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U.S. Department of State

Diplomacy in Action

2011 Investment Climate Statement - Ecuador


2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011
Report
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Openness to, and Restrictions upon, Foreign Investment

Ecuador is relatively open to foreign investment in most sectors, including general manufacturing, retail and services. However, its overall investment climate remains uncertain as its economic, commercial and investment policies continue to evolve. Some new laws and regulations have been enacted to spur increased domestic and foreign private investment, while the government continues to move forward with its plans to terminate a number of bilateral investment treaties. Other legal changes have negatively impacted private sector participation in “so-called” strategic sectors, most notably extractive industries.

On July 6, 2009, the Ecuadorian 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 Ecuadorian government requested approval by Ecuador’s National Assembly to terminate 13 bilateral investment treaties (BITs), including one with the United States, claiming the treaties’ international arbitration provisions for resolution of investor-state disputes conflicted with the country’s 2008 Constitution. Article 422 of the 2008 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.”

At the request of the National Assembly, the government petitioned Ecuador’s Constitutional Court for its opinion on the constitutionality of each treaty. Subsequently, the Constitutional Court ruled that the international arbitration provisions contained within the 13 BITs were unconstitutional. Based on the Constitutional Court’s rulings, the National Assembly approved the government’s request to terminate BITs with the United Kingdom, Germany, and Finland. However, on October 19, 2010, the National Assembly failed to approve termination of Ecuador’s BIT with China. As of the time of publication, the National Assembly was reviewing the government’s request to terminate BITs with France, Sweden, and the Netherlands. The government is expected to forward soon requests to the National Assembly to approve termination of the remaining BITs under review (Switzerland, Canada, Chile, Venezuela, Argentina, and the United States).

On December 29, 2010, a new Organic Code for Production, Trade and Investment (Production Code) came into force. Among other things, the new Code establishes investment incentives and makes available certain protections for investors negotiating contracts with the state (see sections on “Performance Requirements and Incentives” and “Dispute Settlement” for more details).

In general, 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.

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. 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).

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

Private investment in Ecuador’s petroleum sector has declined in recent years, in part because of unfavorable economic terms, legal uncertainties, government tax policies, environmental liability concerns, and a lack of a consistent energy policy. High profile legal cases brought by and against foreign oil companies, often stemming from tax disputes, have dampened foreign investor interest in the sector, although some cases were resolved within the last year. All subsurface resources belong to the state. Ecuador permits investment by foreign oil companies, but has changed the terms for private sector participation in the sector over the last few years. Until recently, foreign oil companies were engaged in exploration and development activities under production-sharing contracts with the state oil company Petroecuador, that gave private investors the right to share in finds. Beginning in 2007, the government sought to change these contracts to a fee-for-service model.

Reforms to Ecuador’s Hydrocarbons Law that came into effect on July 27, 2010, provided the legal framework and deadlines for the Ecuadorian government to negotiate new contracts with foreign oil companies operating in the country. Negotiations with the major foreign oil operators were concluded on November 23, 2010, resulting in new service contracts for seven concessions with five operators. Negotiations were not successful with three other companies, which are negotiating the turnover of their operations to the state. Separately, another company in the oil and gas sector is negotiating the sale of its gas operations to the government. Marginal oil-field operators have until January 23, 2011, to conclude new service contract negotiations with the government. Some general features of the new service contract are that the State will receive an initial payment of 25 percent of gross revenues as a “sovereign margin;” companies will receive a negotiated per barrel tariff for oil produced; and while international arbitration is not available for tax or contract non-compliance issues, other cases may be heard under UNCITRAL rules by the Arbitration and Mediation Center of Santiago (Chile).

Petroecuador is exploring the negotiation of contracts with oil service companies for enhancing production within some of its extensive, mature oil fields. The Ecuadorian government has announced that it plans in April 2011 to make available new oil concessions in the southwestern portion of the country.

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 interest in mining investment in Ecuador in recent years, problems with local communities opposed to mining operations have caused periodic shutdowns. A politically controversial new law on water usage that would likely have had regulatory consequences for many industries, including mining, was not passed in 2010, but is expected to be taken up again in 2011.

