How can we navigate the business environment to take advantage of Bolivia’s lithium deposits? 2. What are some social and environmental factors to consider?

Findings Country Report

The purpose of the report is to examine the business environment in the selected country. Use a general framework of a business entity or AID providing government agency or NGO organization to frame the analysis.

Write an 8-10 page paper (double-spaced, about 225 words per page, not including title page, Executive Summary, tables, notes, and graphs). Use a report style which an executive would expect:

() – Executive Summary
(x) – statement of research questions – THOMAS
(x) – constraints and obstacles – THOMAS
(x) – criteria used to evaluate and make judgments (MDGs) – JENE
(x) – analysis of each question or topic using headings and sub-headings – SPLIT UP
() – specific conclusions & recommendations (positive or negative) based on conclusions, advice on how to implement recommendations.

Help the firm decide whether or not the country has economic, political, ethical, and legal environments that are acceptable. Discuss country risk.

Help the organization decide whether or not business infrastructure in the country will be suitable.

Are the essential natural, physical and human resources available or can they be imported if necessary? What are the CPI, HDI, GINI, etc., as indicators of development?

Help the organization’s headquarters managers who might work in the country to:

1. Understand the cultural environment they will encounter in the workplace,
2. Decide whether or not it is suitable, and
3. Develop appropriate ways of managing people, information, and things.

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IMF 2012 Annual Report: http://www.imf.org/external/pubs/ft/scr/2012/cr12149.pdf
World Bank Doing Business Indicators: http://www.doingbusiness.org/data/exploreeconomies/bolivia/
World Economic Forum’s Global Competitiveness Index (p.110): http://nmi.is/media/92463/wef_globalcompetitivenessreport_2012-13.pdf
Millenium Development Goals Progress:
http://www.un.org/en/development/desa/policy/mdg_gap/mdg_gap2010/mdggap_bolivia_casestudy.pdf

– HIGH tax rate, one of longest to start a business
– **UN Millenial Development Goals – explanation, current status, is it feasible?

Suggestions:
– Strengthening Policy Framework. Adoption of a medium-term fiscal framework to manage the hydrocarbon wealth. Greater transparency and accountability in the operations of public corporations as well as keeping the role of the central bank in developmental policies limited.
– Managing Credit Expansion. Monitoring the current credit expansion closely, maintaining banking sector buffers, and continuing strengthening supervision.
– Achieving high medium-term growth and social inclusion. Meeting Bolivia’s large infrastructure and development needs will require higher investment. Beyond ensuring the stability of the legal framework, improvements can be achieved through a removal of distortions and reducing microeconomic uncertainties. Social policies have been effective and Bolivia has made inroads toward achieving the MDGs. Further improving targeting and avoiding erosion in the real value of transfer programs will help further improve the conditions of the most vulnerable groups.

Funding isn’t the problem, spending efficiently and effectively is.
– work on effective public policies and efficient systems of policy implementation
– work on better access through lower non-tariff barriers (importance of agricultural products), integration with world markets (esp. regional neighbors), improving access to technology (sp. through technical assistance on regulatory framework) and access to affordable drugs(through patent pools and incentivising exports of generic drugs to Bolivia from countries with manufacturing capacity)

Research Questions and Background

Recently it has been discovered that Bolivia has almost half of the world’s lithium resources. We will assume that we are a foreign company looking to take advantage of these abundant and largely untapped resources. In order to navigate the business environment effectively, we will look at a variety of factors, and frame our investigation with the following questions in mind:

1. How can we navigate the business environment to take advantage of Bolivia’s lithium deposits?
2. What are some social and environmental factors to consider?

