2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report

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. While some laws and regulations have been enacted to spur increased domestic and foreign private investment, other legal changes have reduced private sector participation in “so-called” strategic sectors, most notably extractive industries, and negatively affected banking and media sectors. Frequent changes in Ecuador’s tax code have complicated business planning. Ecuador, and the long-term status of a number of bilateral investment treaties, including with the United States, remains uncertain.

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 percent 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 percent 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 the tax on capital outflows was increased from two percent to five percent on November 24, 2011. 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 few years, new state companies have been formed in mining, pharmaceuticals, and the banana sector.

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. 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, which 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 negotiated the turnover of their operations to the state and left the country. Separately, a U.S. company sold its gas operations to the government in 2011. Marginal oil-field operators concluded new service contract negotiations with the government. Some general features of the new service contract are that the State receives an initial payment of 25 percent of gross revenues as a “sovereign margin;” companies 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 announced in April 2011 its plans to make available new oil concessions in the southwestern portion of the country, but these concessions have not yet been offered. . New service contracts should be announced for seven marginal fields in the first quarter of 2012 as well.

Only the state is authorized to participate in domestic fuel distribution, refining and transport activities. 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. Ecuador’s mining potential is concentrated in gold, copper, and silver. 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 regulatory consequences for many industries, including mining, is still pending in the National Assembly.

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 four of them began contract negotiations with the government in December 2010 for the production phase of their concessions. Although uncertainty about the regulatory framework has delayed the signing of final agreements, at least one company is in the advanced stages of negotiating its contract for a major gold project. Ecuador’s new mining law requires all mining concessionaires to pay a minimum 5 percent royalty on the sale of all primary and secondary minerals; an additional 25 percent income tax; a 12 percent tax on profits; a 70 percent windfall tax on extraordinary profits; and a 12 percent 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 EP) in early 2009. CNEL’s mandate is to manage the electricity distribution companies. CELEC EP 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 sold its gas-fired electricity power plant to the Ecuadorian government in May 2011 after the government declared the company to be in breach of contract regarding its associated gas operations. The Production Code of December 2010 opened several opportunities in the area of renewable energies.

The Ecuadorian government is currently undertaking a large-scale program to expand the country’s generation capacity by over 60 percent, building 10 large wind and hydroelectric projects. However, to date all construction and equipment contracts have been awarded to Chinese and Russian state-owned companies in a non-competitive bidding process linked to Chinese and Russian-provided credits.

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. Claro, formerly Porta, the dominant cellular provider, is owned by a Mexican investor. New telecommunications legislation, which might increase centralization and government control of the sector, which was expected to be introduced in mid-2011, has been delayed. Satellite and internet services are provided by private companies. In July 2011 the government sold its remaining 35 percent equity in TV Cable, a provider of cable and internet services, to a private holding firm.

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. A new telecommunications law is being discussed which would centralize power back with the state.

Media

Foreign companies are prohibited from owning more than 25 percent equity in broadcast stations. Foreigners are not permitted to obtain broadcast concessions. In addition, the Organic Law for Regulation and Control of Market Power, enacted in October 2011, prohibits anyone possessing more than a six percent interest in a media company from investing in any other business sector.

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


If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Measure

Year

Index/Ranking

TI Corruption Perceptions

2011

120 out of 182

Heritage Economic Freedom

2011

158 out of 179

World Bank Doing Business

2012

130 out of 183

MCC Gov’t Effectiveness

N/A

N/A

MCC Rule of Law

N/A

N/A

MCC Control of Corruption

N/A

N/A

MCC Fiscal Policy

N/A

N/A

MCC Trade Policy

N/A

N/A

MCC Regulatory Quality

N/A

N/A

MCC Business Start Up

N/A

N/A

MCC Land Rights Access

N/A

N/A

MCC Natural Resource Mgmt

N/A

N/A

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 percent in 2000 to single digits since 2003. According to the Ecuadoran Central Bank, in 2011 the annual rate of inflation was 5.5 percent.