Investment in mining continues to be modest by Andean standards, but is expected to increase over the next several years. In April 2008, Ecuador’s National Assembly revoked the majority of existing mining concessions, suspending large-scale mining activity for over a year. A new mining law was approved in January 2009. Its implementing regulations, which were published the following November, provided the necessary legal framework for companies to resume exploration activities, pending the update of their mining and environmental permits. Several major international mining companies restarted exploration activities in February 2010, and began contract negotiations with the government in December 2010 for the production phase of their concessions. 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 Ecuadorian government 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

In 2007 the Ecuadorian government 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, eleven of which are still state-owned. CELEC was created to centralize management of most of the generation companies and the transmission company. The Ecuadorian government 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. While some private electricity generation companies exist, all future investment is expected to be in the form of public investment. Only one U.S. firm still operates an electricity power generation plant in Ecuador. Another U.S. company is negotiating sale of its electricity power plant to the Ecuadorian government after the government declared the company to be in breach of contract regarding its associated gas operations.

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, and was recently absorbed by the landline state company Corporación Nacional de Telecomunicaciones (CNT). In 2004, U.S. company BellSouth sold its assets in Ecuador to the Spanish company Telefonica, the mobile operator with the second largest market share of the two foreign-owned cellular providers. Porta, the dominant cellular provider, is owned by a Mexican investor. New telecommunications legislation, which might increase centralization and government control of the sector, is expected to be introduced in mid-2011. Satellite and paging services are provided by private companies.

In 1998, Emetel, the former state telephone monopoly, was split into two corporations (Andinatel in the highlands and Pacifictel in the coastal region). Pacifictel faced severe management challenges and was the focus of several scandals. Andinatel and Pacifictel received approval to merge in 2008 and formed the CNT, which 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 than 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/Ranking

Measure

Year

Index/Ranking

TI Corruption Perceptions

2010

127 out of 178

Heritage Economic Freedom

2011

158 out of 179

World Bank Going Business

2011

130 out of 183

MCC Government Effectiveness

FY2011

19 Percentile

MCC Rule of Law

FY2011

6 Percentile

MCC Control of Corruption

FY2011

16 Percentile

MCC Fiscal Policy

FY2011

56 Percentile

MCC Trade Policy

FY2011

63 Percentile

MCC Regulatory Quality

FY2011

3 Percentile

MCC Business Start Up

FY2011

24 Percentile

MCC Land Rights Access

FY2011

72 Percentile

MCC Natural Resources Management

FY2011

88 Percentile

 

Conversion and Transfer Policies

In 2000, following a severe financial crisis, 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 2010 the rate of inflation was 3.3%.

Foreign investors may remit 100% of net profits and capital, subject to a 2% tax. 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 Ecuadorian government passed a tax on capital outflows, which since January 1, 2010, has been set at 2%.

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 Ecuadorian government 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. International arbitration proceedings initiated by the U.S. company under the BIT are still pending.

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.” 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. New land reform legislation is expected in 2011.

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 legislative oversight nor internal judicial branch mechanisms have shown a consistent capacity to investigate effectively 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. Should the Ecuadorian government terminate the U.S.-Ecuador BIT, the BIT’s provisions would be fully in effect for one year from the date of termination notice, and for an additional 10 years for investments existing on the one-year anniversary of the termination notice.

Ecuador’s new Production Code contains a provision which allows the state to negotiate the inclusion of an international arbitration clause within contracts with private investors. Implementing regulations that define the process under which such a clause could be sought and utilized have not been published.

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.

Performance Requirements and Incentives

There are no formal performance requirements associated with foreign investment in Ecuador. The country’s new Production Code establishes tax incentives to attract both domestic and foreign investment in certain priority sectors: fresh and processed food, forestry, agro-forestry, metalworking, petrochemical products, pharmaceuticals, tourism, renewable energies, logistical services, biotechnology, applied software, and those determined by Ecuador’s President to be “strategic import substitution” sectors. These incentives, which may take the form of tax exemptions, income tax deductions, as well as a five-year tax holiday, are only available for investments made outside of Quito and Guayaquil. To qualify for the tax incentives, an investment proposal must be approved by a yet-to-be formed Technical Secretary of the Sectoral Council for Production. Implementing regulations for the Production Code are to be published before the end of March 2011.

