Why Argentina?

13 REASONS TO INVEST IN ARGENTINA This document has been prepared by the Investment Promotion Agency on September 2004. Reproduction in whole or in part is authorized, with appropriate acknowledgment of the source. For further information visit: www.inversiones.gov.ar

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Why Argentina? 1. High economic grow potential

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2. Investment Incentives

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3. Competitive access to international markets

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4. Competitive and qualified workforce

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5. Availability of Natural Resources

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6. Developed infrastructure

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7. Relative low costs of investing

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8. Modern diversified industry

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9. Diverse offer of business opportunities

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10. An integrated economy with its doors open to the world

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11. Favorable Legal Framework for foreign investment

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12. Investment protection treaties

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13. Appropriate social climate and consolidate democracy

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Investment Promotion Agency of Argentina: About us

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This document has been prepared using the exchange rate valid on 2003 (US$ 1= $ 2,98)

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High Economic Growth Potential

Over the period 1991 to 1998 Argentina’s economic growth were among the highest of the region, GDP grew in real terms at an average annual rate of 5.8%, despite a 2.8% contraction in 1995 due to the Mexican financial crisis of 1994. Nevertheless, from the last quarter of 1998 through the first six months of 2002, Argentina suffered a severe economic recession. This economic crisis was triggered by a series of external shocks that took place between the last quarter of 1997 and the fall of 2001, including economic and financial crises in Russia, Asia and Brazil and rising worldwide interest rates. Domestic structural barriers to economic growth also contributed to the crisis (Argentina’s trade and fiscal deficits; the rigidity of its monetary system; its excessive reliance on foreign capital). In late 2001 and the beginning of 2002, capital flight from Argentina and a run on bank deposits brought an end to the Convertibility regime. By the middle of 2002, Argentina’s economic situation began to stabilize. The adjustment in the current account had created the conditions for a stabilization of the peso. As the domestic currency stabilized, inflationary pressures declined. This, combined with the expansion of the monetary base, permitted a gradual stabilization of interest rates. The increase in production resulting from rising domestic demand due to import substitution began to fuel an economic recovery. Since January 2002, 8 consecutive quarters of growth were recorded, a sequence that had not been witnessed since 1997. Argentina recorded the highest growth in Latin America in 2003 and is expected to continue to be among the leaders in the years to come. The economy grew 8.7% last year, exceeding all expectations, driven by a strong recovery in investment and consumer spending, both of which explain the positive evolution in GDP. The increase in investment resulted in part from the export growth and import substitution process that began during 2002. This increase in production in turn led to higher levels of employment and incomes. In addition, domestic consump-

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tion increased in 2003, strengthening the recovery and further encouraging domestic investment. Despite the reactivation of local demand, inter-annual inflation fell from 41% in 2002 to less than 4% in 2003. This trend continued, with the year-on-year inter-annual inflation standing at 2.3% in February 2004. This year the economy is expected to show a similar dynamic to 2003, even though with smoother variations than the ones registered in last year's rebound. Thus, the economy growth will be driven mainly by domestic demand, with an expected 6.6% annual expansion for consumption and a 20.4% annual expansion for investment. Exports will also contribute to the economic recovery (+9% annual), encouraged by the greater growth in world's economy, good perspectives in commodities prices and the high real exchange rate. In the Central Bank's latest survey1 , the forecast for GDP growth is 7.2% and full-year 2004 industrial production is now seen at 10.5%. Similar forecast was made by the International Monetary Fund (IMF).

Source: World Economic Outlook (IMF), 2004.

1

The survey is compiled from projections of more than 50 local and international institutions.

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In an international favorable context (greater growth of world economy, in particular of Latin American region, strong commodities prices and low international interest rates), argentine economy recovery is expected to extend to the year 2005, with private growth estimates being more optimistic than the government ones (+6.5% vs. +4.5%, respectively).

SOME ECONOMIC INDICATORS Activity Indicators The recovery of the argentine economy started in the second quarter of the year 2002 and there have been eight consecutive quarters of growth for the first time since 1997. The surge in growth is also noteworthy: Variation rates reached 3% in the last months of the series.

The manufacturing industry was significantly and adversely affected by the latest ec onomic downturn, but has led economic recovery in 2003 due to increased domestic consumption, reaching the 1998 level in March 2004, only 4% below the historical record (June 1998). Industrial production accumulated 18.3% growth between March 2002 and June 2003.

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Labor Indicators The recovery in economic activity led to a significant increase in jobs. Between second quarter

2003

and

second

quarter

2004,

some 2.1 million people joined the labor market. The albeit still high unemployment levels began to drop following the recovery in economic activity. During the year 2003 the unemployment rate decrease 29% and the employment rate increase 7%. 1. Employment Rate: Employed / Total Population. 2. Unemployment Rate: Unemployed / Economically Active Population

Domestic Investment Following eight consecutive negative quarters, there has been a gradual recovery in investment as from 4Q 2002. Renewed growth in investment represented a significant 6

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contribution to GDP. Measured at current values, the investment in the first quarter of 2004 was $ 71.939 millions (24 US$ billions), 51% above the same period of 2003. Since the last quarter of the year 2002, the variation of seasonally adjusted Gross Domestic Fixed Investment (GDFI) compared to the previous quarter showed a significant increase (average of 11%). At the same time, 6 consecutive quarters of growth were recorded as from 4Q 2002 in the GDFI/GDP quotient.

The recovery of investment was stronger in durable equipment, whose participation in GDFI recovered the level of the average of the 90s. As regards national equipment and construction there were also a considerable increase. Foreign Trade The depreciation of the local currency led to a significant surplus in Argentina’s trade balance, mainly as a result of import substitution. In 2002, there was a 3.1% reduction in exports. Although the devaluation of the peso in January 2002 tended to boost the competitiveness of Argentine goods abroad, the collapse of the banking sector undermined the level of exports during 2002: Nevertheless, in 2003, exports increased 14.3%, notwithstanding the economic slowdown that affected certain of Argentina’s main trading partners (Brazil and certain European countries). This increase in exports was attributable primarily to an increase in the international prices of oil and other commodities (such as wheat and soy) and a

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significant increase in Argentine soy production, which resulted in greater exports of soy-based products. The decline in imports between 1999 and 2001 resulted primarily from the recession, which reduced consumer demand, including demand for foreign goods. The decline in imports in 2002 resulted from the combined effect of the recession and the devaluation of the peso, which increased the price of foreign goods. In 2003 this trend was reversed, as imports increased 54.4% as compared to 2002. This increase in imports resulted from the growth of the Argentine economy during 2003, which generated greater domestic demand for foreign products and the appreciation of the local currency, which made foreign products relatively cheaper. A robust trade surplus was maintained in 2003 despite the recovery on imports.

