House of Commons - Trade and Industry

Select Committee on Trade and Industry Written Evidence

APPENDIX 26

Further supplementary memorandum submitted by UKTI

CHAPTER 1—MERCOSUR

1. Mercosur is South America's leading trading bloc known as the Southern Cone Common Market. Mercosur was set up in March 1991 by Argentina, Brazil, Paraguay and Uruguay under the treaty of Asuncion. This was later amended and updated by the 1994 Treaty of Ouro Preto. Its aim is to bring about the free movement of goods, services, capital and people among its member states.

2. The five full members of Mercosur are Argentina, Brazil, Paraguay, Uruguay and Venezuela (who joined on 4 July 2006). The associate members are Bolivia, Chile, Colombia, Ecuador and Peru. Mexico is an observer but is in the process of becoming an associate member. Associate membership allows countries to be part of the free trade agreements but they remain outside the bloc's Customs Union.

3. A table of the key economic indicators for each country in 2005 follows.


	GDP (US$ billion)	GDP Growth	GDP per head (US$)	Population (million)	Exports to other Mercosur countries (US$ millions)

Argentina	183	9%	4,688	39***	14,311
Bolivia	9**	4%	974**	9	1,812
Brazil	800	2.3%	4,386	182	21,105
Chile	115	6%	7,415	15	4,450
Colombia	124	5.1%	2,704	44	4,675
Ecuador	41*	2.7%	3,271*	13	1,906
Paraguay	8	2.7%	1,407	6	1,214
Peru	78	6.7%	2,807	27**	2,739
Uruguay	17	6.6%	5,182	3**	963
Venezuela	140	9%	4,600	25	1,778

Lines in bold denotes full Mercosur member.

* Figures from 2006 (estimate).

** Figures from 2004.

*** Figures from 2001.

CHAPTER 2—TRADING WITHIN MERCOSUR

4. Despite some specific trade barriers applied within the bloc to certain products, over 95% of all trade within the customs union carries 0% customs duty.

5. Total exports between the Mercosur countries during 2005 are as follows:


Exporting market	Arg US$m	Bol US$m	Bra US$m	Chile US$m	Colo US$m	Ecua US$m	Para US$m	Peru US$m	Urug US$m	Vene US$m

Argentina	-	380	6,328	4,497	361	265	509	599	862	510
Bolivia	264	-	1,016	41	179	3	22	126	2	159
Brazil	9,912	579	-	3,611	1,405	644	960	932	848	2,214
Chile	626	211	1,729	-	347	341	40	725	72	359
Colombia	47	50	141	296	-	1,324	2	710	7	2,098
Ecuador	42	8	89	301	471	-	1	869	3	122
Paraguay	103	22	330	101	8	7	-	59	578	6
Peru	54	155	453	1,129	347	295	0	-	7	299
Uruguay	267	5	458	83	14	10	56	37	-	33
Venezuela	18	5	187	103	1,013	296	4	151	1	-

Lines in bold denotes full Mercosur member.

6. Most exports of goods and services from Mercosur members are to the US, Eastern Asia or the rest of Latin America. Other trading partners include:


	Main trading partners

Argentina	Brazil, US, Chile, China, Germany.
Bolivia	US, Japan, Brazil, Chile, Peru and Argentina.
Brazil	US, China, Argentina, Germany, Japan, Italy, France and UK.
Chile	Asia, US, EU.
Colombia	US, Venezuela, Mexico, Brazil and China.
Ecuador	US, Japan, Korea, other Latin America markets.
Paraguay	Brazil, Argentina, UK, US, Japan, South Korea, Hong Kong.
Peru	US, other Latin America markets, EU.
Uruguay	US, Brazil, Germany, Argentina, Venezuela.
Venezuela	US, Colombia, Brazil, Cuba, Japan.

Lines in bold denotes full Mercosur member.

CHAPTER 3—UK RELATIONS WITH MERCOSUR

Trade Statistics

7. The UK's total exports to Mercosur countries in 2005 were £1,294 million (and to associate members £356 million). This represents approximately 7% of all imports into Mercosur countries.

8. Individual commentaries on our trading relations with each Mercosur country are at Annex C.

UK EXPORTS


	Ranking as a UK trading partner*	2004 £m	2005 £m	Jan-Sep 2006 £m

Argentina	69th	179	169	159
Bolivia	151st	5	11	3
Brazil	35th	791	840	420
Chile	75th	135	151	112
Colombia	81st	117	118	58
Ecuador	112th	31	30	19
Paraguay	144th	16	12	11
Peru	101st	42	46	26
Uruguay	105th	31	37	28
Venezuela	56th	187	236	164

Lines in bold denotes full Mercosur member.
* Based on 2005 export figures.

UK IMPORTS


	Ranking as a UK trading partner*	2004 £m	2005 £m	Jan-Sep 2006 £m

Argentina	65th	272	291	248
Bolivia	132nd	11	14	6
Brazil	32nd	1,581	1,771	895
Chile	50th	484	485	410
Colombia	64th	284	303	134
Ecuador	103rd	43	42	21
Paraguay	179th	0.9	0.7	1
Peru	80th	135	127	85
Uruguay	92nd	44	59	50
Venezuela	56th	213	395	387

Lines in bold denotes full Mercosur member.
* Based on 2005 import figures.

UK Company perceptions of trading with Mercosur out of Brazil

9. The beneficial tariff regime between Mercosur members may at first glance represent a significant incentive for UK companies to establish business in Brazil, as a mechanism through which they can better access (with a more advantageous cost structure) the wider Mercosur market. However, in practice, this opportunity seems to be viewed more as a peripheral benefit than either a determining factor in investment decisions or an attractant to the Brazilian market in its own right.

10. The experience of the UKTI Brazil network and anecdotal reports from UK companies suggests that companies target Brazil for the size and sophistication of the domestic market and not primarily as a gateway to wider Mercosur. The fact that the Brazilian market dwarfs the other members is clearly a factor in this equation. UK companies seeking to adequately service the Brazilian market are unlikely to have the capacity to simultaneously seek to penetrate the rest of Mercosur. One UK company (in the specialised printing and bar code market) reported that after 10 years in the Brazilian market only now were they starting to explore the potential for using this platform as a gateway to wider Mercosur.

11. In terms of company presence, the main UK players established in Brazil are likely also to have a presence in some of the other member countries, as often do the major Brazilian firms. This is not so much an indication of the existence of a strategy to exploit the potential synergies in business units across Mercosur, as it is a reflection of the truly global nature of these businesses.

