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Ecuador: Looking for Mr. Investor
Mexico Business / April 1996

By Larry Luxner

QUITO -- Visitors eager to set foot on the Equator -- one of this country's biggest tourist attractions -- generally take a taxi from downtown Quito and head north about 15 miles along the Pan-American Highway to the famed Equatorial Monument, located in the picturesque village of Mitad del Mundo.

What they don't notice is the huge Maresa auto plant right off the highway, where 300 factory workers literally a stone's throw from the Equator turn out Mazda 323 cars and B-2000 trucks for the local market, and increasingly for export to neighboring Colombia.

In fact, Ecuador's membership in the five-nation Andean Pact has been a godsend for the country's struggling automotive sector, which is going through one of its toughest periods in recent history. Last year, Maresa and Ecuador's other three vehicle assembly plants produced only 26,500 units from kits -- down from 33,869 in 1994. This year, they expect to produce just 23,000.

"The market is depressed because of the country's economic situation," says Marcelo Ruíz León, executive director of the 48-member Cámara de la Industria Automotriz Ecuatoriana. "There's no purchasing power, and credit is very expensive. Interest rates are between 60% and 70%."

That's pretty much holds true for industry in the rest of Ecuador as well. Everyone from banana exporters to textile manufacturers blame 1995's lackluster performance on an unlucky combination of war, political scandal, power blackouts and low prices for the country's chief exports

Early last year, Ecuador and Peru fought a month-long, unnecessary skirmish that cost an estimated $1.5 billion and scared investors away from both countries. The war began over disputes arising from the 1942 Rio Protocol, which ended the last battle over a sparsely inhabited tract of Amazon jungle territory.

Then came electricity cuts of up to nine hours a day, triggered by the lack of rains that normally keep the nation's hydroelectric plants functioning. The big factories all have diesel generators, but buying the fuel to run the generators is expensive -- even in a country that exports more than $1 billion worth of crude oil a year.

Later in the year, a power struggle erupted in the Galápagos Islands -- 625 miles west of mainland Ecuador -- during which locals threatened to kidnap foreign tourists unless their demands for greater autonomy were met. No one was ever kidnapped, but the incident did hurt the $250 million tourist industry and helped to erode Ecuador's image in the international business arena -- not to mention an embezzlement scandal that tainted the administration of President Sixto Durán-Ballén and forced his once-respected vice-president, Alberto Dahik, to flee to Costa Rica.

To top it off, inflation is galloping along at 22%, and the national currency, the sucre, now trades at 3,000 to the dollar. That further saps purchasing power from Ecuador's 11 million inhabitants, whose per-capita income stands at around $1,500.

Says Juan José Pons, president of the Ecuadoran Federation of Exporters (FEDEXPOR): "Even though the total value of exports rose from $3.84 billion in 1994 to $4.1 billion in 1995, there was no profit because exchange controls caused the cost structure to eat up any possibility of profitability."

According to preliminary 1995 figures, Ecuador's chief exports last year were crude oil ($1.27 billion); bananas and plantains ($772.2 million); cultivated shrimp ($630.1 million); coffee ($167.9 million); petroleum derivatives ($123.5 million); cacao ($70.1 million) and cut flowers ($64.3 million).

Despite the impressive numbers -- particularly in banana exports, where Ecuador ranks No. 1 in the world -- FEDEXPOR's executive director, Hernán León Guarderas, says "Ecuador doesn't have a coordinated export strategy. The private sector has long urged the government to adopt a new policy and a foreign trade law."

In the middle of it all, voters are gearing up for the May 19 presidential elections. Veteran politician Jaime Nebot of the Partido Social Cristiano seems to be the clear favorite, with recent polls giving him 35% of the ballot. Nebot, who's blanketed the Ecuadoran countryside with blue-and-yellow campaign signs, is far ahead of his closest rivals, Abdala Bucaram of the Guayaquil-based Partido Roldosista Ecuatoriana and Rodrigo Paz of Quito-based Democracia Popular, each with 11-14%. Since no candidate will likely win a 50% majority, a runoff election will be held in July. In addition, 14 parties are vying for 77 Congressional seats.

Undoubtedly, Ecuador's troubled economy is likely to be a major campaign issue. Even though the inflation rate has slowed since last year, roughly 42% of all citizens are either jobless or underemployed. Nebot, ex-governor of Guayas province, says he advocates "humanist capitalism" and private investment through the selloff of Ecuador's oil, electricity, energy and telecom sectors.

"Basically, I believe in a state that governs a great deal but administers little," Nebot told the Quito newspaper Hoy,"in a state that spends better and invests better, that decen-ralizes, and that permits the participation of private enterprise in activities that are now performed by the state, which does them badly."

Overshadowing the race, however, is the very real possibility that Durán-Ballén -- who can't run again -- may be indicted by the Supreme Court on obstruction of justice charges. The accusations stem from the president's refusal to turn over microfilm records of checks issued by Vice-President Dahik, who fled the country after the Supreme Court threatened to jail him for embezzlement. At least two attempts have allegedly been made to splice the records or destroy them while in the president's possession.