Source: ADI based on INDEC data.

For further information visit the Ministry of Economy and Production website: www.mecon.gov.ar

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Investment Incentives

Argentina has a number of regimes designed to promote investments by both dome stic and foreign investors alike. These regimes could be divided into three groups or categories: General Incentives, Sectoral Incentives and Regional Incentives

GENERAL INVESTMENT INSTRUMENTS Export promotion incentives Including drawback, temporary admission and turnkey plant exports. Exemption from import duties corresponding to the importation of capital goods Resolution 8/2001 of the Ministry of Economy and Production went into effect on March 23, 2001. This resolution reduced the import duty on certain telecommunic ations products, information technology industries, and capital goods to 0 percent. VAT reduction on capital goods VAT reduction (10,5%) applies on locally purchased and imported of capital goods (finished goods) and information and telecommunication goods (including their parts and components). Import Regime for Large Industrial Investments Promotional incentive that tend to reduce the cost of an initial investment through zero tariffs on imports of capital goods destined to new production lines of tangible goods or for goods destined to improve environmental conditions of productive plants of tangible goods Leasing Regime The possibility of using leasing contract has been extended to software, brands and

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licensees, real state, machinery and tool manufacturers. When the purchase option takes place, the buyer could consider the amount paid as rental as loan quotas. In - House Customs The payment of exports and imports related tariffs and duties are done once the final goods are shipped either for domestic consumption or to be exported. To be eligible for this benefit a minimum yearly requirement of trade transactions and amount must be fulfilled. Simplified importation system Decree 161/99 and Resolution AFIP 503/99 establish an optional custom clearance method called the "Simplified Importation System". Companies wishing to carry out importation proceeding through this system must be registered in the Importers/ Exporters Records. As a requisite, the F.O.B value must not exceed the sum of US$3,000, and each importer must not exceed a maximum of four operations per month. Merchandise imported under this regulation must follow the following conditions: §

Must be new, unused, and not require reconditioning.

§

Must not be prohibited imports, nor be subjected to quotas or intervention of other organisms.

§

Must not be protected by any regulation that implies any type of exemption or tariff preferences

§

Must be included in the Pre-shipment Inspection Regime.

As of March 8, 1999, merchandise imported under this simplified method pays a unified 50 percent import fee on the CIF value, which covers import duties and other taxes and rates of whatever nature. Temporary Admission Regime (TAR) The Temporary Admission Regime (TAR) allows duty free admission for goods such as commercial samples, packaging, pallets, containers and odds for exhibits. Decree 1439/96 regulates the import of primary and intermediate goods into Argentina for

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use in export production, applying special procedures The imported goods must be substantially transformed or embodied in the production of goods for export. Merchandise may suffer changes, which increase or lower its value, but no export charges will be levied when goods remain unchanged. If value is increased, charges will apply on this added value. New initiatives The Executive Branch has launched new mechanisms designed to promote invest ment: §

Accelerated depreciation for machinery, equipment, and infrastructure works destined for investment projects. Capital goods purchases may be depreciated in the balance sheets for the three years subsequent to purchase and infrastructure project depreciation will be reduced by 50% vis-à-vis the usual depreciation period.

§

Refund of VAT paid on the purchase of goods destined for use in investment pro jects. All VAT not offset will be refunded in cash three months after purchase.

SECTORAL PROMOTION Mining Promotion Regime In order to attract investment in the mining sector, Argentina through the Mining Investment Law N° 24.196 established a 30-year guarantee of fiscal stability for new projects and/or extension of existing projects. The tax treatment encourages risk investments by providing access to machinery and equipment at international prices, rapid recovery of capital invested through accelerated depreciation of capital goods, extraordinary deductions of exploration costs and the deductibility of new assets incorporated in the process. Forestry Regime The Forest Investment Law (Law N° 25.080) have direct impact not only at primary level, but also it will be reflected in the future of industries related to this sector. This

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law complements the Promotion Regime for Forest Plantations started in 1992. Law 28080 grants important fiscal and economic benefits with the goal of reaching a 3 million hectares planted area by the year 2010. The law establishes a fiscal stability for a period of 30 years from the date of approval of the project, an economic non refundable support and very favorable tax treatment for projects in this sector (valued added tax refunding, exemption from all taxes on assets for forestry production, special regime of deductions for Income Tax). Automotive Regime On December 2000 during the Mercosur Meeting at Florianópolis was settled the Mercosur Common Automotive Policy. The negotiations conclude with the exchange regime that will lasts until 2006 between Argentina and Brazil and the 35% tariff level for imports into Argentina and Brazil of passenger vehicles and light commercial vehicles from third countries. Tourism Promotion The construction and equipment of new hotels, the reforms and improve upon existing ones and for recreation and general services related with tourism are promoted through total or partial exemption on turnover tax and real state tax for a period that could range from 5 to 15 years according to the location and activity. REGIONAL PROMOTION Various provinces in Argentina have investment promotion regimes. Even when there are certain differences among these regimes, generally include the following incentives: §

Exemption from provincial taxes such as turnover tax, stamp duty, real estate tax, etc.

§

Reduced public utility rates.

§

Support for infrastructure and equipment projects.

§

Facilities for the purchase, rental, or lease without charge of public property.

