensive and potentially dangerous vigilance
ove the land.


Dispute Settlement


14. Costa Rica uses the Roan civil law system rather than common
law. Thejury system is not used, although judicial reform fforts
have included testing the use of juries i some cases. The
fundamental law is the country’s political constitution of 1949,
which grants th unicameral legislature a particularly strong role
The civil and commercial codes govern commercial transactions. The
courts are independent, and their authority is respected. The roles
of public prosecutor and government attorney are distinct: the
public prosecutor or Attorney General ("Fiscal General") operates a
semi-autonomous department within the Judicial branch while the
government attorney or Procurator General ("Procurador General")
pertains to the executive branch. Judgments of foreign courts are
generally accepted and enforced. The Constitution specifically
prohibits discriminatory treatment of foreign nationals.
15. Monetary judgments are usually made in Costa Rican colones.
However, if the dispute involves a dollar-denominated transaction,
the award may first be calculated in dollars and then converted to
colones for payment.
16. Litigation can be long and costly. The legal system is
significantly backlogged, and civil suits take over five years on
average from start to finish. Some U.S. firms and citizens have
satisfactorily resolved their cases through the courts, while others
have seen proceedings drawn out over a decade without a final
ruling. The process to resolve squatter cases through the courts
can be especially cumbersome. The legal owner of land can be at a
disadvantage in a system that has recognized adverse possession
rights acquired by squatters, especially when the disputed land is
rural and is not being actively worked. Also, civil archives
recording land title are at times incomplete or contradictory.
Potential buyers should retain experienced legal counsel and
carefully conduct due diligence to ensure that properties are free
of conflicting ownership claims.
17. Arbitration is theoretically possible under the civil and
commercial codes. However, U.S. investors have experienced mixed
results from such proceedings organized by local attorneys. A 1998
law governing alternative conflict resolution (Law 7727) sought to
encourage arbitration and simplify the procedures under which
arbitration takes place. Several arbitration centers have since
been established, including one at the Costa Rican - American
Chamber of Commerce. A few cases reportedly have been successfully
and quickly resolved under the new law.

18. Costa Rica has been a member of the International Center for the
Settlement of Investment Disputes (ICSID) since 1993, when it
acceded to the Washington Convention. Since then, the ICSID has
successfully resolved one land expropriation case. Costa Rica is
also a member of the World Bank Multilateral Investment Guarantee
Agency (MIGA), which provides a forum for international arbitration
in investment disputes, as well as investment guarantees. Private
energy producers have included international arbitration clauses in
their contracts. Costa Rica has not joined the United Nations
Protocol for the Compulsory Settlement of Disputes between
Countries.
19. The provisions of Chapter 10 of CAFTA-DR provide an additional
avenue for aggrieved investors to pursue international arbitration.
The arbitration process under CAFTA-DR is designed to be open and
transparent; hearings and documents are public, and amicus curiae
submissions are expressly authorized. The CAFTA investment chapter
includes checks to help assure that investors do not abuse the
arbitration process. The agreement includes a provision that allows
tribunals to dismiss frivolous claims and award attorney’s fees and
filing costs.
20. The Costa Rican bankruptcy law, addressed in both the commercial
code and the civil procedures code, is similar to corresponding U.S.
law. Title V of the civil procedure code outlines creditors’ rights
and the processes available to register outstanding credits,
administer the liquidation of the bankrupt company’s assets, and pay
creditors according to their preferential status. Compared to other
countries in the region, Costa Rican bankruptcy laws are less
flexible, and affected creditors recover proportionally less from
judgments, according to World Bank analysis.


