Special Report The Ecuador Report

EXPLOSIVE PROFITS Ecuador is opening up its natural wealth to investors

, IN-DEPTH SECTOR ANALYSIS Mining - Oil - Agriculture - Real Estate

ENERGY & MINING SPOTLIGHT TRADE SPOTLIGHT ECONOMY SPOTLIGHT We talk to Carlos Pérez , Minister Minister of Production, Foreign We interview the Minister of of Energy and Non-Renewable Trade, Investment & Fisheries, Economy and Finance, Richard Resources Iván Ontaneda, discusses Martínez

LatAm INVESTOR Ecuador’s13 Q4 2019 growth plans COUNTRY REPORT | ECUADOR Ecuador

CAPITAL CURRENCY CONTINENT OFFICIAL POPULATION Quito US Dollar South LANGUAGE 17.37 m America Spanish

COLOMBIA Politics Global Rankings

PRESIDENT EXECUTIVE BRANCH Lenin The current Head of QUITO 86 114 123 Moreno Government is Lenin Moreno.

ECUADOR s s LEGISLATIVE BRANCH ene s A unicameral Congress of 137 members that are elected orruption

for a four-year term by proportional representation. C The President also has the power to convene an

executive cabinet to draft legislation, though this can ompetiti v PERU C be overruled by sucient votes from Congress. Ease of Doing Busine s JUDICIARY BRANCH The judicial branch of government is headed by a 21-member National Court of Justice in Quito, while the Constitutional Court interprets the constitution with regards to individual rights. The last elections were held on April 2017 and the next are due in 2021.

Main Trading Partners Exports Imports

US VIETNAM PERU US CHINA COLOMBIA 31.5% 7.6% 6.7% 22.8% 15.4% 8.7% CHILE PANAMA 6.5% 6.4% PANAMA 4.9% BRAZIL RUSSIA 4.4% OTHER 4.4% OTHER PERU 34.4% CHINA 38.1% 4% 4.2%

Petroleum, shrimp, bananas, cut flowers, Industrial materials, fuels and lubricants, cacao, co‡ee, wood, fish nondurable consumer goods

LatAm INVESTOR 14 Q4 2019 INFLATION GDP (PPP) GDP GROWTH GDP PER CAPITA (PPP) 0.3% $108 bn 0.2% $6,198 2019 est

National Tax Rates GDP Composition

CORPORATE AGRICULTURE 22% 6.7%

PERSONAL INCOME INDUSTRY 35% 32.9%

SALES SERVICES 12% 59.9%

GDP per Capita Growth (Annual %) Foreign Direct Investment, Net Flows (% of GDP)

6

4

2

0

-2

-4

-6

-8 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Sources: World Bank, Transparency International, World Economic Forum, BCRP

LatAm INVESTOR 15 Q4 2019 COUNTRY REPORT | ECUADOR

THE UK VIEW: HM Ambassador to Ecuador, Katherine Ward, explains why the bilateral relationship is back with a bang…

ATAM INVESTOR: In May 2017 a new president was Earlier this year, the Ecuadorian Explain how the UK’s elected. And even though Lenin Moreno government decided to put an end relationship with was from the same political party, his to the Assange issue. That led to the attitude towards the Assange issue and first visit of a UK minister to Ecuador LEcuador has changed recently? the type of relationship he wanted with in eight years, when Minister for Trade the UK was completely different than Policy George Hollingbery MP came to AMBASSADOR WARD: When that of his predecessor Rafael Correa. sign the Andean Continuity Agreement I arrived in January 2017 the relationship So, we shifted our policy and began to in Quito. In July, Sir Alan Duncan, then was not positive. Ecuador’s previous engage Ecuador on issues where there Foreign Office Minister responsible government granted asylum to Julian was a clear interest for the UK. for the Americas, came to Ecuador Assange, which allowed him to breach to formally relaunch the bilateral bail conditions in the UK and flee British In autumn 2017, Ecuador’s then Trade relationship, sign a joint cooperation law by remaining in the Ecuadorian Minister, Pablo Campana, included the declaration and meet the President. Embassy in London. It caused a serious UK in his first overseas visit, leading to So the bilateral relationship now is diplomatic incident between the UK the first ministerial meeting between extremely good and very friendly. and Ecuador, with some describing our Ecuador and Great Britain for several relations as ‘in the freezer’. As a result, years. Ecuador’s First Lady also paid LAI: Will trade and investment there were no ministerial visits from a private visit to the UK that included between the two countries either country, with our brief meetings some official meetings on gender grow? in international fora merely confirming issues, and we invited President our disagreement on the Assange issue. Moreno to be the keynote speaker at By the time I arrived in Quito, British the Global Disability Summit we held in AW: In 2016 Ecuador joined the EU cooperation on most other agendas London in summer 2018. Trade Agreement with Colombia and had also mostly ground to a halt. Peru. That led to a 143% increase in British exports to Ecuador in 2017. So, it was vital that we signed a continuity agreement that ensured the same terms of trade would exist after Brexit. We are pleased that is now in place with Ecuador, but ratification will take a few months. Both governments are working hard to ensure that there will not be any disruption to trade when the UK leaves the EU.

On the investment side, one of the sectors with the most potential is mining. We are part of a diplomatic group of mining countries that works

LatAm INVESTOR 16 Q4 2019 with mining companies and the mining area of common interest is human fortunate to have an excellent British chamber to try to help them resolve rights. Both the UK and Ecuador want Chamber of Commerce here. issues holding the industry back. We to fight gender inequality. In Ecuador, are also working to improve conditions like in much of Latin America, there is a In Ecuador the regional differences for British investors in Ecuador. For problem with violence against women between the coast and the highlands example, we have started negotiations and girls, so we are working with them are very marked so the chamber has on a double taxation agreement, with to reduce that. two separate branches, one in Quito a tentative agenda already arranged. and one in Guayaquil. They support Ecuador is also keen to have a new Environment is another area of strong each other, share branding and have bilateral investment treaty with the cooperation. We are using British equal status; however, each tends UK, so we should see the investment technology to run an environmental to operate in their own sphere of climate continue to improve in coming education programme with Ecuador’s influence. Depending on where a new years. Science Museum and the Darwin UK company will be focused, they can Foundation, to enable Ecuadorian work with the relevant branch of the The change with this new government children, many who have never been chamber.

is more radical than people give it to the Galapagos, to see and learn credit for. Indeed, I believe history will about the islands via virtual reality. We be kinder to Moreno’s government than are backing Galapagos Conservation CONTENTS his current poll numbers suggest. The Trust’s work to identify where plastics Ecuador Snapshot 14 IMF deal would have been unthinkable that arrive in the Galapagos come under the previous government. In from. Meanwhile Ichthion, a British The UK View 16

2018 FDI rose by 127% to a historic company started by an Ecuadorian Oil ad Gas 19 high. A batch of ambitious economic student in the UK, received a £600,000 Energy & Mining Spotlight 22 reforms is due in the autumn, covering innovation grant from the British everything from labour law to the tax government to develop solutions to Gold Rush 24 regime. If approved, the reforms could remove and recycle plastics from rivers. Brave New World 30 help transform the economy. Coupled The Embassy is supporting Ichthion in Trade Spotlight 34 with the anti-corruption measures its bid to introduce this technology in taken by this government - which are Ecuador. Feed the World 36 beginning to be felt in the corruption Economic Spotlight 40 perception index - we are seeing a Does the UK need to beef LAI: Legal Certainty 42 steady improvement in the business up its diplomatic presence in environment. Final Word 44 Ecuador? The Ecuador View 46 LAI: How is the British Embassy AW: We’ve managed to do quite a in Quito making the most of lot with a small footprint, as many USEFUL CONTACTS the improved relationship? of the initiatives I mentioned above

are delivered by collaborating with Ecuador Trade Office, London AW: We have a small team here, so we partners. But I hope we will be able Juan Carlos Yépez Tel: +44 (0) 203 078 8040 have to prioritise our resources. One of to secure more staff to pursue the [email protected] the really positive developments with opportunities the relaunched bilateral this government is the fight against relationship presents. British Chamber, Quito Diego Gordon corruption. Before she was given the [email protected] role, we invited the new Prosecutor For trade, our team from the +593 2 2250883 General to the UK to see our anti- Department for International Trade can British Chamber of Commerce corruption methods and we will act as a point of contact for your readers Guayaquil continue to support her work. We have when they come to Ecuador, providing Cira Villacresses [email protected] also been helping Ecuador combat contacts and local knowledge to help Tel: +593 4 3703870 narcotics and organised crime. Another UK companies succeed. We are also

LatAm INVESTOR 17 Q4 2019 COUNTRY REPORT | ECUADOR Ecuador Opens Up its Oil Industry to International Investors The Opec member needs foreign firms to help it capitalise on its oil wealth before new energy sources render it redundant…

ore than a century ago, instability meant its oil policies would the oil price is high, both Ecuador and legendary Ecuadorian swing, pendulum-like, from ‘investor the companies benefit. And when it is M president, Eloy Alfaro, signed friendly’ to ‘resource nationalism’. low, we both suffer. That fairness has the country’s first ever oil exploitation helped it attract oil and gas firms. For contract. A flurry of further deals The government of Rafael Correa, example, in our Intracampos Round we eventually saw Anglo Ecuadorian 2007 to 2017, oversaw a swing to had successful bidders for seven of the Oilfields, that would later become part resource nationalism. In a time of eight contracts offered, with a total of BP, emerge as the dominant player record commodity prices, a windfall investment of $1.2billion.” Ecuador’s oil industry, producing tax was created to increase the state’s steady amounts in the coastal province share of profits. Meanwhile existing You would expect a minister to talk of Santa Elena. oil companies that had production up his government’s new oil contracts sharing contracts with the Ecuadorian but many in the industry view them Ecuador’s coast may have been the state saw them forcibly changed as a positive development. Fernando starting point for the country’s oil to service contracts. Now Moreno’s Emanuele is the CEO of Orion Energy, industry but it wasn’t to remain its administration is trying to attract a privately-owned, Ecuadorian- epicentre. Rumours of immense oil international oil firms by creating more focused oil company backed by British wealth in Ecuador’s jungle continued to welcoming conditions for investors. and Singaporean investors. In 2014 draw international investors east, with it acquired two blocks in the jungle both Shell and Standard Oil conducting Investor friendly in Ecuador’s northeast and operates extensive exploration. The man in charge of Ecuador’s oil under the service contract model. industry is Carlos Pérez, Minister Emanuele is keen to stress that the By the 1960s the Oriente, as the area for Energy and Non-Renewable service contracts are not all bad, noting east of the Ecuadorian Andes is known Resources. The son of a former general that, despite the name, the Ecuadorian locally, began producing commercial manager of Anglo Ecuadorian Oilfields, version is different to service contracts amounts of oil. That sparked an oil Pérez grew up in the coastal oil camp in other countries, like Mexico. “If we rush, with companies from around the of Ancon. Surrounded by expat oil don’t produce, we don’t get paid. We world vying for blocks in Ecuador’s workers he spoke English before he earn per barrel, so really, it’s a revenue jungle over the following three learned Spanish and went on to have sharing contract with a fixed fee.” decades. Yet their status and business a successful career in the industry, conditions would constantly change working for the likes of Halliburton However, he agrees that there are as different Ecuadorian governments before being headhunted by this some serious drawbacks. “We can’t get altered national oil policy. New state administration. reserved-based lending, which cuts oil companies emerged as major off an important source of funding. players in the industry, while various “The service contract model that That’s because we rely on the state, in foreign firms left in protest at their the last government favoured was particularly the Ministry of Energy and treatment. That Ecuador, which joined not very attractive for international Non-Renewable Resources’ trading international oil cartel Opec in 1973, companies. We’ve changed that to a branch, PetroEcuador, to commercialise should assume greater control over its participation contract, which allows our oil. Once it sells the oil it repays us natural resources was both fair and in companies to book reserves. Another out of the national budget. That means keeping with prevailing global trends crucial element is that they are fair. that if the oil price falls or Ecuador has at the time. Yet the country’s political We use a formula that means when budgetary problems our payments can 

