Market Newsletter : Peru Has Resources, Needs Investors : Rebel warfare, a sluggish bureaucracy and an ailing economy discourage outsiders. But the Fujimori government appears determined to attack those problems.

President Alberto Fujimori’s fledgling administration promises more encouragement for foreign investors than they have received in Peru since the 1960s. And the rich resources of this country, nearly as large as Alaska, offer many potential opportunities for investment.

A depressed economy, infrastructure problems, guerrilla violence, labor laws and bureaucratic red tape present formidable obstacles, making it difficult for Peru to compete for scarce capital. But if the government can show progress toward solving these problems, investing in Peru may become an attractive option for some kinds of businesses.

“I hope we can make good deals with the United States,” Fujimori told the American Chamber of Commerce in Lima recently. He added: “1991 should be the year of investment in Peru. . . .”

The Background

Alan Garcia, the previous president, followed the nationalist and “anti-imperialist” precepts of his party, the American Popular Revolutionary Alliance. In 1986, the government nationalized the oil interests of Enron Corp., a U.S. company. Garcia’s administration also had disagreements with the two largest U.S. investors, Southern Peru Copper Corp. and Occidental Petroleum, over profit remittances, taxes and production pricing.

But government policy began to change even before Garcia left office last July. After new provisions in the country’s petroleum law improved terms for investors in 1987, Occidental expanded exploration activities and other oil companies began to show interest in coming to Peru. Mobil signed an exploration contract in late 1989. . . .

The Pace Quickens

Fujimori’s administration allowed the expiration of a 1986 decree that prohibited the repatriation of profits by many foreign investors. The government is pushing a bill in Congress that would lift many other restrictions on foreign investors and simplify procedures for investment.

The Peruvian administration is negotiating for an agreement with the U.S. government’s Overseas Private Investment Corp. that would provide insurance for American investors against expropriation. An expected settlement between Peru and Enron Corp.’s private insurer on compensation for the company’s nationalized oil interests will help open the way for an OPIC agreement.

Investment Opportunities

A summary of some potentially fertile areas for investment in Peru:

* Petroleum. Peru is self-sufficient in oil and has been an exporter in the past. In the early 1980s, Peruvian production reached 180,000 barrels a day but has sunk to about 130,000 barrels a day. Prospects for new reserves are seen offshore, where Enron made its strike, and on the eastern slope of the Andes, where Mobil will be drilling. Union Oil and Conoco also have expressed interest in Peruvian exploration contracts.

* Natural gas. British-Dutch Shell discovered a huge gas field in eastern Peru called Camisea, but no agreement was reached between the company and the Garcia administration on exploitation. Fernando Sanchez Albavera, Fujimori’s minister of energy and mining, has said he wants to begin negotiations with Shell or other companies early in 1991.

* Mining. Peru has major reserves of copper, zinc, lead, silver, anthracite coal, phosphate and other minerals. The only large-scale private mining company not nationalized by previous governments was Southern Peru Copper. Mario Samame, former minister of energy and mining, has proposed a $7-billion mining investment program that he says would quintuple the annual value of Peru’s mining production to $10 billion.

* Fisheries. Peru is blessed with cold, productive sea currents and once was the world’s leading exporter of fish meal. Soviet factory ships are currently licensed to exploit much of the offshore area, but the Fujimori administration is expected to look for other arrangements, including foreign investment in Peru’s fishing industry.

* Tourism. The famous Inca ruins at Machu Picchu are only a small part of the archeological wealth that is a potential tourist magnet for Peru. The country also boasts sunny beaches with fine surfing, Andean scenery and climbing challenges, teeming tropical jungles, and many other attractions for foreign tourists--and foreign investment in tourism.

* Agriculture. Arable land accounts for only about 6% of Peru’s territory. But tropical lowlands have untapped potential for producing exportable fruits and vegetables, and some analysts say investment in wells and drip irrigation could make the southern desert bloom. Peruvian asparagus is already going to the U.S. market, and now that the U.S. Department of Agriculture has approved a hot-water method for treating fruit against the Medfly and other infestations, Peruvian mangoes will soon be on their way.

* Textiles. Peru’s high-quality cotton and luxurious alpaca wool make textile production another possible target of foreign investment.

Please Send Cash

Investment is desperately needed to revive the Peruvian economy, which shrank by 8.8% in 1988 and 12.2% in 1989. Unemployment and underemployment is estimated at 70% of the work force.

The ailing economy itself, however, is a major disincentive for investment. Domestic demand is extremely weak. Inflation, which raced at 60% a month before Fujimori took office, has come down to about 10% a month, but is still a factor of instability.

The country lacks funds for improvements in deteriorated highway, electrical and communications systems needed to make new enterprises work. Inefficient ports, among the most expensive in the world, jeopardize the viability of ventures in the export sector. Labor legislation that protects workers from layoffs also discourages many potential investors.

Guerrilla warfare and terrorism by the Shining Path and Tupac Amaru rebels make it difficult to sell Peru as a tourist destination and could be a risk for some foreign-owned operations in other sectors. Mobil faces the threat of both guerrillas and armed cocaine traffickers in the Huallaga River valley, where the company is looking for oil.

A sluggish and complicated bureaucratic system, rife with corruption, is also a serious problem to contend with.

The American View

James Plunkett, vice president of the American Chamber of Commerce in Peru, said the Fujimori administration appears to be determined to attack problems that discourage both domestic and foreign investment. “The first step is to gain the confidence of the Peruvian investor and show the foreign investor that Peruvians themselves believe in their own system and are confident that things will progress,” Plunkett said.

He suggested that because of the minefield of problems, the most secure investments may be those made by companies that already operate in the country and know their way around or that can negotiate joint ventures with Peruvian partners.

Doing Business in Peru

The United States led all foreign nations last year in investing in Peru. TOTAL CUMULATIVE DIRECT FOREIGN INVESTMENT BY COUNTRY OF ORIGIN, 1989 (in thousands) West Germany: 2.0% Sweden: 3.1% Britain: 3.4% Canada: 4.1% Japan: 4.4% Switzerland: 6.2% Panama: 13.3% United States: 46.3% Others: 17.2% SOURCE: Peruvian National Commission for Foreign Investment and Technology