ProNicaragua

and

TPL Quota Office

May 2006

NicaraguaGeneral Information of the Regulations

and Administration of TPLs

Furniture

Apparel

60%

11%

Tobacco

Cardboard Boxes

3 %

Electronic Components

8 %

Others

2 %

3 %5 %

3 % 2 %Screen Printing

ChemicalsEdible

Products

3 %

Plastic Bags

Firms Operating in Export Processing Zones Firms Operating in Export Processing Zones in Nicaragua as of March 2006in Nicaragua as of March 2006 Country of

originQty

.

United States 24

Korea 23

Taiwan 18

Nicaragua 13

Mexico 5

Hong Kong 2

Italy 2

Guatemala 1

Honduras 2

Belize 1

Argentina 2

Canada 2

Total 95

Industry Overview

- Exports to the U.S. totaling 203.9 million SMEs in volume and $715.6 million in value (Compared to 2004: 16% increase in quantity and 20% increase in value)

- To the US, Nicaragua is : # 5 provider of M/B cotton trousers & shorts# 9 provider of M/B cotton knit shirts# 9 provider of MMF brassieres & body support garments# 10 provider of M/B MMF woven shirts# 12 provider of W/G cotton knit shirts and blouses# 14 provider of W/G cotton trousers & shorts# 14 provider of W/G MMF trousers & shorts

Industry OverviewNicaragua Apparel Industry Information 2005

Industry Overview

Expected Industry Growth – Post CAFTA

Growth Jobs Industrial Space

( KM2)

Payroll(Millions)

Investment(Millions)

Exports(Millions)

2006 27.03% 79.2 k 720 $16.6 $554.4 $753.4

2007 28.5% 95.0 k 870 $21.2 $665.3 $968.1

2008 25.9% 113.1 k 1,640 $26.5 $791.7 $1,218.8

2009 22.9% 132.3 k 1,880 $31.8 $926.1 $1,498

2010 19.8% 152.0 k 2,100 $36.5 $1,064 $1,794.6

2011 13% 167.20 2,310 $41.2 $1,170.4 $2,028

Source : ANITEC 2005

Industry Forecast

General Characteristics

– Trade Preference Levels (TPL) is a DR-CAFTA benefit which allow free access to US Market for garments produced with fabric or yarn that do not comply with rules of origin

– Quota: 100 million square meter equivalent (SME) per year

– Period: Constant for 9 years – Applies to Apparel Exporters only (in or out of the Free Zone Regime)

– Pocketing rule does not apply to TPL garments

– Not retroactive

– Not Negotiable nor Transferable among Apparel Exporters

– Textile Mills may receive TPL assignation which has to be distributed among their clients (apparel exporters)

Trade Preference Levels

– Wool products – 1.5 million SME per year

– One for One Purchasing Rule:  For each SME of TPL exported in categories of 347/348 and 647/648, Nicaragua has to export an equivalent amount of the same category, using U.S. formed fabric of U.S. formed yarn.

– Categories 647/648 (woven bottoms, synthetic fiber): 1 to 1 rule applies from the start of TPL use

– Categories 347/348 (woven bottoms, cotton)1 to 1 needs to be matched up to:• 1st year: up to 20 million SME• 2nd year: up to 30 million SME• 3rd year: up to 40 million SME• 4th and subsequent years: up to 50 million SME

Trade Preference LevelsLimitations

¿What is Nicaragua’s objective?

1. Protect and expand the existing industry and attract new investors.

2. Utilize the TPL as a transition tool to take the industry from a basic to a vertically integrated operation oriented towards higher value added, high fashion and designer products.