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Most provinces have business support infrastructure such as industrial parks and free trade zones. Free Trade Zones The free trade zones offer exporters the possibility to import free of customs duties, statistics rate and VAT, all the necessary equipment to build a "turnkey operation" within the zones. Furthermore, exporters manufacturing within the zones enjoy the benefit of buying supplies and raw materials from third countries, without having to pay duties or taxes that lead to increased prices. The customs authority regulating the goods considers them as stored in a third country; therefore, incoming products are subjected to inspection with the sole purpose of classifying quantity and type. In other words, goods enjoy a duty-free status until they enter the Argentine customs territory. Goods may remain in the zone for a maximum period of five years. Goods can be released according to market demand, thus avoiding payment of duties and taxes until a purchaser for the goods is found; i.e., free zone customers pay the duties and taxes on goods sold and leaving the zone (deferring payment of duties). Incoming goods can be split, have value-added work performed, etc. to increase their commercial quality or to save on transportation costs. Goods may be re-exported to any part of the world without paying any duty or tax. Law N° 24.331 of 1994 establishes the foreign trade zone regime for Argentina. The law permits establishment of four zones. In addition, each province can establish a foreign trade zone. Currently, there are free trade zones in Buenos Aires, Córdoba, Chubut, La Pampa, Mendoza, Misiones, Salta and San Luis.

Our website present a complete document of Investment Incentives available in Argentina (Spanish version only): www.inversiones.gov.ar/incentivos.htm

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Competitive Access to

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Intern ational Markets ARGENTINA: POINT OF ENTRY TO MERCOSUR Argentina, Brazil, Paraguay and Uruguay form the Southern Common Market, widely known as Mercosur. Chile, Bolivia

and

Peru

have

entered

into

agreements with Mercosur as well. As of December 31s t, 1994 tariffs and other non-tariff

trade

restrictions

between

member states were eliminated and free movement of capital, services and people was established. Moreover, Mercosur adopted a common external tariff on foreign trade which ranges from an average of 11%up to a maximum of 20% (35% only in the case of cars). Through Mercosur, Argentina provides access to a market of 220 million inhabitants, comprising an area of 11.9 million square kilometers, with a GDP of US$ 797 billion that represents more than 40% of Latin America’s total GDP 2 .

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World Bank (2001).

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TRADE AGREEMENTS Argentina has executed agreements in order to gain preferential access to relevant external markets through regional agreements or favorable treatment from developed countries. Preferential Duty Rates on Regional Integration The most relevant Commercial Agreements are the ones executed on the Latin American Integration Association (LAIA). Tariff reductions among LAIA country members are granted through two different kinds of agreements: Regional Agreements and Economic Complementation of Partial Range Agreements One of the most important regional agreements is the PRA N° 4 (Tariff Preference Regional Agreement) that was signed by all LAIA members. Differential tariff cuts among countries have been implemented according to the cat egory they belong (most developed, intermediate and least developed), nevertheless most of the products are covered by these tariff cuts. Argentine exports could be benefited through the following trade tariff reductions. . Argentine exports are granted on tariff rates (8%) of Bolivia, Ecuador and Paraguay. . Colombia, Cuba, Chile, Peru, Uruguay and Venezuela grants reductions of tariffs on imports from Argentina (12%). . Exports from Argentina are granted reduced with 20% reduction on import duties of Brazil and Mexico. General System of Preferences (GSP) Under GSP schemes of preference-giving counties, selected products originating in developing countries are granted reduced or zero tariff rates over the MFN (most favored nation) rates. The least developed countries (LDC’s) receive special and preferential treatment for a wider coverage of products and deeper tariff cuts, in order to increase their export earnings; to promote their industrialization; and to accelerate their rates of economic growth.

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The following countries grant GSP schemes: Australia, Austria, Belarus, Byelorussia Bulgaria, Canada, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Liechtenstein, Luxembourg, New Zealand, Norway, Poland, Portugal, Spain, the Czech Republic, the Netherlands, the Russian Federation, the Slovak Republic, Sweden, Switzerland, Turkey, United States of America and United Kingdom. The products covered by the GSP scheme are selected by the countries that grant the benefits. In order to be eligible for preferential tariff treatment products must be recognized as originating in a country benefited. The main aspects of the prevailing conditions related with the GSP scheme in the European Union, United States and Japan are enunciated below. European Community To benefit from GSP tariff preferences, products from eligible countries must be "originating" according to the EU’s rules of origin for the purposes of GSP. The current EC GSP scheme offers duty free access for all non sensitive products, to the products belonging to sensitive category the rates are calculated by applying a flat rate reduction of 3,5 percentage points to the most favored nation (MFN) duty in the case of ad valorem duties, or 30% reduction to the MFN duty in the sole presence of specific duties. The provisions on the exclusion of beneficiary countries on grounds of the degree of their development should be applied once a year. However, countries should be excluded only where they meet the criteria for exclusion during three consecutive years, and they should be readmitted where they do not meet those criteria during three consecutive years. The provisions on graduation of sectors should be applied once a year. However, sectors should be graduated only where they meet the criteria for graduation during three consecutive years, and they should be readmitted where they do not meet those criteria during three consecutive years. United States of America

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The United States GSP scheme permits duty-free entry to all products covered by the scheme. United State offer duty-free treatment to more than 5.000 products from developing countries and 1.700 products from the least advanced among the developing countries. In 2002 products worth 16,7 billion dollars were imported into the United States under GSP scheme. Only the 2% came from Argentina. Exports from Argentina have a significant potential to take advantage of the system because 70% of the current argentine exports to the United States could be included on the benefits of the GPS when only 9% of them are currently using this benefits3 . Japan Japan’s GSP scheme grants preferential treatment to 164 developing countries and territories including Argentina. Various tariff reductions apply to the 339 agricultural and fishery products covered by the GSP scheme. Preferences are granted for all industrial products with the exception of 180 selected products (in principle industrial products receive duty free treatment). There are no ceilings for agricultural products. In respect of industrial products there are no ceiling for a number of such products, for the rest imports can be made until the exceed the ceilings. No allocation or reservation is made for any individual beneficiary country. Ceiling and maximum country amounts are administered on first come, first served basis, subject to monthly control. For further information related with the GSP visit the following websites: Fundación Export-AR: www.exportar.org.ar. SGP-UE: www.taric.com. SGP-US: dataweb.usitc.gov. SGP-Japan: www.mofa.go.jp/policy/economy/gsp

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Figures provided by the Subsecretariat of External Trade Negotiation and Policy using data from the United Stated of America Department of Commerce (2002).