LatAm INVESTOR 18 Q4 2019 Some large energy infrastructure projects were hit by political problems so it remains to be seen if this government can have more success

be delayed. In 2017, we didn’t get paid for six months, which matter, says Emanuele. Orion’s access to the northern put us under enormous strain.” pipeline “means we pay transport costs of less than $3 per barrel – if we had to truck it the cost would be around $20.” The new participation contracts avoid that problem and therefore should succeed in attracting more investment. “We Under the previous administration you would have expected are planning to expand in Ecuador”, says Emanuele, “and will state firms, such as national E&P firm Petroamazonas, to be be bidding for some of the blocks coming available under called on to boost production and build infrastructure. But the new contracts. We will stick to the northeast of Ecuador, as Minister Pérez frankly admits in his exclusive interview where you have nearfield exploration opportunities. That’s with LatAm INVESTOR, the national oil firm, “lacks capital”. great for a mid-sized company like us because it’s the type As a result, opportunities will be created for international of exploration risk we can carry on our balance sheet. And if firms. you find oil, then the infrastructure is already in place to take it to the market. There are some larger scale opportunities “There is definitely a shift in the market environment and the that will become available in the southeast of the country government is embracing local and international investment over the next decade but they are too big for us to take on.” to the oil and gas sector”, observes Juan Cevallos, founder and President of the eponymous oil production equipment New projects supplier Importadora Juan Cevallos, known as IJC. His firm Ecuador’s oil industry officially began more than 100 years sources the best oil equipment from around the world and  ago with Alfaro’s first contract to the Englishman, Carlton Granville Dunne, in 1909 but there are still at least 4.7 billion barrels of oil that have been untouched. That’s an incredible strategic asset for the country but one that may lose its value in the future as new energy technologies replace oil. Minister Pérez believes global oil demand will be in decline by 2040 and that “it’s imperative that we make the most out of our resources now”. But with the right investment conditions the minister estimates that oil production could hit 700,000 within a few years, up from its current level of 550,000 barrels per day (bpd).

That 2040 deadline has given Ecuador’s oil market a sense of urgency because there are several challenges that need to be overcome if the country is to make the most of its black gold. Ecuador’s northeast oil basins are served by excellent infrastructure, with current pipeline capacity of 850,000 bpd. Yet decades of constant production mean these maturing basins are also becoming more geologically complex. Some of the most exciting, barely-touched oil basins are in the country’s southern jungle but they come with social challenges, as some tribes are against the industry, coupled with a lack of infrastructure. Pipelines,

LatAm INVESTOR 19 Q4 2019 COUNTRY REPORT | ECUADOR

maintains a well-stocked inventory Unfortunately, the project became 80,000 barrels per day (bpd). But the to supply Ecuador’s hydrocarbon enveloped in the Odebrecht scandal, potential is even greater, with scope industry. Cevallos is confident that that we are far removed from, but we for 200,000 bpd.” The emphasis on it could help with a new southern are proud to have met the technical environmental protection has led to pipeline, given that it is already a requirements. Likewise, we supplied a new type of oil service company trusted partner of the $1.4billion the parts for a 90km, 48-inch diameter that is capable of delivering safe northern oil duct, OCP. “Ecuador’s pipeline that was laid for the Refineria energy projects in the rainforest. FYI largest international private-sector del Pacifico coastal refinery project. Group, an Ecuadorian engineering oil and gas investment so far was the Again, we are proud to have fulfilled and construction firm that specialises OCP pipeline, that takes crude from our duties but sadly that project has in energy, mining and water projects, Ecuador’s northwest jungle region to also been halted for political reasons.” is a good example. “We’ve built three the refinery on the coast. We worked production platforms in the ITT oil on the construction of that project, Environmental care field”, explains FYI Group CEO, Fabián providing the tubes, valves and joints Ecuador is faced with a dilemma. The Yar. “We did everything from definitive it needed in 2003 and 2004. Then we bulk of its proven oil reserves are design to production. have stayed as a partner, providing the to be found in the midst of its other spare parts for essential maintenance great natural resource – the Amazon These platforms were subject to four during the pipeline’s operation. I’m rainforest. Much of the oil is in or audits. First PetroAmazonas inspect proud to say that in 2007 OCP selected around Yasuní, a national park whose your work, then the Ministry of us as the best provider out of more rainforest is one of the most biodiverse Environment, then the international than 700 other companies.” places on the planet. Previous guarantor countries that have a president Correa floated an ambitious commitment to protecting Yasuní Fortunately for companies like IJC the scheme for developed countries to pay and finally the community. One of our new government has an ambitious to leave the oil untouched but it proved environment audits had 450 different portfolio of energy projects. The economically unviable. That means items that had to be independently most urgent is the refinery, with the Ecuador, a country still struggling to checked every month, so these were existing plant at Esmeraldas only able provide its poorest with acceptable very stringent tests. It is probably one to process 110,000 bpd. Moreover, fuel healthcare, education and housing, of the most controlled oil and gas areas produced by the 42-year-old refinery must find a way to use one endowment in the world. I’m proud to say that not will soon fall foul of the International without damaging the other. only did we pass the audits but we Maritime Organisation’s new 0.5% have won ecological awards for our sulphur regulations. The government is For many years that seemed care of the environment.” also inviting private-sector bidders for impossible. The state, often inefficient a new 300,000 bpd refinery, having or corrupt, proved unable to Ecuador will have to develop its own decided to scrap the protracted, develop and enforce the stringent set of best practises and technology, expensive and corruption-ridden environmental standards needed to because nowhere else in the world attempt of the previous administration develop oil and gas in the Ecuadorian has identical conditions to Yasuní. to build one. jungle, while some international FYI Group is leading the charge. “We companies were criminally negligent created some innovative ecological The challenge for this government, towards their ecological obligations. solutions. For example, in one project says Cevallos, is not only attracting Fortunately, that changed in Correa’s our idea, which the client accepted, the investment but making sure the administration and Ecuador’s oil and was to place a temporary road that can projects actually get built. “Some gas industry is now governed by strict be removed when oil production stops. large energy infrastructure projects local and international regulations. It means that eventually the jungle were hit by political problems so it returns to its original state. We invest remains to be seen if this government Minister Pérez is clear that responsible heavily in buying the most ecologically- can have more success. For example, in production in the rainforest is vital friendly equipment and supplies from 2014 we won an important contract to if Ecuador is to realise its oil and gas around the world to ensure that we supply all of the fitting for the multiuse potential. “In the ITT hydrocarbon minimise the environmental impact. pipeline being built from Cuenca in the deposit, which is one of our main Another innovation is that we don’t highlands to Pascuales on the coast. targets, we have raised production to use local wood for constructing the

LatAm INVESTOR 20 Q4 2019 campsite and the facilities. We bring our own prefabricated equipment.” It is probably Extracting oil responsibly from the jungle is never going to be easy, one of the most explains Yar, but it’s not impossible. controlled oil and “Ecuador can and is exploiting its oil and gas potential in an environmentally gas areas in the responsible manner. The environmental world regulations are among the strictest in the world, but if companies comply FYI Group CEO, with them then they can make Colombia, which was the oil and gas Fabián Yar successful projects.” darling of the region, struggled with poor infrastructure and too much has always been a tough country to With all this talk of the challenges, competition for reserves that are not govern and Alfaro was killed on the one may wonder why investors would that big”, it became apparent that streets of Quito by a conservative mob. come to Ecuador in the first place. Ecuador is one of the most attractive Fast-forward 100 years and another Perhaps the best reminder comes countries in Latin America. Ecuadorian reforming president, from Orion Energy, which recently Alfaro was a force of nature – a Lenin Moreno, is trying to modernise scaled back its pan-Latin American revolutionary-turned-president who Ecuador’s oil industry. And while aims to concentrate on Ecuador. achievements, such as opening up Moreno will hope to avoid Alfaro’s Emanuele notes that “as Mexico’s the oil sector and building the Quito- grisly fate, he too is looking to British energy reform stalled, Venezuela sunk Guayaquil railway, dragged Ecuador investors to kickstart his hydrocarbon further into deep problems and even into the 20th century. Yet Ecuador revolution.

LatAm INVESTOR 21 Q4 2019 COUNTRY REPORT | ECUADOR

MINING ENERGY AND MINING SPOTLIGHT: Minister for Energy and Non-Renewable Natural Resources, Carlos Pérez, explains why Ecuador is welcoming UK investors…

ATAM INVESTOR: of responsible mining we are encouraging Miners’ biggest worry should be allowed. in Ecuador are the Lpolitical risks; what is your LAI: What are the advantages ministry doing to mitigate of Ecuador as a mining them? jurisdiction?

MP: Ecuador’s most important MINISTER PÉREZ: We share competitive advantage is our geology. We the industry’s concern and we are working have mineral rich sections of the Andes on reducing the political risk. We have to that haven’t been exploited by miners. As show a different face of mining industry a result, the mineral content of the rock to the Ecuadorian people because the being targeted in these initial projects is bad examples they have seen so far has very high. We have had some of the world’s triggered opposition from environmental largest copper and gold discoveries in and social groups. As a government we are recent years, which look like they will be attracting international companies, with turned into very profitable mines. That best practises that will bring responsible cost structure is further aided by the fact mining to the country. Our challenge because it hadn’t fulfilled some technical that we are a relatively small country, with is to make the protestors realise that. safety requirements. We believe that this good infrastructure coverage. We have an Unfortunately, some of these protests are strict approach is good for the industry in excellent road system and surplus power led by international NGOs from Europe the long run because it will help convince generation capacity, which means that and the US that are opposed to all forms the Ecuadorian people that legal, regulated new projects don’t need to build massive of mining. mining will not harm the country. amounts of infrastructure. We have further complimented these advantages One way we are doing this is by cracking Of course, some of the political risk is out by designing an excellent mining regime, down on the illegal, informal mining that of our hands. In Rio Blanco, located in the with profit sharing that is in line with blights our country. We recently stopped Azuay province, mining was stopped after international standards. 10,000 illegal miners in Buenos Aires, a judge misinterpreted the result of a local Imbabura province. This informal mining referendum. We’re now working through is linked to organised crime in Ecuador, the courts to get that decision overruled, LAI: Ecuador’s oil is in the Colombia and Venezuela, and causes as the project in question complies jungle; how will it overcome much environmental and social damage. with all of the relevant legislation. The the social, environmental and The other way we reduce political risk Constitutional Court has the final say infrastructure challenges? is by closely regulating the new legal when a community decides to challenge miners coming to the country. We are very mining. As a government we are strongly strict in ensuring they comply with their communicating to the court that it should MP: Obviously there are restrictions environmental and social obligations, for take rational decisions based on fact and in the rainforest. We can’t operate in example we stopped one project for a year Ecuadorian law. If it does so, then the type Yasuni National Park, yet we are allowed