Benefits to UK of trading with Mercosur

12. There are several ways in which UK trade with Mercosur is hindered. For direct trade it is the absence of an EU Mercosur agreement (to offer preferential access) that leaves UK companies subject to, often punitive, tax and tariff regimes. In terms of trade through Brazil to Mercosur the lack of a genuine single market, the complication of another language, cultural and business practice differences and political uncertainty all reduce the attractiveness of this approach for UK business. There is an awareness that the opportunity exists but it does not appear to be a driving force in business decision making.

Relations with other Mercosur member countries

13. Companies established in Argentina, Uruguay, Paraguay and Venezuela (the latter a member since last July) can benefit from the common external tariff (TEC)—a more favourable tax treatment established under Mercosur—when trading with Brazil (the converse is also true). This allows companies established in Mercosur to access a bigger consumer market but it is perceived as unlikely that UK companies (with an interest in Brazil) will decide to operate from another country—instead of entering the Brazilian market directly.

CHAPTER 4—EU/MERCOSUR FREE TRADE AGREEMENT

14. Negotiations for an inter-regional Association Agreement between the EU and the Mercosur began in April 2000. The agreement under negotiation consists of three parts: a chapter on political dialogue; a chapter on trade and economic issues (creating a bi-regional free trade area); and a chapter on co-operation.

15. Negotiations on the trade chapter are governed by three main principles:

— A region-to-region approach, which constitutes the basis of discussions on all regulatory areas.

— The agreement should be comprehensive and balanced, going beyond the respective obligations in WTO. No sector should be excluded, whilst taking account of product sensitivities.

— The agreement should constitute a single undertaking, implemented by the parties as an indivisible whole.

16. The negotiations cover liberalisation of trade in goods and services; improving access to government procurement markets; improving the investment climate; IPR protection; a mechanism for co-operation on competition policy; agreement on sanitary and phytosanitary measures; agreement on wines and spirits; ensuring "adequate and effective" disciplines in the field of trade defence instruments; agreement on a Business Facilitation Action Plan; and establishing a binding dispute settlement system.

17. To date 16 rounds of negotiations have taken place and the political and cooperation chapters have almost been completed. Although substantial progress had been made in the trade chapter, which hoped to be concluded at the end of October 2004, Ministers concurred that the offers on the table did not reach the degree of ambition that both parties expect from the agreement and discussions still continue with very little progress. Any EU-Mercosur agreement must be complimentary to the Doha Development Agenda.

UK Trade Interests

18. It is unclear what the benefit of reducing or eliminating tariffs on manufactured goods would be for UK exporters. An EU-Mercosur FTA is unlikely to deliver the same level of economic benefits as an FTA with another country or regional bloc would due to the relatively low level of UK trade with the region. At this stage an FTA with Mercosur would probably bring greater benefits to Spain, Sweden and Germany whose exports amount to more than the UK's.

19. However, UK importers are likely to benefit greatly, particularly the food and drink manufacturing industry, which would benefit from a reduction of the high tariffs applied by the EU to agricultural and food product exports from Mercosur. EU tariffs range from 19% to 75% on these products, which form the bulk of EU imports from the region. This could boost the UK's export performance in other markets (the UK is the 5th largest food and drink exporter in the world), as well as supporting the manufacturing sector, of which the food and drink industry is the largest sub-sector.

CHAPTER 5—TRADING ENVIRONMENT WITH MERCOSUR MARKETS

Argentina

20. Argentina is richly endowed with natural resources. Its agriculture and agro-industries have traditionally been important and it is a net exporter of oil and gas. Argentina's most important industries are food and beverages, chemicals, petrochemicals and automotives.

21. The economic crisis in 2001-02 resulted in the devaluation of the Peso (previously pegged one to one with the dollar) but it encouraged a process of import substitution in sectors such as textiles and metal mechanics. The devaluation also stimulated export orientated sectors such as the steel and edible oils industries. Exports accounted for 24.6% of nominal GDP in 2005.

22. Investment rates have been sensitive to external shocks and the availability of external finance. Between 1999 and 2002 fixed investment contracted as the economy went into recession ending at 12% of GDP in 2002. During 2003 to 2005 investment increased by 31.8% per year lifting the investment/GDP ratio to 21.5% of GDP.

23. Trade between the UK and Argentina is predominantly influenced by bilateral rather than Mercosur related issues. Most British companies in Argentina are affected more by internal political issues than by regional considerations.

24. Barriers to trade that UK companies face are not Mercosur related. The obstacles tend much more to be in terms of internal Argentine trade regulation, at a national and provincial level, or (depending on the sector) in terms of Argentine government intervention, including price control. This is particularly, though not exclusively, the case in a sector like oil and gas.

25. The key relationship within Mercosur is between Argentina and Brazil (and some would argue also between these two and Venezuela, since the latter became a full member earlier this year). Relations between the larger countries and the two smaller members, Uruguay and Paraguay, are at best irrelevant. It is quite clear that Argentina and Brazil do not take seriously the economic needs of their smaller neighbours, who entirely lack the political or economic clout to impose them.

26. An illustration of the asymmetry of Mercosur is a discussion between Argentina and Brazil reported in the local commercial press of eliminating the dollar as the trading currency in bilateral trade between the two, so transactions would be settled directly in pesos or reales. This demonstrates the lack of interest in a Mercosur-wide currency.

Paraguay

27. During the five year period between 1998 to 2002 Paraguay's economy has been severely affected by a series of recessions and weak recoveries which has led to GDP to contract by an average of 2% over this period. Since then, however, the economy has recovered slowly driven by agriculture exports, a boom in cattle ranching and improved macro-economic management. This has resulted in GDP growth of 3.8% in 2003, 4.1% in 2004 and 2.7% in 2005. If measured by GDP per head, Paraguay is one of the poorest countries in Latin America.

28. Contraband products traded around the border town of Cuidad del Este has led to Brazil and Argentina putting pressure on the Paraguayan government to clamp down on this sort of trade. There are concerns about the infringements of IPR and the smuggling from Paraguay of a range of goods under a preferential tax regime for alleged resale to tourists.

29. In the past Paraguay has been unable to redress the unilateral trade restrictions, imposed by Argentina and Brazil, through Mercosur and this has resulted in increased opposition within Paraguay to Mercosur during the past few years. However, in June of this year, Mercosur partners agreed to set up a regional development fund for its smaller members in which Paraguay would be a major beneficiary.

Uruguay

30. Uruguay's economy is characterised by manufacturing, commerce and financial services activity around Montevideo, tourism in the East and arable and livestock farming in the interior. The latter accounted for 12.6% of GDP in 2004 and manufacturing 18.4% during the same period. Fixed investment was 10% of GDP in 2004.