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Competitive and Qualified Workforce ONE OF THE LOWEST ILLITERACY RATE OF LATIN AMERICA Argentina, which boasts a literacy rate of 97.4 percent, has long prided itself on its educational system. Illiteracy in the City of Buenos Aires, with a population similar to Uruguay, is 0.5% and 1.3% in the metropolitan region, with a population similar to that of Chile. It means that Argentina has the most populated urban area with the lowest illiteracy rate of Latin America.

Education is compulsory and free for the 5-14 year age group, thus ensuring high school enrolment rates. In addition, attendance expectancy at educational establishments is the highest in Latin America and only one year less than that observed for developed countries such as Spain, Italy, and the United States. Secondary and high school education is generally both affordable and available. The percentage of individuals attending and completing university degree programs is increasing. Argentina boasts a broad network of public and private universities attended by over one million students. The country’s university system is also free. The university student / total population ratio is the highest in Latin America and compares with the ratio for several developed countries.

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THE QUALIFICATION OF ITS WORKFORCE IS COMPARABLE TO THE MOST DEVELOPED NATIONS There are almost 2,4 million high education graduates in the country. High education institutes are split between public non tariff and private universities and tertiary n istitutions. The wide offer of institutions (almost 100 institutions) guaranteed the access to a large number of people. The number of university students during the past decade grow by 65%, reaching 1,3 millions of students in the year 2002. Tertiary Education Enrolment Rate 48,0% Latin America & The Caribbean: 22,1%

49,9%

37,5%

16,5%

Brazil

Chile

Argentina

Spain

Source: World Bank (2001).

Tertiary Education Enrolment Rate: is the ratio of the total enrolment regardless of age, to the population of the age group correspond to the level of education.

COMPETITIVE SALARIES After devaluation Argentina is among the most competitive economies in the international market in terms of labor costs. Argentine legislation establishes wages

minimum of

$350

(US$

121,1). Nevertheless the average

gross

monthly

wage in the private sector is $1240 (US$ 413).

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MONTHLY FIXED WAGES Management

Pesos

Dollars

High

10.500 - 15.000

3.559 - 5.085

Medium

7.000 - 10.000

2.373 - 3.390

5.000 - 6.500

1.695 - 2.203

Initial

High Management: Big companies directors or medium enterprises CEO´s Medium Management: First level of report at small and medium companies and second level at big companies

The percentage of variable components among executives wages it also depends on the management category. In the case of initial management it oscillate in a 10% for high management it oscillate in 30%. THE BEST LABOR PRODUCTIVITY INDICES OF LATIN AMERICA According to CEPAL, Argentina is the Latin-American country that have the lowest relative gap of labor industrial productivity compared to the United States. Argentina average labor productivity in the manufacture industry represents 67 percent of the same indicator in the U.S., Brazil is 37 percent and in the rest of Latin American countries this indicator is below 40 percent. LENGTH OF THE WORKING DAY The basic working day is 8 hours per day and according to the Argentine legislation may not exceed 48 hours per week. This situation along with the relatively low level of the wages generate a highly competitive hourly average wage. RELATIVE LOW LABOR CONFLICTS According to the Labor Indicators Survey made by the Ministry of Labor and Social Security, labor conflicts are relative low. From May 2002 to May 2003, less than the 0,14% of the enterprises and 0,23% of the employees have been involved in labor conflicts. For further information related with this issue visit the Ministry of Labor and Social Security website: www.trabajo.gov.ar.

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Availability of Natural R esources Argentina is characterized by the abundance and quality of its natural resources that provide competitive advantages in developing activities linked to these resources. Argentina is the eighth largest country in the world in terms of surface area and its relevance is even greater if factors relating to the potential its surface area offers are considered (i.e. the proportion of surface area suitable for agriculture, mining resources, etc.). ARABLE LANDS The Argentine territory has almost 250.000 square kilometers of arable land. This abundance of land along with its excellent agroecological conditions enables Argentina to be : è The world’s leading producer and exporter of sunflower oil è The world’s leading exporter and third largest producer of soybean oil. è The world’s leading exporter and second largest producer of honey. è The world’s leading exporter of horse meat. è The world’s second largest exporter of corn. è The world’s third largest producer of soybeans. è The world’s third largest producer and second largest exporter of lemons. è The world’s third largest producer of beef. è The world’s sixth largest producer of wine. (Source: FAO, 2002).

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Agricultural production increased 105% in the period 1990-2003. Principal crops include soybean, wheat, sunflower, and corn. Cultivated surface area increased approximately 52% over the same period, representing significant progress in terms of yields. In comparison with the major grain-producing countries, Argentine yields are highly competitive at international level. Similar conclusions are obtained when comparing yields for other crops such as apples, pears, lemons, beans, and garlic in which Argentina also has a considerable global market share. FISHING As a result of the considerable length of the Atlantic coast (4.725 kilometers) and the great variety of species found in the fishing zone make Argentina one of the best fishing areas worldwide. The total capture volume goes beyond 1 million tons and about 80 percent of it is exported. FORESTRY The main factors determining competitive advantages in this activity (soil types, climate, costs, human resources, etc.) are present in vast regions of Argentina. Of the 20 million hectares suitable for forestry, only 5% are currently used for this purpose. Land suitable for forestry does not compete with other agricultural activities. The diversity of climates and soil types makes it possible to cultivate a wide variety of species. In addition to tree growth rates, the relatively low land value compared to countries such as Brazil and Chile yields high rates of return and exceptional payback periods. High growth rates: 41 m3 / hectare/ year (Chile 35 m3 ) for eucalyptus and up to 32 m3 / hectare/ year for pine (three times the growth rate in Canada and twice that of the United States). OIL AND GAS Not only is Argentina self-sufficient in terms of oil and gas production but it is also able to generate production for export as well. Furthermore Argentina is the world’s 10th largest country in terms of gas production and the world’s 18th largest exporter of oil. Despite increased production in recent years, investment in exploration has

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made it possible to maintain levels

of

significant reserves.

Gas production has increased constantly since the early 90s, doubling

early

90s

levels in 2003. Although oil production has fallen in recent years, levels are still 50% above the levels

recorded

12

years ago.

Source: ADI based on Secretariat of Energy data.