The Production Code also contains measures to promote establishment and growth of small and medium enterprises (SMEs). The measures are designed to improve access for SMEs to public bank financing and the stock market, and to develop credit guarantee institutions and a special guarantee system for SME financing.

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. Although under the TRIMS Agreement Ecuador was obliged to eliminate local content requirements by 2000, the local content requirement is still in place; in 2011 the requirement is 24.3%.

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 primary goal of this program is to promote export diversification and provide sustainable economic alternatives to drug-related activities in the Andean region. The current program provides Ecuador with duty-free access to the U.S. market for over 6,000 products, and has helped promote growth in Ecuador's cut-flower, pouch tuna, textile and apparel, wood, and fruit and vegetable exports. At the end of December 2010, the U.S. Congress approved a short extension of the ATPDEA program, until February 12, 2011. Ecuador is also a beneficiary of the Generalized System of Preferences trade program, which was not renewed at the end of 2010. At time of publication, it was unknown if these programs would be renewed by the U.S. Congress in 2011.

Through its InvestEcuador program, the Government of Ecuador promotes and facilitates local and foreign investment, particularly in areas of special interest for development, by establishing incentives and working through existing bureaucratic hurdles. An investment promotion institute affiliated with Ecuador’s Foreign Ministry is to be created in 2011. 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. Visa and residence requirements do not inhibit foreign investment.

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 Public Contracting (INCOP) has regulated the process for evaluating proposals. 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 charges INCOP with ensuring 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 purports to provide 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 patentability and strengthening data exclusivity provisions.

The Ecuadorian Intellectual Property Institute (IEPI) was established in January 1999 to handle patent, trademark and copyright registrations. 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. In 2010, Ecuador established compulsory license regimes for pharmaceutical and agrochemical products. As of January 2011, one compulsory license had been issued for a pharmaceutical product and none had been issued for an agrochemical product.

Ecuadorian government 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 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 Ecuadorian government has proposed further to 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 sell 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 streets and even in shopping malls. The Ecuadorian government has committed to take action to reduce the levels of copyright piracy, launching an anti-piracy initiative in early 2011. However, weak copyright enforcement remains a significant problem, especially concerning sound recordings, computer software and motion pictures. The government 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 covers 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. In early 2011, IEPI initiated an enforcement initiative aimed at stores selling pirated DVDs and CDs.

Transparency of Regulatory System

Ecuador's regulatory system is not transparent. There are no antitrust laws and industry is fairly concentrated. The Ecuadorian government 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. Reportedly, 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 2010-2011 Competitiveness Index, Ecuador ranked 105 out of 139 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; lending and deposit rates have been decreasing. The private sector has access primarily to short-term bank credit, approximately 59% of the loan portfolio has a maturity of less than one year and approximately 65% 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 Central Bank has the authority to regulate and set interest rates. The financial sector showed minimal growth in 2009, but recovered significantly in 2010. According to the Superintendent of Banks, deposits increased by 14.1% from January through November 2010, while the total outstanding loan portfolio decreased by 17.4% during the same time period. New Central Bank regulations require private banks to maintain at least 45% of their liquid reserves in Ecuador.

Political Violence

Ecuador does not have a tradition of substantial guerrilla activity, nor of frequent 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 protests occasionally result in violence and destruction of property. Some indigenous communities opposed to the development of extractive industries have protested to block access by petroleum and mining companies. Popular protests in 1997, 2000, and 2005 contributed to the removal of three elected presidents before the end of their terms. 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.

On September 30, 2010, a protest by the National Police over benefits turned violent. President Correa’s recently-operated knee was re-injured when he visited the police barracks in an attempt to speak with the protesters. At least nine persons were killed in ensuing encounters between the protesting police and military forces. Correa called the police protest an attempted coup d’etat. Following the protest, President Correa declared a “state of exception” to allow the military to conduct law enforcement activities.

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. At least one U.S. citizen was killed by kidnappers, but other victims were released following payment of ransom or were rescued by law enforcement.