31. Uruguay is a founding member of Mercosur but the devaluation of the Brazilian Real in 1999 and the Argentine Peso in 2002 has resulted in Uruguay's exports to the other Mercosur countries being less than 23% of the total amount. There is currently significant internal debate in Uruguay about its future role in Mercosur. Many politicians have complained that the two largest members, Brazil and Argentina, do not fully consider the smaller countries when taking decisions. This is compounded by ongoing problems with some Uruguayan exports to these countries (eg rice to Brazil). As a result, various sectors want Uruguay to develop its commercial links with other parts of the world to reduce its dependence on Mercosur. The Government is currently negotiating a Trade and Investment Framework Agreement (TIFA) with the US. Many would like this to develop in due course into a Free Trade Agreement, but the Uruguayan Government appears to be split on the issue.

32. Uruguay's hallmarks are political stability and low corruption, combined with an open financial system. These are important assets, given the relative instability of some of Uruguay's neighbours. Companies interested in Uruguay appreciate the high general level of education and the overall infrastructure quality. Uruguay has the highest level of literacy in Latin America and a number of good universities.

33. The British Embassy have been heavily involved in lobbying for UK companies particularly on fair excise tax on whisky and on sanitary barriers against the import of bovine hides and skins from the UK.

Venezuela

34. Venezuela became a full member of Mercosur in July 2006, although so far only Argentina and Uruguay have ratified Venezuela's admission. Venezuela's rationale for joining Mercosur is mainly political and models suggest that membership will be of limited economic benefit to the country. Current Venezuelan exports to Mercosur countries are mainly primary products (petrol and derivatives). Principal imports from Mercosur are agricultural and food products (meats, fats, dairy products and food) and manufactured products specifically from Brazil (chemical, vehicles, machinery, metal and textile products).

35. At the same time as joining Mercosur, Venezuela indicated its intention to withdraw from the Andean Community regional bloc, CAN. Members of CAN are Bolivia, Peru, Columbia and Ecuador. As a full Mercosur member and a preferential partner of the CAN, Venezuela has retained links with both Latin American customs unions. For the moment Venezuela still retains its CAN preferences (reached through bilateral agreements) and most tariffs with CAN countries remain at 0%, although negotiations are still ongoing to determine whether these will continue to be applied.

36. Although all Mercosur countries have been associate members of CAN since July 2005, without a CAN/Mercosur free trade agreement, other Mercosur countries do not benefit from preferential access to the Andean Market. Therefore, while the situation remains fluid, for the moment Venezuela seems to offer the exporter preferential tariff access to both markets.

37. The sectors that are likely to benefit most are those areas where Venezuela currently has a competitive advantage namely: oil and gas goods, services and derivatives, hydroelectric power and associated industries, tourism, and agriculture specifically fruits and vegetables, fish, dairy products and wool. Certain Venezuelan sectors will be protected under the Mercosur Adhesion Protocol including: food, livestock, software, electronic equipment and automobiles.

38. Venezuela has expressed interest in several Mercosur strategic proposals. These include a strategic energy alliance (Petrosur); the Gasducto del Sur southern gas pipeline through Brazil and Uruguay to Argentina; the Common Bank of the South (Bansur) as an alternative source of financing to the IMF; a TV channel of the South (Telesur); and the University of the South. In addition, Mercosur membership should facilitate special co-investment agreements in infrastructure and strategic projects such as satellites, ships, medicines, food and consumables.

39. Venezuela has particularly close relations with Argentina, from which it has purchased large numbers of government bonds during 2006. In December 2006 the Venezuelan government paid out US$135 million to bail out a failing Argentinean dairy company in exchange for guaranteed supplies of powdered milk and technology transfer. Relations with Brazil are also close and cordial. Venezuela's relations with Uruguay and Paraguay are insubstantial, but good. The two small Mercosur members hope that Venezuela will help break the dominance in the grouping of the two "bigs".

40. Venezuela operates an exchange rate mechanism, which controls payment for goods and services and the repatriation of dividends in hard currency. Only those purchasing goods on an approved government list are entitled to receive foreign exchange at the official exchange rate. Applications for official foreign exchange are bureaucratic and time consuming. Dollars are available by legal means through a parallel exchange market, which operates at a rate approximately 40% higher than the official rate.

41. Information about work tenders in Venezuela is often difficult to find. Companies need to establish good contacts within their respective sector to monitor opportunities. This is best done by regular visits to the market. Many oil and gas contracts are awarded through single company tender procedures.

42. The Government has placed increased emphasis on social development. Companies submitting tenders for government work must now compete on three levels: technical specification, price and social contribution.

43. The Venezuelan British Chamber of Commerce based in Caracas has 132 members representing companies with UK interests.

CHAPTER 6—UKTI REGIONAL AND DEVOLVED ADMINISTRATION ACTIVITY

Argentina

44. There is no substantial activity being undertaken by UKTI in the English regions or Devolved Administrations. General market events, including Brazil and Chile, have been organised by the East Midlands highlighting potential trade opportunities. A market visit by the West Midlands region is planned for February/March 2007.

Paraguay

45. There is no activity being undertaken by UKTI in the English regions or Devolved Administrations.

Uruguay

46. There is no activity being undertaken by UKTI in the English regions or Devolved Administrations.

Venezuela

47. There is no activity being undertaken by UKTI in the English regions or Devolved Administrations.

Associate Members

48. There is no activity being undertaken by UKTI in the English regions or Devolved Administrations. However, a market visit to Chile by the North West region is planned in February 2007.

CHAPTER 7—SECTOR OPPORTUNITIES

LIFESCIENCES

UK Trade and Investment

50. Under UK Trade and Investment's new strategy resources and budgets within UKTI have become more targeted. As a result, with the exception of Brazil, none of the Mercosur markets are a UKTI priority in this sector. However there are opportunities in some of the Mercosur markets that are highlighted below.

Argentina

Pharmaceuticals

51. Argentina is the third largest producer of medicines in Latin America, behind Mexico and Brazil, accounting for 10% of the total production in the region. In 2005, the sector showed positive results when total pharmaceutical sales grew by 5.38% to reach 5,520 million pesos (US$1.8 billion). Together Mexico, Brazil and Argentina are calculated to be worth US$35 billion and expected to reach a market value of US$52 billion at retail prices by 2011, with growth expected in both overall and per capita expenditure.

52. Pharmaceuticals, finished medicines, intermediate goods and chemical raw materials, have traditionally ranked among the top five UK exports to Argentina. GlaxoSmithKline and Astra Zeneca are long established investors with local manufacturing facilities for both the domestic and export markets.

