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Diplomacy in Action

2010 Investment Climate Statement - Ecuador


2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2010
Report
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Openness to Foreign Investment

Ecuador’s investment climate has become increasingly uncertain as the Ecuadorian government’s economic policies continue to evolve with implementation of the country’s new Constitution. While Ecuador is still relatively open to foreign investment in most sectors, including general manufacturing, retail and services, new laws and regulations limit to some extent private sector participation in “so-called” strategic sectors, most notably extractive industries.

As a member of the Andean Community, Andean Decisions 291 and 292 of 1991 nominally govern Ecuador's foreign investment policy. Implementing regulations issued in January 1993 and a 1997 law to promote foreign investment sought to liberalize the investment regime. More recently the Government of Ecuador has modified the country’s investment regime in response to key provisions included in Ecuador’s October 2008 Constitution. For instance, Article 339 of the Constitution provides that “the State will promote national and foreign investment … prioritizing national investment.” Also, “foreign direct investment will be complementary to national investment … and be targeted in accordance to the needs and priorities defined in the National Development Plan.” Article 422 of the Constitution states that “Ecuador will not enter into international agreements or instruments under which the Ecuadorian State would have to cede sovereign jurisdiction to international arbitral tribunals in contractual or commercial matters between the State and individuals or corporations.”

Citing Article 422, on July 6, 2009, the government submitted written notice of its withdrawal from the World Bank’s Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention). Ecuador’s withdrawal from the ICSID international arbitration body became effective on January 7, 2010. In September 2009, the government requested approval by the National Assembly to terminate thirteen bilateral investment treaties (BITs), including with the United States, stating that provisions covering international arbitration and national treatment conflict with the 2008 constitution. As of publication, the National Assembly had returned the request for a Constitutional Court opinion.

The legal complexity resulting from the inconsistent application and interpretation of its existing investment laws complicates enforcement of contracts and increases the risks and costs of doing business in Ecuador. Government officials and private Ecuadorian businesses have used regulatory schemes and questionable legal maneuvers to affect foreign company operations in the country. Companies have sometimes been confronted with requirements of additional payments not negotiated in original agreements; receiving full and timely payments due can be another recurring problem. Business disputes with U.S. companies can become politicized, especially in sensitive areas such as the energy sector. Several commercial disputes involving U.S. companies, mostly linked to the energy sector, are currently under international arbitration. The central government and a number of provincial governments are exploring ways to provide investment attraction services to support current investment, facilitate the entry of new investment, and alleviate the bureaucratic and other hurdles mentioned above. The impact of these efforts is as yet unclear.

Foreign investment with up to 100% foreign equity is currently allowed without prior authorization or screening in most sectors of the Ecuadorian economy currently open to domestic private investment. However, constitutional provisions directing the State to prioritize domestic private investment could impact this in the future. There is no legal discrimination against foreign investors at the time their investments are made. Foreign investors may participate in government-financed research programs. Foreign investors must register their investments with the Central Bank for statistical purposes. Ecuadorian law requires private companies to distribute 15% of pre-tax profits to their employees each year.

Ecuador does not have a law in place specifically governing franchises. For license and franchise transactions, no limits exist on the amount of royalties that may be remitted, but a new two percent tax on capital outflows became effective on January 1, 2010. All license and franchise agreements must be registered with the Ecuadorian Intellectual Property Institute (IEPI).

New investment rules have had the most impact on extractive industries, such as mining and petroleum. Although a 2008 mandate temporarily stalled activity in the mining sector, activity has resumed after passage of a new mining law in January 2009 and promulgation of implementing regulations in November 2009. In December 2009, the government released a new model contract for private participation in the petroleum sector and a new hydrocarbon law is expected in early 2010.

Articles 313 through 315 of the 2008 Constitution establish that the State is responsible for management of “strategic sectors” through state-owned or controlled companies. Strategic sectors identified include: energy in all its forms, telecommunications, non-renewable natural resources (includes petroleum, natural gas, and mining), transportation, hydrocarbon refining, media, water, and biodiversity and genetic patrimony. Within the last year, new state companies have been formed in mining, pharmaceuticals, and banana exports.

Selected Strategic Sectors:

Petroleum

All subsurface resources belong to the state. Ecuador permits investment by foreign oil companies, but has sought to change the terms for private sector participation in the sector over the last few years. Until recently, foreign oil companies had been engaging in exploration and development activities under production-sharing contracts with the state oil company Petroecuador that give private investors the right to share in finds. Since 2007, the government has sought to change these contracts to a fee-for-service model. In September 2009, the Government of Ecuador proposed a draft Hydrocarbon Law that would require all contracts to follow the new service model, some details of which were released in early December. The government has announced that all contracts with private oil companies should be renegotiated in accordance with the new model by March 2010. Some general features of the new model contract are that the State will receive an initial payment of 20 percent of revenues, and arbitration of disputes will be limited to national or regional fora. Foreign private participation is not permitted in Petroecuador's extensive oil fields.

Private investment has declined in Ecuador’s petroleum sector in recent years, in part because of unfavorable economic terms, legal uncertainties, government tax policies, environmental liability concerns, and a lack of a coherent energy policy. High profile legal cases brought by and against foreign oil companies have also dampened foreign investor interest in the sector. In 2005, then-President Palacio issued a decree requiring that all petroleum exploration and production contracts be renegotiated. In 2006 the Government of Ecuador made this decree law by amending its hydrocarbons law, unilaterally modifying the terms of oil production sharing contracts and imposing a 50% “windfall” tax on private companies’ extraordinary petroleum revenues. In 2007, President Correa issued a decree increasing the State’s share of extraordinary petroleum revenues under the 2006 amendment to 99%. On December 28, 2007, a new tax law was passed that set the State’s share of extraordinary petroleum revenues at 70% for contracts signed after the law went into effect. The tax reform that went into effect January 1, 2010, further amended the tax code to require petroleum companies to pay this tax on extraordinary revenues on a monthly basis, as opposed to year-end, as required by the 2007 reform.