Performance Requirements and Incentives


21. Three investment incentive programs operate in Costa Rica: the
free trade zone system, a so-called active finishing regime, and a
duty drawback procedure. These incentives are available equally to
foreign and domestic investors. These incentives include tax
holidays, free or subsidized infrastructure and industrial parks,
and training of specialized labor force.
22. The export processing law of 1981 established publicly- operated
free trade zone (FTZ) industrial parks in Santa Rosa (Puntarenas) on
the Pacific Coast, and Moin (Limon) on the Caribbean seaboard.
Subsequently, the law 7638 of October 30, 1996; law 7467 of December
20, 1994; and law 7830 of September 22, 1998 established the current
FTZ regime as practiced in the country. Individual companies are
able to create industrial parks that qualify for a Free Trade Zone
status by meeting specific criteria and applying for such status
with Costa Rica’s Foreign Trade Promotion Authority (PROCOMER).
Presently, there are nearly two hundred fifty companies operating
within twenty-eight FTZs within Costa Rica. Companies in FTZs
receive exemption from virtually all taxes for eight years and at a
reduced rate following that period. In addition to the tax
benefits, companies operating in FTZs enjoy simplified investment,
trade and customs procedures which provide a convenient way to avoid
Costa Rica’s burdensome business licensing process. The tax
holidays provided for investment in FTZ manufacturing companies are
scheduled to phase out in accordance with World Trade Organization
(WTO) agreements by 2015, although it is likely that an alternate
incentive regime will be in place by then. In any case, the
WTO-mandated change does not apply to those companies that export
only services. Call centers, logistics providers, and software
developers are among the companies that may benefit from FTZ status
but don’t physically export goods. Such service providers have
become increasingly important participants in the free trade zone
regime.
23. The active finishing regime, created by decree in August 1997,
suspends taxes for renewable one-year periods on imported inputs of
qualifying companies, and then exempts the inputs from those taxes
when the finished goods using or containing them are exported. The
regime also facilitates a five-year renewable suspension of taxes on
capital goods used to manufacture exported goods. Companies within
this regime may sell to the domestic market if they have registered
to do so and pay pro rata import duties on capital equipment used
for the domestic market. Finally, the drawback procedure provides
for rebates of duties or other taxes that have been paid by an
importer for goods subsequently incorporated into an exported good.


Right to Private Ownership and Establishment


24. All private entities and persons, domestic or foreign, may
establish and own businesses and engage in all but a few forms of
remunerative activity. The exceptions are in sectors that are
reserved for the state (legal monopolies) or that require
participation of at least a certain percentage of Costa Rican
citizens or residents (electrical power generation, broadcasting and
professional services). Under CAFTA-DR, the insurance and a part of
the telecommunications sectors are now opening to competition. In
other activities, such as medical services, state firms operate, but
that does not preclude private sector competition, which generally
receives equal treatment to state companies. Three banks owned by
the state receive some advantages over their 11 private competitors,
namely that they cannot be forced into bankruptcy, a guarantee not
afforded to private banks.