53. Pharmaceutical companies of Argentine origin have a 51% market share and an increased participation in the growing generics pharmaceutical market. These companies to various degrees are seeking to expand their export markets. They already have highly trained staff and in order to become international players they are incorporating higher quality standards. Local companies have incorporated new production lines, brought packaging equipment and tablet compression tooling equipment from the UK and are sourcing chemicals. There are opportunities for UK companies seeking qualified partners for regional marketing and distribution. Also UK companies seeking to undertake clinical trials will encounter, such as other EU and US companies do, lower costs and easy access to bilingual doctors—many of who have trained overseas.

54. The sector currently lacks a specialised strategic plan and a consensus on public policies to encourage the higher production and a greater emphasis on exports. The withholding tax on exports of pharmaceutical products and local price controls on medicines are obstacles to reach full industrial potential and companies complain about the lack of public policies and incentives to encourage further development.

Biotechnology

55. Despite the biotechnology sector in Argentina still being in its infancy it has been an active sector for the past 20 years. Although there are no technical limitations and Argentina does have excess scientific capacity there does remain a lack of commercial expertise.

56. The ANPCYT Agency finances research, development and innovation activities. Resources come from national budget's contributions and Inter-American Development Bank (IADB) credits. It operates through the Scientific and Technological Research Fund (FONCYT) and Argentine Technological Fund (FONTAR).

57. Biotechnology application has largely impacted on the Pharmaceutical Industry sector, where the long tradition on biomedicine and the active national industry combine. Local pharma controls almost 50% of the market and, 4% of total annual sales (US$2 billion) correspond to Biotech products, protected by Argentine patent law.

58. There have been some significant results in pharmaceutical biotechnology with DNA recombinant medicines that are being exported but the area that offers most potential opportunities is crop plants biotechnology. Argentina, albeit lagging behind Brazil, is poised to become a world player in the supply of biofuels derived of GM crops. Locally produced biopharmaceuticals include human insulin, interferons, erythropoietin, colony stimulating factors and growth hormone.

59. Argentina was the first country in the world to develop genetically modified cows, capable of excreting in their milk human growth hormone. Gene therapy has also developed in the country, mainly directed to oncology and to revascularization (arteriolar growth in severe coronary artery disease). In the human diagnosis sector, detection kits including biotech-derived markers and monoclonal antibodies have been designed locally for infectious diseases such as Chagas, Cholera, Hepatitis B and C and AIDS.

60. The result of the proper regulatory environment, the development promotion policies and biotechnology application for the past ten years, has converted Argentina into the second country producer of GMOs, after the United States. During 2004, Argentina exported GM crops for US$6 billion. These events included varieties tolerant to herbicides and insect resistant, which resulted in a US$500 million expense cut in chemical products.

61. The Foro Argentino de Biotecnolog-«a (FAB) is a non-profit foundation representing the most outstanding enterprises in the biotechnological sector that focuses on biotechnology diffusion and promotion throughout the country. FAB brings together the business and scientific communities with the local government to jointly develop strategies and policies.

Healthcare

62. With the exception of Nagor mammary implants (in 2005 the export of these implants totalled about £90,000), tablet compression tooling and some diagnostics equipment, UK exports of medical devices have not been significant. Health services have not attracted UK investors, although a few UK universities have made introductory contacts to promote continued education courses in nursing and primary care. Subject to multilateral funding agencies such as the Inter-American Development Bank (IADB) and World Bank financing these projects, this may become an area that will provide some opportunities for UK companies.

Paraguay

63. The British Embassy in Paraguay is closed and therefore no information on this sector is available.

Uruguay

64. Uruguay is one of only four countries in the world that produce vaccines for anthrax. This is one of the many Lifescience areas that gives Uruguay a prominent role in the region. The high quality of local education and the advanced level of the scientific community have attracted important players on the world scene to establish joint ventures with Uruguayan laboratories. Some of these include: CAMR Health Protection Agency, UK; Special Pathogens Reference Unit (SPRU), UK; Pasteur Institute (the only Pasteur Institute in Latin America, opened December 2006); and United States Department of Agriculture

65. The main global pharmaceutical laboratories have representatives or research facilities in Uruguay.

Venezuela

66. After a dramatic decline in 2002-03, Venezuela's pharmaceutical market has re-emerged as a star performer of the Latin American region. Uruguay and Venezuela led the Latin American pharmaceutical market in per capita unit sales in 2005. UK Lifescience companies GlaxoSmithKline, Astra Zeneca and Unilever are active in the Venezuelan market mainly supplying private healthcare needs and the consumer market. There are Mercosur proposals for regional economic alliances to include different industries such as pharmaceuticals, where harmonisation of standards and procedures should lead to improved regional trade opportunities.

FINANCIAL SERVICES

UK Trade and Investment

67. Under UK Trade and Investment's new strategy resources and budgets within UKTI have become more targeted. As a result, with the exception of Brazil, none of the Mercosur markets are a UKTI priority in this sector. However there are opportunities in some of the Mercosur markets that are highlighted below.

Argentina

68. The Financial Services sector was one of the hardest hit by the 2001-02 crisis, and many areas are still struggling to recover. The banking and pensions industries remain in crisis. Insurance is recovering slowly while the capital markets remain small and largely underdeveloped. However, opportunities could exist in PPP/PFI and project finance; the reform of public financial institutions; reform of the regulatory framework and private banking.

Banking

69. After a period of consolidation during the 1990s, at the time of the crisis 100 banks served Argentina. This number has continued to reduce to 73 today. The market is dominated by two large public banks, Banco de la Nacion and Banco de la Provincia (Buenos Aires) which, together with other public banks, hold 45% of all deposits. Large foreign banks hold 35% of deposits and include important players such as BBV, Santander, HSBC, Citibank and BankBoston. The rest of the sector comprises of national private banks, many of which have been growing aggressively, as foreign banks look to reduce their exposure.

70. While the level of deposits is now stable and interest rates have fallen, banks continue to find it difficult to lend. Demand for consumer credit remains depressed as consumers opt for short-term investment instruments, and borrowers' demand is focused on short-term working capital rather than longer-term growth-oriented investment. Lack of confidence and a lack of regulatory certainty are the system's major constraints with political and economic uncertainty delaying both personal and corporate investment decisions.

71. In contrast, the prevailing uncertainty in the domestic system is pushing investors to look offshore. As a result, private banking opportunities are increasing in areas related to booming sectors of the economy, particularly export related industries earning hard currency such as agriculture, food and drink. Furthermore, opportunities may exist in the much needed restructuring of the public banks and in March 2004 a supervisory body was formed to oversee financial regulation. Although it is unclear how this will interact with the Central Bank and other regulatory bodies.