Private companies, including foreign ones, can participate in domestic fuel distribution, refining and transport activities. However, fuel prices are controlled by the central government. Ecuador has insufficient refining capacity to meet domestic demand for refined products and must import many oil derivatives.

Mining

The mining sector is open to foreign investment. Foreigners have the same access to large-scale mining concessions as domestic investors, but are prohibited from investing in small-scale mining operations. Foreign investors must receive permission from the President and the approval of the Ministry of Defense to obtain mining rights in zones adjacent to international boundaries. Although rising commodity prices have led to an increase in mining investment in Ecuador in recent years, problems with local communities opposed to mining operations have caused periodic shutdowns. Expected passage of a new law on water usage in 2010 is likely to have regulatory consequences for many industries, including mining.

Investment in mining continues to be modest by Andean standards. In 2000-2001, legislation and regulations were enacted to encourage additional investment in the sector by eliminating government royalties, reducing the payment for surface rights, approving the validity of mining concession titles for 30 years, and streamlining the concession approval process. In April 2008, Ecuador’s National Assembly revoked the majority of existing mining concessions, suspending large-scale mining activity for over a year. The subsequent passage of a new mining law in January 2009 and its implementing regulations the following November provided the necessary legal framework for international companies to resume exploration activities, pending the update of their mining and environmental permits. Several major international mining companies have restarted exploration activities as of February 2010. Ecuador’s new mining law requires all mining concessionaires to pay a minimum 5% royalty on the sale of all primary and secondary minerals; an additional 25% income tax; a 12% tax on profits; a 70% windfall tax on extraordinary profits; and a 12% value-added tax.

In January 2010, the Government of Ecuador established a new National Mining Company (ENAMI) to engage in joint ventures with state and private companies and increase government investment in the sector. Per the new mining law, ENAMI has a preemptive right to establish mining operations in areas considered “of interest” by the government and where no previous concession exists.

Electricity

Amendments to the 1996 Electrical Sector Law adopted by the Ecuadorian Congress in 1998 authorized greater private participation in the electrical sector, but did not permit private firms to obtain majority control over any distribution, generation, or transmission firms controlled by the state (the vast majority). Additional reform legislation passed in 2000 authorized private firms to purchase up to 51% of shares of government-owned electric distribution, transmission, and generation companies.

Electricity generators, including U.S. companies, face chronic problems in collecting accounts receivables from government-owned power distributors, which often operate at a loss. In 2007 the Government of Ecuador created a new Ministry of Electricity and Renewable Energy to focus more attention on the sector. A new electricity mandate issued in July 2008 established a single electricity tariff for distributors and consolidated the 19 state distributors into one. The mandate was implemented with the creation of the National Electricity Company (CNEL) in late 2008 and the National Electric Company (CELEC) in early 2009. CNEL’s mandate is to manage the electricity distribution companies, 11 of which are still state-owned. CELEC was created to centralize management of most of the generation companies and the transmission company. The Government of Ecuador is discussing the creation of a new organization that would monitor and manage the entire electricity system and bring the generation, transmission, and distribution companies back under the control of one umbrella organization. Ecuador’s 2008 Constitution declares the electrical sector as a public service and strategic sector. U.S. firms in this sector had been pursuing international arbitration; one won its arbitration and was paid an arbitral award in December 2008, and another reached a negotiated settlement with the Government of Ecuador.

Telecommunications

Basic telecommunications had traditionally been reserved for the state, but a 2002 law liberalized the sector. Two private groups with foreign participation were granted concessions in 1993 to develop cellular telephone systems. A third state-owned company was granted a cellular concession in 2003. In 2004, U.S. company BellSouth sold its assets in Ecuador to the Spanish company Telefonica, the smaller of the two foreign-owned cellular providers. Porta, the dominant cellular provider, is owned by a Mexican investor. Satellite and paging services are also in private hands.

In 1998, Emetel, the former state telephone monopoly, was split into two corporations (Andinatel in the highlands and Pacifictel in the coastal region). Pacifictel has faced severe management challenges and was the focus of several scandals. Andinatel and Pacifictel received approval to merge in 2008 and formed the Corporación Nacional de Telecomunicaciones (CNT); CNT was converted into a fully-public company in January 2010. A new Ministry of Telecommunications was created in August 2009, modifying the role of the sector’s key players. Detailed regulatory processes and delayed state company payments to the private sector continue to hinder foreign investors.

Media

Foreign companies are prohibited from owning more that 25% equity in broadcast stations. Foreigners are not permitted to obtain broadcast concessions.

Fishing

Foreign investment in domestic fishing operations is subject to approval by the National Fishery Development Council based on a favorable report from the National Fishing Institute. Extractive fishing by foreign companies is permitted provided that the catch is processed in Ecuador. The local sea cucumber population has been nearly eliminated, but shrimp, tuna and other fish products are harvested by national and foreign flag vessels and are major exports for Ecuador.

Other "strategic enterprises" are reserved for the state, including national security industries, in which the military often acts as a joint venture partner with private industry.

Economic and Business Measures/Rankings

Year/Index/Ranking
2009 /TI Corruption Index/ 146 out of 180
2009 /Heritage Economic Freedom/ 147 out of 179
2009 /World Bank Doing Business/ 138 out of 183
FY2009 /MCC Government Effectiveness/ 3 Percentile Rank with Income Peers
FY2009 /MCC Rule of Law/ 7 Percentile Rank with Income Peers
FY2009 /MCC Control of Corruption/ 10 Percentile Rank with Income Peers
FY2009 /MCC Fiscal Policy/ 89 Percentile Rank with Income Peers
FY2009 /MCC Trade Policy/ 43 Percentile Rank with Income Peers
FY2009 /MCC Regulatory Quality/ 3 Percentile Rank with Income Peers
FY2009 /MCC Business Start Up/ 7 Percentile Rank with Income Peers
FY2009 /MCC Land Rights Access/ 48 Percentile Rank with Income Peers
FY2009 /MCC Natural Resources Management/ 79 Percentile Rank with Income Peers

Conversion and Transfer Policies

In 2000, Ecuador adopted the U.S. dollar as its official currency. After Ecuador adopted the dollar, inflation rates declined from a high of near 100% in 2000 to single digits since 2003. According to the Ecuadoran Central Bank, in 2009 the rate of inflation was 4.31%.