Protection of Property Rights


25. Secured interests in both chattel and real property are
recognized and enforced, and mortgage and title recording is
mandatory. The laws governing investments in land, buildings and
mortgages are generally transparent. However, there are continuing
problems of overlapping title to real property and fraudulent
filings with the national registry, the government entity that
records property titles. The Costa Rican government does not
prevent foreign title companies from operating. While title
guaranty is not a service traditionally offered in the country,
Stewart Title Company, First Costa Rican Title and Trust and
LatinAmerican Title Company all offer title guaranty and related
services.
26. Similar to fraudulent filings, investors have faced difficulties
with transactions involving property located in indigenous protected
zones that has been represented as property without other claims or
risk of expropriation. Investors should exercise appropriate due
diligence when conducting transactions dealing with land in
indigenous zones as they may either be unable to obtain free and
clear title or risk future expropriation.
27. Investment in Costa Rican real estate requires care; many U.S.
real estate investors have experienced problems with obtaining clean
titles, adverse possession by squatters, and unscrupulous lawyers.
Problems with squatters often occur when absentee owners of
undeveloped or vacant rural properties confront a Costa Rican
agrarian law regime that is relatively quick to confer title to
occupants of land considered "abandoned." Landowners thus should be
sure to demonstrate a continuing presence on and control over their
land.
28. Investment in beachfront property in Costa Rica faces a unique
set of circumstances. Almost all beachfront is public property for a
distance of 200 meters from the mean high tide line, with an
exception for long-established port cities. The first 50 meters from
the mean high tide line cannot be used for any reasons by private
parties. The next 150 meters, also owned by the state, can only be
leased from the local municipalities for specified periods and
particular uses, such as tourism installation, vacation homes, etc.
Investors should exercise caution and obtain qualified legal counsel
before purchasing property, particularly near beachfront areas.
Potential investors in Costa Rican real estate should also be aware
that the right to use traditional paths is enshrined in law and can
be used to obtain court-ordered easements on land bearing private
title. Disputes over easements are particularly common when access
to a beach is an issue.
29. Costa Rica is a signatory of many major international agreements
and conventions regarding intellectual property. It ratified the
GATT agreement on Trade Related Aspects of Intellectual Property
(TRIPS), which took effect in Costa Rica on January 1, 2000. Eight
bills to implement the TRIPS agreement were passed by the
Legislative Assembly in 1999 and 2000. One of these bills extended
Costa Rica’s patent protection to twenty years. Building on the
already existent regulatory and legal framework, CAFTA-DR required
Costa Rica to further strengthen and clarify its IPR regime, with
several additional IPR laws added to the books in 2008.
30. While the legal framework governing intellectual property is
basically in place, Costa Rica does not adequately enforce those
rights. At the beginning of 2002, the Costa Rican Government
announced steps to improve intellectual property protection through
a government strategy for strengthening the enforcement of IPR.
Since then, the government has taken minor steps to increase
enforcement efforts and to increase IPR training for judges and
prosecutors. Despite these steps, enforcement of IPR remains weak.
The current attorney general has publicly stated that given limited
judicial resources, IPR enforcement is a low priority.
31. In 2002 the United States Trade Representative (USTR) moved
Costa Rica from the Priority Watch List to the Watch List in its
annual Special 301 Report. In 2008 Costa Rica remained on the Watch
List. The USTR noted that IPR enforcement with respect to copyright
piracy and trademark counterfeiting required greater priority and
resources. Significant delays in judicial proceedings and a lack of
official investigators, public prosecutors, and criminal and civil
judges specializing in intellectual property continue to hamper
effective enforcement. Since 2005 the U.S. Embassy in Costa Rica
has actively recruited candidates to attend various IPR training
seminars offered and funded by the United States Patent and Trade
Office (USPTO) and the United States Department of Justice (DOJ).


Transparency of Regulatory System


32. Costa Rican laws, regulations and practices are generally
transparent and foster competition, except in the sectors controlled
by a state monopoly, where competition is explicitly excluded. Tax,
labor, health and safety laws are not seen as interfering with
investment decisions. When applying environmental regulations, the
Costa Rican organization that reviews environmental impact
statements has been slow in issuing its findings, causing delays for
investors in completing projects.
33. There are several independent avenues for appealing regulatory
decisions, and these are frequently pursued by persons or
organizations opposed to a public sector contract or regulatory
decision. The avenues include the comptroller general (Contraloria
General de la Republica), the Ombudsman (Defensor de los
Habitantes), the public services regulatory agency (ARESEP), and the
constitutional review chamber of the Supreme Court. The procurator
general’s office (Procurador General de la Republica) is frequently
a participant in its role as the government’s attorney.
34. The process has kept the regulatory system relatively
transparent and free of abuse, but it has also rendered the system
for public sector contract approval exceptionally slow and
litigious. There have been several cases in which these review
bodies have overturned already-executed contracts, thereby
interjecting uncertainty into the process. Bureaucratic procedures
are frequently long, involved and can be discouraging to new
investors.