72. In addition opportunities exist in specialised banking services, which have been doing better, where there should be scope for activities such as leasing and factoring.

Insurance

73. The 2002 devaluation reduced the size of the insurance market by over 50% to US$3 billion. However, since then the industry has shown a gradual recovery and by March 2004, annual premium income reached AP$10 billion (US$3.3 billion). Of this, AP$6.3 billion (US$2.1 billion) corresponded to non-life and AP$3.7 billion (US$1.2 billion) to life, personal accident and healthcare. This represents an increase of 6% over the previous year.

74. Argentina's insurance market's total assets at the end of 2004 totalled AP$13.7 billion (US$4.7 billion), 60% of which are in public bonds. However, the majority of structural problems resulting from defaulted debt, pesification and devaluation have now been solved through negotiation with policy holders and creditors. The regulator has proved flexible in allowing insurance companies to regain solvency while, legislation introduced in April 2003 now permits all insurers to place up to 50% of their assets overseas which considerably eases reliance on non-performing public debt. There are no limitations on the foreign ownership of local insurers. Indeed around 45% of the non-life market is understood to be in the hands of overseas companies.

75. The industry has largely restructured and is now seeking opportunities to expand through the introduction of new technology, reduction of costs and expansion of client bases. Key players in the sector include Aon, Marsh & McLennan, Willis, Mapfre, Zurich, AGF Allianz, La Caja, Sancor, HSBC, Royal & Sun Alliance.

Reinsurance

76. The economic crisis and a hardening of the reinsurance market worldwide, has prompted higher reinsurance rates and stricter terms and conditions for the Argentine market. Reinsurance is now written in AP$ instead of US$, with the inclusion of stability clauses. Reinsurers registered in Argentina or placed by reinsurance brokers authorised to operate in the country must write reinsurance placed abroad. The market has shrunk considerably as a result of the shift from US$ to AP$ contracts. The lack of large-scale capital investment and a slow recovery in the retail insurance sector mean that the market remains largely stagnant.

Investment Funds

77. In June 2001 over US$8 billion was managed by some 243 investment funds. Since devaluation, the expansion of this market has come to an abrupt standstill and many existing funds have been dismantled. By April 2004, 187 funds existed (50 of which were in the process of liquidation) administered by 36 companies managing US$2.8 billion (AP$8 billion) of assets and in February 2005 this was 165 funds in managing US$2.8 billion.

78. The market is now showing signs of a partial recovery and 2003 saw a reactivation of the peso market due in part to the continued problems of the banking sector able to provide little credit. Given the continued difficulties in the banking and pensions sectors, and the availability of private capital, the investment fund market would appear to have a good opportunity to grow through the development of new products based on overseas funds, futures and derivatives, none of which are currently available.

79. The economic recovery is, however, creating niche opportunities for lending and mergers and acquisitions. In addition to the acquisition of distressed debt, there have been a number of high profile acquisitions in the regulated sectors (energy and telecoms) where local funds have been particularly active. These opportunities are highly specialised due to the highly perceived risk caused by lack of political and judicial stability.

80. However, while many of the distressed debt opportunities may now have passed, the strong economic recovery coupled with continued uncertainty in the banking sector should present good investment prospects particularly in export-oriented small and medium enterprises and some larger businesses seeking to exploit Argentina's increased competitiveness.

Capital Markets

81. The equity market in Argentina is underdeveloped compared to other emerging economies. While some of the major provincial cities have their own stock exchanges most rely on shares traded on the Buenos Aires market, with the exception of some specialist products such as cereals in Rosario and wine in Mendoza.

82. Low liquidity, high taxes, frequent changes in regulations and bureaucracy are serious problems that have seen a trend towards delisting in the period up to and immediately following the crisis. However, since then, the stock market has performed strongly and volumes have increased as it offered one of the few alternative investment vehicles for those untrusting of the banking sector. In May 2005 the Buenos Aires Stock exchange had 106 shares listed, 71 corporate bonds and 142 financial trusts. However, despite this and the high cost of credit elsewhere, local markets have seen few flotations. There are recent signs that with government encouragement and some successful restructuring of corporate debt, more large Argentine companies may seek to raise capital through the stock market.

83. The Government's planned reform of the capital markets that was proposed prior to the crisis is now at a standstill.

PPP/PFI

84. Argentina's default means that access to the international financial markets is now severely restricted while the requirement to maintain and improve infrastructure continues to increase. The government is currently attempting to meet these needs through conventional procurement systems and the formation of a series of trust funds designed to assist infrastructure development. Until a successful debt restructuring is complete, it will be difficult to attract private funds. Even after a restructuring, the government will have severe budgetary limitations and will need to consider PFI. The Municipality of Buenos Aires, who have re-negotiated their debt, are planning to expand the Underground network of Buenos Aires through PFI and will be appointing financial advisers later this year. The national state bank, Banco de la Nacion, are working to set up a pilot PFI to create confidence in the system.

UK Argentina Memorandum Of Understanding

85. In May 2001 UK and Argentina signed a Memorandum of Understanding, which will ensure greater co-operation in tackling the abuse of financial rules and regulations. It also opens the way for UK investment service firms to access the domestic Argentine market, and for Argentine securities to be traded on the UK exchange.

86. All regulation in the financial services sector is domestic and therefore Mercosur membership has no impact.

Paraguay

87. The British Embassy in Paraguay is closed and therefore no information on this sector is available.

Uruguay

89. The UK is the largest holder of Uruguayan foreign debt, and several British investment funds hold Uruguayan bonds which is estimated to be worth over US$2.5 billion (Source: Walter Cancela, President of the Central Bank). The Uruguayan Central Bank and the Ministry of Economy and Finance channel most of their financial operations through the City of London.

90. The Uruguayan authorities have expressed their interest in PPP and the British Embassy have been active in facilitating contacts with several British consultancy firms (Partnerships UK, Currie & Brown). The LLP concept has also been introduced to the market due to demand for offshore registered companies from local businesses.

91. The biggest asset Uruguay has in terms of demand is the 250 million-plus consumers living in the Mercosur trade region. Uruguay is a services-oriented country, taking advantage of its key location between Argentina and Brazil. As a consequence, the country has developed a large financial sector to provide services to residents of the surrounding countries.