MINING Argentina is the sixth largest country in the world in terms of mining resources and occupies second place in the ranking of investment opportunities. The estimated surface area with mining potential totals approximately 750,000 km2 , 75% of which has still to be exploited. Argentina has considerable gold, copper, lead, zinc, natural borate, bentonite, clay, and ornamental stone deposits. The effective tax rate is 41%, 6 points below the average for the principal Latin American mining nations and almost 20 points lower than that of the major Canadian and Australian mining regions. The regulatory framework and current mining incentive regime play a key role in attracting investment to this sector. For further information visit the following websites: Secretariat of Agriculture, Livestock, Fishery and Food: www.sagpya.mecon.gov.ar Secretariat of Energy: energia.mecon.gov.ar Secretariat of Mining: www.mineria.gov.ar

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Developed Infrastructure

Argentina has an important infrastructure network in the areas of air navigation, railways, roads, port facilities, electricity and telecommunications. Some of these areas have been utterly deregulated, and most of them are managed by private companies. Appropriate infrastructure provides a platform to boost production sector competitiveness and ensure territorial and social integration. TELECOMMUNICATIONS Argentina began developing telecommunications 123 ago, only 4 years following the launch of the Bell Telephone Company. Over the last 10 years, investments totaling more than 20 billion dollars have n icreased the number of telephone lines in service by 74%, total digitalization of the network has been achieved, and the mobile telephone service has grown from less than half a million to 8 million phones in service.

ROADS The National Road Network spans 38,632 km, 81% of which are paved. A further 180,000 km of roads are under provincial and 280,000 km under municipal jurisdiction. Along these roads, 85 percent of passengers and 87 percent of merchandise are transported. RAILWAYS The Argentine railway network is one of the most extensive worldwide, covering a distance of 35,753 km. The federal government has decided to promote regional inte-

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gration though the railway system and consequently decreed the reopening of branch lines such as the Central Trans-Andean Railway via tender and the rehabilitation and transformation of the Belgrano Cargas freight line. PORTS Argentina has 38 maritime ports along the Atlantic coastline and 25 river ports. Recognized international maritime cargo operators operate out of Argentina. The Port of Buenos Aires is the main container port in Latin America and the Caribbean. Argentina’s main port has achieved considerable progress in recent years in terms of operability.

AIRPORTS The National Airport System includes 57 airports of which 24 are international. Thirtythree airports are consigned to private operators. Future investment in this sector is expected to escalate to US$ 2,228 million. As a consequence, an increase in passenger volume is expected from the current level of 11 million passengers, to 23 million in 2010 and 34 million in 2025. ELECTRICITY The electricity generation capacity reaches 21,300 MW. The annual production is 75,554 GWh, or 2,042 kWh per inhabitant. The deregulation of this sector allowed the entrance of new competitors that led to a drop in rates, placing such rates among the lowest in the world.

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Low direct and indirect costs of investing in Argentina

As a result of the local currency depreciation Argentina has become in one of the most competitive economies in the world. Next are mentioned some of the relevant costs investors must take into consideration if they wish to set up their business in Argentina. ARABLE LAND COSTS The Argentine territory has almost 250.000 square kilometers of arable land. Argentina land prices vary depending on their agroecological potential and their proximity to the ports and urban centers. In areas with excellent ecological aptitude the average cost of land for sowing vary from US$ 1.000 per hectare to US$ 3.000 per hectare. At the same time the cattleraising average cost of land is US$ 550 per hectare. URBAN CENTERS LAND COSTS In the City of Buenos Aires the average cost of land is $ 897 (US$ 304) per square meter. Nevertheless there are significant variation due to the location in the city. Currently there are almost 200 industrial agglomerations –industrial parks, industrial areas-. Most of them have available land for sale and infrastructure like concrete pavement/sidewalk, street lighting, potable water, treated water, sewage system, natural gas and 13,2 KVA electrical power. The average cost of land in those agglomerations is US$ 0.5 / m2 . Nevertheless the prices vary according to the utilities, infrastructure that offer, to the geographical location, services available in the area, etc.

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OFFICE RENTAL RATES In the Metropolitan area prices vary according to the location and building categories. The average sell price of square meter vary from US$ 1.500 to US$ 500; meanwhile the monthly rental rate in Class A offices is 8 US$ per m².

Class A buildings: Buildings generally used for rental purposes. Located in easy access areas. Modern layouts with good natural light and view. Well finished and maintained. Tenants are generally multinational companies and/ or tenants with a high economic capacity.

WORKFORCE As we mentioned before local workforce present not only high levels of qualification but also competitive international wages. Argentine legislation set legal minimum wages with the purpose of guaranteeing a minimum standard of living for unskilled workers. The legal minimum wages is $350 (US$ 121), nevertheless the average gross monthly wage in the private sector is $1240 (US$ 413).

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Modern Diversified Industry

Development of the industrial sector began during the early years of the last century and has accelerated during the World War II. Industrial development is heavily concentrated in Buenos Aires as well as in Santa Fe and Córdoba. Argentina boasts a relatively modern and diversified industrial structure. There has been substantial investment in machinery and equipment in recent years and a nucleus of state of the art companies has emerged. In addition, Argentina’s industrial profile is characterized by: § Pronounced alignment with Argentine factor endowment. § High labor productivity indices. § High capital intensity. § Export-oriented production. § Increases of scale. § The presence of transnational enterprises. Argentine businesses have been operating in an open and competitive environment for the last 14 years. Survival under such conditions would be impossible without the attainment of a high level of technological capability. The principal factors which have put Argentina at this level of development are its experience with manufacturing, the generally high level of education of its population and the existence of a dynamic, demanding, and diverse internal market. Industrial production has developed favorably in recent months. The recovery in domestic demand, the integration of Argentine world class producers of industrial inputs and primary commodities into external markets is intensifying, accompanied by a new

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process of import substitution in specific branches. The industrial sector is one of the pillars of the current economic recovery. Sectors that were internationally competitive in the 90s (petrochemicals, iron and steel, foodstuffs) reacted favorably, while other previously relegated industries (textiles, metalworking) led the recovery in the industrial sector. Economic opening has transformed the industrial sector, resulting in: A greater emphasis on exporting: Manufactured goods exports have increased their share of industrial GDP. Increased international integration: Intermediate goods imports have increased their share of industrial GDP. At the same time, Argentina has recorded significant progress in human resource productivity with a 26% increase in labor productivity between 1995 and 2000.