Foreign investors may remit 100% of net profits and capital. Investors may also repatriate the proceeds from liquidation of their investments. There are no current limitations on outflows of funds for debt service, capital gains, returns on intellectual property, or imported inputs, other than the tax on capital outflows. There is also no significant delay for remitting investment returns such as dividends, return on capital, interest and principal on private foreign debt, lease payments, royalties and management fees through normal legal channels.

Ecuadorians may also export capital, and there are substantial Ecuadorian financial holdings in the United States and other offshore banking centers. In December, 2007, the Government of Ecuador passed a broad tax reform package, which included establishing a 0.5% tax on capital outflows. This tax was increased to 1% in December 2008 and to 2% effective January 1, 2010.

Expropriation and Compensation

Expropriation is provided for in Ecuadorian law with appropriate compensation. In cases of expropriation, the affected party has the right to petition a judge to establish an appropriate price for expropriated holdings. The Agrarian Development Law restricts the grounds for expropriation of agricultural land and makes land cases subject to regular courts. It can be difficult to enforce property and concession rights, particularly in the agriculture, mining, petroleum, and commercial and residential real estate sectors. In some cases, Ecuador’s judicial system has failed to provide adequate protection from unlawful expropriations or provide investors and lenders with prompt, adequate, and effective compensation for expropriated property.

Property, whether land or mobile assets jointly owned by several persons or companies, can be seized by Ecuadorian courts through judgments or seizure orders. Resolution and compensation typically require many years and significant legal costs.

Under Ecuador's existing bilateral investment treaty (BIT) with the United States, expropriation can only be carried out for a public purpose, in a nondiscriminatory manner, and upon payment of prompt, adequate and effective compensation. In 2006, the Government of Ecuador nullified a U.S. company’s contract and seized the company’s considerable assets in Ecuador alleging the company had improperly transferred assets to another foreign company. The U.S. company initiated arbitration proceedings under the BIT; the Government of Ecuador is participating in the proceedings.

Some private oil company assets have been seized by the government as a result of disputes over the “windfall” tax. In December 2006, April 2008, and June 2008, three U.S. companies initiated international arbitration proceedings based on the tax changes. One of the U.S. companies reached agreement with the Government of Ecuador to buy out its contract in August 2008 and has since left the country. The 2008 Constitution establishes that the State would manage land use and access to lands while recognizing and guaranteeing the right to private property, “which should fulfill social and environmental functions.” As of January 2010, implementing laws to clarify this provision have not been issued. The Constitution provides for the redistribution of land if the land is not in productive use for more than two years. The definition of “productive use” is complicated, particularly for pastures and unexploited land. Access to land for the landless is a major theme of the government’s agricultural policy, but to date there have not been any public seizures of private assets under the current administration.

Some local and foreign mining companies have had their concessions occupied by informal miners, who have subsequently sought a share of the concessions or have carried out mining activities without repercussions.

Dispute Settlement

Systemic weakness in the judicial system and its susceptibility to political or economic pressures constitute important problems faced by U.S. companies investing in or trading with Ecuador. The Ecuadorian judicial system is hampered by processing delays, unpredictable judgments in civil and commercial cases, inconsistent rulings, and limited access to the courts. Criminal complaints and arrest warrants against foreign company officials have been used to pressure companies involved in commercial disputes. There have been cases in which foreign company officials have been prevented by the courts from leaving Ecuador due to pending claims against the company. Ecuadorians involved in business disputes can sometimes arrange for their opponents, including foreigners, to be jailed pending resolution of the dispute. Concerns have been raised in the media and by the private sector that Ecuadorian courts may be susceptible to outside pressure and are perceived as corrupt, ineffective, and protective of those in power. Neither Congressional oversight nor internal judicial branch mechanisms have shown a consistent capacity to effectively investigate and discipline allegedly corrupt judges.

The resource-starved judiciary continues to operate slowly and inefficiently. There are over 55,000 laws and regulations in force. Many of these are conflicting, which contributes to unpredictable and sometimes contradictory judicial decisions. Enforcement of contract rights, equal treatment under the law, IPR protection, and unpredictable regulatory regimes are major concerns for foreign investors.

The existing U.S. - Ecuador BIT provides for binding international arbitration of disputes between the government and investor in a venue of the investor's choosing, including the International Center for Settlement of Investment Disputes. Given Ecuador’s withdrawal from ICSID, alternative arbitration venues available to U.S. investors include: ICSID’s Additional Facility; ad hoc arbitration under UNCITRAL rules; and arbitration administered by any other arbitral institution to which the parties agree. Ecuador’s new constitution recognizes only local or regional arbitration centers, or other forums as agreed to by the parties, for settlement of disputes between the State and investors, and could limit future arbitration options for investors.

A number of U.S. companies operating in Ecuador, notably in regulated sectors such as petroleum and electricity, have filed for international arbitration resulting from investment disputes. Investors in more lightly regulated sectors have had fewer disputes. Over the last several years, one U.S. electricity company has received a favorable ruling under ICSID; another filed a case with ICSID, but subsequently negotiated a settlement with the government.

