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Ecuador's new trade team seeks end to corruption
Journal of Commerce / August 6, 1998

By Larry Luxner

WASHINGTON -- Jamil Mahuad, the Harvard-educated grandson of Lebanese immigrants, won't be inaugurated as Ecuador's new president until Aug. 10 -- but his privatization and finance team is already working hard to win over U.S. investors.

Alvaro Guerrero Ferber is the new chief of Ecuador's investment promotion agency, Consejo Nacional de Modernizacion del Estado (Conam). Last week, he and the country's newly appointed finance minister, Fidel Jaramillo, accompanied the president-elect on a visit to Washington, where Mr. Mahuad met with President Clinton and top officials from the World Bank, the Inter-American Development Bank and the IMF.

"We know we have a very difficult sell, but Ecuador is one of the few countries where there are still opportunities for investing in state-owned telecommunications, energy and oil," Mr. Guerrero said in a lengthy interview Thursday. "It's a peaceful country, we have a new democratically elected government, and a clear majority in Congress inclined toward market-oriented policies within a social context. No more than 20% of our legislators are leftists, and that's a good sign."

Mr. Guerrero, 43, has a master's in business administration from Wharton, and was CEO of Ecuador's privatized Banco La Previsora before being appointed to his current position. Despite the country's current difficulties -- 40% inflation, 11% unemployment, widespread corruption and an estimated $1 billion in crop losses from El Niņo -- he says "we're looking forward to 6% average growth for each of the next four years."

At the moment, Ecuador has a foreign debt of $15 billion, making it one of the most heavily indebted countries in Latin America on a per-capita basis. The United States is the top source of foreign investment, but in 1997, U.S. investment fell to $75 million from $99 million the year before.

Even those who are far less optimistic say Mr. Mahuad's election could be a turning point for Ecuador.

Walter Spurrier, a Guayaquil-based economist and publisher of the newsletter Analisis Semanal, says the incoming president has a long-term view of things, "something his predecessors have not had."

"In the past, privatization failed is because the heads of the entities to be privatized opposed efforts by Conam. With the ports, especially at Guayaquil, the main problem has been that Conam wanted to sell all operations to one single company, whereas the local business associations wanted to privatize different activities so you'd have a wealth of small entities at the port. We don't know what Conam's new policies will be."

Joseph Massoud is commercial director at Ultramares, a coffee-exporting company controlled by banana tycoon Alvaro Noboa, who was narrowly defeated by Mr. Mahuad in last month's runoff election.

"Right now, the country lacks total direction, and it's very corrupt at all levels. So any new government is going to make a difference, as long as they have a decent macroeconomic policy," Mr. Massoud said in a phone interview from Guayaquil. "What Mahuad is trying to do is not a secret. Everybody is trying to recuperate taxes, because here, nobody pays taxes."

Mr. Guerrero, 43, says that over the next few months, observers will see that the Mahuad administration is serious about selling off the state-owned phone company, Emetel, and boosting foreign investment in the oil and electricity sectors.

"The president understands the country's need for modernization. One of his main goals is to fight corruption. If you have simple rules and regulations, you can reduce corruption drastically," Mr. Guerrero told The Journal of Commerce. "Ecuador will have a broad and ambitious plan for modernization of the whole public sector, including the sale of most of the public firms providing public services: telephone, electricity generation and distribution. In the oil sector, there will be private investment in new wells, and a new pipeline from Oriente to the coast. This will be built, owned and operated by a private consortium chosen by international tender, which will be done very soon. Conam will work on 10 or 15 projects at the same time."

Regarding the previous government's two unsuccessful attempts at selling Emetel, Mr. Guerrero says "the recent experience of Brazil has been very encouraging, and has shown us that the telecom business is very attractive. We are not going to sell Emetel right away. We want investors to see changes in the country first. We're planning to bid for three to five top investment bankers, reassign the process, and study what went wrong."

On the bright side, Mr. Mahuad's inauguration may mean a resolution to Ecuador's long-simmering Amazon border dispute. The fact that Peru's Alberto Fujimori plans to attend the inauguration in Quito is giving Ecuadoran executives hope that a final agreement with Peru will boost trade between the two countries and free up official funds that had been going for defense.

In addition, the U.S. is promoting $2-3 billion in highways, oil pipelines, power grids and other integration projects for the border area, with funds to be provided by industrialized nations, NGOs and the private sector.

"In our view, the market may not be fully incorporating the favorable impact for Ecuador of the peace dividend," says Santander Investment Securities, adding that "the relative importance of defense spending in the Ecuadoran economy suggests that the potential impact would be greater than the comparable effect on Peru."

Maria Teresa Perez, executive director of the 750-member Ecuadorian-American Chamber of Commerce in Guayaquil, says Mr. Mahuad has brought a "climate of confidence" to investors, and that "one of the most important things is to depoliticize the judicial sector, so the rules of the games are very clear for foreign investors. The privatization process must be accompanied by modernization of the state."

Mr. Guerrero wasn't specific about how his government would speed up the concession of various operations at the Port of Guayaquil, which handles half of Ecuador's exports. Bananas, of which Ecuador is the world's largest exporter, account for nearly 80% of total outbound volume at Guayaquil; the remainder is mostly coffee, frozen shrimp and seafood. Chief imported goods come mainly from the United States, Canada and Australia, and consist of chemicals, grain, iron, steel and paper products.

"We have corruption problems at the port, and the military is in charge of the port," said Ms. Perez. "I think that will continue until there's a real genuine process of modernization, without corruption."

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