Efficient Capital Markets and Portfolio Investment


35. There are no controls on capital flows in or out of Costa Rica
or on portfolio investment in publicly traded companies. Larger
investors often arrange their financing abroad where rates tend to
be lower and lending limits are higher. Foreign investors are able
to borrow in the local market, but they are also free to borrow from
abroad.
36. Within Costa Rica, long-term capital is scarce.
Dollar-denominated mortgage financing is popular and common, even
for Costa Ricans who do not earn their income in dollars because of
more favorable lending terms for dollar-denominated vs.
colon-denominated loans. As an alternative to encourage long-term
credit, since 2005 the government has published the value of
"Unidades de Desarrollo", an inflation-adjusted index value that may
be used to denominate debt transactions. There is a small secondary
market in commercial paper and repurchase agreements. The
securities exchange (Bolsa Nacional de Valores) is small and is
dominated by trading in government bonds. However, the exchange is
looking to expand in several promising areas including currency
futures and small stocks. Stock trading is of limited significance
and involves only a dozen of the country’s larger companies,
resulting in an extremely illiquid secondary market. Stock volume
traded is often in the range of $ 1 million per week.
37. Credit is generally allocated on market terms, although the
state-owned banks are sometimes obliged to act as development banks
for activities deemed to be of public interest. In addition, a new
"development bank" structure involving both public and private banks
is being unveiled in 2009. Private commercial banks have been
steadily increasing their share of the market since private banks
were allowed to offer checking and savings accounts to the public in
1996. In recent years, smaller private banks have been absorbed by
large multinationals, so that Costa Rica currently hosts
subsidiaries of HSBC, Citibank, Scotiabank and GE Finance
Corporation. Nevertheless, the three state-owned commercial banks
are still dominant, accounting for 43 percent of the country’s
financial system’s assets as of November 2008.
38. Consolidated total assets of the country’s public commercial
banks were approximately USD 9.3 billion in November 2008, while
consolidated total assets of the eleven private commercial banks
were approximately USD 6.90 billion. The combined assets of all bank
groups (including affiliated pension funds and brokerage houses,
plus factoring houses and credit unions) were approximately USD
21.58 billion as of November 2008.
39. Costa Rica’s national council for the supervision of the
financial system (CONASSIF) oversees Costa Rica’s financial sector
and consists of four principal components. The country’s general
superintendent of financial institutions (SUGEF) regulates banks and
other financial institutions. The general superintendent of
securities markets (SUGEVAL) oversees the securities exchange. The
general superintendent of pensions (SUPEN) oversees pension funds.
The newly created superintendent of insurance (SUGESE) currently
works within SUPEN. The Costa Rican government is working to
strengthen supervision of the financial sector with assistance from
international donors. Legal and accounting systems are transparent
and consistent with international norms. Many well-known accounting
firms in Costa Rica are affiliated with large U.S. firms.


Political Violence


40. Costa Rica has not experienced significant domestic political
violence since 1948. There are no indigenous or external movements
likely to produce political or social instability. During the
national debate on CAFTA-DR, public unions opposed to the trade
agreement organized strikes and marches designed to disrupt normal
business activity. Although they had threatened to bring the
country to a halt during a national strike in 2006, the unions were
unable to mobilize the masses and, at best, the street
demonstrations were an annoyance. Marches and demonstrations by
these same groups in 2007 were peaceful. The greatest potential
(and localized) focal point for physical protest in 2009 in Costa
Rica may be the Limon port facility on the Caribbean coast. The
Arias Administration appears determined to cede the port operations
in concession but that is vigorously opposed by the dockworker’s
union.