LatAm INVESTOR 22 Q4 2019 in a transition area. That also causes some 2021. I don’t think we will make that target capacity with a new refinery. delays, for example it took us six months to as the industry has been held back by get the licenses for Ishipingo platforms A delays on the environmental licenses in the LAI: Tell us about the country’s and B. But we have seen success in recent north and tenders in the southern blocks. exciting renewable energy years. For example, in the ITT hydrocarbon We are currently producing 560,000 bpd plans. deposit, which is one of our main targets, and I think we will end the year on 580,000 we have raised production to 80,000 bpd. barrels per day (bpd). But the potential is MP: Ecuador already has a very green even greater, with scope for 200,000 bpd. Ecuador has 4.7 billion barrels of oil in grid, with 85% of our electricity generated proven reserves. The real figure is probably by hydroelectric plants. However, that One of the main restrictions is that higher, for example in its annual energy dependence on hydro means that during Petroamazonas lacks capital. As part of review UK oil firm, BP, gives us a much rainy seasons we have a surplus of power, this government’s austerity programme larger figure. However, at the Ministry we that we export to Colombia and Chile. But its budget was reduced this year. We like to use the most conservative, proven during September and October, when are getting around that by inviting reserves amount. Either way that you look it is the dry season in the east of the more private-sector companies, mostly at it we have a lot of oil. Moreover, when country where most of our power plants international, to develop hydrocarbon you consider that global oil demand will are located, we have less hydropower. So, projects. In the northern part of the probably stop growing after 2040, then we want to balance our grid by building jungle we already have all of the major it’s imperative that we make the most renewable projects on the west side of infrastructure, such as pipelines and roads, out of our resources now. I believe the the country. We are looking at wind and that we need to develop the oil there. In infrastructure needed in the south will take solar. We will also have some natural gas the southern part of Ecuador, in blocks 86 a few years to develop. When it comes to provide relatively clean baseload power. and 87, we don’t have the infrastructure online you would see a big leap forward The gas plant will be between 500 MW needed to develop those oil projects. our national production figures. and 1,000 MW and will also involve a gas import terminal as our local supplies are There are also some social issues in the To attract the investment needed to not sufficient. Finally, there are still two south, where tribes are against the industry. develop our reserves and build the excellent, and very large, hydroelectric I believe that’s because the government infrastructure we need to have competitive projects to be developed. has not effectively explained the benefits contracts. The service contract model that and we will launch a new communication the last government had favoured was not We have been blessed by nature so these effort to show them how the industry very attractive for international companies. wind and solar projects have incredible can help develop their community. I think We’ve changed that to a participation efficiency numbers. For example, the the south is more interesting for the contract, which allows companies to book 110MW wind farm that we are tendering in majors because those blocks are less-well reserves. Another crucial element is that Loja has a plant factor of 50%. We will be explored and have a much greater upside. they are fair. We use a formula that means holding auctions, where the winning bids The fields in the north are better-suited when the oil price is high, both Ecuador will have guaranteed PPAs from the state to mid-sized companies as they involve and the companies benefit. And when it electricity company. We are also open to smaller capex but also have less upside. is low, we both suffer. That fairness has private initiatives from investors. The biggest opportunities in Ecuadorian helped it attract oil and gas firms. oil and gas will come when we open up the So, if someone approaches us with a southern concessions, which we plan to do For example, in our Intracampos Round we renewable project that can guarantee in the coming years. had successful bidders for seven of the eight clean energy at a competitive price, we contracts offered, with a total investment will also give them a PPA and declare LAI: Ecuador has plenty of $1.2billion. It’s also worth mentioning their project of national interest, which of reserves; how high could downstream. We need to upgrade our will speed up development. We also want refining capacity as we currently have to to switch the Galapagos Islands from production grow? import petroleum derivatives. Our existing fossil fuels to renewable energy. That is a refinery in Esmeraldas has to be upgraded great opportunity for a renewable energy MP: Our original plan on forming this to comply with new shipping fuel sulphur company to have a project in one of the government was to reach 700,000 bpd by regulations, while we also need to boost natural wonders of the world.

LatAm INVESTOR 23 Q4 2019 COUNTRY REPORT | ECUADOR

MINING Gold Rush More gold and copper have been found in Ecuador in the last ten years than anywhere else on earth...

cuador’s metallic riches have scale mining? will likely result in more discoveries. I been sought after since the days can’t see other countries with that type E of the Inca empire. Gold mined Clearly not, says Giovanni Espinosa, of scale and growth potential. Ecuador from the south of modern-day Ecuador, CEO of Enami EP, Ecuador’s state has not been explored compared to its in a province that is now called El Oro, mining company. “Ecuador has a neighbours and has multi-billion tonne was turned into intricate religious privileged location, immersed in the deposits that can be turned into multi- and ceremonial jewellery prized by metalogical belt that runs along the generational deposits.” the Incan’s ruling class. Yet despite Pacific Coast of South America, from half-hearted attempts by the Spanish Colombia to Chile. Only 10% of the But it’s not just that Ecuador has lots and then other international investors country’s territory has been explored of metal, explains Nicholas Mather, following Ecuador’s independence in for minerals, which shows Solgold’s CEO. It has the right metals. the 19th century, the country never the potential we have fostered the type of large-scale mining for further “Solgold is a porphyry copper-gold industry that arose in Mexico, Brazil, Colombia, Peru or Chile.

Mining remained small scale, with an array of locally-owned mines in the country’s south operating with varying degrees of formality. Different attempts by foreign miners to establish large operations during the 20th century were expropriated or side- lined as political instability brought radical changes in mining policy. As a result, no large sums of international capital, or leading technology, were brought to bear on Ecuador’s mineral discoveries… Indeed, we’ve seen more exploration specialist. We like those resources. mineral finds in Ecuador in recent years targets because they contain two of than anywhere else on earth.” the commodities that the world has Geological riches an inexorably increasing demand But in today’s globalised world it’s That bullish view is shared by for: copper and gold. The former will increasingly difficult for national international mining firms. Jason benefit from the move to renewable anomalies to buck international Ward is the Country Manager of energy and electric cars, while the trends. As mining investors made Solgold (LSE:SOLG), an Australian latter is the ultimate form of money.” fortunes along the Andes from Chile headquartered, Ecuador-focused Solgold’s prolific series of discoveries to Colombia, attention began to turn London-listed, copper and gold miner. show that Ecuador is rich in both to the odd one out. Could it really be “The incredible scale and richness of copper and gold. “Cascabel is the first possible that Ecuador, blessed with Ecuador’s mineral deposits allow you [target] that will be developed”, says so many other natural resources, just to make ambitious plays that wouldn’t Ward. “The MRE 2 showed 10.9 million happened to have the only stretch of be possible elsewhere. If you look at us, tonnes of copper and 24 million ounces the Andes that couldn’t support large- we have 12 more targets to test which of gold, with another resource upgrade

LatAm INVESTOR 24 Q4 2019 due later this year.” countries to default on its sovereign because of Ecuador’s history and the debt in the 21st century – many were challenging gold market at the time.” As a result, now no one doubts still nervous about committing capital. Ecuador’s mineral potential. But then One of the first to make their move Hochstein believes several factors it hasn’t been a lack of metals that was Lundin Gold, which is part of strengthened Ecuador’s commitment has prevented the emergence of a the Lundin Group of Companies, a to develop its mining industry. “The exit modern mining industry in Ecuador. collection of publicly-listed resource- of Kinross really sent a strong message It’s been the legal, regulatory and fiscal focused companies that are backed by to the Ecuadorian government, which conditions above ground that have the Lundin family from Sweden. Lundin made them more willing to work scared off miners. Gold CEO, Ron Hochstein, remembers with us. Also, the falling oil price in first scouting out the project in 2014. a dollarized economy that couldn’t Above ground devalue its currency like its neighbours In 2015 the government of Rafael Correa “I came with Lukas Lundin to Ecuador increased government appreciation for unveiled new, investor-friendly mining to look at the Fruta del Norte project mining. The higher oil prices had helped taxes. In an unexpected move for a - one of the best undeveloped gold Ecuador to improve the standard of socialist firebrand that had previously deposits in the world because of its living and the country’s infrastructure, tried to squeeze the industry, Ecuador size and gold grade. We had meetings but these factors meant that many hired international natural resource with Kinross of course but Lukas political figures began to see mining as consultancy, Wood Mackenzie to also wanted reassurance from the a way to keep those gains in a period of help draft the fiscal regime. On paper government that it was serious about low oil prices.” Ecuador now had a solid mining law but developing a mining industry. We given the country’s inconsistent track judged that it was and then we moved Ward agrees that this government record with international investors – forward, raising the equity to buy is serious about mining. “I think the it is one of only two Latin American the property, which was tough both political environment here is very 

LatAm INVESTOR 25 Q4 2019 COUNTRY REPORT | ECUADOR

supportive of mining. We are starting the government in 2013 and by 2019 fail, with only 3 in 1,000 becoming a to see established mining countries, had built the mine plus a processing mine. They are terrible statistics. I’d such as Canada and Australia, reject plant capable of 60,000 tonnes of rather be working in Ecuador with a projects because they are wealthy ore per day. Meanwhile Lundin began great chance of finding something countries. Here Ecuador is just at the construction in July 2017 and was than be drilling away in a perceived beginning of the journey and wants already producing by the fourth positive jurisdiction which has been to use mining to have the economic quarter in 2019. That shows that, over explored and has less chance of growth that Canada and Australia have despite the country’s reputation for discovery.” enjoyed. If you respect the laws here stifling bureaucracy, mining projects and act like a model company, you will can be developed quickly in Ecuador. Communities get support.” Ecuador’s government also took a Ecuador also has several infrastructure proactive approach with community Miners already operating in the advantages, says Mather. “It’s a small, relations. Across the world mining country also praise this government’s compact country, packed with great investors have learned the importance willingness to learn from its own mining targets. For Alpala we will have of gaining local support. However, mistakes. Ecuacorriente is the local to build just 30 km of road to connect in Latin America the combination of decentralised political systems, with weak states that lack presence in remote areas and an array of indigenous cultures, means that community opposition to mining projects can be particularly strong.

Ecuador created an advanced royalties programme, which means miners have to make upfront payments to the government for it to spend on community works around the project. They are significant sums, for example Ecuacorriente has paid about company of two behemoth Chinese the mine to the country’s excellent $85million, which impact the net present conglomerates that have built, a highways. In other countries you have value of a project, but help build local $1.5billion copper project that became to build hundreds of kilometres of road support for a mine. The government Ecuador’s first modern, large-scale to connect mines. The same goes for uses the money on amenities such as mining operation when it entered into water supplies, which are abundant, hospitals, water sanitation and schools, production in July 2019. and the electricity matrix, which is so the community benefits from cheap, reliable and very renewable.” mining before they started to see other Mauricio Núñez, Ecuacorriente’s Vice impacts, such as increased truck traffic. President of Legal Affairs, hails the Of course, challenges remain. For Miners are then able to recoup the government’s willingness to listen. example, the closing of the mining money from future royalty payments. “They changed the sales tax structure, cadastre has stalled the development which allowed us to reclaim VAT once of fresh projects. Meanwhile regulatory Of course, the government can’t handle exports started. That helped boost the agencies are slow to issue permits as all of a mine’s community relations. The country’s competitiveness. They also they struggle to gain the expertise advance royalties programme should removed the windfall tax, which was a and scale to handle the mining boom. help the project get off to a good start real disincentive to investment. However, Ward believes these teething but then it’s down to each company problems pale in comparison to the to ensure that the community remains Núñez’s positive assessment is potential. “The biggest risk in the onside as the mine grows. Ward backed up by the facts. EcuaCorriente mining industry is geological – not believes that its particularly important signed its investment contract with political. Nearly all exploration projects that the pioneers, like Lundin Gold and

LatAm INVESTOR 26 Q4 2019 SolGold is a leading exploration company focussed on the discovery and definition of world-class copper and gold deposits in Ecuador

SolGold first entered The geology and mining copper gold major in Ecuador. Ecuador in early 2013, industry of Ecuador has been SolGold’s 100-year vision for and has since established endorsed by a number of major the Ecuadorean mining industry companies investing in the has been built on strong Alpala as a Tier 1 copper- country. foundations, with sustainability gold project. The resource and responsible mining at the at the Alpala deposit SolGold is the largest tenement heart of all activities. boasts a high grade holder in Ecuador. SolGold used core which will target its successful and cost efficient SolGold employs a staff of early cashflow and an blueprint established at Alpala, over 650, 98% of which are to explore for additional world Ecuadorean. We expect this accelerated payback of class copper and gold projects number to grow significantly as initial capital. across Ecuador. the operations at Alpala, and across the country expand. SolGold is currently SolGold is strategically applying investigating development and its exploration blueprint across LSE: SOLG financing options to bring the its pipeline of potential world project through to feasibility class projects, to ultimately TSX:SOLG stage. develop its vision to come a

SolGold Ecuador @SolGold_plc SolGold Plc SolGold Plc

Brisbane: +61 7 3303 0660 | London: +44 20 3823 2130 | Quito: +593 2 6011021 LatAm INVESTORwww.solgold.com.au 27 Q4 2019 COUNTRY REPORT | ECUADOR