Bolivia has a long history of resource exploitation. During the 16th and 17th centuries, a massive amount of silver was extracted from mines around Potosi, constituting fifty percent of the silver used in the development of New World colonies.. This put the Andean region on the global economic map and the silver exports remained one of the major internationally traded raw materials for centuries.
The conquest of the region by Spanish invaders saw the continued extraction of silver, as well as major tin mining operations. The conquistadors used indigenous people as laborers for this and other purposes. After gaining independence from colonial rulers in 1825, tin remained a major industry for the country. The twentieth century saw the discovery of oil, and Bolivia’s government earned a great deal of its revenues through the extraction and sale of this fossil fuel. In the 1980s, the state oil company was capitalized and sold to foreign investors, and despite the fact that this plan was sold as one that would provide social benefits through larger amounts of revenue, almost three-quarters of profits from oil and natural gas extraction were externalized throughout the next twenty years.
The year 2005 saw a major shift in Bolivian politics. Evo Morales, who had gained influence through a coca grower’s movement and through the creation of a socialist-leaning party (MAS), became Bolivia’s first indigenous-identified president. He stated that his presidency would mark “the end of the colonial and neoliberal era” and put an end to the plunder of the country by transnational corporations only interested in exploiting the country’s resources for large profits, with no consideration of social or environmental impact. His political rhetoric called for reforming the dominant economic model of exporting raw materials that only benefited such companies and a small Bolivian business elite. This was a new and historically significant attitude towards the use of natural resources in the domestic economy.
Morales’ attitude remains staunchly anti-imperialist and focused on using the country’s resources to the benefit of its own people first and foremost. His presidency has seen significant social investment and economic growth, but the reality of Bolivia’s economy still does not completely match the rhetoric. Despite his criticisms of the global capitalist system and foreign investors, none of the foreign hydrocarbon extraction companies operating in Bolivia left the country after Morales nationalized the nation’s oil reserves in 2006, and the companies continue to make millions of dollars in profits.
Morales’ professed commitment to protecting the nation from foreign exploitation has, however, manifested itself in the form of rules for foreign companies wishing to become involved with the extraction of lithium, a resource which has recently been discovered in vast amounts. Morales has dictated that any company seeking to mine lithium must also set up battery plants on Bolivian soil. His government is requiring this in an effort to create domestic jobs, so that ordinary Bolivians will be the prime beneficiaries of lithium extraction, rather than foreign businesses and investors. No company has offered to do so thus far, so the government is taking action to utilize lithium domestically without depending on foreign investment. However, the scope for potential investment in this area remains grand.
Lithium is a soft metal that has major potential for technology investment because of its capacity for storing large amounts of energy. As the world begins to invest more in non-petroleum energy, the demand for lithium is expected to increase as electric cars begin to replace gas-powered vehicles. In addition to current technology, engineers are currently working on expanding lithium battery technology to be more efficient, and thereby increase the scope of electric cars. For instance, IBM is investing in lithium-air battery technology, which would be even more efficient than lithium-ion batteries. This technology is still in development, but it is certain that such technological improvements will increase the demand for lithium in the long run, in addition to the short-run demand for lithium ion batteries, which are already in high demand.

Constraints and Obstacles
According to the World Bank’s Ease of Doing Business report, Bolivia scores very low overall (155 out of 185) and in many key areas, such as starting a business (174),registering property (139), and paying taxes (180). Bolivia is generally still open to foreign investment, but there are many limits to the scope and ease of foreign business practices. Regulatory decisions are complicated, and bureaucratic procedures are cumbersome. There are many constraints to consider in addition to the reinvestment requirement that companies mining lithium must also set up battery plants. In accordance with Bolivia’s 2009 constitutional referendum, domestic investment must be prioritized over foreign investment, so this would be a roadblock if the investment crowds out domestic business. Additionally, the new constitution granted indigenous communities greater autonomy, collective land titles, as well as a greater say in how natural resources on their land are used. This is also a potential hindrance to lithium extraction activities, because challenges to land titles are common in the country.
There are some other constraints to take into account. The new constitution allows the Bolivian government to expropriate land that does not fulfill a “social purpose,” and noncompliance or tax evasion will result in seizure of the land. This demonstrates the administration’s seriousness about ensuring that business activity benefits society at large. There are also some legal constraints to consider. Bolivia’s new constitution limits foreign companies’ access to international arbitration when it comes in conflict with the government. Additionally, Bolivia is the only country ever to withdraw from the International Center for the Settlement of Investment Disputes, which is a World Bank entity that moderates contract disagreements between foreign investors and host country governments.
In general, Bolivia has been experiencing lower levels of private investment because of these uncertainties in the business climate, as well as inefficiencies in the goods and factor markets. However, there is evidence that foreign investment is likely to continue. Some Japanese and French companies have met with Bolivian leadership to express interest in lithium investment and discuss options (despite the risk factors), so this is a sign that the Morales government is willing to work with foreign investors to some extent. Relations with the US have been more tense, however, as Morales sees the US as an imperial power to be resisted. In fact, the MAS government terminated a bilateral investment treaty with the US. In its absence, there will be fewer cross-border protections and opportunities for conflict arbitration.
Finally, there are some larger economic factors to consider. First of all, there is significant global competition in the lithium extraction industry. Chile and Argentina already produce significant amounts of lithium, and reserves have also recently been discovered in Mexico. As demand for batteries increases, quick action is needed to take advantage of Bolivia’s vast resources and compete globally.
The International Monetary Fund’s 2012 report on Bolivia provides useful insight into some macroeconomic factors for the country. Bolivia experienced considerable growth during and after the 2008 global financial crisis, which has been helped in part by the country’s strong financial buffers. The government has significantly cut down its public debt as well. These factors imply relative macroeconomic stability. Some macroeconomic risk factors are as follows. First, a rapid growth in demand for a good could lead to economic overheating. Second, since commodity dependency is high, the economy is vulnerable to falling commodity prices. Finally, the economy needs to diversify away from hydrocarbons to be economically viable in the long run. All of these factors are important to take into account when pondering investment opportunities.