Corruption


41. Costa Rica has laws, regulations, and penalties to combat
corruption, though the resources available to enforce those laws
have been limited. Corruption became a major issue in 2004, when
two former presidents and a number of officials at public
institutions were placed in preventative detention on corruption
charges; in late 2008, the two ex-president’s trials were underway.
Allegations of lower-level corruption are common, and some
prosecutions have resulted. In addition, as part of the
implementing legislation for CAFTA-DR, in December 2007, the
Legislative Assembly amended the penal code to include harsher
penalties for public corruption. This followed amendments made in
2004 to make anti-corruption laws easier to interpret and apply.
42. Costa Rica ratified the Inter-American Convention Against
Corruption in February 1997. This initiative of the Organization for
Economic Cooperation and Development (OECD) and the Organization of
American States (OAS) obligates subscribing nations to implement
criminal sanctions for corruption. The attorney general (Fiscal
General de la Republica), procurator general (Procuraduria General
de la Republica), comptroller general (Contraloria General de la
Republica) and ombudsman (Defensoria de los Habitantes) have mounted
a common effort to combat corruption. The comptroller general, the
organization of judicial investigation (OIJ), and the public
prosecutors’ office investigate allegations of corruption. The
comptroller general is responsible for approving or rejecting
auditing public contracts and detecting instances of corruption.
43. While most U.S. firms have not identified corruption as a major
obstacle to doing business in Costa Rica, some have made allegations
of corruption in the administration of public tenders. Developers
of tourism facilities periodically cite municipal-level corruption
as a problem when attempting to gain a concession to build and
operate in the restricted maritime zone.
44. Acts of bribery, including those directed against government
officials, are criminal acts punishable by imprisonment. Public
officials convicted of receiving bribes are subject to prison
sentences from two to six years, according to the Costa Rican
Criminal Code (Articles 314-315, and 338-339). Entrepreneurs may
not deduct the costs of bribes or any other criminal activity as
business expenses.


Bilateral Investment Agreements


45. As of June 2008, Costa Rica has Bilateral Investment Treaties
(BITs) in force with Argentina, Canada, Chile, the Czech Republic,
France, Germany, Korea, the Netherlands, Paraguay, Spain,
Switzerland, Taiwan, and Venezuela. Awaiting ratification are BITs
with Belgium, Bolivia, China, Ecuador, El Salvador, Finland,
Luxembourg, and the United Kingdom. Negotiation of a bilateral
investment treaty with the United States was suspended in 1990,
restarted in 1996, and suspended again in 1997. The investment
chapter of CAFTA-DR includes all aspects of a BIT thereby making the
negotiation of a separate BIT with the United States unnecessary.


OPIC and Other Investment Insurance Programs


46. The Overseas Private Investment Corporation (OPIC) offers both
financing and insurance coverage against expropriation, war,
revolution, insurrection and inconvertibility for eligible U.S.
investors in Costa Rica. OPIC can provide insurance for U.S.
investors, contractors, exporters and financial institutions.
Financing is available for overseas investments that are wholly
owned by U.S. companies or that are joint ventures in which the U.S.
firm is a participant. OPIC holds a diversified portfolio of more
than 300 clients. In Costa Rica, OPIC’s portfolio exposure in 2007
totaled USD 138 million. The portfolio consists of projects ranging
from electrical generation to home building to the manufacture of
consumer products. In late 2008, OPIC announced support of two
programs in Costa Rica totaling $105 million in partnership with two
local subsidiaries of US companies: Banco Lafise and Banco BAC San
Jose.
47. U.S. investors should be aware that OPIC, in accordance with
statutory requirements, may not offer insurance to projects with a
detrimental effect on the U.S. balance of payments or employment.
These statutory requirements have led OPIC to offer only limited
insurance coverage for textile and citrus investments. The
Government of Costa Rica approves prospective OPIC-insured projects
taking into account possible balance of payments or labor problems.
Costa Rica became a member of the Multilateral Investment Guarantee
Agency, a member of the World Bank group, in 1993.