Solgold, don’t have a negative social massive benefits that a modern, That doubt was like a Sword of or environmental impact. “From the responsible mining industry can bring. Damocles hanging over the industry very beginning we realised that we I would say that every year since 2013 and its removal is a positive step for had to be a model company. That’s the overall attitude towards mining has both mining and Ecuador in general. because we are going to be one of the improved slightly.” “Mining is permitted in the constitution. first major mining projects in Ecuador, It cannot be banned.” so it’s vital that we prove the industry Choosing, modern, responsible can be responsible and sustainable. mining instead of illegal, unsafe The decision was a vindication for But also, because we have many more extraction would seem a no-brainer. the likes of Lundin Gold and Solgold targets in the country, so Cascabel is But communities don’t always that believed in the country from the our way of showing other communities understand the difference. Moreover, beginning. Ward, who has lived in that we can deliver economic and internationally-funded, anti-mining Ecuador since 2013, when Solgold came social development.” NGOs, that are opposed to any to the country, feels his company’s faith form of the industry, often spread has been rewarded. Now, notes Ward, The problem, says Ward, is that misinformation and fake news about Ecuador “is the focus of a modern gold much of the country doesn’t really the new projects to stoke local rush with many of the world’s largest understand modern, responsible opposition. In some cases, the protest mining companies already setting up mining. “Most mining in Ecuador up leaders have even been found to have offices here. As an early mover, we’re to now has been informal and set a links to the illegal miners. happy to see more of the industry bad precedent.” It’s a point echoed realise that this is the place to be. by Carlos Pérez, Minister for Energy Javier Robalino Orellana, Managing We’ve got the best projects and the and Non-Renewable Resources. “We Partner of Ferrere, Quito’s leading influx of new companies should help have to show a different face of mining corporate law firm and a specialist in broaden the industry’s position in the industry to the Ecuadorian people mining, believes the sector needs more country.” because the bad examples they have support. “it’s important that the State seen so far have triggered opposition continues sending a strong message Lots of the most famous successful from environmental and social groups. in favour of large-scale responsible trades - think Soros shorting the pound As a government we are attracting mining. I feel that’s been missing or the hedge funds that spotted the international companies, with best recently.” US subprime crisis brewing – involve practises that will bring responsible identifying an anomaly that isn’t mining to the country. Our challenge Just before this magazine went to sustainable in the long run. There are is to make the protestors realise that.” print, those in favour of modern, country-specific reasons why Ecuador The government recently cracked down responsible mining received a huge didn’t develop a large-scale mining on 10,000 illegal miners in Buenos boost from the Constitutional Court’s industry in the 20th century. But it Aires, Imbabura province. Investigation decision to throw out two requests for seems unlikely that its citizens would revealed the mining operations were mining referendums. Ecuador’s mining have been content in the 21st had their linked to organised crime groups from industry had been nervously awaiting country continued to miss out on the Ecuador, Venezuela and Colombia. the decision, as the referendums could economic and social development have meant that huge swathes of the mining has brought to their neighbours. Anti-mining movement country’s mineral resources would be “I think if you take a bell curve of off limits to new mining projects. In With tens of billions of dollars pouring society’s perception of mining you will theory the court ruling should never into projects along the Andes it was find small amounts of people at either have been in doubt, says Robalino. only a matter of time before Ecuador end who are intensely in favour or opened up to international miners. opposed to the industry and will never “My legal interpretation is that the The early movers may be reaping the change their opinion”, says Ward, “and Constitutional Court should continue advantages now but the sheer scale of a big majority in the middle who are rejecting these referenda requests as Ecuador’s opportunities mean there is open to learning about its impact. mining, just like water, oil or telecoms, plenty more to come for new investors. We have been appealing to rational is a strategic sector subject to central LatAm INVESTOR readers should take Ecuadorians and showing them the government policy.” a closer look at the country.

LatAm INVESTOR 28 Q4 2019 The Benets of RESPONSIBLE Mining in Ecuador MINING 53% $2.9 Responsible mining 4% billion Projected Contribution to GDP to investment to 2021 2021 47% Other sectors 10 community Ecuadorian universities projects funded in o ering mining degrees 267 Azuay, Imbabura $147 and Zamora Chinchipe millon among others Invested in local communities around projects 33,000 Direct jobs created $715 by 2019 millon Mining tax revenues through Large-scale mining to 2021 project in construction Large-scale mining project in 10% production Mining tax revenues through to 2021 Leading mining companies from Australia, Canada, Chile, the UK This is likely to increase as Ecuador's and the US have already invested mining industry matures in Ecuador

Areas likely to see a positive impact

Increased Generation of local Increase in local Boost to local coverage of basic Development of supply chains authority tax take economies amenities in rural social projects Ecuador

Sources: Minister of Energy and Non-Renewable Resources EcuadorianLatAm Central INVESTOR Bank 29 Q4 2019 COUNTRY REPORT | ECUADOR

MINING Brave New World Ecuador is starting a large-scale mining sector from scratch and it will transform the country...

n homes and offices across Ecuador, investment (FDI) per capita in the entire foreign direct investment and thereby excitement is growing about the Latin American region. It’s never nice to increase the country’s macroeconomic I coming mining boom. In July the be ignored but the lack of investment stability. The dollar is incredibly popular country’s first large-scale mining project is particularly dangerous for Ecuador, in Ecuador and trying to switch back started production, with a second mine whose dollarized economy needs an to the sucre would be political suicide. due to begin operations in autumn. All inflow of hard currency – either from Yet that could be forced on Ecuadorians of a sudden, mining, which had been exports or FDI - to finance government by a prolonged period of low oil prices touted as the panacea for Ecuador’s expenditure. Ecuador brought in the in the future. Now, thanks to mining, struggling economy since the dying dollar in 2000, in the midst of a financial Ecuador’s dollarized economy is a lot days of Rafael Correa’s administration, crisis that had sent its old currency, the more sustainable. seems real. Ecuadorians don’t have to sucre, into a hyperinflation of 100%. look far to see what the industry could Until 2014 high oil prices provided the This international investment isn’t some do for their country. Chile has built Latin export earnings Ecuador needed to abstract economic theory - it’s already America’s richest economy on the back maintain the dollar. But the subsequent happening. In 2018 FDI to Ecuador of a well-organised mining industry. oil price fall demonstrated the danger of increased by 126% to $1.4billion. More depending on one volatile commodity than half of that money, 53%, came Mining has the potential to solve many and raised the spectre of Ecuador from mining. It’s estimated that mining of Ecuador’s acute needs. In particular having to ditch the dollar. will lead to $2.7billion of further FDI mining can create macroeconomic between now and 2021. All of the stability, generate well-paid formal That’s why, in its final years, the international investment is also helping employment and transfer technology government of Rafael Correa turned to with Ecuador’s two other big problems to local companies. For individual mining. Correa may have been a populist – jobs and government spending. Ecuadorians it’s a unique opportunity but he also has an economics PhD and to better their standard of living while realised that the industry could diversify Work needed for the country it’s a way to drive Ecuador’s export earnings, attract Ecuador suffers from a lack of formal economic development. These benefits are important to investors too. The only way the industry can be successful in the long-run is if it benefits Ecuadorian society. Widespread public acceptance of mining will help protect it from the radical swings that characterise Ecuadorian politics. So, the onus is on international mining companies to ensure that Ecuador gains as much as possible from the industry.

Dollar darling For more than a decade Ecuador has been shunned by international investors. Its lowly status hit rock bottom in 2013 when Ecuador received the lowest amount of foreign direct

LatAm INVESTOR 30 Q4 2019 employment, which is why president of employees and purchase of local and Lenin Moreno pledged to create national goods and services throughout Local partners 500,000 new jobs by the end of his the operations phase.” “There is a misguided perception term. He looks unlikely to reach that that mining began with the arrival goal as Ecuador’s outdated and rigid Tax take of the international companies”, labour market acts as a disincentive for Ecuador’s government is – to use the says Juan Carlos Peña, Commercial employers. Indeed, his hopes now rest technical term – broke. Under Correa it Director of ExoLuxen, a small gold on passing a labour reform this autumn. went from having the lowest government mining and processing operation However, in the meantime the mining expenditure per capita to the highest. in Ecuador’s southern province industry is coming to the rescue with That proved unsustainable when oil of El Oro. “Actually, there is a 33,000 direct jobs created so far. prices fell and Correa had to borrow thriving industry of small to money from China through murky, oil- medium-sized local gold miners In addition to the direct employment, the linked deals. As a result, his successor, in the south of the country.” Critics long supply chains of these vast mining Moreno, who inherited a fiscal crisis accuse the existing local miners operations also generate much more and burdensome external debt, had to of tax avoidance, environmental indirect employment. Ron Hochstein, go cap-in-hand to the IMF. In return for damage and money laundering for CEO of Lundin Gold, whose goldmine, a $10billion package of loans from the narco groups but Peña rejects the Fruta del Norte, enters production in IMF and other multilaterals, Moreno has accusations. “Like in any industry the fourth quarter of 2019, has been promised to cut government spending there may be one or two payers working hard to involve local firms in the and raise revenues. In practice this has breaking the rules but most of the project. “We could contract everything proved difficult and will need structural Ecuadorian mining companies are in Quito but instead we foster local reforms to be passed by Congress in responsible” firms. The biggest success was with autumn. However, in the meantime our catering company. Under Kinross mining has come to the rescue, with The smaller, local miners could these had been direct employees but the industry expected to generate prove interesting partners or we thought we could help them develop $715million of taxes for the government acquisitions for incoming foreign their own company. So, we decided to between now and 2021. firms looking to establish a toehold put the catering services out to tender in the Ecuadorian market. and a new company made up of local All of the statistics mentioned above former employees managed to win are impressive but they are only the Another local player with the contract. The Lundin Foundation beginning. Ecuador’s mineral riches partnership potential is Enami gave them consulting and a loan for means it has the potential to become a EP, the state mining company set $100,000 of working capital and from global mining powerhouse. Hochstein, up in 2010. Being the national that beginning it has gone from strength believes mining can reshape Ecuador’s company means Enami has been to strength. It is now one of the largest economy. “Ecuador has an incredible given some choice concessions and businesses in the province, employing geological endowment and with the interesting tax breaks. However, over 250 people. Moreover, it is having right conditions we could see mining Giovanni Espinosa, Enami’s CEO, a further multiplier effect as other local grow to be around 20% of GDP like in believes the firm’s main asset as people form companies to supply it.” Peru.” a partner is its network of local contacts. “Being a state company “Before, most people in Ecuador w Mather, CEO of Solgold, a copper means that Enami offers solid thought that all natural resources were and gold explorer that is developing intergovernmental relationships the same but examples like this show a copper-gold mine in Ecuador and that streamline the paperwork that they are not. Oil has the potential has a string of further concessions to and processes for developing a to generate lots of income for a country be developed in the future, believes mine. Moreover, partnering with but mining can create many more jobs Ecuador can become a significant player the national mining champion and related economic activities. Once in world mining. “Our ambitious plan earns you goodwill with the you have a well flowing into a pipeline could eventually help turn Ecuador into local communities around your it doesn’t need much to keep it going the second-largest copper producer projects. Our social programmes but mining can generate economic on earth, creating opportunities for and mechanisms are very strong development due to the higher number smelting, refining and manufacturing.” and will help us avoid protests.” 