Industrial sector hourly productivity (Base year 1997 = 100) 120 110 100 90

I-03

IV-02

III-02

II-02

I-02

IV-01

III-01

II-01

I-01

IV-00

III-00

II-00

I-00

1999

1998

1997

1996

1995

80

Source: ADI based on INDEC data

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Diverse Offer of Business

9

Opportunities Argentina offers a wide range of business opportunities with evident competitive advantages in front of other international options. These opportunities are open for national investors as well as foreigners. The local currency devaluation of beginning of the year 2002 has generated strong incentives in favor of local production of tradable goods. This relative prices change has led so much to an increase of the exports like a process of import’s substitution. Local producers are replacing previous foreign supplier in segments where the Argentinean production have rules of quality, design and dependability that are in line with best international practices. Economic sectors in which investment opportunities are shortly presented are listed below: AGROINDUSTRY The geographic vastness -Argentina is the eight largest surface in the world- combined with a great variety of climates allows Argentina to enjoy one of the richest and diverse ecosystems in the world. Agroindustry have been, traditionally, the economic sector in which Argentina has demonstrated that it has the biggest advantages to compete in the world market. Some of the competitiveness factors that led this industry into one of the most attractive sectors for foreign investment are: §

Excellent quality and diversity of soils.

§

Great variety of climates and rains.

§

Usage of low environmental impact technologies.

§

Appropriate development of the agricultural product chain.

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Worldwide quality recognition.

BIOTECHNOLOGY Biotechnology is in a process of growth worldwide and locally. The conjunction of qualified investigators, scientists and engineers and strong interaction among comp anies, national organism and universities rank Argentina high. Argentina has an important offer of biotechnological projects related with relevant economic sectors like medicine, agriculture, cattle raising, food, high technology in dustrial processes, therapeutic proteins, or molecular biology. ELECTRICITY Argentina has carried out an important advance in the development of its electric offer. It has a deregulated energy system, generator of positive balances for export and balanced between several sources of energy including renewable sources like hydroelectric, solar, wind and geothermal. Demand for electricity continues to increase, and there is a concurrent need to upgrade electrical generation, transmission and distribution facilities. Some major hydroelectric projects are being planned for the future, offering opportunities for foreign investors. OIL AND GAS Plans are being made to explore and develop oil holdings throughout the country and to pump gas across wide areas to supply domestic needs and the needs of bordering countries. The recovery will also be tied to the contribution in terms of production to the energy sector of the Government’s newly created state-owned energy company, Energia Argentina,. This company was created with the goal of stimulating increased investment in oil and gas transportation, exploration and production. MINING Argentina is the 6th largest country in the world in terms of mining resources, and the

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2nd in the ranking of investment opportunities. The Argentina’s geologic potential (75% of the area with mining potential has not been exploited yet) and the favorable legal framework related with the activity (fiscal stability for 30 years) offer an unique opportunity when investing. Furthermore return rates of argentine copper and gold mines are among the highest in the world. SOFTWARE Competitive advantages recline on the presence of highly qualified human resources, modern infrastructure, relative low costs and regulatory framework and current software incentive regime. The presence of all these key factors could position the country as the “digital pole” of the spanish-speaking world. The significant offer of highly specialized engineers and scientific at technology and computer solutions, competitive salaries along with a modern net of telecommunic ations could transform Argentina into an attractive point for the developments of the software industry. TELECOMMUNICATIONS AND TECHNOLOGIES OF THE INFORMATION Since the deregulation of the sector, the telecommunications along with the IT sector register one of the highest growth rates of Argentina. The developed infrastructure opens new business opportunities for the installation of activities of high technology like the industry of Internet contents, call and contact centers, development of the electronic trade, educational services, digitalization of the State, etc. TOURISM Argentina has countless possibilities to develop investments in this sector. The market is ready for improved tourist infrastructure to help satisfy the ever-growing international demand. The country’s tourist attractions and the increasing volume of visitors from abroad guarantee the success of such efforts. Argentina is a fascinating country where all four seasons and all kind of scenery can be enjoyed just by traveling from one region to another. The country has enormous nature reserves and it is a worldwide pioneer of nature conservation. At the same

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time, it has cities with a wide offer of culture and entertainment in which the major hotel chains of the world are present.

CONSTRUCTION AND REAL STATE The construction is one of the pillars of the current economic recovery and is expected to continue to grow in following years. The demand for construction of commercial property and industrial plants will continue to be firm, given the level of planned and expected investments. The infrastructure plan along with the investment incentives (accelerated depreciation for infrastructure works and automatic refund of VAT) recently announced by the government will stimulate further growth. EXPORT OPPORTUNITIES FROM ARGENTINA Argentina offers a wide variety of products that can be purchased at competitive prices to satisfy international requirements. These include commodity products ranging from grains and beef to petrochemicals and basic steel to such specialized composite products as the engineering and installation of hydroelectric turbines and offshore platforms. Argentine businesses operate in an open, competitive environment comparable to that found in other market economies, and survival under this conditions serves to ensure that the goods produced meet international standards and cost considerations. For more detail information related with business opportunities visit our website: www.inversiones.gov.ar.

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An integrated economy with its doors open to the world

Argentina passed through significant structural reforms during the past years. These reforms included the open up to the rest of the world and privatizations and deregulations in order to provide more participation of private sector. As a consequence of these reforms along with the forces of globalization and regionalization, the foreign trade as well as foreign direct investment has recorded a considerable increase. Since the late 80s and as a result of a significant reduction in tariff and non-tariff barriers, foreign trade has been particularly dynamic, a phenomenon that does not exclude trade with the region.

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During the period that goes from 1991 to 2003 exports rose 146%. The evolution of the exports could be mostly explain by some special regimes that were in force in particular sectors, gains of productivity as a consequence of the changes in the productive structure and the regional integration through the Mercosur. During the 90s the growth of imports was notably faster than that of exports. The increase of the local demand and the exchange rate of the past decade along with the regional integration explain most of the increase in the imports. The prevailing economic conditions after the devaluation of the peso shows a favorable evolution of the exports and imports during the years 2003 and 2004 after the descent of the year 2002. Gross Domestic Product and Openness of the Economy GDP

350.000

Openness Coefficient

45%

40%

40%

.