Criteria Used to Evaluate and Make Judgments

One of our primary guides for reference are the UN’s Millenium Development Goals which were established in 2000. It measures factors of poverty, access to education, health, and environmental sustainability that should be improved by 2015. Currently, Bolivia is on track to meet 10 of the 14 indicators of the MDGs, though primary education will require a more efficient and effective manner of government spending. Though recent efforts by president Evo Morales have improved the country’s economy, there is still a mismanagement of government spending and policy implementation. Investments in social programs like Plan Vida, that have a phased approach with initial focus on giving cash transfers to the poorest geographic areas have improved poverty, and signal a step in the right direction regarding public expenditures. Other conditional cash programs, such as Bono Juancito Pinto for children attending public primary schools, and Bono Juana Azurdury for births attended by skilled health personnel, are also signs of improved expenditure management.
Through a review of the Millenium Development Goals, Bolivia’s primary concern is the use of effective public policies and efficient systems of policy implementation. The international community played a crucial role in financing fiscal expenditure, especially with those that were socially-related. Our primary concern for entering the lithium market is their lack of integration into the world market, especially with regional neighbors. An improved access to markets through low non-tariff barriers may help physical integration into the international community, which can lead to investments in infrastructure which will make it easier for foreign companies to do business in Bolivia. There is also much opportunity for improving access to technology, especially through technical assistance on regulatory framework. Through our analysis we will discuss how our approach in foreign investment in the lithium market in Bolivia will keep in line with the MDG indicators, all of which are indirectly affected by the success (or failure) of this potential market.

Analysis of Questions

1. How can we navigate the business environment to take advantage of Bolivia’s lithium deposits?

Appointing local representatives in the country will not only help us identify market opportunities sooner, but will also give us a local perspective on foreign investors in the lithium market. Though Bolivian investment is favored over FDI since the passage of the new constitution, utilizing local help is a key opportunity to engaging in FDI with Bolivia’s lithium market efficiently. Along with local representatives, conducting extensive research on the proper methods of investing in social factors related to the Millenium Development Goals will give us a positive image in Bolivia. This is especially important in a country that has recently passed a constitution that aggressively promotes social inclusion, state-owned enterprises, control of natural resources, and worker’s rights.
Considering Bolivia has just terminated the Bilateral Investment Treaty from 1998, we will pay careful attention to alternative methods of conducting international arbitration in case of expropriation. We can do this by retaining competent Bolivian legal and outside counsel for recommendations. Their recent withdrawal from the International Center for the Settlement of Investment Disputes will also complicate resolving contract disagreements. There may be potential for a memorandum of understanding to promote infrastructure and lithium extraction and production in the future, but considering the sensitive timeline of entering the lithium market, we will enter the market taking into consideration the higher stakes that are involved.
2. What are some social and environmental factors to consider?

Considering the large success that Bolivia has had in recent years regarding export revenues, primarily from hydrocarbons, we have to take into consideration that Bolivia is not searching for foreign investment. Since their primary issue is a mismanagement of public spending and bad policy implementation, we have to assume that they are more focused on improving their policy implementation process.
As mentioned earlier, Morales’s recent legislative decisions, including the recent passage of a new constitution, will make it more difficult for foreign investors, especially in the U.S. considering the termination of the Bilateral Investment Treaty. Morales’s focus on nationalization and government ownership of natural resources suggests we need to focus our efforts on not only profit but the public interest of Bolivia. The country is also known for their unreliable methods of arbitration and dispute resolution, which creates a riskier environment for foreign investors.
We also have to take into consideration Morales’s 3-step plan for the extraction and production of lithium products. The steps are 1) an expert assessment of the quality of Uyuni’s lithium deposit, 2) implementing facilities to produce lithium carbonate, using the raw lithium from the Uyuni salt flats, and 3) production of lithium batteries on Bolivian soil. The facilities and infrastructure for producing lithium batteries are reported to be installed and operational by 2018, which also becomes a definite factor to consider when investing.
There is also a question of the quality of the lithium deposits, considering scientists are concerned that the high amounts of magnesium found in a lithium deposit could make extraction efforts costly. Even if the quality is rendered choice, Mexico’s recent discovery of lithium deposits is another factor to consider, especially with a more attractive location and investment environment for the U.S. There is also the factor of neighboring countries Argentina and Chile who are already in production and have established investors.

