THE PERUVIAN OIL PRIVATIZATION PROCESS

• Jurisdiction: Derecho Internacional

Mining And Oil & Gas Development In Latin America
(2001)
CHAPTER 4D
THE PERUVIAN OIL PRIVATIZATION PROCESS
Germán Barrios
Barrios-Fuentes-Urquiaga, Abogados
Lima, Peru

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I. INTRODUCTION

The Peruvian Government started an aggressive privatization process in all business in which the government had a participation in 1990. The government had a monopoly operated by the company called Petroleos del Peru-Petroperu S.A. In 1991 the Peruvian Government decided to start the privatization of Petroperu S.A. as soon as possible considering the bad shape of the company.

By the end of 1989, Petroperu S.A. was practically in a bankruptcy situation. Petroperu S.A. had excess of personnel and installations with precarious conditions of operation and safety, which made difficult the internal supply of fuels in Peru.

The privatization of the oil industry had a good start privatizing 1 refinery, 3 oil fields, 1 off shore field, 1 lubricant plant, 88 gas stations, 1 LPG business and 3 terminals (north, center and south terminals).

Alberto Fujimori's second administration began to lose its strengths in the oil industry privatization considering the social high cost (firing of workers) which is not good for reelections proposes.

Additionally, Fujimori's administration lost all its intention of continuing with the privatization when the privatized refinery (La Pampilla) was reluctant to reduce the gasoline prices when the oil international price began to fall in 2000. At present, the Peruvian Government is using the State owned refinery (Talara Refinery) for an indirect control of fuel pricing. In other words, the Government reduces or increases the fuel price refined in its refinery according to the oil international prices forcing the privatize refinery to do the same.

The Privatization of the oil industry was suddenly paralyzed due to political reasons in 1999 and its future depends on who is the next elected President of Peru. Peru's presidential elections are on April 8, 2001 and the favorite candidates are in favor of continuing with the privatization process.

II. PRIVATIZATION LAWS

In the 1990s the Peruvian Government started a liberal process of the economy. In this liberal economical process the private sector is the promoter of the development of the country and that the role of the State should only be a normative entity and promoter of the private investment.

Peru was not the first country in Latin America to wake up to the economic logic of privatization, but its program was certainly the most radical in conception.

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With the new liberal tendency the government started enacting the following laws:

A. Legislative Decrees 622 and 757 and Supreme Decree 162-92-EF

Legislative Decrees 622 and 757 and Supreme Decree 162-92-EF established the framework for foreign investment in Peru and the juridical and tax guaranties of such investments for 10 years.

The general framework established by the above legal Decrees can be summarized in the recognition of the following principles guaranteed by the Government:

1. No discrimination between nationals and foreigners and the recognition of the same rights for both types of persons or corporations coupled with the declaration that any previous regulations that established discriminations were null and void;

2. Equal treatment in all aspects for public and private entities;

3. Free access for all juridical forms to do business in Peru (corporations, branches, subsidiaries, joint ventures and others);

4. Right of access to private property in all sectors available to nationals and foreigners;

5. Right to enter into and to develop any economic activity for nationals and foreigners;

6. Right to import and export;

7. Right to freely distribute the profits generated by businesses and the right of an investor to repatriate investments profits and dividends overseas;

8. Right of foreigners to acquire shares, participations and all other types of assets from nationals;

9. Free access for nationals and foreigners to the exchange market, establishing a total free exchange and having any person or corporation, national or foreigner, the right to acquire and sell foreign or local currency from any source at the most favorable type of exchange that could be obtained; and

10. Right to remit royalties abroad.

In order to guaranty the above mentioned principles, the aforementioned norms permit national and foreigner investors to execute contracts with the Government. Such contracts have the following characteristics:

1. They are ruled by the Civil Code and not by Public Law, treating both parties — even though one is the Government- as two private parties entering into a contract;

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2. They have the same force of law and cannot be modified unilaterally by any of the parties without the acceptance of the other;

3. They are executed between the Peruvian Government with the national or foreign investor and the benefits also include benefits for the entities in which the investment is made;

4. They must be formalized before making the investment;

5. The term of the contract is 10 years starting as of the date of the closing of the contract, with longer terms for investments in mining and oil and gas activities;

6. The national or foreign investor has the right to renounce to the contract and terminate the same at any moment, in which case the legislation in force at the moment of the termination will apply;

7. The national or foreign investor has the right to assign the contract to a third party, thereby transferring its rights as well; and

8. The contract can be submitted to either national or international arbitration, in which case, it will be under the norms of the international treaties subscribed by Peru.

The benefits that these contracts provide are the following:

1. Stability regarding income tax norms so that the income tax in force at the time of the signature of the contract will be applied for the term of the contract, but adding an additional 2% to the income tax rate in force by the time of the execution of the contract.

2. Stability in the nature of transfer of the existing Sales Tax (VAT), Selective Tax on Consumptions and Promotional Municipal Tax.

3. Guaranty of the permanence of the benefits to special regimes for the recovery of taxes, temporary admission and the regime granted to exporters at the moment of the signature of the contract.

The requisites that the Government demands to celebrate a juridical stability contract are the following:

1. That the investment is US$5 million or more for all sectors, except for Mining and Hydrocarbon sectors which investment is US$10 million or more, and in the case of a foreign investment, that it is brought to the country through the financial system (banks and financial companies);

2. That the investment is made within a time period that should not exceed 2 years from the date of the signature of the contract;

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3. Finally, leasing contracts and joint ventures can be included, if they comply with the minimums mentioned above.

B. Legislative Decree 674

Legislative Decree 674...