Performance Requirements and Incentives

There are no formal performance requirements associated with foreign investment in Ecuador. Except for "strategic" sectors described earlier, foreign investors are not required to have local equity participation. Visa and residence requirements do not inhibit foreign investment. Through its newly formed InvestEcuador program, the Government of Ecuador hopes to promote and facilitate local and foreign investment, particularly in areas of special interest for development, by establishing incentives and working through existing bureaucratic hurdles. A number of Ecuador’s provinces are also working to attract investment, often as public-private collaborations between provincial governments and private commercial associations and universities. In addition to conducting international road shows to attract FDI, the provincial investment promotion agencies seek to assist both current and prospective investors to open new facilities, increase existing investments, and overcome bureaucratic hurdles. Some provinces, with financial assistance from the Central Government, are actively implementing large-scale infrastructure improvement projects to make their regions more attractive to local and foreign investors.

Under the Andean Community Common Automotive Policy, Ecuador and Colombia impose local content requirements on automobiles assembled in country in order to qualify for reduced duties on imports. The WTO Agreement on Trade-Related Investment Measures (TRIMS) prohibits such requirements. The local content requirement for passenger vehicles was 32 % in 1997. It was raised to 33% for 1998, and was then lowered to 24% for 2000. Under the TRIMS Agreement, Ecuador was obliged to eliminate local content requirements by 2000. The local content requirement is still in place in 2010 and continues to be 24%. This automotive policy may be inconsistent with Ecuador's WTO obligations under the TRIMS Agreement.

Ecuador is a beneficiary of the Andean Trade Promotion and Drug Eradication Act (ATPDEA), which renewed and expanded the original Andean Trade Preference Act (ATPA). The current program provides Ecuador with duty-free access to the U.S. market for over 6,000 products and is due to expire December 31, 2010. The primary goal of this program is to promote export diversification and to provide sustainable economic alternatives to drug-related activities in the Andean region. ATPA has helped promote growth in Ecuador's cut-flower, pouch tuna, textile and apparel, and fruit and vegetable exports.

Right to Private Ownership and Establishment

Foreign and domestic private entities can own business enterprises and engage in almost all forms of business activity. Private entities can compete freely with the public sector in most areas although in some cases the government has clearly favored state-owned enterprises in awarding its business. In August 2008, Ecuador’s Constituent Assembly passed a new public contracting law, which grants priority to locally produced products and services in public purchases although foreign suppliers can compete for the contracts. The National Institute for Contracting has regulated the process for evaluating proposals, which prioritizes local producers. However, local origin content is not the only factor evaluated in awarding a contract; other factors such as price and quality are also assessed. The law eliminates the former requirement to obtain approval from the Attorney General and the Controller prior to being awarded a government contract, and creates a National Institute of Public Contracting (INCOP) to oversee transparency and timeliness of the contracting process.

Protection of Property Rights

There have been numerous instances where the judicial system has not adequately protected property owners’ rights. U.S. investors in real estate should exercise caution when considering a land purchase in Ecuador.

Ecuador's intellectual property regime is governed by the "Law on Intellectual Property" adopted in 1998. The law provides criminal and administrative relief to right holders. Ecuador has ratified the Berne Convention for the protection of literary and artistic works, the Geneva Phonogram Convention, and the Patent Cooperation Treaty. Ecuador is also bound by Andean Community Decisions 345, 351, and 486. Decision 486 improves intellectual property protection by expanding the definition of patent ability and strengthening data exclusivity.

The Ecuadorian Intellectual Property Institute (IEPI) was established in January 1999 to handle patent, trademark and copyright registrations. In 2009, IEPI eliminated its backlog of applications for trademark registration and reduced the standard time to register a trademark from two years to three months. All trademark and patent archives have been digitized and IEPI is working to fully digitize the application process.

Ecuador has been on the Special 301 Watch List of the Office of the United States Trade Representative since 2003. Enforcement against intellectual property infringement remains a serious problem in Ecuador. The national police and the customs authority are responsible for carrying out IPR enforcement orders, but it has sometimes been difficult to have court orders enforced. There is a widespread local trade in pirated audio and video recordings, computer software, and counterfeit activity regarding brand name apparel. On the other hand, local registration of unauthorized copies of well-known trademarks has been reduced.

Patents

Ecuador’s IPR law extends patent protection for 20 years from the date of filing. In infringement cases, the burden of proof lies with the alleged infringer. Although Andean Community Decision 486, issued in late 2000, represents a significant improvement over Decision 344, it still does not provide adequate protection for "second use" patents. Although patenting of pharmaceutical products is permitted, on October 23, 2009, President Correa signed Presidential Decree 118, which identified the competent authorities and loosely described a process for issuing compulsory licenses for patented pharmaceutical products, with the stated aim of expanding access to medicines and promoting local production. Presidential Decree 183, signed on December 21, 2009, is a companion decree which covers compulsory licenses for agrochemical products. The Ecuadorian government has said it will comply with all pertinent national and international rules regarding compulsory licensing, including those contained within the WTO Trade Related Intellectual Property Rights Agreement (TRIPS). On January 15, 2010, IEPI issued Resolution 10-04 P-IEPI which provides details of the process and requirements for obtaining compulsory licenses for patented pharmaceutical products. No compulsory licenses had been issued by the Government of Ecuador as of February 2010.

Government of Ecuador health authorities continue to approve the commercialization of new drugs that are the bioequivalent of patented drugs, thereby denying the originator companies effective patent protection for innovative drugs. A modification to Ecuador's health code in late 2006 permits the granting of sanitary registrations without regard as to whether a medication is patented.

Producers of branded pharmaceuticals are concerned that the "Law on Generic Drugs," which was passed in 2000, enshrines discrimination against branded pharmaceuticals into law. The law mandates that government entities buy only generic drugs. The law also lowers drugstore gross profit margins on branded medicines to 20%, while maintaining the margins for generic drugs at 25%. Under the law, drugstores are to devote a certain percentage of shelf space to generic pharmaceuticals. The Government of Ecuador has proposed to further reduce allowable profit margins on pharmaceutical sales, but no final action has been taken in that regard. Presidential Decree 181, issued on December 21, 2009, established a National Pharmaceutical Company (ENFARMA) that will initially commercialize Cuban generics, but will later produce generics.