LatAm INVESTOR 31 Q4 2019 COUNTRY REPORT | ECUADOR

Indeed, Mather is conscious that Technology The Semaica story is interesting because Solgold’s projects must meet Ecuador’s Latin America is notoriously bad at it serves as a case study for how economic needs “The most important investing in research and development. Ecuador can leverage its mining boom reason why investors in Solgold can be There are many regional factors at play, and build a local service industry. For sanguine about the political risk of our for example not a single Latin most of its history, the firm had nothing project is that we are partnering the American university makes the top to do with mining. “Semaica is a two country. If you look at our development 100 global ranking, but Ecuador scores family-owned, Ecuadorian engineering plan, we’re not looking to high-grade particularly poorly. According to the and construction firm”, explains the the deposit and leave with big profits. UN, Ecuador invests just 0.4% of its firm’s Technical Director, Mauricio We’ve designed it to maximise the GDP on R&D compared to 1.7% in the Martínez. “In a large country you have lifecycle, which means more revenues UK. One fast way for Ecuador to catch construction firms that specialise in a for the government and employment up is for international firms to transfer particular area, say roads or hotels. Yet for Ecuadorians… We’ve aligned our technology to local ones. And that’s my father, who founded this company goals with the Ecuadorian people, exactly what’s happening in the mining with his close friend and partner, which makes it politically sustainable in sector. always told us that because Ecuador is the long run.” a small country we should “specialise Building Ecuador’s first large-scale in Ecuador”. What did he mean? That Mauricio Núñez, Vice President of Legal subterranean mine meant Lundin Gold we have to adapt to what the country Affairs at Ecuacorriente, the Chinese- required expertise, technology and skills needs in each particular age. Twenty backed firm that started production that weren’t available in Ecuador, says years ago, there was a hotel boom at the Mirador copper mine this July, Hochstein. “We needed to develop eight in Ecuador and we built the Marriott, notes the project will continue to kilometres of tunnel so we contracted Hilton and Sheraton at the same time in benefit for Ecuador for many years. a joint venture made up of local EPC the same city. During that time people “We have already invested $1.25billion, firm, Semaica, and a Chilean mining thought that we were hotel builders, paid $140million in taxes and paid specialist, Mas Errazuriz. Semaica is but for the next 10 years there were no $85million in advanced royalties. But a well-respected player in Ecuador more hotels in Quito, so we focused on there is plenty more to come. We that has underground experience with hospitals, universities, sports facilities, estimate that Mirador will generate road tunnels and hydro plants but it etc. And throughout our history we built $4.2billion of production throughout needed some mining expertise from its what the country required.” the life of the mine, which will give partners. It successfully completed the the Ecuadorian economy a significant tunnel for us and now Semaica has the What helped Semaica, and many of its boost.” expertise and technology to work on peers, prepare for the mining industry other mines in Ecuador.” was a spate of Ecuadorian energy projects. Over the past two decades the country has built sophisticated hydroelectric plants and hydrocarbon facilities.

“About 25 years ago we moved into civil engineering and tunnelling projects”, recalls Martínez, whose firm is now one of Ecuador’s leading hydroelectric plant builders. “It started with water tunnels for irrigation, as Ecuador has lots of water but in the eastern region instead of the highly productive Andes valleys. That tunnelling expertise also helped us win important road projects, as Guayaquil also has lots of traffic that needs to be moved to the other side of

LatAm INVESTOR 32 Q4 2019 the hills. The emphasis on engineering with ore. This is Ecuador’s first taste to change. For us, now we have made it and civil works transformed our of modern, responsible subterranean part of Semaica’s DNA, it has become a company because it helped us gain large-scale mining and it’s a great competitive advantage… We found that the experience and skills to allow us to honour for Semaica to be involved in once we’d integrated the safety-first move later to the mining sector.” this project. More than just an honour it concept into our entire business then has also allowed us to become a leading it didn’t impact on the speed or cost With its project portfolio giving it the engineering and construction player in of our projects. The best proof of that equipment and engineering experience Ecuador’s burgeoning mining industry.” is the Lundin Gold project, which was all Semaica needed was a specialist completed six months in advance.” mining partner, says Martínez. “In a The arrival of international mining consortium with Mas & Errazuriz, a to Ecuador won’t just bring new Mining and Ecuador are a good fit. Chilean company that has a lot of technology; it also brings best practices Ecuador has plentiful deposits of the experience in subterranean mines, we from around the world. “In our job copper and gold that miners need. recently finished Ecuador’s largest ever with Lundin Gold we realised that this Meanwhile the industry can provide the mining tunnelling project for Lundin company’s first priority is safety”, says macroeconomic stability, jobs, taxes Gold. It is an interesting project because Martínez. “If you don’t make that as and technology that Ecuador requires. it is the first time that an international part of your company’s DNA then you Mining will transform Ecuador and mining company develops a world- won’t get the work. These international create wealth both for its people and class gold deposit in Ecuador. So, this mining companies prioritise safety the investors who risk their capital to is a huge mine, involving thousands above production, speed and even cost. launch the country’s large-scale mining of people that will last for decades. That’s because they realise that in the sector. UK mining firms are strong We built eight kilometres of tunnels – long-run the industry isn’t sustainable in neighbouring Peru and Colombia four down and four up – which allows if it’s not safe…That insistence on safety - now it’s time for them to look for them to send equipment and people may be a barrier to entry for some opportunities in Ecuador. to the bottom of the mine and return Ecuadorian firms, who find it difficult

CONSORCIO SEMAICA (ECUADOR) MÁS ERRÁZURIZ (CHILE)

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Dir. : Av. Colón E4-75 y 9 de Octubre Edif. Paco pisos 5,6,7 y 8. Telf.: (+593-2) 395-5600 e-mail: [email protected] www.semaica.com Quito - Ecuador

LatAm INVESTOR 33 Q4 2019 COUNTRY REPORT | ECUADOR

TRADE SPOTLIGHT: Minister for Production, Foreign Trade, Investment and Fisheries, Iván Ontaneda, explains why economic growth will pick up...

ATAM INVESTOR: LAI: What opportunities will completely reject that route. Instead we How are you planning that export growth create for are improving productivity so that our goods can compete in the international to increase Ecuador’s investors? L market regardless of the dollar. That exports to the UK? boost to exports also helps to balance MO: To help boost our productivity we our current account, reducing the MINISTER ONTANEDA: are developing an incentive programme need for external Ecuador has a very diverse export offer. to encourage international investment financing. Since Even if you strip out petroleum you in Ecuadorian export projects. Our coming to see that we have earned a leadership programme offers tax incentives power this position in many international markets and a stable, favourable regulatory government with products such as banana, shrimp, environment that supports exporters. has enacted cacao and flowers. They are our traditional export products where we have worked over many years to gain a strong position in the EU, the US and Asia.

We are fortunate to have this base of solid export products, however, our challenge at the moment is to diversify with new goods and services. These can be agroindustrial, which build on our strong existing exports, but also in new areas. The crucial thing for your readers to a series of laws to improve conditions for To achieve this diversification, we have understand is that this emphasis on investors and they are already starting to improve our productivity so that more productivity-led exports is part of a to take effect. In the last 18 months of our exports can be competitive in fundamentally different economic Ecuador has seen a large increase in FDI, international markets. At the Ministry we model. Ecuador has a dollarized which shows that international investors have been identifying consumer trends economy, which brings many benefits have faith in our new business climate. in our key markets and planning how – for example currency stability for our local production can exploit these international investors. However, that LAI: How strong is the opportunities. We are fortunate that also creates a higher cost structure than relationship between the UK the geographic and natural diversity in neighbouring countries, such as Peru and Ecuador? of Ecuador means that we can grow a and Colombia that can devalue their wide variety of agricultural products and currencies. The previous Ecuadorian therefore serve many different market government relied on heavy borrowing MO: I am in close contact with the niches. to sustain dollarization. However, we British Ambassador, Katherine Ward,

LatAm INVESTOR 34 Q4 2019 and our two countries now have a great a new level of financial responsibility and LAI: Ecuador is one of only political and commercial relationship. transparency. For international investors two Latin American countries Previously, despite the political problems, it’s a strong sign that Ecuador is back to default in the 21st century; there has been strong and growing trade as a serious member of the global is that now part of the past? between the two countries. Now, with community. International integration the more positive political context, we is key for us. That’s why we signed the expect that trade to grow even more Continuity Agreement with the UK, why MO: When it comes to international quickly. we are looking to join the Pacific Alliance investment the government of 2008 and why we are strengthening our ties had a diametrically opposed view to The bilateral relationship is in its best with key export markets in Asia and the present administration. That is ever moment and that creates all sorts North America. demonstrated by the laws, business of business opportunities. I am focused environment and macroeconomic on attracting more UK investment to We realise that the world is becoming position that we have built during this Ecuador. We have our trade office in ever more integrated and for a small administration. Investment decisions are London, ProEcuador, which acts as a country like Ecuador to ride the coming based on perception so we have been first point of contact for British firms waves of technology and innovation very careful to send the right messages that want to learn more about the it is essential that we are part of to the international community. opportunities in our country. international trade and investment Moreover, we have reinforced the new networks. This government is trying to regulatory landscape, ensuring that LAI: Explain how this prepare the country so that it can ride it can’t be easily changed on future government’s attitude to the highway of growth. We know that political whims. trends such as the fourth industrial private investors is different to revolution and agriculture of the future, By signing up to international alliances its predecessor. have the potential to catapult our and treaties we have guaranteed that country forwards. Ecuadorian people future Ecuadorian governments will have MO: British investment, and are hardworking and it’s the role of this to respect international investors’ rights. international investment in general, has government to help the country position For example, the IMF deal hasn’t been been low in Ecuador over the past decade itself so that our citizens can benefit easy for Ecuador but it’s important to because there was little confidence. We from the coming changes in the global help us have working arrangements with see examples from around the world of economy. We want to make sure that other multilaterals and the international how, when countries inspire confidence Ecuador is ready for the 21st century. financial community. in the business environment and judicial system, they attract international capital. Ecuador’s AQUACULTURE BANANA & PLANTAIN With this government we’ve been Non-Oil Exports 25.4% 25% building a judicial framework that offers guarantees to international investors, so FLOWERS & PLANTS CACAO METALWORK they can be sure the rules of the game 6.7% 6% 4.5% won’t change. Guarantees that investors can have their returns, which is their AGROINDUSTRY FORESTRY OTHERS main priority. Last year we passed a law 3.9% 3.5% 22.2% to boost production, attract investment, increase employment and achieve fiscal stability. We are now adding to that Ecuador’s Total Exports Including Oil with extra measures to further help 22.3 23.8 24.8 25.7 21.6 investment and boost production. That’s 17.5 18.3 16.8 19.1 why we’ve seen investment grow under

this government. 2010 2011 2012 2013 2014 2015 2016 2017 2018 US$ BILLIONS

In addition to our laws there have also At present Ecuador’s exports are closely correlated to oil prices, which leave the been historic international agreements. country exposed to volatile swings in its terms of trade. Minister Ontaneda is trying to strengthen Ecuador’s external position by diversifying its basket of exports. For example, the deal with the IMF, shows

LatAm INVESTOR 35 Q4 2019 COUNTRY REPORT | ECUADOR Feed the World Ecuador’s shrimp and banana exports dominate global markets but there is plenty of scope for the country to boost productivity and add value…

or a small country Ecuador’s If it can solve these, then the country is Ecuador’s unique position also brings agriculture sector punches well placed to benefit from rising world benefits to the banana industry, says F above its weight. It’s the world’s food demand in the 21st century. Jorge Alex Serrano, CEO of Jasafrut, largest exporter of both bananas and an Ecuadorian company that sells shrimp. What makes that even more Natural blessings bananas under the Equapak brand impressive is the country’s versatility. One reason for Ecuador’s strong agro- to supermarkets in Asia, Europe and During the 19th and early 20th century export industry is that it’s been blessed North America. it was a major cacao and coffee with several natural advantages. Being exporter. But when large-scale banana on the equator gives it at least 12 hours “We are the only major banana exporter export farming was introduced in the of sun each day throughout the year, in the southern hemisphere. That gives 1950s, Ecuador soon became so there is no cold, dark winter to hit us a big advantage because it means a global player. production. Depending on the crop that our peak harvest is at a time when Likewise, that can allow for multiple harvests. production in the northern hemisphere is low. Moreover, another trait of our bananas is that they grow more slowly than in other countries. That would seem like a disadvantage, and it certainly means that we produce less fruit per hectare, but the final banana is a much denser product. Ecuadorian bananas’ slow growing time mean they have more natural sugars than other bananas. As a result, it’s a much more solid fruit that can withstand longer journeys and tastes great when it eventually arrives.”

