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UNCLAS QUITO 000036 
 
SIPDIS 
 
DEPARTMENT FOR EB/IFD/OIA 
USTR FOR BHARMAN, MCARRILLO 
 
E.O. 12958: N/A 
TAGS: EINV ETRD KTDB OPIC USTR EC
SUBJECT:  ECUADOR'S 2009 INVESTMENT CLIMATE STATEMENT 
 
REFTEL: 08 STATE 123907 
 
¶1.  In response to State 123907, Embassy Quito reports the following 
update for its 2009 Investment Climate Statement.  This update has 
also been sent to EB/IFD/OIA (J. Nathaniel Hatcher) by email. 
 
Openness to Foreign Investment 
 
Ecuador can be a difficult place in which to do business, although 
it is relatively open to foreign investment.  There are restrictions 
or limitations on private investment in many sectors that apply 
equally to domestic and foreign investors. As a member of the Andean 
Pact, Andean Decisions 291 and 292 of 1991 nominally govern 
Ecuador's foreign investment policy. Implementing regulations issued 
in January 1993 and a 1997 law to promote foreign investment sought 
to liberalize the investment regime. Additional legislation to 
facilitate private sector investment in the telecommunications and 
mining sectors was passed in 2000 and has led to increased foreign 
investment in the former, though foreign companies have been 
frustrated by commercial disputes.  A 2006 hydrocarbons law imposed 
new conditions in the petroleum sector that have been problematic 
for many companies, complicated by a 2007 decree that imposed 
additional restrictions.  A 2008 mining mandate stalled mining 
activity, and a new Mining Law is expected in early 2009. 
Negotiations for a free trade agreement between the United State and 
Ecuador, which would have included investment provisions, stopped in 
April 2006.  The current Government of Ecuador has not expressed 
interest in restarting negotiations. 
 
Inconsistent enforcement of contracts is one of the main concerns of 
foreign investors in Ecuador. Government officials and private 
Ecuadorian businesses have used regulatory schemes and questionable 
legal maneuvers to hinder 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. 
 
Under current regulations, foreign investors receive the same rights 
of entry as Ecuadorian private investors.  Foreign investment with 
up to 100% foreign equity is allowed without prior authorization or 
screening in most sectors of the Ecuadorian economy currently open 
to domestic private investment.  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. Many companies, mostly 
domestic, use legal loopholes to circumvent this requirement. 
 
Prior authorization is required for license and franchise 
transactions. No limits exist on the amount of royalties that may be 
remitted. All license and franchise agreements must be registered 
with the Ecuadorian Intellectual Property Institute (IEPI). In 
September 1997, the Ecuadorian Congress repealed the law for the 
protection of representatives, agents and dealers of foreign 
enterprises, which had imposed discriminatory restrictions on 
foreign companies in their dealings with their Ecuadorian agents. 
However, dealers whose relationships predated the repeal may 
continue to take action under the law. 
There is no legal discrimination against foreign investors at the 
time their investments are made. Foreign investors may participate 
in government-financed research programs.  According to a new 
constitution adopted in October 2008, the Government will promote 
both local and foreign investment, but local investment will take 
priority; foreign investment should respond to national priorities 
as defined by the National Development Plan.  The Government of 
Ecuador has not defined how these provisions will be implemented. 
 
Although the scope for private sector participation has been 
expanded in recent years, foreign investors, and often domestic 
investors as well, still operate with limitations in certain sectors 
of the economy: 
 
Petroleum: 
 
All subsurface resources belong to the state. Ecuador permits 
investment by foreign oil companies. Foreign oil companies 
previously engaged in exploration and development activities were 
under risk-service contracts with Petroecuador. With limited 
exceptions, investments in the oil sector now use production-sharing 
contracts that give private investors the right to share in finds. 
However, the current Government of Ecuador has recently indicated 
interest in reverting to risk-service contracts; negotiations are 
taking place to transition to these contracts. Foreign participation 
is not permitted in Petroecuador's extensive oil fields. 
 
Ecuador has been unable to increase private investment in the 
petroleum sector in recent years, in part because of unfavorable 
economic terms, legal uncertainties, GOE tax policies, environmental 
liability concerns, and a lack of a coherent energy policy. 
State-owned Petroecuador's production increased slightly in 2008 
through November, compared to the same period in 2007. 
 