Violent crime has significantly increased over the last few years, with American citizens being victims of crimes, to include, homicides, armed assaults, robberies, sexual assaults, and home invasions.

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 127 out of 178 countries surveyed for Transparency International's Corruption Perceptions Index 2010 and received a score of 2.5 out of 10 (10-highly clean, 0-highly corrupt). In comparison with other countries in the Western Hemisphere, Ecuador ranks above Nicaragua, Honduras, Haiti, Paraguay, and Venezuela.

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 reportedly 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 demand "gratuities" to issue necessary permits.

Offering or accepting bribes is illegal and punishable by imprisonment for up to five years. The Controller General 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 2010, found that Ecuadorians ranked 8th in Latin America in the frequency with which they were victimized by corruption, and 16th in 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 Ecuadorian government requested approval by Ecuador’s National Assembly to terminate the U.S.-Ecuador Bilateral Investment Treaty, along with the BITs of 12 other nations. The National Assembly has not yet approved the government’s request (see the section on “Openness to, and Restrictions upon, Foreign Investment” for more details). 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 annually by the National Compensation Council and Ministry of Labor. The minimum basic salary for 2011 is $264 per month, but mandatory bonuses and other contributions push total compensation to over $300 per month. Ecuador’s Production Law, enacted in December 2010, requires that workers be paid a “dignified wage,” defined as an amount that would enable a family of four with 1.6 wage earners to be able to afford a basic basket of necessities. The cost of the basic necessities basket is determined periodically by Ecuador’s Statistics Institute (INEC). As of November 2010, the basic needs basket was valued at $541.82, requiring a “dignified wage” of $339 per month. Should the average monthly compensation for the year not reach the dignified wage, companies will be required to pay the difference in the form of bonuses, before claiming any profits. The dignified wage requirement will apply to wages paid in 2011; implementing regulations are to be published by the end of March 2011.

As of December 2010, Ecuador’s unemployment rate for its five largest cities was estimated at 6.1%. Since 2008, INEC has not published statistics on unemployment or underemployment in rural areas; those rates are expected to be higher. The national underemployment rate hovers at around 50% and approximately 47% of Ecuadorians work in the informal sector.

Ecuador's periodic economic difficulties during recent decades have contributed to high levels of emigration in recent years. An estimated 5 million Ecuadorians live outside the country, but can still claim Ecuadorian citizenship. Between 1 million and 3 million are estimated to live in the United States. Approximately 610,000 people, or 18% of Ecuador’s labor force, emigrated between 2002 and 2009, principally to Spain and the United States.

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 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 the funding allocation for primary and secondary education within the budget by at least 0.5% of gross domestic product (GDP) annually until reaching 6% of GDP. 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 put a strain on maintaining academic standards.

A weak public university system produces a surplus of semi-qualified graduates in some 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. With the new Higher Education Law, which went into effect on October 3, 2010, the Executive will regulate and oversee higher education and may demand that all institutions adhere to the National Development Plan in their program offerings. It also calls for the professionalization of the faculty by requiring a PhD or equivalent degree for full time positions.

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 who avoid benefits for full-time employees, but the provisions also 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 limited financial indemnification, but the law does not mandate reinstatement. On October 4, a new Public Service Law went into effect. This law applies to all technical, administrative, or professional categories, which are a majority of public servants. The law prohibits them from joining unions, exercising collective bargaining rights, or paralyzing public services in general, and specifically mentions strategic sectors, as designated in the 2008 Constitution. The Constitution lists health; environmental sanitation; education; justice; fire brigade; social security; electrical energy; drinking water and sewerage; hydrocarbon production; processing, transport, and distribution of fuel; public transport; and post and telecommunications as strategic sectors. The few public workers who are not under the Public Service Law may join a union and bargain collectively since they are governed by the provisions under the Labor Code. 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 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. 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. 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

Provisions within the new Production Code, approved at the end of 2010, superseded Ecuador’s 1991 free trade zone law. The Production Code authorizes the creation of Special Zones of Economic Development (ZEDEs). ZEDEs are subject to special trade, tax and financial rules; imported goods entering these zones are exempted from tariffs. ZEDEs are not intended to operate solely for the manufacture of exports. In granting ZEDE status to a project, the government will consider the extent to which the project promotes technology transfer, innovation, industrial diversification, and development of multimodal services. Existing free trade zones may continue to operate according to their original authorization, but administrators and users will have to adjust to new administrative procedures defined for ZEDEs. 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. The effect the Production Code may have on maquila operations will not be clear until implementing regulations are issued.