Labor


48. The Costa Rican labor force is relatively well educated when
compared to other countries in Central America. While Costa Rica
has historically placed a high priority on education and the
creation of a skilled work force, long-term government investment in
education fell behind during previous administrations. The country
claims a literacy rate of 95 percent although the average tenure of
student matriculation is 7.3 years. The current Arias
administration has committed to reversing the decline in education
by fully funding the country’s public educational institutions.
Costa Rica’s national vocational training institute (INA) and
private sector groups provide technical and vocational training.
49. The rapid growth of Costa Rica’s service and tourism sectors has
created such demand for English-language speakers that foreign
investors have recently faced a shortage of workers with sufficient
language skills. The arrival of companies such as Intel, Procter
and Gamble, Western Union, and various call center operators has
drawn down the supply of speakers of fluent business and technical
English. The Costa Rican Government has made English language and
computer literacy a national priority at all levels of education.
Nevertheless, testing in 2008 revealed that about 38 percent of
teachers of English in public schools are seriously deficient in
their ability to teach English; the Ministry of Education has been
actively identifying and training those professors. Several public
and private institutions have also been active in Costa Rica’s drive
to English proficiency, including the 60-year-old U.S.-Costa Rican
binational center (the Centro Cultural Costarricense
Norteamericano), which offers general and business English courses
to as many as 5,000 students annually.

50. Costa Rican law guarantees the right of workers to join labor
unions of their choosing without prior authorization. Unions
operate independently of government control and may form federations
and confederations and affiliate internationally. The vast majority
of unions are located in the public sector, including state-run
enterprises. In the private sector, many Costa Rican workers join
"solidarity associations," under which employers provide easy access
to saving plans, low-interest loans, health clinics, recreation
centers, and other benefits. Both solidarity associations and labor
unions coexist at some workplaces, primarily in the public sector.
Business groups claim that worker representation by solidarity
associations provide for better labor relations compared to firms
with workers represented only by unions. However, labor unions
allege that private businesses use solidarity associations to hinder
union organization in contravention of International Labor
Organization rules.
51. The constitution protects the right of workers to organize. The
Labor Code enacted in 1943 provides protection from dismissal for
union organizers and members and requires employers found guilty of
anti-union discrimination to reinstate workers fired for union
activities. However, the labor courts are backlogged and the legal
process can be lengthy.


Foreign-Trade Zones/Free Ports


52. Free trade zones have been established near the port cities of
Limon/Moin (Caribbean) and Puntarenas (Pacific) as well as in
various central valley locations. The benefits, primarily fiscal,
are described in the previous section titled Performance
Requirements and Incentives.


Foreign Direct Investment Statistics


53. Total Foreign Direct Investment Flows into Costa Rica


-
Year | Amount (USD million) | Percent of GDP


------------------ -------------
2007 1,896 7.2%
2006 1,469 6.5%
2005 861 4.3%
2004 794 4.3%
2003 575 3.4%
2002 659 4.1%
2001 460 2.8%
2000 409 2.6%

54. 2007 Foreign Direct Investment by Country of Origin, Percent of
Total


----
Country | Amount (USD million) | Percent


----
United States 940.2 49.6%
Netherlands 265.7 14.0%
Canada 96.3 5.1%
Mexico 63.8 3.4%
Germany 59.3 3.1%
Spain 54.3 2.9%
Switzerland 48.5 2.6%
El Salvador 40.7 2.1%
Colombia 30.3 1.6%
Venezuela 20.8 1.1%
Cayman Islands 20.0 1.1%
United Kingdom 19.5 1.0%
Italy 19.0 1.0%
Others 217.6 11.5%

55. 2007 Foreign Direct Investment, by Sector


Sector | Amount (USD million)


Industry 687.0
Real Estate 644.7
Tourism 321.3
Commercial 77.0
Financial 73.9
Services 63.7
Agro-industry 35.1
Agriculture -10.4
Other 3.8
-----
Total 1,896.1
Source: Central Bank of Costa Rica

56. Partial List of Major U.S. Investors in Costa Rica:


Baxter
Bechtel
Chiquita
Citibank
Conair
Del Monte
Hanes Brands
Hewlett-Packard
Hospira
IBM
Intel
Kimberly-Clark
McDonalds
Merck
Pfizer
Price Smart
Procter and Gamble
Scott Paper
Standard Fruit Company (Dole)
Sykes
Vanity Fair
Wal-Mart
Western Union

END REPORT.

CIANCHETTE