High profile legal cases brought by and against foreign oil 
companies have also dampened foreign investor interest. In 2005, 
President Palacio issued a decree requiring that all petroleum 
exploration and production contracts be renegotiated. In 2006 the 
Government of Ecuador made this decree law by amending its 
hydrocarbons law, unilaterally modifying the terms of oil production 
sharing contracts. In 2007, President Correa issued a decree 
increasing the State's share of extraordinary petroleum revenues 
under the 2006 amendment to 99%. On December 28, 2007, a new tax law 
was passed which sets the State's share of extraordinary petroleum 
revenues at 70% for contracts signed after the law goes into effect. 
 Foreign oil companies in Ecuador argued that operations would not 
to be feasible under this scenario.  In December 2006, April 2008, 
and June 2008, three U.S. companies initiated international 
arbitration proceedings based on the changes (while continuing to 
pursue negotiated solutions), as did other foreign oil companies. 
One of the U.S. companies reached agreement with the GOE to buy out 
its contract in August 2008 and has since left the country.  The 
Government of Ecuador has initiated negotiations with the remaining 
foreign companies to renegotiate their contracts. 
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, and foreigners have 
the same access to mining concessions as domestic investors. Foreign 
investors are prohibited from obtaining mining rights in zones 
adjacent to international boundaries without the permission of the 
President and the approval of the National Security Council of the 
Armed Forces (COSENA). Legislation and regulations were enacted (in 
2000 and 2001) to encourage additional investment in the sector by 
eliminating government royalties, reducing the payment of surface 
rights per hectare, approving mining titles valid for all mining 
processes for 30 years, and streamlining the concession process. 
However, the validity of mining concessions under the 2000 law was 
called into question when the Ministry of Energy and Mines 
unexpectedly canceled some concessions in 2003. Investment in mining 
continues to be modest by Andean standards. Although rising 
commodity prices have led to an increase in mining investment in 
Ecuador in recent years, problems with local communities opposed to 
mining operations have caused periodic shutdowns. The Government of 
Ecuador has also temporarily suspended operating permissions for 
some concessions due to conflicts with communities.  The mining 
mandate of April 2008 revoked over 4,000 mining concessions and 
suspended mining activity for six months.  Major mining activity had 
not resumed as of January 2009.  The Government of Ecuador has 
proposed a new mining law that was being reviewed by the legislative 
assembly in January 2009. 
 
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. 
 
Electricity: 
 
Amendments to the 1996 Electrical Sector Law adopted by the 
Ecuadorian Congress in 1998 authorized greater private participation 
in the electrical sector, but did not permit private firms to obtain 
majority control over any distribution, generation or transmission 
firms controlled by the state (the vast majority). Additional reform 
legislation passed in 2000 authorized private firms to purchase up 
to 51% of shares of government-owned electric distribution, 
transmission, and generation companies. 
 
Electricity generators, including U.S. companies, face chronic 
problems in collecting accounts receivables from government-owned 
power distributors, which often operate at a loss. In 2007 the 
Government of Ecuador created a new Ministry of Electricity and 
Renewable Energy to focus more attention on the sector. A new 
electricity mandate issued in July 2008 establishes a single 
electricity tariff for distributors and consolidates the 19 state 
distributors into one.  However, the mandate has not yet been 
implemented. 
 
U.S. firms in this sector had been pursuing international 
arbitration; one won its arbitration and was paid an arbitral award 
in December 2008, and another reached a negotiated settlement with 
the government of Ecuador. 
 
Telecommunications: 
 
Basic telecommunications had traditionally been reserved for the 
state, but a 2002 law liberalized the sector. Two private groups 
with foreign participation were granted concessions in 1993 to 
develop cellular telephone systems. A third, state-owned company was 
granted a cellular concession in 2003. In 2004, US company BellSouth 
sold its assets in Ecuador to the Spanish company Telefonica. 
Satellite and paging services are also in private hands. 
 
In 1998, Emetel, the former state telephone monopoly, was split into 
two corporations (Andinatel in the highlands and Pacifictel in the 
coastal region). Pacifictel has faced severe management challenges 
and has been the focus of several scandals. In September 2008, the 
National Telecommunications Council CONATEL approved the merger of 
Andinatel and Pacifictel, which are currently in the process of 
forming the Corporacisn Nacional de Telecomunicaciones. Detailed 
regulatory processes and delayed state company payments to the 
private sector continue to hinder foreign investors. 
 
Media: 
 
Foreign companies are prohibited from owning more that 25% equity in 
broadcast stations. Foreigners are not permitted to obtain broadcast 
concessions. 
 
Strategic Sectors: 
 
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. 
 
Conversion and Transfer Policies 
 
In 2000, Ecuador adopted the U.S. dollar as its official currency. 
Since Ecuador adopted the dollar, inflation rates have declined from 
a high of near 100% to single digits. The rate of inflation from 
October 2007 to October 2008 was 9.85%. 
 
Foreign investors may remit 100% of net profits and capital. 
Investors may also freely 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 2008 tax on capital 
outflows.  There is also no significant delay for remitting 
investment returns such as dividends, return on capital, interest 
and principal on private foreign debt, lease payments, royalties and 
management fees through normal legal channels. 
 
Ecuadorians may also export capital, and there are substantial 
Ecuadorian financial holdings in the United States and other 
offshore banking centers.  In December 2007, the Government of 
Ecuador passed a broad tax reform package, which included 
establishing a 0.5% tax on capital outflows.  Transfers for imports, 
dividends on foreign investment, interest and principal payments on 
external debt registered with the Central Bank, and insurance 
premiums are exempt.  In December 2008, the tax on capital outflows 
was increased to 1% and the exemptions were eliminated. 
 