Venezuela

92. The Venezuelan banking sector has been a beneficiary of Government economic policies. Banks have taken full advantage of the opportunities the Government has provided through the continued application of the exchange control mechanism, the liquidity expansion and intermediation with the public sector. The sector has also benefited greatly from high oil prices. This combination of factors has resulted in record profits since 2003. There are question marks, however, over profit sustainability in the medium to long term. UK banks (HSBC, Standard Chartered) offer corporate and financial services.

93. UK companies (Royal & SunAlliance, AON, Kingdom, Cunningham & Lindsey) are active in the asset management, insurance and reassurance sectors particularly in the oil and gas market. KPMG provides accountancy services.

AEROSPACE

UK Trade and Investment

94. Under UK Trade and Investment's new strategy resources and budgets within UKTI have become more targeted. As a result, with the exception of Brazil, none of the Mercosur markets are a UKTI priority in this sector. However there are opportunities in some of the Mercosur markets that are highlighted below.

Argentina

95. Despite the recent sale of four Jetstream 38s by BAE, an active Rolls Royce Aeroengines operation serving both military and civilian customers, and the recent inclination of Aerolineas Argentinas and LAN Argentina (the two largest carriers) to source Airbus rather than Boeing, the Aerospace sector in general is fairly depressed and offers limited opportunities.

96. Air transport in the region has been ruled by domestic legislation rather than Mercosur wide rules. Each member country has its own aeronautical code and there has been no effort to try and make them homogeneous. As an example, Argentina had limitations on the foreign ownership of airlines. This was in practice a barrier to entry for LAN, Chile's largest airline who wanted to start operations with a local airline. After years of trying to find a solution to this problem, in mid 2005, after the bankruptcy of Southern Winds, LAN was allowed to start operations with a local group fronting the control of the company. In September 2006, when all other airlines were receiving fuel subsidies and LAN threatened to abandon the market, the restriction to have the majority of an airline's capital in local hands was lifted and they are now increasing the company's capital with funds from their headquarters in Chile (and hence eligible for fuel subsidies).

97. Decisions on air traffic and slots in airports and routes within Mercosur are handled via bilateral agreements and not pan Mercosur ones. Similarly, decisions on air safety are homogeneous but only to the extent all countries mirror American FAA rules.

98. The largest carrier of air freight between Argentina and Brazil is British Airways, whose four times a week cargo bays can accommodate larger cargo than the regional players and who have a very good agreement for distribution by land in Brazil. This is also one of the few sectors in which one of the key barriers to trade have been lifted as foreign investment in airlines is now allowed.

Paraguay

99. The British Embassy in Paraguay is closed and therefore no information on this sector is available.

Uruguay

100. Uruguay has a growing parts industry for the aerospace sector in Latin America. Among the companies that are looking to supply the major aerospace industries in the region is the British company NP Aerospace, which recently opened a facility in Montevideo. The company plans to manufacture defence materials such as helmets and body armour, to produce armoured versions of road vehicles, and manufacture spare parts for the aeronautical industries.

Venezuela

Airlines

101. In recent years the Venezuelan airline sector has suffered from a deteriorating exchange rate, a FAA-imposed Category II status (since upgraded to Category I in April 2006), a decrease in internal tourism and conflicting government rules affecting tax and operations costs. This has led to concerns about the survival of many domestic carriers. International carriers have also suffered from the failures of the exchange rate mechanism, and new rules on the transport and storage of cargo. Despite high demand for tickets and cargo services, international operators struggle to make a profit on flights to and from Venezuela. British Airways withdrew from the market in early 2005.

Leasing, components and servicing

102. The markets for both aircraft leasing, and components and servicing are strong due to improved leasing opportunities. A devaluating currency and threats of new taxes on aircraft imports have reduced demand for new aircraft. There is no domestic production of aircraft components. All spare parts and support equipment must be imported. Since there are no large aircraft overhaul facilities in Venezuela, Venezuelan users of large jet aircraft use external providers particularly US MRO companies for their C and D checks and for engine work beyond line maintenance.

Satellites

103. Venezuela (in cooperation with Uruguay) has signed an agreement with the Chinese to develop a Venezuelan Space Centre and to launch the Venesat 1 telecommunications satellite in early 2008. Thirty Venezuelan professionals are receiving graduate training in China, at the Aeronautics and Aerospace University. The goal is to train 90 Venezuelans in the areas of space engineering and information technology. Domestically the Universidad de Los Andes in Merida is to open a four-year Aerospace course.

Defence equipment

104. All of the four armed forces are currently purchasing military hardware and technology. The Airforce have recently purchased 24 Sukhoi aeroplanes and four Mi-35 combat helicopters from Russia. The purchase of 12 military transport aircraft from Spain was cancelled due the failure of the US to permit export licences for US-manufactured components.

ICT

UK Trade and Investment

105. Under UK Trade and Investment's new strategy resources and budgets within UKTI have become more targeted. As a result, with the exception of Brazil, none of the Mercosur markets are a UKTI priority in this sector. However there are opportunities in some of the Mercosur markets that are highlighted below.

Argentina

106. The Argentine ICT sector is fairly impressive with software exports now exceeding those of Argentine wine and many of the large international blue chip companies such as IBM, Motorola, Hewlett Packard have established representation in the market.

107. The Argentine online advertising industry is also world class and local companies have developed a complete campaign for the launch of The Lord of The Rings in Spain and more recently, one of the WPP group of companies, WM United, locally prepared the online launch for a new Pepsi Cola beverage in India.

Paraguay

108. The British Embassy in Paraguay is closed and therefore no information on this sector is available.

Uruguay

109. The related industries for the IT cluster exist in three classes, and include those which:

— Provide direct inputs for the industry. These are software development outsourcing companies, database and internet services, hardware, etc. In software development alone there are more than 1,600 companies.

— Provide indirect inputs, through access to a pool of trained workers. Uruguay's IT cluster is surrounded by a dynamic services industry. Financial services and logistic services are a particular source not only of sophisticated demand, but also of qualified workers speaking English and Portuguese, in addition to Spanish.

— Provide a good environment to attract people. Uruguay's quality of living is matched only by Chile in Latin America. Montevideo qualifies in most indices as one of the best cities in the region.

110. Relevant institutions include the main chamber for the software cluster, the CUTI (Uruguayan Information Technology Chamber). There are other initiatives that try to co-ordinate issues like IP legislation or evolution of communication networks. The CUTI has some specific initiatives for the Software industry, but it also covers the rest of the information technology industries. Montevideo is also the HQ of LACNIC, the body which supports ICANN in allocating Internet domain addresses throughout Latin America and the Caribbean.