 

Conclusions (specific to each question) including recommendations and advice on how to implement recommendations
We think that the potential benefits to our company and Bolivian society outweigh the risks and challenges of doing business in the country. In addition to complying with the government’s requirement that our company reinvest domestically by opening a battery plant, we propose investment in fields such as infrastructure, education, and technology. Reinvestment of private profits from natural resources within Bolivia is already a requirement of the new constitution. This will benefit the citizens and workers of Bolivia as well as our company and the general business environment. Improved infrastructure will make it easier for our own company and others to do business and develop the local economy. Investing in education benefits the locals and also increases their value as prospective employees. Technology is also a self-evidently worthwhile investment, especially when we are looking to gain a competitive edge by exploring new lithium energy technology. Demonstrating this commitment will make our company more attractive to Bolivian leaders and thus give us an edge over other foreign companies seeking to enter the Bolivian lithium market. Finally, there is an obvious advantage to being the first market entrant if we act quickly enough.
Through investing in areas that provide social benefits to Bolivians, we will be providing a net benefit to Bolivian society across the board. (talk about weighing environ. factors)

– obtain credit abroad: foreign investors may find it difficult to qualify for loans from local banks due to the requirement that domestic loans be issued exclusively against domestic collateral.
– move fast, come prepared to Lithium Forum (because of already-established competitors and new discovery of lithium in mexico)

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Sources:

http://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/Tax/Taxation%20and%20Investment%20Guides/2012/dttl_tax_highlight_2012_Bolivia.pdf
http://www.state.gov/e/eb/rls/othr/ics/2010/138037.htm
http://www.un.org/en/development/desa/policy/mdg_gap/mdg_gap2010/mdggap_bolivia_casestudy.pdf
http://www.doingbusiness.org/data/exploreeconomies/bolivia/
http://bolivia.usembassy.gov/marketentrystrategy.html

Millenium Development Goals
• Eradicate Extreme Poverty and Hunger:
o economic crisis at beginning of decade had negative effect on employment and income
o extreme poverty incidence decreased from 45.1% in 2000 to 31.8% in 2009
o On their way, goal is to reduce extreme poverty incidence to 22.3%
o Gov’t has taken steps to reduce poverty, improve social safety nets – social programs like Plan Vida that has a phased approach with initial focus on poorest geographic areas, cash transfers
o
o

• Achieve universal primary education:
o off track in education goal, no significant progress in 200s
o consistent primary enrollment ratio
o main challenge is to keep children in school and improve internal efficiency of system by reducing repetition/dropout rates
o fiscal revenue boom: better position for aggressive policy
o increased spending on education, average rate of about 8%
o Bono Juancito Pinto: conditional cash transfer program, offers cash equivalent for all children attending public primary schools

• Promote gender equality and empower women
o target already attained in 2005/06
Gender Disparities at Completion of Primary Education (%)

• Reduce child mortality
o on track, rates declined substantially over past decades
o decreased from 81.9/1000 in ’89 to 44 in ’07 – target is to reduce to 30
o increase in public spending in health sector, avg. rate of about 6.6% (but gov’t expenditures decreased)
• Improve maternal health
o on track, rate dropped from 416/100,000 to 213 in 2004 – target is 104
o also on track for proportion of births attended by skilled health personnel – 25% in ’94 to 65% in ’06 – target is 70%
? Bono Juana Azurduy: condicional cash transfer program contributes greatly
o
• Combat H IV/AIDS, malaria and other diseases
o halt by 2015, begin to reverse spread of HIV/AIDS has already been attained in ’07
o on track for reducing prevalence of malaria – 24/1000 in ’98 to 4.2 in ’08, goal is 2
o off track in achieving target of increasing incidence of tuberculosis cases cured – was 72.1% in ’08, expected to rise to 85% by 2015, target is 95%
• Ensure environmental sustainability
o succeeded in improving access to potable water – from 57.5% in ’92 to 75.5% in ’07, target is 78.5%
o access to improved sanitation facilities has increased over time, but still off track – 28% in ’92 to 46.8% in ’07, goal is 64% by ’15
• Develop a Global Partnership for Development

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