Millions of pesos

300.000

30% 200.000

Percentage

35% 250.000

25% 150.000

20%

16% 100.000

15% 1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Note: The Openness Coefficient is the participation of the exports plus imports on Gross Domestic Product (X+M / GDP). The variables are on current values.

LONG TRADITION OF ATTRACTING FOREIGN INVESTMENT The opening of the capital market and economic performance attracted numerous foreign direct investment projects in various sectors of the economy.

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Foreign investment have been playing a significant role in the formation of capital over the years. Companies including Shell, Exxon, Ford, Coca-Cola, Fiat, Bayer, Renault, Siemens, Nestle, Firestone, Basf, Pirelli and Abbott, among others, have been operating in Argentina for over 50 years. The conjunction between natural attractiveness of Argentina and the elimination of investment barriers, along with the external context and the regional integration explain the favorable evolution of the FDI during the 90s. We must take into account that the worldwide upturn in foreign direct investment flows started in that period, and privatizations of state owned business and the merger and acquisition process was particularly significant during those years. FOREIGN DIRECT INVESTMENT IN ARGENTINA FDI/GDP 10%

20.000

8%

15.000

6%

10.000

4%

5.000

2%

0

0%

1993 1994 1995 1996 1997 1998 1999 2000 2001

Net Inward FDI Flows Annual Average Million of Dollars

7.739

4.397 2.391 591 1980-89

1990-93

1994-97

1998-2001 Source: UNCTAD.

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Percentage

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Favorable legal framework for foreign investment The rules covering foreign investment are contained in the Foreign Investment Act N° 21382 which enacted in 1993 by Executive Order 1853/93, established the legal framework for foreign investment.

The main aspects of the prevailing legal framework regarding Foreign Investments bases on: National Treatment, which means that foreign investors have the same rights and obligations that the Argentine Constitution and laws give to national investors involved in economic activities within the country.

.

Foreign companies can invest without prior approval or the fulfillment of any registration requirements.

.

Foreign investors have the same access to incentive programs as local investors do.

.

Foreign companies have unrestricted access to all economic activities.

.

Foreign companies can adopt any legal organization allowed by the Argentine business law.

.

Foreign companies enjoy the same facilities to access credit as local companies do. Other types of contributions established in special or promotional regimes.

Temporary contributions of foreign capital made pursuant to contacts for the prevision of goods, works, services, or other activities are not subject to this law. They are instead governed by the terms of the respective contracts in accordance with applicable

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laws, notwithstanding which the owners of such contributions may choose to have their investment governed by this law. Legal deeds entered into between a domestic company of foreign capital and the company (or a subsidiary thereof) that directly or indirectly controls it are considered, for all purposes, to have been created between independent parties when the terms and conditions conform to usual market practices among independent entities. DEFINITIONS USED IN THE ARGENTINE LAW Foreign capital investment: . All capital contributions belonging to foreign investors and used in economic activities in Argentina; and . All or part of an existing domestic company’s capital acquires by foreign investors. Foreign investor: All physical or juridical persons domiciled outside the national territory; the holder of a foreign capital investment; and domestic companies of foreign capital (defined in the next section) that invest in domestic companies. Domestic company of foreign capital: all companies domiciled in Argentina in which natural or legal persons domiciled outside the republic directly or indirectly own more than 49 percent of the capital, or directly or indirectly control the number of votes necessary to prevail in stockholders partner’s meetings. Domestic company of domestic capital: all companies domiciled within Argentina. In which natural or legal persons also domiciled within Argentina directly or indirectly own not less than 51 percent of the capital and directly or indirectly control the number of votes necessary to prevail in stockholders partner’s meetings.

The legislation mentioned above can be found in www.infoleg.gov.ar or in our website: www.inversiones.gov.ar.

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Agreements to provide reci procal investment and avoid double taxation BILATERAL INVESTMENT TREATIES (BITS ) ARE INFORCE WITH 50 COUNTRIES Argentina seek foreign investment to advance its development process. Part of the efforts in promoting and protecting such investment involve the adoption of bilateral treaties for the promotion and protection of foreign investment. BITs promote stable and market-oriented policies towards foreign investment through: Non Discriminatory Treatment: Investment of investors of each contracting party shall at all times be accorded fair and equitable treatment in the territory of the other contracting party. Each contracting party shall in its territory subject investment of the other contracting party to treatment no less favorable than that which it accords to investment of its own investors or investors of any third State. Transfer of Payments: Each contracting party guarantee to an investor of the other party the unrestricted transfer of investments and returns without limiting the generality of the foregoing, each contracting party also guarantee the unrestricted transfer of fund in repayment or loan directly related to a specific investment, the proceeds of the total or partial liquidation of any investment; wages and other remuneration accruing to a citizen of the other Contracting Party. Expropriation: BITs establish clear limits on the expropriation of investments and provide for payment of prompt, adequate and effective compensation when expropriation takes place. Disputes between the contracting parties: BITs give investors from both Parties the right to submit an investment dispute with the treaty partner's government to international arbitration. There is no requirement to use that country's domestic courts.

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The agreements that have been signed by Argentina to promote and provide Reciprocal Investment Protection are listed below: COUNTRY

LAW

DATE

COUNTRY

LAW

DATE

Germany

Law 24.098

10/06/1992

Italy

Law 24.122

26/08/1992

Armenia

Law 24.395

09/11/1994

Jamaica

Law 24.549

13/09/1995

Australia

Law 24.728

07/11/1992

Lithuania

Law 24.984

03/06/1998

Austria

Law 24.328

11/05/1994

Luxembourg

Law 24.123

26/08/1992

Bolivia

Law 24.458

08/02/1995

Malaysia

Law 24.613

07/12/1995

Bulgaria

Law 24.401

09/11/1994

Morocco

Law 24.890

05/11/1997

Canada

Law 24.125

26/08/1992

Mexico

Law 24.972

20/05/1998

China

Law 24.325

11/05/1994

Nicaragua

Law 25.351

01/11/2000

Korea

Law 24.682

14/08/1996

Netherlands

Law 24.352

28/07/1994

Costa Rica

Law 25.139

04/08/1999

Panama

Law 24.971

20/05/1998

Croatia

Law 24.563

20/09/1995

Peru

Law 24.680

14/08/1996

Cuba

Law 24.770

19/02/1997

Poland

Law 24.101

10/06/1992

Denmark

Law 24.397

09/11/1994

Portugal

Law 24.593

15/11/1995

Ecuador

Law 24.459

08/02/1995

United Kingdom Law 24.184

04/11/1992

Egypt

Law 24.248

13/10/1993

Czech Rep.