111. The software development and software consulting segments are thriving. Uruguay is far from being a world leader in software, but it is the biggest exporter in Latin America. Brazil's IT production is much higher than any of its neighbours as it is focussed on its domestic market, but it only exports $70 million pa compared to $180 million pa for Uruguay. More than 60% of Uruguay's IT exports go to Latin America. Uruguay exports more software than Brazil and Argentina combined. This is probably a sign of the competitive advantage that Uruguay has in terms of software development, compared to its neighbours, offering products in the language of this market.

112. Software industry data in Uruguay is difficult to obtain for two reasons: (a) there is no consistent data on exports of services in Uruguay and (b) the exports from Free Trade Zones are not accounted as country exports. The data on the performance of the industry comes mainly from company surveys, particularly of the members of CUTI .

113. There are significant tax incentives provided by the Free Trade Zone (FTZ) regime and a decree giving software companies operating outside FTZs the same tax preferences as FTZs. The FTZs have the most potential for attracting foreign and national IT investment, because of their stable policy framework, good telecommunications and logistic facilities, which have improved in recent years with the participation of foreign capital.

114. In 2003, Tata Consultancy Services (TCS), one of the leading Indian IT consulting companies, decided to set up a Global Development Centre in Uruguay to serve clients in Latin America. TCS invested $10 million in cash and $20 million in training and equipment, and claims that the Global Development Centre in Montevideo will soon employ 2,000 people. It projects $60 million in sales in 2006. When asked why they decided to invest in Uruguay, company officials respond that the most important factors for the decision were:

— The high levels of advanced education and English and Portuguese language skills.

— The stable political environment.

— The high quality of living.

— The willingness of the government to negotiate a good deal, particularly conditions to bring employees from abroad.

115. Artech, an Uruguayan software developer is a worldwide leading company in code-generating software. Its main product, "GeneXus" reached $20 million and 35 markets last year, the bulk of that in the United States (Latin Trade, 2005).

Venezuela

116. The Venezuelan Telecommunications Equipment market has grown rapidly in recent years recovering quickly from a period of contraction in 2003 when local Venezuelan factors compounded the weaknesses of a world-wide sector. New technologies are being introduced and networks expanded. This has pushed demand for different platforms and for greater bandwidth. Areas of significant growth include internet-related equipment, mobile telephony, and private and government-owned telecommunications centre equipment. All the major international telecommunication equipment providers are present: Cisco Systems, Lucent, Alcatel, Nortel, Avaya, Siemens, Huawei, and Ericsson. There are also smaller specialised companies such as Alvario and Adendus (Israel) participating in certain equipment market niches. The Venezuelan Telecommunications Equipment Market is worth approximately US$600 million (2004) (Source: Conatel (National Telecom Commission)).

117. To put Venezuela in perspective there are 3.6 million (2005) landline telephones and 12.4 million (2005) mobiles in use. There are three million internet users and 52,000 (2006) internet hosts (Source: CIA yearbook). Both private and government sectors are seeking ways to develop a "bridge to close Venezuela's social/economical/technological gaps".

OIL AND GAS

UK Trade and Investment

118. Within Mercosur Brazil and Venezuela are priority A markets for UKTI oil and gas trade development activity. This has been agreed with the industry/government International Oil and Gas Business Advisory Board. A summary of the sector in Venezuela and the UK's activity in that market is at paragraphs 134-141 below. Furthermore although not UKTI priorities there are also opportunities for UK companies in some of the other Mercosur companies as detailed below.

Argentina

119. Argentina has the third largest gas reserves in South America and in the 1990s it became a net exporter of gas, exporting some 14% of production in 2004; exports were mainly to Chile and Uruguay. However the recent shortfalls in supply have lead Argentina to cut its gas exports to Chile, which depends heavily on imports for power generation; this created some political tension between both countries. Some analysts think that Argentina's gas reserves will be fully depleted within the next 10 years, unless the investment climate improves and new reserves are discovered.

120. Most exploration and production is on-shore but it is likely that future development will include off-shore fields, as on-shore production is becoming increasingly mature (20% of wells account for 80% production). There are more than 30 international operators in the country, the largest being Repsol/YPF, which has a fully integrated business. Downstream, there are 10 refineries with a combined capacity of about 100,000 cu m/day. There are 4,300 service stations, about 25 million users of natural gas and 1.3 million natural gas vehicles. BG Group, Shell and BP all have investments in Argentina.

121. The effect of the 2001-02 crisis on this sector has been severe. The upstream is affected by the pesofication of gas tariffs and retenciones (export taxes) on oil products. The downstream gas sector continues to be affected by a cap on the well-head price for gas. As a comparison, Bolivia exports gas to Argentina for US$2.40/BTU, whilst the well head price for Argentine gas is only US$1.40-1.60/BTU; residential customers pay an even lower tariff of around $0.40/BTU. Although in the medium to long-term gas prices and tariffs are expected to recover to some extent, the current situation means that the domestic gas industry is not very attractive and most new investment has stopped. Following devaluation, many downstream gas companies are now in default to their international creditors.

122. The government is currently trying to renegotiate contracts with the privatised utility companies, which includes several downstream gas companies. There are also proposals for a new legislative and regulatory framework for these companies, which is being debated in the Argentine Congress. Several investors have complained that the proposed legislation would not allow investors a reasonable rate of return and would deter investment.

123. As the downstream oil sector is not officially regulated, it has not been as severely affected, however the government applies strong pressure to retailers in order to keep pump prices low. With an increasing number of cars switching to gas, petrol consumption has fallen and supply has been affected with about 1,300 service stations closing since devaluation.

124. In May 2004 the government announced increases in export taxes (retenciones) on fuel: from 0% to 5% for petrol; 5% to 20% on LPG; and rates of up to 45% on crude oil. This has meant that despite the current high prices for oil, Argentine based firms face restrictions on their oil exports.

ENARSA (Energ-«a Argentina SA)

125. In 2004 the Argentine government announced the creation of ENARSA—a new state energy company. The announcement should be seen in the wider political context of a government elected in 2003 that was opposed to the privatisation of state enterprises in the 1990s. The federal government passed legislation that ceded all off-shore concessions (other than those already licensed) to ENARSA. On-shore concessions remain under the jurisdiction of provincial (state) governments. In May 2005 the government announced a series of tax breaks/allowances for companies in order to encourage private companies to form joint ventures/strategic partnerships with ENARSA. Some commentators criticised the tax breaks as being insufficient to offset the risks of working with ENARSA.

126. The government appears keen to develop and explore further blocks off-shore, but ENARSA does not have the funding nor the technical expertise to do this. To date, ENARSA is a shell company with no assets (other than its off-shore rights). In late 2004 the company opened two service stations in central Buenos Aires (in partnership with PDVSA), but these were seen as little more than a political gesture.