following the arrival of modern shrimp The biggest change within the year That natural advantage has helped the farming in the 1970s it didn’t take is from wet to dry season, which is Ecuadorian banana conquer distant Ecuador long to build up a strong particularly marked on the west coast. markets, says Serrano. “Our position on position. But even dry season is rarely a problem the west coast of Latin America actually for farmers as Ecuador has abundant puts us at a logistical disadvantage to Banana and shrimp are now Ecuador’s freshwater supplies. It’s also far from our competitors in major markets. For two largest non-oil exports, helping the hurricane path that can devastate example, we are further from Europe to diversify its economy. They look some of its competitors in Central than the banana growers in Colombia, set to expand further as the growing America and the Caribbean. Meanwhile Central America and the Caribbean. global population and the rise of the its coast is the site where the cold We are also a lot further from Japan emerging market middle class, boosts Humboldt Current, travelling north and China than the growers in the demand for high-quality, healthy food from the Antarctic, meets the warm Philippines. Nevertheless, thanks to like Ecuadorian shrimp and bananas. El Niño current, coming south from their superior quality, our bananas do Moreover, Ecuador’s dominant position Central America. The clash of currents, well in all of those markets.” in shrimp and banana comes despite leads to one of the world’s most several structural challenges in key abundant fish stocks. That supports Social impact areas such as infrastructure and labour. Ecuador’s tuna exporters. Producing great tasting fruit is a

LatAm INVESTOR 36 Q4 2019 good start but it’s not enough to win community, we have a computer lab seed provider Agripac, that LatAm market share in developed markets like with a trained assistant that helps the INVESTOR readers will remember the UK. Increasingly consumers look young children use the computers from our 2015 Ecuador Report. Since for fruit that also delivers a positive for productive purposes such as their we last interviewed General Manager, environmental and social impact. For homework. The Equapak Foundation Gustavo Wray, Agripac’s annual sales example, about ten years ago Tesco, helps Jasafrut stand out from other have hit $300million, up from around began purchasing fruit directly from banana growers in Ecuador. While the $200million back then. Agripac’s growers, instead of going through fact we are helping such small growers growth story, shows how Ecuador’s international traders. In addition to implement these programmes helps us agro-export sector is becoming looking for competitive, nice fruit, stand out from other banana growers increasingly sophisticated. “We Tesco wanted companies that met in the region.” began life representing international the stringent new environmental and firms like ICI, however, over the last social requirements being demanded Politicians across Latin America decade we’ve begun to increase our by the UK market. Initially Serrano often talk about adding value to proprietary production. All of our feed hoped to help his family’s large banana agriculture. Normally they’re thinking range, from pets to shrimp, is produced firm work with Tesco, but when a in terms of industrial processes, for by us in Ecuador and now accounts for large order from an existing customer example turning a pineapple into approximately 30% of group sales.” made that impossible, he decided to pineapple juice, which is regarded as set up Jasafrut in 2013. Since then he more developed. But with social and Servicing Ecuador’s shrimp boom has has been working with socially and environmental consciousness shaping driven growth, explains Wray. “Over environmentally responsible small-to- demand in major markets, producing the last five years Ecuadorian shrimp medium sized third-party growers to fair-trade, sustainable bananas is production has rocketed and recently supply Tesco, and other supermarkets another way to add value. overtook banana as the country’s main around the world, with his Equapak non-oil export. Indeed, Ecuador is now brand of bananas. Ecosystem the world’s largest shrimp exporter. Ecuador’s natural advantages are a Agripac has been supporting that “One area where we are really strong key factor in its strong agro-export growth as we have invested heavily is our community work through position. However, technology, in our shrimp feed manufacturing the Equapak Foundation. In other best practices countries, Tesco tends to work with and logistics large plantation owners. Jasafrut all determine is the one of the few organisations a product’s they partner that is made up of small competitiveness growers. Tesco realised that lots of the in the international small growers that supply bananas to market place. Jasafrut, don’t have the scale, resources Traditionally or training to implement their own Ecuador has social responsibility programmes. imported key farming “So, we made an agreement with Tesco technology, such where they would shave a couple as machinery and of pennies of the price of each box agro-chemicals, and give us the money to found the from abroad but Equapak Foundation. It has allowed over the last two us to set up health and education decades local programmes for the communities and players have workers around our banana growers. begun to emerge. They’ve also given us expert advice so that we could really maximise the A good example impact of the foundation. For example, is Ecuadorian instead of just gifting a computer to a fertilizer, feed and

LatAm INVESTOR 37 Q4 2019 COUNTRY REPORT | ECUADOR

facilities.” terminal this year. It’s Ecuador’s first prevent larger ships from making the deepwater port and improves the journey. Posorja is a purpose-built port Agripac has been fortunate that country’s position on the global trade on the coast, which can handle the Ecuador’s shrimp industry has taken map, explains Ernst Schulze, the DP biggest ships in the world. The fact off. However, the boom has also World Posorja CEO that oversaw the that it can serve larger ships, and that bought its own pressure, explains development of the project. “When they don’t have to deviate much from Wray. “Ecuador’s new status as the the Panama Canal was upgraded in already established shipping routes, world’s largest shrimp exporter means 2016 it led to the creation of larger means that shipping containers to and its produce has to fight international NeoPanamax ships that can carry up from Posorja should be much cheaper competition. In demanding markets, to 13,000 containers. These larger than to Guayaquil port.” such as the UK, that means increasing vessels are the future of shipping in the scrutiny is being put on the whole Americas yet they were unable to dock The challenge at the moment, production chain. So, we’ve obtained at any Ecuadorian port. Now, with DP says Serrano, is the supporting the highest food safety and quality World Posorja, Ecuador is directly infrastructure. “At the moment the certificates, such as Global GAP and connected to the major shipping transport cost of trucking goods the HACCP, which ensures that shrimp routes.” Posorja began commercial extra distance to the new deepwater raised on our feed can enter any operation in August, with the EuroSal port in Posorja makes it a more market.” service that connects the West expensive option. Coast of South America with However, as It’s not just Ecuador’s shrimp that’s the Caribbean and more of facing competition. The strong growth the big in the local market has attracted shipping the world’s top feed producers lines to Ecuador. Yet Wray is confident Agripac’s feed can withstand the test. “Because we’ve invested heavily in our research centres and factories, we now have the same technology as the multinational feed producers.” As a result, says Wray, “our product is the same, or in some cases better, quality.”

Wray’s confidence is supported, not only by Agripac’s growing domestic Northern Europe. It’s a boost for start offering services there then the sales, but also its recent international British-Ecuadorian trade relations as maritime costs will reduce, making expansion. “This January we opened the first European stop on Eurosal our first store outside of Ecuador, with vessels coming from Ecuador is the UK. the overall package more competitive. a new shop in Tumbes, in the north of Moreover, DP World is building a Peru. Peru’s aquaculture industry is “DP World Posorja is a cracking project”, barge terminal near Guayaquil that only just beginning, so our expertise says Nick Armstrong, President of will provide a cheaper alternative to and product range puts us in a good the British Chamber of Commerce trucking containers to the port.” position to support its shrimp farmers.” Guayaquil. “For years Ecuador has been planning a deepwater port and Another benefit of DP World Posorja Logistics leverage now it has finally built it. The existing is that it’s pushing the pre-existing Once farmers have produced excellent port at Guayaquil is efficient and run Ecuadorian ports to up their game, agricultural products, they then have by a well-respected international ports says Armstrong. “In the long term it to get them to market. That looks set operator but it is limited by its access can only be a positive for importers to become a lot easier for Ecuadorian river. Ships visiting the port have to and exporters in Ecuador as it is also producers with the opening of the negotiate 60 kilometres of river, which encouraging the existing ports in $1.2billion DP World Posorja container is complicated by changing tides that Guayaquil and Machala to improve

LatAm INVESTOR 38 Q4 2019 their offer. So, it gives us more the poor state of the road. Ecuadorian The agro-exporters aren’t the options and it will make Ecuador more agricultural exporters have been only ones to have spotted these competitive. Eventually it should make asking for this to be fixed for a long challenges. Both the IMF and the Ecuadorian goods cheaper to bring time and we hope more attention will Moreno government have highlighted to the UK and vice versa. Moreover, be paid in the near future. However, it’s inefficiencies in Ecuador’s economy Ecuador has a strategic location so a not all bad. We’ve been pleased with that need to be”, says Pablo Zambrano, deepwater port here has potential as the help of ProEcuador in helping us President of the Chamber of Industries a regional transhipment hub.” Indeed meet potential international buyers in and Production, Ecuador’s largest Schulze believes Posroja will eventually new markets.” chamber of commerce. “However, for become a regional distribution hub for it to improve the productivity and agro exports and a future phase of the An expensive workforce is another competitiveness of the Ecuadorian project includes a 100-hectare logistics problem that’s especially acute in the Economy there are five key areas that park. labour-intensive agriculture industry, it needs to improve: electricity, labour says Serrano. “Our labour costs are reform, state bureaucracy, education Challenges very high with a minimum wage of and innovation.” We have presented The new port is a positive example of more than $400. Moreover, labour this strategic plan to the government Ecuador tackling the type of structural law is very rigid, with high penalties and are hopeful that it will manage to challenge that can hold back its for firing workers. Moreover, social pass at least some of these reforms. agro-exporters. However, there are security obligations add 15% to the Ultimately, it’s a transition government plenty more hurdles to overcome. company’s cost per employee, while that doesn’t have to worry about “We have the typical developing we also have to give each worker three being popular so it can take difficult country problems”, says Jymy Riera additional pay cheques throughout the measures.” of Banabio, a medium-sized banana year, which increase the total average producer from El Oro province in wage to $600 per month. That forces The IMF, which made the Ecuador loan southern Ecuador. “The bureaucracy banana growers to be conservative, on the understanding that it would should be more efficient to support because if prices drop and you have implement structural reforms, will be the export companies. Infrastructure to reduce headcount it creates a hoping that Zambrano’s optimism is is also a challenge. For example, some hefty redundancy bill. In effect the well founded. If the government does shipping lines don’t stop at Bolivar redundancy bill exacerbates cashflow manage to make these improvements Port, our local southern terminal, so problems during difficult market then Ecuador’s world-beating agro- we have to truck bananas north to the conditions, and it has caused several export industries will become even Port of Guayaquil. That is hindered by firms to go bankrupt.” stronger.

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LatAm INVESTOR 39 Q4 2019 COUNTRY REPORT | ECUADOR

ECONOMIC SPOTLIGHT: Minister of Economy and Finance, Richard Martínez, on his plans to get Ecuador back on track…

ATAM INVESTOR: opportunity, social protection and But it’s not just about the state, How is your ministry work, and the efficient, transparent we’ve also stimulated the business trying to stimulate the management of resources. environment. 2018 saw a record amount L of private-sector investment, worth Ecuadorian economy? It has been a difficult task of more than $4billion. That’s been led by reengineering policy. Reconstructing the our Production and Investment Law, MINISTER MARTÍNEZ: catastrophe of ‘21st Century Socialism’ in which encouraged companies to pledge The severe macroeconomic distortions the country will take lots of time, but at $9.4billion of investment in the coming accumulated over the last ten years least now we are paving a path that will years. Meanwhile our non-oil exports demanded a radical change of policy take us to a better place. Little by little, grew by 5%. Outside of Ecuador our and wide-ranging structural reforms. we are building a more reliable, stable plans received a big vote of confidence We created the Prosperity Plan and sustainable country with ordered with a package of loans from the IMF roadmap that is based on four pillars: public finances, international openness and development bank loans totalling fiscal consolidation, monetary stability, and a business environment that’s $10.2billion, while our new attitude is equality of attractive for private-sector investors. reflected in our current attempts to join We are also deepening social assistance the Pacific Alliance and the OECD. and welfare for the marginalised in our society. This titanic work of economic LAI: Ecuador has a fiscal crisis; recuperation is a challenge but we have how are you managing it? already achieved important results.