Copyrights

Printed and recorded works are in theory protected under the IPR law for the life of the author plus 70 years. Computer programs and software are also protected. However, pirated CDs and DVDs are readily available on many street corners and even in shopping malls. The Government of Ecuador, through the IEPI’s Strategic Plan against Piracy, has committed to take action to reduce the levels of copyright piracy, including though implementation and enforcement of its 1998 Copyright Law. However, weak copyright enforcement remains a significant problem, especially concerning sound recordings, computer software and motion pictures. Sellers of pirated goods sell their illegal wares with no fear of prosecution. The Government of Ecuador has not taken action to clarify that Article 78 of the 1999 Law on Higher Education does not permit software copyright infringement by educational institutions.

Trademarks

Trademark registration is permitted for renewable 10-year periods, but registration may be canceled if the trademark is not used in the Andean region for a period of three years. The IPR law provides protections for well-known trademarks. A trademark registration cannot be cancelled without the consent of the trademark owner.

Other Protection

The IPR law provides protection for industrial designs and extends protection to industrial secrets and geographical indicators. Semiconductor chip layouts are protected. Plant varieties and other biotechnology products are also, in theory, protected.

Registrations and Enforcement

The Ecuadorian National Police and Customs service are responsible for carrying out IPR enforcement, but do not always enforce court orders. IEPI can take enforcement actions through an administrative process that can result in sanctions and/or interception of counterfeit goods by Ecuadorian Customs.

Transparency of Regulatory System

Ecuador's regulatory system is not transparent. There are no antitrust laws and industry is fairly concentrated. The Government of Ecuador has prepared a draft competition law, which is available for public review and has not yet been considered by the National Assembly.

The Superintendent of Banks and Insurance (SBI) regulates financial and insurance institutions. The 2008 Constitution calls for the creation of separate regulatory agencies for the public, private, and informal financial sectors. The Constitution also mandates that each financial institution have an ombudsman office. The regulatory authorities must now be appointed by the Council for Citizens Involvement and Social Control from a short-list of candidates submitted by the Executive. The law for the Creation of a Financial Safety Net, which was approved by the National Assembly in December 2008, improved coordination of the financial regulatory agencies by having both the Central Bank and the SBI as members of the new corporations that will manage a new liquidity fund, deposit insurance agency, and resolution system. In October 2009, the National Assembly passed a law reforming the Central Bank Charter, eliminating its autonomy and redefining the composition of its Board. The new Charter gives the Executive total control over Central Bank policies and operations. It appears that the purpose of this law was to align the Central Bank Charter with Articles 302 and 303 of the 2008 Constitution.

The National Secretary of Telecommunications (SENATEL) establishes the regulatory framework for fixed-line and wireless communications services. The Superintendent of Telecommunications (SUPERTEL) controls and establishes sanctions to fixed-line and wireless communications services. The National Council of Radio Broadcasting and Television (CONARTEL), which previously regulated broadcasters, became part of SENATEL after the creation of the new Ministry of Telecommunications in August 2009. The Superintendent of Companies regulates all other firms and, via the National Securities Council, the Quito, Guayaquil, and Over-the-Counter stock exchanges.

Policies, regulations and standards, particularly in regards to agricultural trade, often are not based on scientific principles and discriminate between local and imported products. Political appointees in the Ministries of Agriculture and Health control imports of agricultural goods, and customs procedures are cumbersome. Ecuadorian regulators currently provide little or no opportunity for public comment on newly proposed laws and regulations, particularly those related to food safety, sanitary and phytosanitary and other trade-related matters. Ecuador does not always comply fully with the WTO notification requirement.

In addition, ministries, parastatals, and regional and municipal governments all impose their own requirements and regulations on commercial activity. In the World Economic Forum’s 2009-2010 Competitiveness Index, Ecuador ranked 105 out of 133 countries surveyed.

Efficient Capital Markets and Portfolio Investment

The 1993 Capital Markets Law set up a modern regulatory structure, opened stock market trading to banks and other firms, and encouraged the development of mutual funds. However, Ecuadorian capital markets remain underdeveloped. Most large industrial groups are privately held and are financed largely through debt or retained earnings. The bulk of activity on the country's two small stock exchanges currently involves trading in short-term commercial paper, bank obligations, and government debt. Regional rivalries complicate efforts to develop a truly efficient capital market in Ecuador's small market.

Most stock trades involve shares in a handful of banks and companies. Bank credit on market terms is available and improving; rates have been decreasing. The private sector has access primarily to short-term bank credit, approximately 61% of the loan portfolio has a maturity of less than one year and approximately 68% of the resources are demand deposits. Most of Ecuador's blue-chip firms maintain external credit lines or other forms of foreign financing.

In July 2007, Congress approved a law to establish a new methodology to calculate interest rate ceilings for bank loans and eliminate non-interest commissions. The government has introduced new legislation giving authority to the Central Bank to regulate and set interest rates. Contrary to previous years, the financial sector showed minimal growth in 2009. According to the Superintendent of Banks, deposits increased by 6.5% in 2009 while the total outstanding loan portfolio decreased by 2.3% during the same time period. The quality of the credit portfolio of Ecuador’s regulated financial sector has deteriorated during the last year, as the share of non-performing loans has increased.

Political Violence

Ecuador does not have a tradition of guerrilla activity, nor of violence as a result of demonstrations or political instability. Crime is a serious concern, especially in the larger cities.