Foreign investors may remit 100 percent of net profits and capital, subject to a 5 percent 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 percent. 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. However, on November 24, 2011, the Ecuadorian government increased the tax on all capital outflows from 2 percent to 5 percent.

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, energy, 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.

There are a number of expropriation disputes related to the oil sector that are still pending in international arbitration proceedings.

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. The Organic Code for Commercial Production and Investment, approved in 2010, contemplates expropriation to improve the distribution of production factors and enhance the opportunities of the rural population. New land reform legislation, originally expected in 2011, has been delayed.

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. After a public referendum held in May 2011, the judiciary is operating under an emergency decree while it undergoes a restructuring. 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 World Bank’s International Center for Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention). Ecuador withdrew from the ICSID Convention effective January 2010. 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 (see the section on “Bilateral Investment Agreements” for more details).

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.

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 were published in April 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 was 24.3 percent.

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. In October 2011, the U.S. Congress approved the extension of the ATPDEA program through July 2013, with retroactive benefit, following the program’s lapse in February 2011. Ecuador is also a beneficiary of the Generalized System of Preferences trade program, which was also renewed through July 2013. 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. In May 2011, the MFA launched the Institute for the Promotion of Exports and Investments (PRO ECUADOR), which to date has focused more strongly on export promotion. 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. Ecuador is not a party to the Madrid Protocol on trademarks.

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. However, as of January 2012, just one compulsory license had been issued, for a pharmaceutical product, while 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.

The "Law on Generic Drugs," which was passed in 2000, established drugstore gross profit margins on branded medicines at 20 percent, while maintaining the margins for generic drugs at 25 percent. Although the October 2011 Law on Regulation and Control of Market Power (Anti-Monopoly Law) abolished the “Law on Generic Drugs,” in practice the profit margins described above will apply until the implementing regulations for the Anti-Monopoly Law are issued in January 2012. A new formula is expected to set a maximum price for pharmaceuticals under three different regimes, i.e. regulated (firms request price approval), monitored (only non-strategic products), and direct (price set by the regulating entity). Presidential Decree 181, issued on December 21, 2009, established a National Pharmaceutical Company (ENFARMA) which has been selling imported generics from Cuba. It is now conducting feasibility studies to build a production plant in Quito.

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. One of Ecuador’s largest outdoor markets (La Bahia) is listed on the United States Trade Representative’s “Notorious Markets” watchlist. 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. Ecuador mandates the use of open source software for all government agencies. Software company representatives are critical of the measure, saying it has the unintended consequence of encouraging the acquisition of pirated commercial software.

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. This initiative was not sustained, however, and sales of pirated goods resumed

Transparency of Regulatory System

The Organic Law for Regulation and Control of Market Power, otherwise known as the “Anti-Monopoly Law”, was enacted in October 2011. The law establishes a regulatory body with the authority to investigate complaints and assess penalties for anti-competitive behavior. Sanctions for companies found to be in violation of the law can range from a formal warning up to a fine of 12 percent of previous year’s gross revenues. Industry groups have criticized the law’s terminology in defining market power abuses as overly vague. Implementing regulations have not yet been published.

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 2011-2012 Competitiveness Index, Ecuador ranked 101 out of 142 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 percent of the loan portfolio has a maturity of less than one year and approximately 65 percent of the resources are demand deposits. Most of Ecuador's blue-chip firms maintain external credit lines or other forms of foreign financing.

The banking sector is undergoing reorganization due to new ownership limits. The Anti-Monopoly Law restricts corporate ownership across banking and other financial interests and requires bank managers and shareholders with more than 6 percent equity in the financial sector to disinvest entirely from any interest in all other non-financial companies by July 13, 2012. The Central Bank regulates and caps interest rates. Starting in 2011, banks were also required to maintain as liquid reserves at least 1 percent of their deposits in securities issued by the non-financial public sector, in addition to maintaining at least 45 percent of their liquid reserves in Ecuador.