MM: We inherited chaotic fiscal What have been your LAI: situation, so we had to adopt firm and main achievements so far? responsible decisions to clean up public finances. We reinstated the autonomy MM: In 2018 we cut the fiscal deficit of the Central Bank and created a to 3% of GDP from 8%, the lowest it’s transparent register of public debt, been for six years. That was helped which allows the public to know the by a bumper tax take of more than exact amount of the country’s external $15billion, the highest since 2000. obligations. We also drew up a General We have implemented an austerity State Budget, which sets spending programme and eliminated or limits for specific government entities to merged 13 government ministries prevent unjustified spending. and departments. We also cut the pay of high-level bureaucrats by We are also working on further reforms 15% and minister wages by 20%. that we hope to pass in congress. We Finally, our changes to petrol and hope to improve local capital markets, diesel subsidies, saved the state refine the legislation for public private $432million. partnerships (PPPs) and, most urgently

LatAm INVESTOR 40 Q4 2019 of all, we want to reform the labour law sector to lead large infrastructure government we are open to one day and the tax code. projects. Indeed, the report shows that signing a new investment treaty with Ecuador is now above the regional the UK. This comes on top of the deal LAI: What advantages, apart average in terms of regulations and Ecuador, Colombia and Peru all signed from the money, does the IMF business environment. with the UK in May to continue applying agreement bring? the preferential tariffs that currently We will keep working on the framework exist under the EU deal. needed so that our economy can be MM: The backing of the international competitive. We passed the Production LAI: What are the best community, reflected by the IMF deal, and Investment Law, which has powerful investment opportunities in shows the world believes in our Prosperity tax incentives to boost economic output Ecuador for UK firms? Plan. The international community and employment. For example, there decided to support the Ecuadorian state is no corporation tax on the profits MM: Mining is an important sector for in our ongoing process of transformation generated by new investments for 12 investors. Between now and 2021 we and economic recuperation. Clearly years across the country, 15 years if hope to receive $3.8billion in mining the financial support is important to it’s for basic industry and 20 years investment, while the sector should balance fiscal accounts but we’ve also for frontier zones and tourism. And generate exports of $3.6billion. Over used the money for social programmes, the figures show that our approach is the same period the sector should entrepreneurship and protecting the working. In 2018 we received $1.4billlion account for 4% of GDP, so it’s a massive most vulnerable. Moreover, with this of FDI, a record high for Ecuador. improved image of Ecuador, we are now opportunity for British investors. more attractive to international investors LAI: The tax on repatriating and more likely to join groups like the We also have other strategic sectors that dividends is an obstacle for OECD and the Pacific Alliance. are important for external investors, such foreign investment; will you as our power grid, road infrastructure LAI: How is your ministry trying cut it? and oil and gas fields. We hope that British firms will be participating in the to boost the competitiveness forthcoming tenders. Finally, there are of the Ecuadorian economy? MM: We have important reforms on the way that aim to give us a solid a plethora of investment opportunities and efficient tax system that attracts in private-sector projects, especially in MM: This isn’t just a challenge for Ecuador investment. It is clear that the repatriation agroindustry, tourism and real estate. - in all of the region we see structural tax has failed. It didn’t achieve its competitiveness problems. What’s more, original objective, when it was created How are you boosting in the Ecuadorian case it’s important LAI: by the previous government, to stop to see where we’re coming from and British investment in Ecuador? dollars from leaving the country. Instead how we’re changing. During the last it just became another way of collecting decade, the private sector had limited It’s not just down to our ministry revenue. However, to eliminate it MM: participation as a motor of development. to attract international investment, all immediately would impact the country’s Now we are returning it to the role it of the government is working on it. The fiscal goals. As our macroeconomic deserves as the main actor in driving flow of foreign direct investment from situation improves, we will progressively competitiveness and employment. the UK to Ecuador is trending in the try to reduce this tax. right direction but it is still too small. Clearly there is still a lot that needs More British companies are coming and Will you sign a double to be done but the indicators already LAI: in 2018 we received $35million, which show an improvement. For example, the tax agreement with the UK? was the largest annual UK investment in Economist’s Infrascope ranking measures the last decade. Our aim is to increase the environment for infrastructure PPPs. MM: Ecuador and the UK are making these figures and we will do that by Ecuador climbed to 12th place in 2018, solid progress with our bilateral strengthening the relationship between from 19th in 2017, thanks to the better commercial agreement. The double both countries. Now we are a country political support for private investment taxation agreement is one of our that is open to the world and with a and PPPs. The Economist notes that the priorities and work on that will begin good business climate that encourages government is pushing for the private in October of this year. Also, as a economic powers like the UK to invest.

LatAm INVESTOR 41 Q4 2019 COUNTRY REPORT | ECUADOR Creating Legal Certainty for Investors Ecuador’s government has unveiled a new law to attract investment. We analyse how much protection it gives investors…

o-one doubts that Ecuador has world-class mining, oil N and agricultural investment The deal with opportunities. Nor do they question this government’s willingness, even the IMF is an its need, to open these sectors up to important step in international investors. But Ecuador’s volatile political history, peppered with the right direction expropriations and defaults, scares off many investors. To assuage fears the government unveiled a new investment and production law. The Ley Orgánica para el Fomento Productivo, Atracción Javier Robalino Orellana, Managing de Inversiones, Generación de Empleo y Partner of Ferrere in Ecuador Estabilidad y Equilibrio Fiscal to give it its full title. Guayaquil, Nick Armstrong is also a law is an improvement for investors”, During LatAm INVESTOR’s many director at Ecuadorian feed, seed and says Robalino, “but more protection is interviews with various government fertiliser provider, Agripac. “Along with needed.” officials, from minister level downwards, other leading firms, Agripac made we repeatedly heard that the new law an investment commitment, because “In May 2017, one of the last acts of offers assurances for UK investors. the new law offered tax incentives Correa’s government was to cancel Patricia Armijos, Sub-Secretary of for investors”, says Armstrong. “That Ecuador’s 11 remaining bilateral Investment at the Ministry of Production, encouraged us to buy a seed business investment treaties. It was a spiteful Foreign Trade, Investment and Fisheries, from Pronaca and also to upgrade our act, designed to hamper future foreign highlights that the law brings “long- feed mill and double its capacity so investment as it removed security for term stability for national and foreign that it can meet growing domestic and foreign businesses coming to Ecuador. investors”. She notes that “in addition international demand.” Three of the investment treaties, those to legal security, it grants a series of with Italy, Netherlands and Spain, were incentives for attracting new investments Legal perspective renewed automatically but they are to the country”. In particular, Armijos One person especially well placed to due to end in 2021-2022. Companies emphasises that the law allows the analyse the pros and cons of the new law that had already invested before the private sector to seek arbitration if the is Javier Robalino Orellana, Managing cancellation are still protected under state breaks the terms of the investment Partner of Ferrere in Ecuador. Ferrere the treaties’ sunset provision, however, contract with a company, which she sees is the only multi-jurisdictional purely any fresh investment is not. Ecuador is as an important guarantee for investors. South American law firm, with 250 now working to renegotiate the treaties lawyers in Bolivia, Ecuador, Paraguay but they will have to be ratified in each Many in the private sector have and Uruguay. While Robalino has country’s parliaments, meaning it will reacted positively to the new law. In represented multinationals in various probably take five years to recover all 11.” addition to serving as President of local and international commercial “In the meantime, the idea is that the new the British Chamber of Commerce in and investment disputes. “The new law helps to attract investors by offering

LatAm INVESTOR 42 Q4 2019 them some protection. Originally it was hoped that this law would include ‘arbitration without privity’. This would FDI in Ecuador 2018

allow private foreign investors, whose LOGISTICS AGRICULTURE business has no contract with the state, $44.9m $59.3m to sue Ecuador if the country breached

its investments rights, say by asset SHARED SERVICES RETAIL expropriation. It’s one of the protections $167.3m $202.2m that existed in Ecuador’s former bilateral CONSTRUCTION investment treaties, so it was hoped the MANUFACTURING new law could bring this guarantee back. $103.8m $86.8m Unfortunately, the version of the law ELECTRICITY, that was ultimately passed in 2018 was MINING GAS & WATER far weaker. It only allows for companies $738.5m $6.6m that have a direct contract with the state to have access to arbitration. Moreover, they can only dispute the narrow Strategic Committee for Investment sector. That’s a marked difference from terms of the law – that is to say the Promotion and Attraction [CEPAI by the previous administration, which company’s investment pledge and the its Spanish acronym], which houses a would threaten firms that tried to state’s tax incentives. Arbitration under multidisciplinary body for attracting criticise its policies.” Echeverri accepts this law can’t cover something more and maintaining foreign investment that “legal security is a big issue for fundamental, such as expropriation. in Ecuador. It approves investment foreign investors coming to Ecuador As a result, new international investors projects and helps the private sector as our history of changing the rules of coming to Ecuador now have less power realise them.” There is also a big push the game understandably worries some than they would have had under the old to improve the business environment, international companies.” However, he bilateral investment agreements.” says Armijos, with Ecuador accepting stresses that there are ways to mitigate a proposal from the World Bank Group these risks. For example, the chamber So, this government has improved the to adopt measures to help the country runs a conflict resolution centre that situation but it still has some way to go climb up the Doing Business Rankings. helps companies settle disputes without before it completely repairs the damage lengthy litigation in local courts. of its predecessor. “The new production Indeed, one of the most exciting and investment law enhances the initiatives is the ‘Single Window’, which Undoing a decade of ‘21st-century investment protection agreement will attempt to cut through Ecuador’s socialism’ was never going to be an easy – known as an IPA or convenio de notorious red-tape by creating one task. This government deserves credit inversion”, explains Robalino, and “it point of contact for investors that need for its efforts, but much still remains provides tax incentives and certain to interact with various government to be one. Robalino believes this is a protection.” However, “the bilateral departments and entities. Finally, it is “crucial period” for Ecuador. “In order investment treaties are a broader working on an upgraded version of the to get a significant increase in foreign umbrella protection that covered issues investment and production law, which investment, Ecuador needs to show such as: fair and equitable treatment, it’s hoped will be passed by congress at consistency. We need to demonstrate expropriation, free remittance of funds, the end of this year. that we’re a serious country. The deal full protection and security and most- with the IMF is an important step in the favoured nation status. It’s vital that Alejandro Echeverri, Chairman of the right direction, as it binds us to making Ecuador signs new treaties. In the British Chamber of Commerce in Quito, improvements. Laws are good but meantime, it must look for other ways to is optimistic that conditions will improve what investors really need is stability, reassure investors.” for international investors. “A positive effective responses and steady policies.” trait of this government is that it is LatAm INVESTOR readers will be hoping A lot done, more to do willing to listen. We have seen repeated that Ecuador’s world-class investment It’s doing just that, says Armijos. examples of suggested policies being opportunities are accompanied by “The government has created the modified after dialogue with the private better business environment.

LatAm INVESTOR 43 Q4 2019 COUNTRY REPORT | ECUADOR

Power of Property As Ecuador’s economy enters a period of prolonged growth, its property market looks promising for international investors…

hroughout this report you’ll flatlining, will be growing at 5% per experience significant upside. In short, have read about structural year. And one of the biggest winners of Ecuadorian real estate provides a way T factors that should drive the country’s economic boom should for international investors to play the Ecuador’s economy over the next be its stagnating property market. country’s strong economic growth in decade. The opening of the mining the future. industry will see inflows of vast sums During the Correa years Ecuador’s of international capital and expat property market boomed. That Beachside profits workers. The arrival of investment was mainly down to high oil prices, Ecuador’s leading property developer and people will be supported by the which pumped money into the local is Pronobis, part of the Consorcio Nobis, Ecuadorian oil industry’s new turn economy, and the government’s a group of companies led by Isabel to the private sector. Meanwhile the efforts to boost mortgage lending Noboa, one of Ecuador’s wealthiest country’s agro-export boom will funnel through the state bank. Unsurprisingly, businesspeople. Since being founded increasing amounts of dollar earnings when oil prices fell and finances dried in 1997, Pronobis has built around 50 into the hands of farming groups up, the real estate market also suffered projects, from international hotels to across the country. It all suggests that a correction. Now, with Ecuador’s mixed-use urban developments. Its by the mid-2020s Ecuadorian GDP, economy barely avoiding recession, latest flagship project, Karibao, is a which is currently the property market has stabilised, beachside community in Engabao, an albeit at lower levels than the peak of unspoiled spot on Pacific coast, just 90 its oil and credit-fuelled boom. minutes from Guayaquil.