Expropriation and Compensation 
 
Expropriation is provided for in Ecuadorian law with appropriate 
compensation. In cases of expropriation, the individual 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 and 
petroleum, 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. U.S. citizens have had their assets 
seized because of judgments against their Ecuadorian partner in 
cases having no connection with the U.S. investor. Resolution and 
compensation typically require many years and significant legal 
costs. 
 
Under Ecuador's 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 2004, a U.S. company won a $75 
million international arbitration award against the Government of 
Ecuador.  In March 2008, the government of Ecuador paid the award. 
In 2006, Ecuador's Solicitor General (Procurador General) initiated 
an investigation of the same company for allegedly transferring 
assets to another foreign company without obtaining the required 
government authorization.  The government of Ecuador nullified the 
company's contract and seized the company's considerable assets in 
Ecuador.  The U.S. company has initiated arbitration proceedings 
under the BIT; the government of Ecuador is participating in the 
proceedings.  In September 2008, the arbitral panel ruled that it 
had jurisdiction over the case. 
 
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 fewer disputes.  In 
July, 2007, the World Bank's ICSID ruled against one U.S. 
electricity company's arbitration claim on jurisdictional grounds. 
The company has filed for an annulment of the ruling.  In August 
2008, another U.S. electricity company received a favorable arbitral 
award in its claim against the government of Ecuador.  Two other 
companies reached negotiated agreements with the GOE regarding their 
arbitration claims in 2008. 
 
The 2008 Constitution establishes that the State would manage land 
use and access to lands, while recognizing and guaranteeing the 
right to private property, "which should fulfill social and 
environmental functions."   As of January, 2008, implementing laws 
to clarify this provision have not been issued. 
 
Dispute Settlement 
 
Systemic weakness and susceptibility to political or economic 
pressures in the rule of law constitute the most important problem 
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. 
 
The courts are often susceptible to outside pressure and bribes. 
Neither Congressional oversight nor internal judicial branch 
mechanisms have shown a consistent capacity to effectively 
investigate and discipline allegedly corrupt judges. 
Despite efforts to depoliticize and modernize the court system, 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. 
 
A number of foreign and local investors have had agricultural land 
seized by squatter groups over the years. The Embassy is aware of 
one instance in 2007 where an effort by squatters to seize land was 
blocked by local authorities.  Squatter groups also tried to seize 
land after Ecuador's new constitution was approved in late 2008; the 
government condemned those actions.  The Embassy has not received 
any recent complaints about land being seized by squatters.  In the 
past, the agrarian reform authorities often legally recognized 
squatter claims in the agricultural sector, with minimal or no 
compensation paid. Current agrarian law makes legalization of such 
seizures difficult and guarantees cash payment of the market value 
of the expropriated property. 
 
Some local and foreign mining companies have had their concessions 
occupied by informal miners, who have subsequently sought a share of 
the concessions. Government entities, especially the state oil, 
telephone, and electricity companies, have violated their contracts 
with domestic and foreign private firms. 
 
The U.S. - Ecuadorian BIT provides for binding international 
arbitration of disputes with the Government at the investor's 
option. Ecuador is a member of the International Center for the 
Settlement of Investment Disputes (ICSID).  In November 2007, the 
Government of Ecuador sent a letter to ICSID stating that it would 
no longer submit to ICSID jurisdiction for mining and petroleum 
matters, introducing additional uncertainty to the investment 
climate in the natural resources sectors.  In early 2005, Ecuador 
modified the Arbitration and Mediation Law to prohibit international 
arbitration if the "national interest" could be affected. This 
modification appears to conflict with the terms of the BIT and, at a 
minimum, creates confusion among investors regarding their right to 
arbitration. 
 
Ecuador's new constitution recognizes local or regional arbitration 
centers, or other forums as agreed to by the parties, and could 
limit arbitration options for investors, but these provisions have 
not been implemented.  The new constitution also includes provisions 
which could limit the availability of international arbitration in 
new Ecuadorian investment treaties.  These provisions do not appear 
to apply to existing treaties. 
 
Performance Requirements and Incentives 
 
There are no performance requirements associated with foreign 
investment in Ecuador. Except for "strategic" sectors described 
earlier, foreign investors are not required to have local equity 
participation. Visa and residence requirements do not inhibit 
foreign investment. 
 
Under the Andean Community Common Automotive Policy, Ecuador, 
Venezuela and Colombia impose local content requirements on 
automobiles assembled in country in order to qualify for reduced 
duties on imports. The WTO Agreement on Trade-Related Investment 
Measures (TRIMS) prohibits such requirements. The local content 
requirement for passenger vehicles was 32 percent in 1997. It was 
raised to 33 percent for 1998, and was then lowered to 24 percent 
for 2000. Under the TRIMS Agreement, the three countries were 
obliged to eliminate local content requirements by 2000. However, in 
December 1999 the Andean Automotive Policy Council determined that 
it would not eliminate the local content requirement as it had 
initially indicated, but instead decided to increase it gradually to 
35 percent by the year 2009. This revised automotive policy may be 
inconsistent with Ecuador's WTO obligations under the TRIMS 
Agreement. 
 