Student, labor union, and indigenous protests against government policies are a regular feature of political life in Ecuador. While disruptive, especially to transportation, violence is usually limited and localized. Protesters often block city streets and rural highways, and public transportation tends to be disrupted during these incidents. Protestors also occasionally burn tires, throw Molotov cocktails, engage in destruction of property, and detonate small improvised explosive devices during demonstrations, but fatalities as a result of protests have been rare. Pamphlet bombs are sometimes used to disseminate political literature. Popular protests in 1997, 2000, and 2005 contributed to the removal of three elected presidents before the end of their terms. Some communities have successfully used protests and strikes to obtain promises of increased government spending on social benefits and infrastructure. Some indigenous communities opposed to development have protested to block access by petroleum and mining companies. In September 2009, one individual was killed near the city of Macas during protests by indigenous communities demonstrating against the government’s proposed mining and water laws. It is against the law for foreigners to engage in political activity that starts or promotes civil wars or international conflicts.

The political violence present in neighboring Colombia has a spillover effect in northern Ecuador. Security on the northern border with Colombia, where the majority of Ecuador's oil deposits are located, is particularly tenuous. The area is used as a transshipment point for precursor chemicals used in illegal drug production as well as arms and supplies for Colombian insurgent groups and narco-traffickers. Businesses in the area continue to report being extorted for protection money. Kidnappings have occurred and foreigners have been targeted. The U.S. Embassy in Quito advises against travel to the northern border of Ecuador – to include the provinces of Sucumbios, Orellana, and Carchi and parts of Esmeraldas Province. The Ecuadorian military and government agencies are increasing efforts to promote development and provide security in this area. Kidnappings are more often economically rather than politically motivated. Since 1998, at least 11 U.S. citizens have been kidnapped in Ecuador. In October 2000, kidnappers seized several foreign oil workers in Eastern Ecuador. After murdering one of their American hostages in January 2001, they released the other victims upon receipt of a ransom payment. In October 2009, an American citizen was kidnapped in the northern city of Tulcan and held for ransom. After 21 days, the victim was rescued after an intensive investigation involving Ecuadorian, Colombian, and U.S. law enforcement.

Violent crime has significantly increased over the last few years, with American citizens being victims of crimes, to include, but not limited to, homicides, armed assaults, robberies, sexual assaults, and home invasions. In September 2009, President Correa put into effect a state of emergency for the cities of Quito, Guayaquil, and Manta due to the high incidents of crime within those cities. The state of emergency lasted until January 2010 and allowed for the Ecuadorian Armed Forces to collaborate with the Ecuadorian National Police in anti-crime initiatives.

Corruption

Corruption is a serious problem in Ecuador. Transparency International consistently ranks Ecuador near the bottom among countries it surveys in the region. Ecuador ranked 146 out of 180 countries surveyed for Transparency International's Corruption Perceptions Index 2009 and received a score of 2.2 out of 10 (10-highly clean, 0-highly corrupt). In the Western Hemisphere, only Paraguay, Venezuela and Haiti received lower scores than Ecuador.

Ecuador has laws and regulations to combat official corruption, but they appear to be inadequately enforced. Illicit payments for official favors and theft of public funds take place frequently. Dispute settlement procedures are complicated by the lack of transparency and inefficiency in the judicial system. In addition, there are frequent allegations by the private sector that local authorities may demand "gratuities" to issue necessary permits.

Offering or accepting bribes is illegal and punishable by imprisonment for up to five years. The Controller General of the Nation is responsible for the oversight of public funds and there are frequent investigations and occasional prosecutions for irregularities. These investigations can be politically motivated. Autonomous agencies are subject to little effective oversight. Government officials and candidates for office often make an issue of corruption, but there is little follow-through once in office. Politically motivated corruption scandals are a feature of Ecuadorian political life, but even high-profile cases often become stalled after they are remanded to lengthy and often inconclusive judicial proceedings.

Ecuador is not a signatory to the OECD Convention on Combating Bribery, nor has Ecuador complied with the main requirements of the OAS Inter-American Convention Against Corruption. The 2008 Constitution created the Transparency and Social Control branch of government, tasked with preventing and combating corruption, among other things. In December 2008, President Correa issued a decree that created the National Secretary for Transparency to investigate and denounce acts of corruption in the public sector. Both entities can conduct investigations into alleged acts of corruption but responsibility for prosecution remains with the Office of the Prosecutor General (the Fiscalia).

The most recent Latin American Public Opinion Project (LAPOP), conducted in 2008, found that Ecuadorians ranked 6th in Latin America in both the frequency with which they were victimized by corruption, and their perception of the prevalence of corruption.

Bilateral Investment Agreements

The existing U.S. - Ecuadorian Bilateral Investment Treaty (BIT) provides for national treatment, unrestricted remittances and transfers, prompt, adequate and effective compensation for expropriation, and binding international arbitration of disputes. However, in September 2009, the Government of Ecuador requested approval by the National Assembly to terminate the U.S.-Ecuador Bilateral Investment Treaty, along with the BITs of 12 other nations, claiming provisions covering international arbitration and national treatment conflict with the country’s 2008 Constitution. The National Assembly has not yet approved the government’s request and has recommended that the government seek an opinion from the country’s Constitutional Court. Should the government act to terminate the BIT, the treaty would remain fully in effect for one year from the date of a formal notice to terminate, and would apply for an additional ten years for investments made prior to the one-year anniversary of the termination notice. With Ecuador’s withdrawal from the World Bank’s Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) effective January 7, 2010, this arbitration venue is no longer available to U.S. investors for resolution of new disputes. Alternative arbitration venues identified in the BIT include ICSID’s Additional Facility; ad hoc arbitration under UNCITRAL rules; and arbitration administered by any other arbitral institution to which the parties agree.

OPIC and Other Investment Insurance Programs

Ecuador has had an Investment Guarantee Agreement with the Overseas Private Investment Corporation (OPIC) since 1986. Ecuador has signed and ratified the Multilateral Investment Guarantee Agreement (MIGA).

Labor

Ecuador's population is about 14 million. Semi-skilled workers are relatively abundant at low wages, although widespread emigration over the past few years has led to shortages of skilled workers in some parts of the country. Minimum compensation levels for private sector employees are set by the National Compensation Council and Ministry of Labor according to the job and industry. The minimum basic salary for 2010 is $240 per month, but mandatory bonuses and other contributions push total compensation close to $300 per month. As of September 2009, Ecuador’s Institute for Statistics estimated the unemployment rate at 9.1%. However, the national underemployment rate is estimated near 52%.