"The Dahik issue is the most serious challenge to democracy since 1979," says the U.S. Embassy -- though, unlike many other observers in Quito -- it doesn't see the election process being threatened in any significant way.

Before leaving office, Durán-Ballén is seeking to score some long-lasting economic changes with the privatization of both Ecuador's state-owned phone monopoly, Emetel, and its electric utility, Inecel.

Under the telecom reform law passed last August, Emetel will be split geographically into two companies to be sold to two international operatiors, each of whom would receive 15-year concessions with five-year monopolies for local, national and overseas phone service in their designated areas.

A 35% controlling interest will go to those operators and another 10% to Emetel's 5,500 workers; the government will control the remaining 55%. To carry out the selloff, two entities are now being created: Comotel, a temporary body, and Conatel, a regulatory agency. The package also includes Emetel's cellular concession.

According to a December 1995 study commissioned by Emetel, 50.8% of all Ecuadorans favor the company's privatization, 35.0% are against and 14.3% have no opinion. "There are just over one million lines, but they're meeting only one-third of the demand," says Janice Corbett, commercial attache at the U.S. Embassy. "If you have a billing dispute with Emetel, you have to personally go down there, even to pay a bill. You can't do it over the phone."

In fact, Ecuador has a teledensity of just 5.6 lines per 100 inhabitants and 1 per 100 in rural areas, well below the Latin American average. Its completion rate is only 44% for overseas calls and less than 40% for local and domestic long-distance calls. Getting a new line installed costs $350, with an average wait of four years.

With that in mind, officials of AT&T, MCI, Sprint and Ameritech recently met at the home of U.S. Ambassador Peter Romero to discuss the upcoming auction, though Telefónica de España, France Telecom and Italy's Stet are also interested in bidding.

The proposed selloff of 39% of Inecel is far more controversial. Even though the law also gives workers 10% of Inecel's shares while the state holds onto the remaining 51%, it has been bitterly opposed by the unions, whose members -- fearful of losing their jobs -- briefly paralyzed the Paute hydroelectric dam in January to get their message across.

Nevertheless, Inecel's privatization is long overdue, says Fernando Muñoz, electric utility coordinator for CONAM, Ecuador's privatization agency.

"For years, the state hasn't had the capacity to invest," said Muñoz, estimating that Ecuador needs $3 billion in new investment just to keep up with demand. "There's no specific prohibition against foreign companies, but the truth is that the constitution says the provision of electricity is the state's responsibility. This law would open the market for anyone to provide electricity."

Yet another measure under consideration is a proposed tourism law, which among other things offers generous tax incentives for hotel construction and establishes criteria for ranking properties based on international standards. Hotel projects underway include the $11 million, 112-room Radisson Royal Park Quito -- part of the World Trade Center-Quito complex set for completion in late 1996 -- and the 252-room Quito Marriott, scheduled to open in 1997. It also boosts spending for Ecuadoran tourist promotion campaigns abroad.

"We have to create a positive image. Nobody wants to visit a country at war," says José Luis Alvarez, manager of Quito's five-star Alameda Real and president of both the Pichincha Hotel Association and the Fundación Ecuatoriana de Promoción Turistica.

One test of Ecuador's foreign policy will come this summer, when the World Trade Organization takes up the issue of the European Union's controversial banana regime. Ecuador, which formally joined the WTO on Jan. 21, is firmly on record as supporting Washington's argument that the EU stop giving preferential access to Caribbean banana-producing islands at the expense of Ecuador and other nations that refuse to sign a so-called "framework agreement" with the EU.

"The framework agreement is absolutely in opposition to the WTO," says Patricio Izurieta Mora-Bowen, assistant secretary for economic affairs at Ecuador's Foreign Ministry. "We feel that the current system is discriminatory, unfair and unjust, and creates a difficult situation for banana exporters."

When it comes to Ecuador's struggling auto industry, however, protectionism appears to be a good thing. Local auto executives see their salvation in a common 35% tariff on all vehicles brought in from non-Andean Pact countries. The tariff was already lowered in January from 40%. Not surprisingly,they don't want it cut any further.

"To lower this level, especially considering the size of other countries whose production costs are less because of the volume of their markets -- such as Brazil or Mexico -- would provoke serious damage to one of the most important manufacturing industries this country has," argues a recent editorial in CINAE's Spanish-language newsletter.

Arturo Cárdenas, a top executive with Aymesa, says "the auto industry will become more efficient because it's the only way we'll keep from losing more of the local market to foreign manufacturers that have already penetrated the market successfully." But he adds that the industry's long-term stability depends on maintaining the 35% external tariff.

As for the short term, Ruíz is less hopeful. "This is an election year, and economic activity will diminish," he predicted. "And high interest rates won't come down."

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