Ecuador is a beneficiary of the Andean Trade Preferences and Drug 
Eradication Act (ATPA). The primary goal of this program is to 
promote export diversification and to provide sustainable 
alternatives to drug-crop production in the Andean region. ATPA 
created Ecuador's cut-flower boom, and also provided for duty-free 
exports of wood products, plywood, jewelry, and fruits and 
vegetables.  The Andean Trade Preferences and Drug Eradication Act, 
which expanded the ATPA, provides Ecuador with duty-free access to 
the U.S. market in a number of new export categories in which 
Ecuador is competitive, including textiles, leather products, and 
pouched tuna. 
 
The ATPA and its trade benefits have been extended until December 
31, 2009. 
 
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 calls for priority for locally produced products and services 
in public purchases, although foreign suppliers can  compete for the 
contracts.  The government has not yet defined how it will establish 
priority for Ecuadorian suppliers.  The law eliminates the former 
requirement to obtain approval from the Attorney General and the 
Controller prior to being awarded a government contract, and creates 
a National Institute of Public Contracting to oversee transparency 
and timeliness of the contracting process. 
 
Protection of Property Rights 
 
There have been numerous instances where the judicial system has not 
adequately protected property owners' rights. U.S. investors in real 
estate should exercise caution when considering a land purchase in 
Ecuador. 
 
Ecuador's intellectual property regime is governed by the "Law on 
Intellectual Property" adopted in 1998. The law provides criminal 
and administrative relief to right holders. Ecuador has ratified the 
Berne Convention for the protection of literary and artistic works, 
the Geneva Phonogram Convention, and the Patent Cooperation Treaty. 
Ecuador is also bound by the Andean Community Decisions 345, 351, 
and 486. Decision 486 improves intellectual property protection by 
expanding the definition of patent ability and strengthening data 
exclusivity. In April 2001, the U.S. Trade Representative (USTR) 
removed Ecuador from its Special 301 Watch List to reflect 
improvements in Ecuador's intellectual property regime. However, 
weakened enforcement (particularly in the area of pharmaceuticals) 
led to Ecuador's re-listing in 2003. At the end of 2008, Ecuador was 
still listed on the Watch List.  Ecuador made a public commitment to 
apply the WTO TRIPS agreement from the date of its accession to the 
WTO. 
 
In 2004, the Andean Community confirmed the legality of a Colombian 
decree reinforcing data exclusivity rules and intellectual property 
rights. This decision removed key conflicts between Andean Community 
rules and Ecuador's WTO commitments, theoretically reinforcing the 
legal protections for intellectual property rights. However, Ecuador 
continues to issue sanitary registrations to illegal copies of 
patented products, and at times has relied on test data that the 
original producing company maintains is protected by data 
confidentiality. 
 
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 
 
The IPR law extends patent protection for 20 years from the date of 
filing. Patenting of pharmaceutical products is permitted. 
Provisions for compulsory licensing are limited. In infringement 
cases, the burden of proof lies with the alleged infringer. The law 
also provides patent protection for new drugs. 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. 
 
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 also required to devote a certain percentage of shelf 
space to generic pharmaceuticals. The GOE has proposed to further 
reduce allowable profit margins on pharmaceutical sales, but no 
final action has been taken in that regard. 
 
Copyrights 
 
Printed and recorded works are in theory protected under the IPR law 
for the life of the author plus 70 years. Computer programs and 
software are also protected. However, pirated CDs and DVDs are 
readily available on many street corners and even in shopping malls. 
 The Government of Ecuador, through the IEPI's Strategic Plan 
against Piracy, has committed to take action to reduce the levels of 
copyright piracy, including though implementation and enforcement of 
its 1998 Copyright Law.  However, weak copyright enforcement remains 
a significant problem, especially concerning sound recordings, 
computer software and motion pictures.  Sellers of pirated goods 
sell their illegal wares with little fear of prosecution. The 
Government of Ecuador has not taken action to clarify that Article 
78 of the 1999 Law on Higher Education does not permit software 
copyright infringement by educational institutions. 
 
Trademarks 
 
Trademark registration is permitted for renewable 10-year periods, 
but registration may be canceled if the mark is not used in the 
Andean region for a period of three years. The IPR law provides 
protections for well-known trademarks. A trademark registration 
cannot be cancelled without the consent of the trademark owner. 
 
Other Protection 
 
The IPR law provides protection for industrial designs and extends 
protection to industrial secrets and geographical indicators. 
Semiconductor chip layouts are protected. Plant varieties and other 
biotechnology products are also, in theory, protected. 
 