Ecuador's periodic economic difficulties during recent decades have contributed to high levels of emigration in recent years. An estimated 1,200,000 people, or 17.2% of Ecuador’s labor force, emigrated between 1999 and 2008, principally to Spain and the U.S.

The public education system is tuition-free and attendance is mandatory from ages six to 15. In practice, however, schools often require parents to pay for education-related expenses such as children’s books, school’s utility bills, and transportation costs. Many children drop out before age 15 and in rural areas only about one-third complete sixth grade. The government is striving to create better programs for the rural and urban poor, especially in technical and occupational training. However, government funding for such training has not kept up with demand. In recent years, the government also has been successful in reducing illiteracy. The 2008 Constitution requires the central government to increase funding for education by at least 0.5% of gross domestic product (GDP) annually until reaching 6% of GDP. In the budget for 2010, the government has allotted 5.6% of GDP for education. Public universities have an open admissions policy. In recent years, however, large increases in the student population, budget difficulties, and politicization of parts of the university system have led to a decline in academic standards.

A weak public university system produces a surplus of semi-qualified graduates in the professions. Trained financial professionals and engineers can be difficult to attract and many graduates require additional training to reach international standards. There are relatively few R&D and high technology investments in Ecuador, limited mostly to agricultural research, with a small amount of government activity as well as that of some foreign firms. Little post-graduate education exists in Ecuador, and scientists and medical professionals are nearly all foreign-trained. At this point, none of the Ecuadorian universities offers doctorate programs beyond limited offerings in social sciences at two institutions. Masters-level degrees are widely offered, but relatively few are competitive with international quality levels. Upper-level Ecuadorian business managers have frequently been educated abroad, most often in the United States.

Cumbersome labor regulations apply equally to both foreign and domestic firms and tend to inhibit investment and foster evasion. In 2006, the Labor Ministry worked with an ILO representative to draft a revised Labor Code to better comply with ILO standards. The Labor Code provides for a 40-hour work week, 15 calendar days of annual paid vacation, restrictions and sanctions for those who employ child labor, general protection of worker health and safety, minimum wages and bonuses, maternity leave, and employer-provided benefits. By law, companies must distribute 15% of pre-tax profits to their employees.

The 2008 Constitution bans child labor, requires hiring workers with disabilities, and reduces allowed strikes in the public sector. Provisions that virtually eliminate hourly labor contracts and labor contracts through third parties are aimed at employers avoiding benefits for full-time employees, but reduce flexibility in the labor market.

Most workers in the private and parastatal sectors have the constitutional right to form trade unions and local law allows for unionization of any company with more than 30 employees. However, less than 2% of the work force, mostly skilled workers in medium- to large-sized enterprises or state industries, is officially organized. Private employers are required to engage in collective bargaining with recognized unions. The Labor Code provides for resolution of conflicts through a tripartite arbitration and conciliation board process. The Code also prohibits discrimination against union members and requires that employers provide space for union activities.

The International Labor Organization and prominent NGOs believe international labor standards are not respected in Ecuador. Workers fired for organizing a labor union are entitled to financial indemnification, but the law does not mandate reinstatement. While employees of state-owned organizations enjoy rights similar to those in the private sector, the law prohibits the majority of public sector employees from joining unions or exercising collective bargaining rights. Under the law, employees that do not fall into the technical, administrative, or professional categories may join a union and bargain collectively. Public sector employees in strategic sectors, as designated in the 2008 Constitution, may not take any action that paralyzes those sectors, including striking. The constitution lists health; environmental sanitation; education; justice; the fire brigade; social security; electrical energy; drinking water and sewerage; hydrocarbon production; the processing, transport, and distribution of fuel; public transport; and post and telecommunications as strategic sectors. Although trade union political influence has declined in recent years, the Unified Workers Front (FUT), the teachers’ union (UNE), and other labor groups occasionally attempt to stage national strikes to protest the modernization process and economic reform measures.

With assistance from the ILO, Ecuador has been taking steps to eliminate child labor, which is still common in a few industries. From January to November, the 29 child labor inspectors from the Ministry of Labor Relations conducted 3,664 workplace inspections and removed approximately 1,523 minors working in dangerous conditions in violation of labor laws. Economic realities leave families more than ready to send their boys, and sometimes girls, out to work, even if it means pulling them out of school and placing them in fields, mines or factories where they are exposed to hazardous conditions for little or no pay. The 2006 National Institute of Statistics and Census's Child Labor National Survey (the latest available information) found that 367,000 children between ages five and 14 were engaged in labor not permitted by law, primarily working in rural areas in the informal sector, compared with 550,000 in 2001. However, labor advocates in Ecuador assert that only a significant increase in wages will keep families from sending their children to work in the fields.

Foreign-Trade Zones/Free Ports

A free trade zone law was passed in 1991 in order to promote exports, foreign investment, and employment. The law provides for the import of raw materials and machinery free of duty and tax; the export of finished and semi-processed goods free of duty and tax; and tax exemptions for business activities in the government-established zones. Foreign investments in free trade zones are exempt from future restrictions on capital repatriation. Free trade zones may be used for industrial or commercial activities. Companies establishing operations in free trade zones are required to pay a fee equal to 1% of their investment to the National Council of Free Trade Zones. However, persuading Ecuador’s tax authority to respect the tax benefits conferred by the free trade zone law is burdensome and time consuming. As a consequence, free trade zones are few and largely unimportant to the economy. Free trade zones have been established in Esmeraldas, Manabi, and Pichincha provinces, and a zone is planned for the site of the new Quito International Airport. A maquila (in-bond processing) law has been in effect since 1990. The majority of maquila operations in Ecuador are in the textile and fish-processing sectors.