3. Strengthen the industry to optimize job oportunities in volume and in quality.

4. Create a true partnership with the United States textile/apparel industry.

The Role of TPL’s

Distribution mechanism should be:

– Efficient : TPLs should be used completely

– Predictable : Amount received estimated in advance

– Transparent : Clear rules of the game

– Fair : Equal treatment based on established parameters

– Incentive: Growth of Textile / Apparel Companies

Basic Premises

– Ministry of Industry and Commerce (MIFIC)• Issue of regulations that will control the administration of the TPLs

– National Free Zone Commission (CNZF)• TPL Regulation approval • Supervision and application of the administrative policies• Assignation of the quotas according to the regulations established

– Technical Committee• Advisor to the National Free Zone Commission• Supervision of the Administrative Office

– Administrative Office• Support the committee in the administration and execution of its operation

Administrative Outline

Functions:

– Maintain registry of Manufacturers and exporters

– Collect, process, and analyze production and export data

– Maintain industry statistics

– Distribute and monitor usage of TPLs

– Verify shipment of TPL goods

– Issue domestic visas

– Issue internal communications

– Verify information with national and international entities

The TPL Administration Office

TPL Distribution

BASIC QUOTA 70%

CONTINGENT QUOTA 30%

• Established Apparel Manufacturers• Historical Production of at least 1 year•TPL allocation based on export records

• Start-Up of Apparel Manufacturers with no historical production• Expansions of existing companies• Start-Up of Vertical Operations/ Textile Manufacturing•TPL allocation based on export projections

TPL Distribution

Distribution Mechanism for Garment Manufacturers

1. Total export to US in square meter equivalent (SME)

2. Export value per category

3. Duties per category exported

4. Labor content per category

Distribution Mechanism for Vertically Integrated Co’s- Textile Companies

1. Maximum assignment of up to 25% of production in SME

2. Level of Integration

- Spinning

- Knitting or weaving

- Dyeing and Finishing

3. Investment Amount

2002 2003 2004 Promedio

7,774,725.39 7,899,346.75 7,807,847.34

7,827,306.49

Export value3.71 3.71

Duty rate 5.6% 9.4%

Labor content per category 152 152

CATEGORY 347 348

TPL Assignation

3,121,471

Export Records

Categories exported

Coverage

40%

Company A

TPL DistributionExample of Assignation-Apparel Company

2002 2003 2004 Promedio

7,774,725.39 7,899,346.75 7,807,847.34 7,827,306.4

9

Export Value 2.15 2.73

Duty rate 8.9% 8.5%

Labor content per category 65 119

CATEGORY 351 352

TPL Assignation

2,086,581

Export Records

Categories exported

Coverage

27%

Company B

TPL DistributionExample of Assignation-Apparel Company

Distribution Criteria:

Maximum Assignment of up to 25% of Production

1) Level of Integration

Yarn Formation 15%

Fabric Formation 22.5%

Dyeing & Finishing 37.5%

2) Investment Amount

Equal or over US$ 100 million

25%

Less than US$ 100 million proportionally

The Contigent QuotaVertical Integrated Companies – Textile Mills

The Contigent Quota

- The TPLs can be used during the start-up phase (construction) of the project

• Companies must present a detailed development program• Distribution takes place after signing an Investment Contract

- Textile Mills receive a permanent “FIXED” TPL assignment for the duration of the benefit

• The first 10 Million of permanent assignments will come out of the contingent quota reducing it to 20 Million for the following years

Vertical Integrated Co’s – Textile Mills

Vertically Integrated Co. – Textile Mill

Textile Mill AProduction : 20 Million SMELevel of Integration : Fully VerticalInvestment Amount : $100M

1) Maximum Assignment (25% Production) : 5 million SME

2) Level of Integration

Yarn Formation 15 % .75

Fabric Formation 22.5 % 1.125

Dyeing & Finishing 37.5 % 1.875

3) Investment Amount

Equal or greater than $100 Million

25% 1.25

$80 Million 20%

$40 Million 10%

$20 Million 5%

TOTAL 5 million SME

Example

Summary

– The automated distribution mechanism is efficient, predictable and transparent

– Gives equal treatment to established and new companies coming to the country

– Vertical operations are specially benefited since it is the main TPLs strategic role