Registrations and Enforcement 
 
The Ecuadorian Intellectual Property Institute (known by its Spanish 
acronym IEPI) was established in January 1999 to handle patent, 
trademark and copyright registrations on the Ecuadorian Government's 
behalf. IPR enforcement has improved although piracy remains. The 
Ecuadorian National Police and Customs are responsible for carrying 
out IPR enforcement orders.  IEPI has had to reduce funding and 
staffing for enforcement. However, the enforcement office was 
reorganized in 2007 in an effort to strengthen enforcement, and 
funds have been designated to train the staff in enforcement. IEPI 
has embarked on an initiative to enhance intellectual property 
awareness in children and young adults by providing educational 
materials on the protection of intellectual property to several 
hundred schools. 
 
IEPI and Ecuadorian Customs have increased enforcement actions in 
their areas of competence where they can act without a formal 
complaint by the right-holder, through administrative sanctions 
imposed by IEPI or interception of counterfeit goods by Customs. 
 
Transparency of Regulatory System Return to top 
 
Ecuador's regulatory system is not transparent.  There are no 
antitrust laws and industry is fairly concentrated.  The Government 
of Ecuador has indicated that it is preparing a competition law, but 
has not made it available for public review. 
 
The Superintendent of Banks and Insurance (SBI) regulates financial 
and insurance institutions. The 2008 Constitution calls for the 
creation of new regulatory agencies for the informal financial 
sectors.  The new Constitution also mandates that each financial 
institution have an ombudsman office. The regulatory authorities 
that were formerly autonomous now fall directly under the Executive. 
 Under a law, approved by the legislative assembly in December 2008 
but not finalized as of January 2009 because of partial vetoes, the 
Executive Branch would seek to improve 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.  The National 
Council of Radio Broadcasting and Television (known by its Spanish 
acronym CONARTEL) regulates broadcasters. The Superintendent of 
Telecommunications regulates fixed-line and wireless communication 
services. The Superintendent of Companies regulates all other firms 
and, via the National Securities Council, the stock markets. 
 
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 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 
comply 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 2008 
Competitiveness Index, Ecuador ranked 104 out of 134 countries 
surveyed. 
 
Efficient Capital Markets and Portfolio Investment 
 
The 1993 Capital Markets Law set up a modern regulatory structure, 
opened stock market trading to banks and other firms, and encouraged 
the development of mutual funds. However, Ecuadorian capital markets 
remain underdeveloped. Most large industrial groups are privately 
held, and are financed largely through debt or retained earnings. 
The bulk of activity on the country's two small stock exchanges 
currently involves trading in short-term commercial paper, bank 
obligations, and government debt. Regional rivalries complicate 
efforts to develop a truly efficient capital market in Ecuador's 
small market. 
 
Most stock trades involve shares in a handful of banks and 
companies. Bank credit on market terms is available and improving; 
rates have been decreasing. The private sector has access primarily 
to short-term bank credit; approximately 70% of the loan portfolio 
has a maturity of less than one year and approximately 60% 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 GOE has introduced new legislation 
(currently under discussion), modifying the methodology and giving 
authority to the Central Bank to set the rates.  The financial 
sector continued to grow in 2008. Deposits increased by 28.44% from 
November 2007 through November 2008, while the total outstanding 
loan portfolio increased by 27%, during the same time period. 
 
Political Violence 
 
Ecuador does not have a tradition of widespread political violence 
or guerrilla activity. Crime is a serious concern, especially in the 
larger cities. 
 
Student, labor union and indigenous protests against government 
policies are a regular feature of political life in Ecuador. While 
disruptive, especially to transportation, violence is usually 
limited and localized. Protesters often block city streets and rural 
highways, and public transportation tends to be disrupted during 
these incidents.  Protestors also occasionally burn tires, throw 
Molotov cocktails, engage in destruction of property and detonate 
small improvised explosive devices during demonstrations, but 
fatalities as a result of protests have been rare. Pamphlet bombs 
are sometimes used to disseminate political literature. Popular 
protests in 1997, 2000 and 2005 contributed to the removal of three 
elected presidents before the end of their terms. Some communities 
have successfully used protests and strikes to obtain promises of 
increased government spending on social benefits and infrastructure. 
 Some indigenous communities opposed to development have protested 
to block access by petroleum and mining companies.  It is against 
the law for foreigners to engage in political activity that starts 
or promotes civil wars or international conflicts.  In 2008, there 
were at least two incidents where protestors complained of possible 
excess force used by the police to disperse protests against 
government officials. 
 
Kidnappings have occurred and foreigners have been targeted. The 
political violence present in neighboring Colombia can have a 
spillover effect in northern Ecuador. Since 1998, at least 10 U.S. 
citizens have been kidnapped. 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. However, kidnappings are more often economically than 
politically motivated. In October 2000, kidnappers seized several 
foreign oil workers in Eastern Ecuador.  After murdering one of 
their American hostages in January 2001, they released the other 
victims upon receipt of a ransom payment. 
 