Foreign Direct Investment Statistics

Foreign investment in Ecuador remains concentrated in the oil sector. The construction of the Trans-Andean Heavy Oil Pipeline (OCP), completed in October 2003, accounts for much of this investment. This massive construction project carried out by a consortium of five foreign oil producers resulted in inward investment of $3.5 billion, including direct project investment of $1.4 billion. Subsequent investment in oil production to fill the OCP has not materialized due to lack of a government oil sector development policy, the contract nullification and seizure of assets belonging to a major U.S. oil company, and Ecuador’s demand that all oil contracts be renegotiated. Potential future large-scale projects include the $1.9 billion Coca Codo Sinclair Hydroelectric plant, currently slated to be built by China’s Sinohydro, and the Pacifico Refinery, reportedly to be built by South Korea’s SK Engineering and Construction. However, financing has not been finalized for either project. Although some sizeable one-time investments have been made in recent years, foreign direct investment (FDI) in general remains modest. Aside from the oil sector, FDI is focused on mining, financial services, food processing, the chemical and pharmaceutical industries, and machinery and vehicle manufacturing. Net FDI flows totaled approximately $993 million (1.8% of GDP) in 2008.

In 2008, Mexico and Spain were the major sources of foreign investment capital. The transport, storage, and communications (21%) and mining (25%) sectors accounted for the lion's share of this inflow. Payments made by the communications companies Porta (Mexico) and Telefonica (Spain) to renew their concessions in 2008 amounted to $480 million and $220 million, respectively.

Petroleum companies engaged in exploration and production are, as a group, the largest foreign investors in Ecuador. The major investors include: gas company Noble Energy(U.S.); Andes Petroleum and CNPC International (Chinese); YPF/Repsol (Spain); AGIP (Italy); Petrobras (Brazil); and Ivanhoe (Canada). Perenco (France) departed Ecuador in 2009 over a contract dispute with the Government of Ecuador. U.S. oil service companies Baker Hughes, Halliburton, Weatherford and Hartbert are also present. U.S. firms Duke Energy and Noble Energy subsidiary Machala Power are active in the electrical sector. Exxon Mobil (U.S.) and Shell (Holland/UK) distribute fuels at service stations across the country.

U.S. firms active in the manufacturing sector include: General Motors, which holds an interest in two automotive assembly plants; Philip Morris (cigarettes); Mead Johnson (baby formula); Avon (cosmetics and lingerie); The Coca-Cola Co. (beverages); Colgate-Palmolive and Kimberly Clark (toiletries and cleaning products); and Johnson & Johnson, Eveready, and 3M (consumer goods).

Other U.S. companies operating in Ecuador include: Bristol-Myers Squibb; Schering Plough; Merck Sharp & Dohme; Wyeth Consumer Healthcare; Abbott; Janssen Pharmaceutical; Eli Lilly; and Pfizer. Baxter owns four renal units and has 10 joint-ventures with private and public hospitals and clinics in the country. Also present: Proctor & Gamble (personal care products); Kellogg’s (cereal); Kraft (processed food); Payless Shoes (footwear); and UPS (courier services). Continental Flour and Seaboard Flour have closed some of their operations and consolidated operations by entering joint-venture agreements with local companies. Continental, along with several other U.S. firms, is a major investor in shrimp farming. U.S. firms Dole, Chiquita Banana, and Del Monte are involved in the banana industry from production to marketing and shipping. Several U.S. franchise chains are now operating in Ecuador, including Tricon (Pizza Hut/Kentucky Fried Chicken/Taco Bell), Burger King, McDonalds, Tony Romas, TGI Fridays, Papa John’s, Chili’s, Domino's Pizza, Heel Quick, Swisher, Gymboree, Fast Track Kids, and New Horizons. Citibank has commercial banking operations, while Helm Bank has a representation office in Ecuador. U.S. airlines Delta, Continental, and American, as well as IBM, Xerox, Microsoft (hardware and software), ACE, Pan-American Life, BMI, AIG (insurance), and McCann Erickson (advertising) are also active. U.S. citizens have also invested in the textile and agricultural sectors (flowers, fruit and vegetables).

Among third-country investors, General Tire (Germany) manufactures tires; Holderbank (Switzerland) produces cement; Akzo Nobel (The Netherlands) makes paints, fibers, and textiles; Borden (The Netherlands) manufactures chemicals; and Eternit (Switzerland) fabricates construction materials. British SAB Miller owns a major brewery; Nestle (Switzerland) manufactures consumer goods; and Lloyd's (U.K.) has commercial banking operations.

Net Flows of Foreign Direct Investment (In Millions of Dollars)

Investment Statistics Table (million of $)1 20042005200620072008
Net flow of FDI837493271195993
FDI Net flow/GDP (%)2.56%1.33%0.65%0.43%1.82%
FDI net flow (by Country of origin):
Mexico0743-40303
Spain13786128
Panama9476677871
Virgin Islands7645394262
China-8-20128547
Canada27429-2524944
Brazil1892883697837
Peru29-7332
France15-186831
Switzerland2047131
Colombia121202125
Venezuela7201620
Belgium and Luxemburg354217
Italy0001117
Bolivia001011
United States79-77-16050-18
By Sector Destination:
Oil/Mining385198-117-124248
Manufacturing115759099205
Transport and Communications741883-52211
Services40748985138
Commerce103723292115
Construction39784148
Agriculture7324472520
Community and Social Services218291715
Electricity67712-8

Notes:
1: All figures are listed in millions of dollars unless otherwise noted. Data is from the Central Bank of Ecuador. The Central Bank only publishes FDI calculated as net flows.
Source: Central Bank of Ecuador

Web Resources
Ministry of Foreign Trade – Foreign Trade & Investment Council: www.comexi.gov.ec

Central Bank of Ecuador - Foreign Investment Department: www.bce.fin.ec

Superintendency of Companies: www.supercias.gov.ec

InvestEcuador: www.investecuador.gov.ec



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