Paraguay

127. The British Embassy in Paraguay is closed and therefore no information on this sector is available.

Uruguay

128. Uruguay has no fossil fuel resources. ANCAP, the state-owned oil company, is engaged in oil refining and distribution, alcohol production and the manufacture of portland cement. It has a monopoly on importing and refining crude oil, which is subsequently distributed by ANCAP and three multinationals: Texaco, Esso and Petrobras. ANCAP operates an off-shore mooring station off the Atlantic coast, where crude oil is unloaded and brought to the Montevideo refinery by pipeline.

129. Uruguay's main oil imports have traditionally come from West Africa or Russia. Uruguay tends to buy from whoever offers the best price. However, Uruguay and Venezuela have concluded several oil-related agreements in the last 18 months. As a starter, Uruguay has offered technical help with oil extraction from the Orinoco belt in Venezuela in exchange for cheaper oil supplies. Venezuela has recently supplied Uruguay with crude oil for refining at low prices and with long-term financing of the purchase at very reasonable interest rates.

130. A complicating factor is that Venezuelan oil has a heavier composition than the ANCAP refinery can process. PDVSA (the Venezuelan Oil Company) has offered to modernise and adapt the refinery. PDVSA apparently wish to take ANCAP shares in payment, which would give them a significant stake in the refinery and thereby a base to sell to the Southern Cone. This has put the Uruguayan government in an awkward position as the governing Frente Amplio coalition, when it was in opposition, promoted and won a referendum to prohibit the privatisation or demonopolisation of ANCAP. In the meantime ANCAP, in an attempt to soften its debt burden, has sold 49% of its SOL service stations in Argentina to PDVSA at an undisclosed price. The ANCAP authorities are trying to make ends meet and analysts believe that it will inevitably have to agree some sort of foreign partnership (via PPP, or a joint venture) to upgrade its refinery if it wants to survive.

131. Uruguay's oil-derived fuels have fallen in quality over the past few years. European cars suffer the consequences and some manufacturers no longer supply diesel vehicles to Uruguay. This worries the Uruguayan authorities, as many rich tourists from Argentina and Brazil travel to Uruguay in their expensive cars. Tourism is Uruguay's second highest source of income.

Natural Gas

132. Since 2002 natural gas has been transported to Uruguay through a gas pipeline linking Argentina and Uruguay, constructed by Gasoducto Cruz del Sur (a consortium formed by British Gas, Pan American Energy, BP and Wintershall).

133. ANCAP is carrying out scientific/geological studies with Petrobras to determine the feasibility of extracting gas from the Uruguayan continental shelf. The geological stream of gas is mainly under the Brazilian platform and extends into the Uruguayan platform down to the Punta del Este area.

Venezuela

134. Venezuela is the world's ninth largest producer and fifth-largest exporter of crude oil. It has the world's largest conventional oil deposits outside the Middle East, with 88 billion barrels of proven reserves from which it is currently producing between 1.9-2.1 million bpd. In addition Venezuela has an estimated 1.2 trillion barrels of ultra heavy crude of which it is believed 235 billion barrels can be recovered commercially. From these reserves Venezuela is currently producing approximately 600,000 barrels per day (bpd) of heavy crude. Venezuela has the second largest proven gas reserves in the Western Hemisphere, and the eighth largest in the world (151 tcf). For reasons of energy security and its long-term commercial potential, Venezuela is not an energy market that can be easily ignored.

135. Petroleos de Venezuela S.A (PDVSA), the national oil company has plans to spend up to US$56 billion to increase production capacity to 5.8 million barrels per day by 2012, but it lacks both the technical capacity and investment capital to achieve this on its own. Oil production in Venezuela has fallen in recent years due to: higher than average decline rates; political strife and an antagonistic business environment which has lead to low investment; and a national oil strike in 2002-03, which has resulted in the dismissal of approximately 19,500 PDVSA employees. In the run up to elections in December 2006, nationalist rhetoric has grown increasingly more radical, driven by political rather than economic considerations. If PDVSA is to come close to achieving its ambitious energy development plans it will need to rely on foreign support. Publicly Venezuela has turned to Chinese, Russian and Iranian partners, but quietly is also seeking support from more experienced sources including the UK.

136. ConocoPhillips, Total and Chevron are the three largest international oil company players in Venezuela, but Shell and BP also have major interests. Hocol has small, but important investments in marginal fields. BG is looking to re-enter the market. The Wood Group has built up a large presence in the service market.

137. The UKTI Venezuela Oil and Gas Team based in BE Caracas and the Americas Oil & Gas Unit in Glasgow has dedicated significant resource to the challenge of engaging UK industry on the opportunities Venezuela can offer the UK's innovative and technology-driven supply chain. Since 2004 UKTI has worked to raise the UK's profile and involvement in this important market to a stage where Business UK is now considered a partner of choice for the Venezuelan National Oil Company (PDVSA) and is actively courted by key Venezuelan industry representative organisations. Significant work has also been done to engage a sometimes conservative UK supply chain, already kept busy by opportunities in more familiar or closer markets. These efforts have led to major business opportunities and a range of contracts won.

138. This integrated package of activity has contributed to many hundreds of UK companies learning about the opportunities in Venezuela and UKTI services. The partnership and range of activity has provided a valuable platform to proactively market the UK's considerable strengths as a world leader in the energy sector. It has also resulted in major business success for industry—for example, a £5 million contract signed between Univation and PDVSA for provision of training. Support from UKTI was central to this success.

139. UKTI has also looked at innovative ways to influence thinking and market UK strengths—the North Sea Story DVD was developed and funded in cooperation with PDVSA, Shell, Wood Group, Robert Gordon University and a range of other industry partners. It provides an overview of the UK's experience in developing its oil & gas sector with key messages on community, supply chain development, alliancing, industry-government partnership and benefits of non-protectionism in developing international capability. The content has been designed to appeal throughout the value chain—from government and industry through to grassroots organisations and students. This innovative marketing tool, specifically designed for Venezuela, is now being rolled out to markets globally.

140. An informal UK/Venezuelan energy dialogue and a Memorandum of Understanding supports bilateral co-operation in both oil and gas. There are likely to be opportunities for UK SMEs (who are aware of the risks) in areas of education and training, and the supply of services and equipment. SME participation is likely to be through joint venture initiatives with local companies.

141. Finally, the UKTI team working with FCO colleagues has also engaged Venezuelan government and industry on key governance issues such as transparency.



© Parliamentary copyright 2007	Prepared 16 July 2007