Violent crime has significantly increased in 2007 and 2008, with 
American citizens being victims of crimes, to include, but not 
limited to, homicides, armed assaults, robberies, sexual assaults, 
and home invasions. 
 
Businesses continue to report being extorted for protection money. 
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 protection as well as arms and supplies for 
Colombian insurgent groups and narco-traffickers. The Ecuadorian 
military and government agencies are increasing efforts to promote 
development and provide security in this area. 
 
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 151 out of 180 
countries surveyed for Transparency International's Corruption 
Perceptions Index 2008 and received a score of 2 out of 10 
(10-highly clean, 0-highly corrupt). In the Western Hemisphere, only 
Venezuela and Haiti received lower scores than Ecuador. 
 
Ecuador has laws and regulations to combat official corruption, but 
they are inadequately enforced. Illicit payments for official favors 
and theft of public funds take place frequently. Dispute settlement 
procedures are complicated by the lack of transparency and 
inefficiency in the judicial system.  In addition, local authorities 
often demand "gratuities" to issue necessary permits. 
 
Offering or accepting bribes is illegal and punishable by 
imprisonment for up to five years. The Controller General of the 
Nation is responsible for the oversight of public funds and there 
are frequent investigations and occasional prosecutions for 
irregularities. These investigations can be politically motivated. 
Autonomous agencies are subject to little effective oversight. 
Government officials and candidates for office often make an issue 
of corruption, but there is little follow through. 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. 
 
The 2008 Latin American Public Opinion Project (LAPOP) found that 
Ecuadorians rated 6th in Latin America in both the frequency with 
which they were victimized by corruption, and their perception of 
the prevalence of corruption. 
 
Bilateral Investment Agreements 
 
The 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 early 2005, 
Ecuador modified the Arbitration and Mediation Law in an attempt to 
prohibit international arbitration if the "national interest" could 
be affected; the current government has also sent mixed signals with 
respect to allowing for at least some types of international 
arbitration in future energy sector contracts, and has indicated it 
may seek to review arbitration provisions of existing BITs. The 2008 
Constitution could limit future international arbitration options. 
 
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 was 13.5 million in 2006, according to census 
data. Semiskilled 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 are set by the Ministry of Labor according to 
the job and industry and can be adjusted by Congress. The minimum 
compensation package was about $170 per month in 2007. In 2007, 
Ecuador's Central Bank estimated the average unemployment rate at 
9%. However, the national underemployment rate is estimated at over 
50%. 
Ecuador's economic woes have contributed to high levels of 
emigration in recent years. An estimated 1,000,000 people, or 17.2% 
of Ecuador's labor force, emigrated between 1999 and 2005, 
principally to Spain and the U.S. 
 
The public education system is tuition-free, and attendance is 
mandatory from ages six to 15. In practice, however, schools often 
require parents to pay for education-related expenses such as to 
cover children's books, school's utility bills, and transportation 
costs. Many children drop out before age 15, and in rural areas only 
about one-third complete sixth grade. The government is striving to 
create better programs for the rural and urban poor, especially in 
technical and occupational training. However, government funding for 
such training has not kept up with demand. In recent years, it also 
has been successful in reducing illiteracy. Enrollment in primary 
schools has been increasing at an annual rate of 4.4% -- faster than 
the population growth rate. According to the current constitution, 
the central government must allocate at least 30% of its revenue to 
education; in practice, however, it allots a much smaller 
percentage. Public universities have an open admissions policy. In 
recent years, however, large increases in the student population, 
budget difficulties, and politicization of parts of the university 
system have led to a decline in academic standards. 
 
A weak public university system produces a surplus of semi-qualified 
graduates in the professions. Trained financial professionals and 
engineers can be difficult to attract and many graduates require 
additional training to reach international standards. There are 
relatively few R&D and high technology investments in Ecuador, 
limited mostly to agricultural research, with a small amount of 
government activity as well as that of some foreign firms. Little 
post-graduate education exists in Ecuador, and scientists and 
medical professionals are nearly all foreign-trained. At this point, 
none of the Ecuadorian universities offer doctorate programs beyond 
limited offerings in social sciences at two institutions. 
Masters-level degrees are widely offered, but relatively few are of 
international competitive levels of quality. Upper-level Ecuadorian 
business managers have frequently been educated abroad, most often 
in the United States. 
 
Cumbersome labor regulations apply equally to both foreign and 
domestic firms and tend to inhibit investment and foster evasion. 
Legal changes to modernize the country's Labor Code were passed by 
Congress in 2000 as part of omnibus economic reform legislation. 
However, the Constitutional Tribunal declared virtually all of the 
changes unconstitutional.  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, favors workers with 
disabilities, and reduces allowed strikes in the public sector. 
Provisions that virtually eliminate hourly labor contracts and labor 
contracts through third parties are aimed at employers avoiding 
benefits for full-time employees, but reduce flexibility in the 
labor market. 
 