The financial sector showed minimal growth in 2009, but recovered significantly in 2010 and 2011. According to the Superintendent of Banks, deposits increased by 17.4 percent between June 2010 and June 2011. Consumer credit has risen sharply, increasing by 43 percent between August 2010 and August 2011. Commercial lending was up by more than 17 percent over the same period.

Competition from State Owned Enterprises

State owned enterprises (SOEs) are regulated under the Law of Public Enterprises (Ley de Empresas Públicas), enacted in 2009. SOEs are most active in sectors designated as strategic under the 2008 Constitution, especially: non-renewable natural resources, telecommunications, and transportation. In addition, SOEs are highly active in the banking sector.

In general, regulations allow SOEs greater flexibility in the use of public resources. The Law of Public Enterprises requires SOEs to follow generally accepted accounting principles, however SOEs are not required to specifically follow the same accounting practices as the central government, nor do they have to participate in the electronic financial management system used in most of the public sector for budget, treasury, and accounting management. Ecuador does not have a sovereign wealth fund, and its asset management bureau is responsible for fixed assets only. SOEs are eligible for government guarantees, and face a lower tax burden than private companies. SOEs are also exempt from the anti-monopoly law.

The Production Code softened some of the restrictions on the private sector introduced in the Constitution and in the Law of Public Enterprises by providing tax credits for new investments and by opening the possibility of investing in strategic sectors. However, the Production Code is secondary relative to the relevant sector laws of the strategic sectors.

Corporate Social Responsibility

There is substantial awareness of corporate social responsibility (CSR) among the large businesses operating in Ecuador. Many multinational and large domestic companies maintain corporate social responsibility strategies, following generally accepted CSR principles and covering areas such as sustainability, clean environmental practices, or promoting education. Consumer awareness of corporate social responsibility is less pronounced than producer awareness. Some local governments have held awards ceremonies recognizing good CSR practices. Ecuador’s investment promotion body, InvestEcuador, emphasizes on its website that opportunities are available for investors who maintain an ethical commitment with their workers, nature, the State, and the community.

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 and growing 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. Six such bombs exploded in November and December 2011, all without serious injury to person or property (although one had the potential to be lethal) and none aimed at businesses or business interests. 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. The government increasingly filed legal charges or opened investigations against protesters who blocked roads or impeded public services. The government charged demonstrators with “terrorism and sabotage,” or similar charges that effectively criminalized protest, for obstructing roads and public services. 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, Carchi and parts of Esmeraldas. 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 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. The Ecuadorian government increasingly used the military to bolster police patrols in 2011.

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 120 out of 182 countries surveyed for Transparency International's Corruption Perceptions Index 2011 and received a score of 2.7 out of 10 (10-very clean, 0-highly corrupt). In comparison with other countries in the Western Hemisphere, Ecuador ranks better than Nicaragua, Honduras, Haiti, Paraguay, and Venezuela, but worse than its closest neighbors, Peru and Colombia.

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, 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.” The National Assembly has approved termination of five of the BITs, but did not approve termination of another four; it has not yet voted on the U.S. BIT. Only one BIT has been formally terminated.

Should the Ecuadorian government to terminate its BIT with the United States, 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. Given Ecuador’s withdrawal from the ICSID Convention, alternative arbitration venues identified in the U.S. 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 15 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 2012 is $292 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). At the beginning of 2012, the basic needs basket was valued at $572.35, requiring a “dignified wage” of $349.74 per month. Should the average monthly compensation for the year not reach the dignified wage, companies are required to pay the difference in the form of bonuses, before claiming any profits. By the end of 2011, Ecuador’s urban unemployment rate was estimated at 5.1 percent, with underemployment of 44.2 percent.