Law 24.983

03/06/1998

El Salvador

Law 25.023

20/10/1998

Rumania

Law 24.456

08/02/1995

Spain

Law 24.118

05/08/1992

Senegal

Law 24.396

09/11/1994

United States

Law 24.124

26/08/1992

South Africa

Law 25.352

01/11/2000

Russia

Law 25.353

01/11/2000

Sweden

Law 24.117

05/08/1992

Finland

Law 24.614

07/12/1995

Switzerland

Law 24.099

10/06/1992

France

Law 24.100

10/06/1992

Tunes

Law 24.394

09/11/1994

Guatemala

Law 25.350

01/11/2000

Turkey

Law 24.340

09/06/1994

Hungary

Law 24.335

02/06/1994

Ukraine

Law 24.681

14/08/1996

Indonesia

Law 24.814

23/04/1997

Venezuela

Law 24.457

08/02/1995

Israel

Law 24.771

19/02/1997

Vietnam

Law 24.778

14/04/1997

TREATIES TO AVOID DOUBLE TAXATION Argentina has signed agreements to avoid double taxation and to prevent fiscal

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evasion with respect to taxes on income and capital gains with 17 countries, 15 of them are already in force. As a consequence of these treaties the effective income tax on dividends, royalties and interest are given below. In the same way, has signed agreements to avoid double taxation on international transport with 21 countries, 17 of which already are in force.

COUNTRY

LAW

DATE

Germany

Law 22.025

25/11/79

Austria

Law 22.589

Belgium

COUNTRY

LAW

DATE

Spain

Law 24.258

27/07/94

18/01/83

Finland

Law 24.654

05/12/96

Law 24.850

21/07/99

France

Law 22.357

01/03/81

Bolivia

Law 21.780

04/06/79

Italy

Law 22.747

15/12/83

Brazil

Law 22.675

07/12/82

Netherlands

Law 24.933

11/02/98

Canada

Law 24.398

30/12/94

United Kingdom

Law 24.727

01/08/97

Chile

Law 23.228

19/12/85

Sweden

Law 24.795

10/05/97

Denmark

Law 24.838

03/09/97

Legislative approval pending treaties: Ÿ

Extensive Agreements: Norway, Switzerland and Australia.

Ÿ

Transport Treaties: Malaysia, Panama, Paraguay y Mexico.

Ÿ

Protocols: Germany and Italy.

Russia, Israel and Poland Agreements are been negotiating. MEMBER OF MIGA, OPIC AND ICSID Argentina is a member, among others, of the Multilateral Investment Guarantee Agency (MIGA), the Overseas Private Investment Committee (OPIC), and the International Center for Settlement of Investment Disputes (ICSID).

Legislation mentioned above could be checked in www.infoleg.gov.ar.

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Appropriate Social Climate and Consolidate Democracy A FRIENDLY ATTITUDE TOWARDS FOREIGNERS Argentinean citizens have an extremely friendly attitude towards foreigners. This situation can be explained by the fact that Argentina was the second receiving country of the biggest migratory waves in the recent history (the end of the XIX Century and principles of XX Century).

Argentine Population Evolution Total Population

Foreigners

40

35%

36,2 30%

30

30%

25%

25%

25 20% 20

15% 15

15%

13%

12%

10%

10%

10

7% 5

Foreingner participation

35

Millions of Inhabitants

13

R e a s o n s

5%

1,8

5%

5%

1991

2001

0

0%

1869

1895

1914

1947

1960

Census

1970

1980

Source: INDEC.

Of the 52 million immigrants that crossed the Atlantic between 1824 and 1924, 11 millions arrived to South America; and the half of them chose Argentina like final destination. Most of Argentina’s population is of European origin, usually being of Spanish, Italian, British, French, and German. Substantial numbers of immigrants also came from Middle-East and other Latin American countries. All these migratory flows have been liv ing together harmoniously.

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ABSENT OF RACIAL OR RELIGIOUS CONFLICTS The diverse cultures that exist in Argentina have lived in harmony respecting each other’s religion and customs and without conflicts at all between them. Although Roman Catholic is the Argentinean official religion, the National Constitution consecrates the cult freedom, existing important communities that profess other religions, as the Judaism or Protestantism. Argentina presents the third largest Jewish community of the world after United States and Israel. In spite of the terrible attacks that it suffered at the beginning of the 90’s as consequence of international terrorism, Argentina presents an environment in which all their inhabitants can cohabit harmoniously by virtue of which ethnic, racial confrontations or religious don't exist.

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Investment Promotion Agency: About us The Investment Development Agency is a work unit within the Secretariat of Industry, Commerce and Small & Medium Enterprises of the Ministry of Economy and Production. The Agency’s activities are focus on: Institutional Promotion: which is basically the identification of business opportunities in different sectors and locations of the country and the distribution of the information generated by the Agency. Investor Support: working as a reference center, specialized in supplying up-dated information on different aspects, such as: economic, financial, legal, education, tec hnical, taxes, or other relevant aspects which are necessary when taking a decision of investing in Argentina. SERVICES Its gives information about different items: .

Legal Framework and Investment Incentives

.

Business Opportunities and Sectorial Information

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Economic Reviews of Argentina Provinces

.

Updated legal information of investment and international commerce

.

Costs of main items

On the other hand, the Agency works jointly with some others national and provincial governmental departments on the promotion of investments in Argentina and the organization of sectoral and regional meetings with the same purposes.

Contact us:

I NVESTMENT P ROMOTION AGENCY (AGENCIA DE DESARROLLO

DE I NVERSIONES)

Ministry of Economy and Production Julio A. Roca Av. 651 -5° Floor Office 20- (C1067AAB) Ciudad de Buenos Aires Tel. (54-11) 4349-3442/ 3313/ 3315

Fax (54-11) 4349-3453

E-mail: [email protected]

Web Site: www.inversiones.gov.ar

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