Most workers in the private and parastatal sectors have the 
constitutional right to form trade unions and local law allows for 
unionization of any company with more than 30 employees. Less than 
10% of the urban work force, mostly skilled workers in medium- to 
large-sized enterprises or state industries, is officially 
organized. Private employers are required to engage in collective 
bargaining with recognized unions. The Labor Code provides for 
resolution of conflicts through a tripartite arbitration and 
conciliation board process. The Code also prohibits discrimination 
against union members and requires that employers provide space for 
union activities. 
 
The International Labor Organization and prominent NGOs believe 
international labor standards are not respected in Ecuador. Workers 
fired for organizing a labor union are entitled to financial 
indemnization, but the law does not mandate reinstatement. 
 
Except for public servants and workers in some parastatals, workers 
by law have the right to strike. Legally striking employees are 
entitled to full pay and benefits and may occupy the premises under 
police protection, although there are restrictions on solidarity 
strikes. Most public sector employees are technically prevented from 
joining unions, but most are members of a labor organization and 
most labor actions are in fact illegal strikes by public employees. 
Although trade union political influence has declined in recent 
years, the Unified Workers Front (FUT), the teachers' union (UNE), 
and other labor groups occasionally attempt to stage national 
strikes to protest the modernization process and economic reform 
measures. From January through November 2006, the number of strikes 
and local conflicts decreased approximately 36% from those in the 
same period in 2005, according to national police records. 
 
With assistance from the ILO, Ecuador has been taking steps to 
eliminate child labor, which is still common in many industries. 
As of August 2007, the Department of Labor had issued 100 citations 
to companies in violation of the Child Labor Law. These actions were 
a direct result of Ecuador hiring 29 full-time child labor 
inspectors and six support staff in 2006 tasked with conducting 
unannounced inspections. The Department of Labor is expected to hire 
additional inspectors. 
 
Economic realities leave families more than ready to send their 
boys, and sometimes girls, out to work, even if it means pulling 
them out of school and placing them in fields, mines or factories 
where they are exposed to hazardous conditions for little or no pay. 
The International Labor Organization estimated that 69,000 children 
ages 10 to 14, and an additional 325,000 young people ages 15 to 19, 
were working in agriculture in 1999, the year of Ecuador's most 
serious economic crisis in recent decades. Anecdotal evidence 
indicates that these figures have dropped since 1999, aided 
substantially by the economic recovery and more recently by the 
hiring of additional child labor inspectors in 2006.  However, labor 
advocates in Ecuador assert that only a significant increase in 
wages will keep families from sending their children to work in the 
fields. The ILO's most recent child labor data dates from 2001. 
 
The National Statistics Institute records that there were more than 
50,000 under age workers in 2007, or 9% of the total labor force. Of 
this total, 63% were under fifteen years old and 70% were working in 
agriculture. 
 
Foreign-Trade Zones/Free Ports 
 
A free trade zone law was passed in 1991 in order to promote 
exports, foreign investment and employment. The law provides for the 
import of raw materials and machinery free of duty and tax; the 
export of finished and semi-processed goods free of duty and tax; 
and tax exemptions for business activities in the 
government-established zones.  Foreign investments in free trade 
zones are exempt from future restrictions on capital repatriation. 
Free trade zones may be used for industrial or commercial 
activities.  Companies establishing operations in free trade zones 
are required to pay a fee equal to 2% of their investment to the 
National Council of Free Trade Zones. However, persuading Ecuador's 
tax authority to respect the tax benefits conferred by the free 
trade zone law is burdensome and time consuming.  As a consequence, 
free trade zones are few and largely unimportant to the economy. 
Free trade zones have been established in Esmeraldas, Manabi and 
Pichincha provinces, and a zone is planned for the site of the new 
Quito airport.  A maquila (in-bond processing) law has been in 
effect since 1990. The majority of maquila operations in Ecuador are 
in the textile and fish-processing sectors. 
 
Foreign Direct Investment Statistics 
 
Foreign investment in Ecuador remains concentrated in the oil 
sector. The construction of the Trans-Andean Heavy Oil Pipeline 
(OCP), completed in October 2003, accounted for much of this 
investment. This massive construction project carried out by a 
consortium of five foreign oil producers resulted in inward 
investment of $3.5 billion, including direct project investment of 
$1.4 billion. Subsequent investment in oil production to fill the 
OCP has not materialized due to lack of a GOE oil sector development 
policy, the contract nullification and seizure of assets belonging 
to a major U.S. oil company, and Ecuador's demand that all oil 
contracts be renegotiated. Foreign direct investment (FDI) outside 
the oil sector remains modest and is focused on mining, financial 
services, food processing, the chemical and pharmaceutical 
industries, and machinery and vehicle manufacturing. Overall net FDI 
flows totaled approximately $193 million in 2007. 
 
The United States is the major source of foreign investment capital. 
The petroleum sector accounted for the lion's share of this inflow. 
 