Foreign Direct Investment Statistics

Traditionally, FDI has been focused primarily in the oil sector. Construction of the Trans-Andean Heavy Oil Pipeline (OCP) by a consortium of five foreign oil producers, completed in October 2003, resulted in inward investment of $3.5 billion, including direct project investment of $1.4 billion. Major foreign oil companies invested billions over the last decade for exploration and production of concessions. However, since 2006, a number of major oil and gas companies have departed Ecuador, including Occidental Petroleum (U.S.) and Perenco (France), with Petrobras (Brazil) and Noble Energy (U.S.) currently negotiating their departures. With the negotiation in November 2010 of new service oil contracts, participating companies have committed to invest $1.2 billion in production and exploration, but spread out over the next four to five years. As mining companies move from the exploratory phase into production over the next several years, foreign investment in that sector is expected to increase significantly. Foreign investment in the communications, commerce, services and agricultural sectors has become more prominent as FDI in the oil sector has declined.

Although some sizeable one-time investments have been made in recent years, foreign direct investment (FDI) in general remains modest. In 2009, there was a net inflow of FDI into Ecuador totaling approximately $318 million (0.6% of GDP), down from a high of $1.0 billion in 2008. In 2009, Panama, Spain, China and Canada were the major sources of foreign investment in Ecuador. The manufacturing (40%), transport, storage, and communications (28%), and commercial (24%) sectors accounted for the lion's share of the investment inflow.

Petroleum companies engaged in exploration and production are, as a group, still the largest foreign investors in Ecuador. The major investors include: Andes Petroleum and Petroriental (Chinese); YPF/Repsol (Spain/Argentina); AGIP (Italy); 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, Schlumberger, Weatherford and Hartbert are also present. U.S. firm Duke Energy is 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; Abbott; Janssen Pharmaceutical; Eli Lilly; and Pfizer/Wyeth. 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); Pioneer (agriculture), Monsanto (agriculture), Payless Shoes (footwear); Barnett Corporation (Paper), 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. franchises now operate in Ecuador, including Yum! Brands (Pizza Hut/Kentucky Fried Chicken/Taco Bell), Burger King, McDonalds, Tony Romas, Johnny Rockets, TGI Fridays, Chili’s, Papa John’s, Domino's Pizza, Subway, Quizno’s, Hooters, Martinizing, 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, and Nestle (Switzerland) manufactures consumer goods. Kinross-Aurelian (Canada) has a gold mine concession and Ecuacorriente (China) has a copper mine concession. Lloyd's (U.K.) commercial banking operations were sold to local Banco Pichincha in 2010.

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

Investment Statistics Table (million of $)1

       
 

2005

2006

2007

2008

2009

Net flow of FDI

493

271

194

1,005

318

FDI Net flow/GDP (%)

1.3%

0.7%

0.4%

1.9%

0.6%

         

 

Panama

76

67

77

73

118

Spain

3

7

85

129

73

China

-20

12

85

47

56

Canada

29

-252

49

44

53

Mexico

7

43

-40

303

39

Peru

9

-7

3

32

14

Venezuela

2

0

16

20

8

Brazil

288

370

100

46

3

France

-1

8

68

30

-3

Colombia

1

20

21

25

-6

         

 

United States

-77

-160

50

-15

-38

         

 

By Sector Destination:

       

 

Manufacturing

75

90

99

206

127

Transport and Communications

18

83

-52

217

88

Commerce

72

32

92

121

75

Agriculture

24

48

25

19

52

Community and social services

18

29

17

16

20

Electricity

7

7

12

-8

0

Oil/Mining

198

-117

-103

244

-6

Construction

7

8

20

49

-14

Services

74

89

85

141

-24

 

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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