Business opportunities for Canadians in Paraguay
“That Paraguay is one of the five countries in Latin America and the Caribbean that have increased foreign investment during the pandemic in 2020 despite a regional drop of almost 40% in foreign investment is a milestone that must be known ” said Claver-Carone, who noted that Paraguay’s stable politics and significant human capital, including one of the youngest workforces in the region, mean that “all the chips for success are on the table”.
Reinforcing the country’s status as one of the best countries to invest in Latin America, the IDB president also highlighted its status as a regional leader in renewable energy: an increasingly crucial sector to economies all over the world that are seeking to develop more sustainable futures. Given Paraguay’s attractive dual residency laws and taxation regime, the country should definitely be on the radar of any Canadian citizen looking to invest, start or expand a business in Latin America, as we will explore in this post.
Investing in Paraguay
Paraguay is an emerging, agrarian economy that specialises in soybean production and hydroelectic generation. Hydropower accounts for nearly 100% of Paraguay’s electricity, with 90% of generated energy exported, primarily to neighbouring Argentina and Brazil. The World Bank classes Paraguay as an upper middle income country, whose financing needs will remain high in the short to middle term, but points out that the nation benefits from a low risk premium compared with its regional neighbours.
Significantly, the Economist Intelligence Unit (EIU) forecasts that Paraguay will be the first South American country to recover from the economic crisis prompted by the COVID-19 pandemic, with real gross domestic product (GDP) returning to pre-pandemic levels – and possibly exceeding them – later this year. National recovery will be driven by the government’s ambitious US$2.5-billion economic recovery plan, which focuses on increasing investment in infrastructure and public works projects, as well as alternate financing and procurement models.
The COVID-19 pandemic has had a profound effect on both the global and national economies, but Paraguay has stood out from the crowd by introducing a number of policies that have helped to attract Foreign Direct Investment (FDI) since early 2020, turning it into one of the best, most reliable countries to invest in Latin America. Some experts claim the country has weathered the economic impact of the coronavirus pandemic better than any other nation in the region so far.
In late 2020, the government announced a streamlining of the residency process for foreign investors – an addendum to the country’s already-attractive dual residency laws – and sought to promote the country’s low-tax regime and long term stability, to stimulate greater investment. Announcing the initiative, then-Finance Minister Benigno López pointed out that “here there is no history of confiscations or changes to the rules for investment.” Early the following year, the government consolidated regulations for transfer pricing, initially introduced in 2019, to bring the country in line with OECD standards. Often referred to as the “good practice club,” the OECD is inspires investor confidence worldwide thanks to its demanding standards and democratic, free market trade practices.
Paraguay can boast several strong investment opportunities in addition to renewable energy, including a booming real estate sector offering returns of potentially 50% higher than in other markets in the region, and a blossoming startup scene in major hubs like the capital of Asunción, and Ciudad del Este. The country also has a well-established agriculture sector, whose main products include soybeans used primarily for animal feed – demand from China has led to a 69% increase in Paraguay’s soy production over the past five years, making it the world’s third largest exporter – not to mention impressive oil and gas reserves for a landlocked country.
Paraguay enjoys free trade access to key markets as a member of the Southern Common Market, aka Mercosur: a 30-year old economic initiative that also includes major economies like Argentina, Brazil, and Uruguay as members. The country is also currently in negotiations with Chile to establish its first bilateral free trade agreement (FTA), which has the potential to create more significant opportunities for domestic and foreign investors.
Business relations between Canada and Paraguay
Canada’s commercial relationship with Paraguay is modest but growing, and Canadian exports to Paraguay were valued at Can$15.2 million as of 2020. Paraguay receives important support from international financial institutions such as the InterAmerican Development Bank (IADB), the World Bank, CAF (the development bank of Latin America), the Japan International Cooperation Agency and the FONPLATA Development Bank, so its economy is closely linked with that of Western states like Canada.
The Canadian Trade Commissioner Service recently stated that it foresees reliable investment opportunities for Canadians in consulting engineering, public-sector advisory and Paraguay’s relatively small financial market, as well as legal advisory services both to the Paraguayan government and private consortiums.
Canadian companies interested in the local market are advised to monitor IFI-financed tenders and build relationships with major local construction companies involved in P3 projects (including Ocho A, Tecnoedil, TOCSA, Concret-Mix, Ecomipa [Empresa Constructora Minera Paraguaya S.A.], Roggio), as well as local legal advisors such as Ferrere or Livieres Guggiari, and key public sector officers involved with infrastructure development.
Public-private investment regulation
In 2013, the Paraguayan government enacted two key regulatory regimes allowing for private investment in public infrastructure development: Law No.5102/2013 (the public-private partnerships [PPP or P3] law) and Law 5074/2013 (law on turnkey projects).
The law on turnkey projects provides a legal framework for the private financing and construction of those key infrastructure projects in which operations and services remain with the public sector. The government’s payment obligations are issued upon milestone completions and are granted with sovereign guarantee. In turn, the P3 law regulates long-term public-private partnerships for the design, construction, operation and maintenance of infrastructure projects and services. Projects may be presented at the initiative of the government but also by private parties.
Paraguay’s greatest deficit is infrastructure, so the leading contracting administration is the Ministry of Public Works and Communications (Ministerio de Obras Públicas y Comunicaciones), responsible for the development and execution of all P3s relating to “transportation, roads and highways, dredging river services, riverine communications and airport infrastructure”. The Ministry of Finance then evaluates proposals and risk assessments for P3s, and ensures that future payments are included in the national budget. In addition, a trust fund is created solely to guarantee payment and liquidity in relation to a P3 contract, with the Ministry of Finance acting as trustee.
Ongoing and planned investment projects
Most of the current and upcoming P3 and turnkey infrastructure initiatives are projects related to transportation – via highways, roads, bridges and waterways – aimed at improving domestic and regional connectivity.
To date, three P3 projects have reached the international tender stage:
- Route 2 and 7 highway roadworks, currently in progress (US$507¬¬ million);
- airport infrastructure improvement, operation and management project, will most probably move forward as a traditional public tender (US$135 million);
- the Asunción Light Rail Project, connecting the capital city of Asuncion with a nearby suburb, Ypacarai; the project tender was cancelled due to financial issues, and the project is now under review (US$500 million).
Two major P3 initiatives have been approved and are well underway following the conclusion of technical feasibility studies:
- Route 1 & 6 highway roadworks, to be tendered this year (US$684 million);
- project for the dredging, signaling, management and maintenance of the Paraguay River waterway (US$110 million).
The Paraguayan government is also considering developing social infrastructure projects related to health and sanitation though P3s, with multiple projects in the pre-feasibility stage.
The first project to be awarded under the turnkey law was the US$45 million asphalt paving of Route 6 (Naranjal-San Cristóbal), to the local consortium Concret-Mix & Associates in 2017. The Bi-Oceanic Road project is another major ongoing project which was awarded under this new law. A consortium formed by Ocho A and Brazil’s Queiroz Galvāo is set to build a 277-km route, including 4 reinforced concrete bridges, in the Central Chaco region, for a total of US$443 million. The consortium recently issued the first international bond (US$732 million) to finance a Paraguayan infrastructure asset.
As we have seen, Paraguay is home to several investment sectors and opportunities which should be of interest to citizens of Canada and other Western states. Paraguay is committed to improving its infrastructure in various areas, and welcomes Canadian companies and entrepreneurs seeking to help develop these projects. The country also allows for Canadians – and especially Canadian investors – to obtain dual residency quickly, easily and affordably, which is another benefit to take into consideration when you are considering doing business in the region. Speak to the Strategicasa team today to find out more!