The largest foreign investors in Ecuador are petroleum companies 
engaged in exploration and production, including gas company Noble 
Energy (U.S.), Andes Petroleum and CNPC International (Chinese), 
YPF/Repsol (Spain), AGIP (Italy), Perenco (France) and Petrobras 
(Brazil). U.S. oil service company Baker Hughes is also present. 
U.S. firms Duke Energy and Noble Energy subsidiary Machala Power are 
active in the electrical sector. Exxon Mobil (U.S.) and Shell 
(Holland/UK) distribute fuels at service stations across the 
country. U.S. citizens have also invested in the textile and 
agricultural sectors (flowers, fruit and vegetables). 
 
American firms active in the manufacturing sector include: General 
Motors, which holds an interest in two automotive assembly plants, 
Philip Morris (cigarettes) and  Bristol-Myers Squibb (medications), 
Among third country investors, General Tire (Germany) manufactures 
tires, Holderbank (Switzerland) produces cement, Akzo Nobel 
(Netherlands) makes fibers and textiles, Borden (Netherlands) 
manufactures chemicals, and Eternit (Switzerland) fabricates 
construction materials. 
 
There are several American pharmaceutical companies operating in 
Ecuador, including: Schering Plough, Bristol-Myers Squibb, Merck 
Sharp & Dohme, Wyeth Consumer Healthcare, Abbott, Janssen 
Pharmaceutical, Eli Lilly, and Pfizer.  Baxter has seven renal units 
in the country.  U.S. firms Colgate-Palmolive and Kimberly Clark 
manufacture toiletries and cleaning products. Also present are:  3M 
(consumer goods), Proctor & Gamble (personal care products), 
Kellogg's (cereal).   British SAB Miller owns the major brewery. 
Nestle (Switzerland) and Kraft (U.S.) are leading food product 
manufacturers, while a number of other foreign firms have invested 
in processing facilities for non-traditional vegetables and fruits. 
Continental Flour (U.S.) and Seaboard Flour (U.S.) 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. Standard Fruit/Dole (U.S.), Chiquita Banana, and Del Monte 
are involved in the banana industry from production to marketing and 
shipping. Several U.S. franchise chains are now operating in 
Ecuador, including Tricon (Pizza Hut/Kentucky Fried Chicken/Taco 
Bell), Burger King, McDonalds, Tony Romas, TGI Friday, Papa John's, 
Chili's, Romano Maccaroni, Domino's Pizza, Heel Quick, Swisher, 
Gymboree, Fast Track Kids, and New Horizons.  Citibank (U.S.) and 
Lloyd's (U.K.), have commercial banking operations, while Helm Bank 
(U.S.) has a representation office in Ecuador. U.S. airlines Delta, 
Continental, and American, as well as hardware and software (IBM, 
Xerox, Microsoft),insurance (ACE, Pan-American Life, BMI, AIG), 
consumer goods (3M), personal care products (Proctor & Gamble), 
cereal (Kellogg's), and advertising (McCann  Erickson) companies are 
also active. 
 
Net Flows of Foreign Direct Investment (In Millions of Dollars) 
 
Investment Statistics Table (million of $) 
 
                      2003    2004    2005    2006    2007 
Net flow of FDI        871.51  836.94  493.41  270.72  193.29 
FDI Net flow/GDP (%) 3.04%   2.56%   1.33%  0.65% 0.42% 
 
FDI net flow (by Country of origin): 
                    2003    2004     2005    2006    2007 
 Cayman Islands  438.22  31.58   -1.64  -9.59    -356.62 
 US               -47.33   78.54  -77.20  -159.79   108.72 
 Bahamas          78.59  113.71   28.33 -17.43  -111.73 
 Panama          85.10   93.54   76.20 66.72    78.33 
 France          70.21   14.77   -755  8.43    77.52 
 Brazil           4.89   188.53  288.06  368.91    75.85 
 Spain           3.33    631 2.68    6.87    72.23 
 China          19.69   -7.68   -19.91   11.94   59.79 
 
By Sector Destination: 
                       2003      2004    2005     2006    2007 
Oil/Mining          148.55 385.37   198.35  -116.62  -122.05 
Manufacturing    78.98 114.93   75.42     90.16  94.57 
Commerce           78.14 103.15   72.46 32.30  77.80 
Transport and Communications 
                      439.10 73.70    17.50 83.32 -52.50 
Agriculture           49.91 72.91    23.93 47.31  24.12 
Services            71.06 39.95    73.83 89.36  116.76 
Construction            3.49 39.22    7.43 8.45  32.94 
Others                   2.28  7.70    24.49     36.43  21.64 
 
Notes: 
 
All figures are listed in millions of dollars unless otherwise 
noted.  Data is from the Central Bank of Ecuador.  The Central Bank 
has changed the methodology used to calculate FDI, and now only 
publishes 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 
 
Superintendence of Companies www.supercias.gov.ec 
 
HODGES