Ecuador's periodic economic difficulties during recent decades have contributed to high levels of emigration in recent years. According to the latest U.S. census, almost 600,000 people of Ecuadorian ancestry live in the United States. Approximately 610,000 people, or 18 percent 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. The current government has dramatically reduced the illegal practice of schools requiring 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 percent of gross domestic product (GDP) annually until reaching 6 percent of GDP. Since 2008, expenditures on education have grown in absolute terms, but short of the mandated growth rate. 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, although there are not enough persons with doctorate degrees to fulfill this requirement.

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 percent of pre-tax profits to their employees.

There is special legislation regulating labor in export processing zones. Most workers in export processing zones are hired on temporary contracts, and, while technically covered by the labor code, enforcement of the code is weak.

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 percent 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. The Public Service Law enacted in October 2010 prohibits the vast majority of public sector workers from joining unions, exercising collective bargaining rights, or paralyzing public services in general. 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. Some of the sectors defined as strategic exceeded the ILO standard for essential services. 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 children 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.. 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 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 2010, there was a net inflow of FDI into Ecuador totaling approximately $157 million (0.3 percent of GDP), down from a high of $1.0 billion in 2008. In 2010, Panama, Canada, and China were the major sources of foreign investment in Ecuador. The oil manufacturing, commercial, and services sectors accounted for the majority of the investment inflow. In 2010, there was a $286.3 million outflow of Mexican FDI from the Transport, Storage and Communications sector.

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). U.S. oil service companies Baker Hughes, Halliburton, 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); Sherwin Williams (paint); Kellogg’s (cereal); Colgate-Palmolive, The Clorox Co., Johnsonwax, 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; Merck Sharp & Dohme; 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); Kraft (processed food); E.G. Hills Flowers, Transmar Commodity Group (cocoa products); Muehlstein International Ltd. (plastic products); Pioneer (agriculture), Monsanto (agriculture), Payless Shoes (footwear); Barnett Corporation (Paper), and UPS and FedEx (courier services).

Seaboard Flour has a strong presence in the Ecuadorian milling market. 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 Roma’s, Johnny Rockets, TGI Fridays, Chili’s, Papa John’s, Domino's Pizza, Carl’s Jr., 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, United/Continental, and American, as well as IBM, Xerox, Microsoft (hardware and software), DirecTV, ACE, Pan-American Life, BMI, AIG, Aon (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 and Belgian Anheuser-Busch InBev own major breweries, 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 (millions of dollars) 1

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

2006

2007

2008

2009

2010

Net Flow of FDI

271

194

1,005

318

157

FDI Net flow/GDP ( percent)

0.70%

0.40%

1.90%

0.60%

0.30%

Panama

67

77

73

118

136

Canada

-252

49

44

53

79

China

12

85

47

56

45

Uruguay

15

2

-32

-12

40

Bahamas

-17

-117

-25

-2

39

Netherlands

38

8

-4

5

17

Spain

7

85

129

73

16

Venezuela

0

16

20

8

14

Peru

-7

3

32

14

13

Colombia

20

21

25

-6

13

Italy

0

11

17

1

11

Brazil

370

100

46

3

10

United States

-160

50

-15

-38

7

By Sector Destination:

Oil/Mining

-117

-103

244

-6

159

Manufacturing

90

99

206

127

123

Commerce

32

92

121

75

70

Services

89

85

141

-24

66

Construction

8

20

49

-14

28

Community and social services

29

17

16

20

22

Agriculture

48

25

19

52

9

Electricity

7

12

-8

0

-6.5

Transport and Communications

83

-52

217

88

-314

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

Foreign Trade & Investment Council: http://www.mcpec.gob.ec/index.php?option=com_content&view=article&id=848&Itemid=78

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

Superintendency of Companies: www.supercias.gob.ec

InvestEcuador: www.investecuador.ec

PRO ECUADOR: www.proecuador.gob.ec

[This is a mobile copy of Ecuador]