That context means Ecuadorian real High-end, beachside community estate is fairly priced at present. When developments can be found across the economic drivers highlighted the Americas but Karibao is the first in this report start to take effect it luxury project of its type Ecuador. As is likely the property market will a result, Pronobis has been taking time to get it just right, explains CEO Juan Albán. “We spent the last few years The real fine-tuning the master plan, taking the latest trends and market needs into estate sector account. We’ve reduced the building in Ecuador density and increased the size of the spectacular crystal lagoon. The new has to adapt design offers better views of the sea to the new and more harmony with the natural spaces that surround the project.” trends that the market Pronobis has also been tweaking Karibao’s offer for investors. “We want demands to give our clients more customised options, so we now have apartments, land lots and single-family beach

LatAm INVESTOR 44 Q4 2019 houses.” south. It’s also about to launch a new project in the highland city of Cuenca. Of course, Ecuador has plenty of nice houses by the beach, but what makes this project stand out is the scale, quality Perhaps the most attractive characteristic of Ecuador’s and amenities. Its main feature is a landscaped lagoon, property market for international investors is that it is developed by Crystal Lagoons, a Chilean firm with a unique dollarized. “It means that investors have stable future water technology that’s now patented in 190 countries. returns”, explains Alejandro Echeverri, President of the British But it’s also supported by first-grade infrastructure, such Chamber of Commerce in Quito. “Many people would say that as a specially-built access road to the Guayaquil highway, Peru or Colombia are more attractive markets than Ecuador a 16-floor apartment building and a club house. but when you look at the devaluation in their currencies over the last five years you realise that international investors will Upgrading Ecuador’s cities have taken a big hit. That hasn’t happened in Ecuador.” The advantage of buying something by the beach is that if your investment plans don’t come to fruition you are still It’s a good point, because even if some property in Colombia left with a spectacular place to spend your holidays. But and Peru is listed in dollars, ultimately local wages, which help for investors looking for a more diversified way to play determine prices, are paid in local currency. In Ecuador the Ecuador’s resurgent economy then there are interesting entire economy is dollarized, meaning investors don’t have to options in the country’s cities. worry about currency risk.

Like many urban conurbations in the spacious New World, In the 19th century, Baron Rothschild, who profited by investing Ecuador’s cities have spread horizontally. Coupled with during the Battle of Waterloo, famously quipped, “the time to insufficient public transport systems, that’s forced people buy is when there is blood in the streets”. Thankfully there is to spend increasing amounts of time stuck in traffic jams no blood in the streets of Ecuador, but its efforts to cut fiscal between their work and homes. For example, in Guayaquil deficits constrain the economy. That’s cooled the real estate one of the newest residential areas, Vía a la Costa, is about market and created a buying opportunity for several of the 20 km from the city centre. new projects being developed. But when Ecuador’s economy bounces back, property prices will soar. The solution, says Albán is to start building upwards. “The real estate sector in Ecuador has to adapt to the new trends that the market demands. For example, we need to develop mixed-use projects that include retail, residential and offices, that allow people to travel less, creating more time for themselves and their families. Another challenge is to develop innovative projects that generate sustainable development, using technology to create intelligent buildings that are more efficient.”

It’s an approach that ProNobis has pioneered in Ecuador over the last 22 years with its ‘ciudades dentro de ciudades’ (cities within cities) concept. In Guayaquil it has built Ciudad del Sol (Sun City), which combines offices, apartments and hotels with Ecuador’s largest shopping centre. It has also built Ciudad del Rio (River City), which combines offices, apartments and a hotel with one of the city’s most pleasant open spaces – a landscaped promenade along the River Guayas. Moreover, Pronobis isn’t just focusing on Ecuador’s largest cities, it has built similar mixed-used developments in smaller cities along the coast. There is a Ciudad del Mar (Sea City) in Manta to the north and another Ciudad del Sol in Machala in the

LatAm INVESTOR 45 Q4 2019 COUNTRY REPORT | ECUADOR

Ecuador’s Ambassador to the United Kingdom, Jaime Marchán Romero explains why his country is welcoming UK plc...

ATAM INVESTOR: Minister for the Americas at the FCO. scandals. How much of a How is the relationship challenge is graft for British between the UK and LAI: How will the removal firms in Ecuador? L of Julian Assange from the Ecuador? Ecuadorian Embassy help AM: It’s public knowledge that this to improve the relationship government has implemented firm legal AMBASSADOR MARCHÁN: and institutional measures to combat The strengthening of Ecuador´s between the two countries? the serious cases of corruption of the relationship with the United Kingdom, previous government and other cases established some 187 years ago, is an AM: The end of the asylum of Mr Assange that are being investigated. Thanks to imperative of foreign policy defined was resolved independently by Ecuador these measures, now any individual or by President Lenin Moreno. Following in strict compliance of international law company can directly report corruption these directives, bilateral relations have and it was never conditioned to the cases. The fight against corruption is begun to experience an encouraging improvement of our bilateral relations one of the national and international upturn. Our purpose is to deepen the with the United Kingdom. priorities of the current government. ties between our two countries. LAI: How important is the LAI: How do you plan to Continuity Trade Deal signed LAI: Ecuador’s previous improve that relationship as between the UK and Ecuador? administration defaulted on the new Ambassador? a sovereign debt. Does this AM: The Continuity Trade Agreement government have a different AM: `to these signals and, at diplomatic signed between the UK and Ecuador attitude towards international and political levels, the UK positively confirms the commitment between investors? responded last June with the official visit the parties to maintain the current preferential tariffs and conditions to Ecuador of Sir Alan Duncan, the then AM: In the Joint Declaration between established under the Trade Agreement Ecuador and the United Kingdom, with the European Union, in the case signed during Sir Alan Duncan’s visit that the UK exits the EU without an to Ecuador, a trade and investment agreement. It also establishes the section was included in order to willingness to start negotiations for a encourage greater investment by British trade deal with the UK as soon as Brexit companies in Ecuador. Both countries takes place. agreed to relaunch the talks towards an agreement to avoid double taxation, The Continuity Agreement is very explore new initiatives to eliminate trade important since provides a clear and investment barriers, and seek new indication to Ecuadorian exporters and opportunities to promote trade with British importers that trade will continue, the support of trade missions of both in the same preferential conditions, after parties. Brexit.

We are also resuming the talks to achieve LAI: Ecuador has seen some an investment protection agreement high-level political corruption with the British government. There is

LatAm INVESTOR 46 Q4 2019 already a proposal that will be examined the most important food and drink work with local companies both the with the British Government as soon as trade shows in the United Kingdom goods and service industries. Many food Brexit is resolved. through our Commercial Section. For and beverage producers in Ecuador example, the IFE 2019. This trade show have high-standard international LAI: What are the most exciting has allowed many exporters to access certifications. This would allow them investment opportunities in the British market. In addition, we are to be not only suppliers, but also co- Ecuador for UK? covering more niche markets with our packers of British brands. recent participation at the Natural & Organic Products Europe Show, which Another opportunity for British AM: We are promoting new tenders focuses on natural and organic products companies specialised in food, flowers, for Villonaco II and Villonaco III, two with high nutritional value. This year, such as roses, and fashion accessories, wind farms, while El Aromo is an non-traditional fruits and bananas were among others, would be that they exciting photovoltaic project. We will promoted, through a trade mission can see Ecuador as a destination to also continue to promote investment organized within the London Produce open subsidiaries or factories of their opportunities in mining projects. Some Show. products. tenders will be announced soon, and we want British mining companies to We plan to expand the range of scenarios There are also plenty of opportunities participate in the process. in which we will participate in the United to work together in other areas, such as Kingdom, in order to strengthen the technological solutions for agriculture, Moreover, with our future incorporation access of our products after Brexit. data protection management, bank to the Pacific Alliance we hope to transfers and product development. attract British investments in the food LAI: What are Ecuador’s I would like to end by saying that and beverage, agricultural, tourism competitive advantages as a diplomacy and trade and business infrastructure and pharmaceutical trade or investment partner opportunities work together since sectors. both consist in knocking on doors compared to other countries in that will open new ways for reciprocal Latin America? LAI: What are the most achievements. exciting trade opportunities in AM: The fact that Ecuador for UK? Ecuador used the US dollar as its national We see great potential to increase AM: currency allows firms to the participation of our products in plan their investment the British market. The trend of British in a more stable consumption lies in personal well-being, scenario. Our inflation social responsibility, ethics, innovation rate per year is below and quality. These elements are aligned 1%, which encourages with our export offer. secure investment. The Ministry for Production, It is important to highlight that part International Trade, Local strength of our daily work as the Embassy of Investment and Fisheries Ecuador in the United Kingdom is has worked on a serious Regional team to identify business opportunities of new tax incentives for British importers and Ecuadorian for new investments in Global standards suppliers. In this sense, our Commercial our country. They will Section (PRO ECUADOR) works on trade be grouped in two laws show encounters, trade missions and to promote production promotional campaigns, among others through foreign direct means, which have given successful investment. results for the access of new products. British companies have Ecuadorian suppliers participate in a great opportunity to

LatAm INVESTOR 47 Q4 2019 COUNTRY REPORT | ECUADOR Final Word Ecuador is opening up its economy to international investors and that’s creating a unique opportunity…

s you’ll have read in this report, due in 2021 and ex-president Rafael and Director of Agripac, a feed, seed Ecuador has some world-class Correa still able to rely on 30% of the and fertiliser firm, which has been in A investment opportunities. In electorate a volte face can’t be ruled Ecuador for 40 years. “Once you learn the mining sector, it’s been the location out. That’s why it’s so important that to navigate the waters here, it is a for the planet’s biggest gold and copper incoming companies use this window very attractive market. It is a country discoveries over the last decade. In to demonstrate the benefits they where there is still a lot to be done, banana and shrimp, it’s the leading can bring to the Ecuadorian people. profit margins can be high and there is global exporter. And in oil and gas it’s As Solgold CEO, Nicholas Mather, less competition... I can only draw on one of the few Opec members that is explained in our mining feature, “The the experience of my own company, opening up untouched hydrocarbon most important reason why investors Agripac. Ecuador has been good to us.” basins to international investors. in Solgold can be sanguine about the Meanwhile the economic growth political risk of our project is that we are Another interesting quirk of the that these sectors should generate is partnering the country… We’ve aligned Ecuador story is that it’s not just likely to boost its depressed property our goals with the Ecuadorian people, opening up to international investors. market. In short this is a once-in-a- which makes it politically sustainable in It’s particularly keen to attract British generation opportunity for investors. the long run.” firms. That’s partly down to Ecuador’s efforts to wean itself off its dependence Ecuador’s current appeal is based Indeed, that’s a theme throughout on China, whose influence grew in on its newfound commitment to our report. Whether it’s the banana the Correa years. But also because attracting international investment. company, JasaFrut, that has created the removal of Julian Assange from Investors will worry about how long a community foundation with Tesco, the Ecuadorian Embassy in London that can be maintained. With elections to benefit local people, or the oil removed a thorn that damaged UK- service companies working in the Ecuador relations for many years. jungle that take extra care with the Armstrong says the benefits from the environment. Pronobis even adjusted new mood between the two countries the design for Karibao, its beachside are already tangible. “The fact that real estate project, to be more in the relationship between the UK and keeping with local needs. For this Ecuador is improving so quickly makes new wave of international investment me bullish on the prospects for British to be sustainable in the long-term it firms in the country. We have had lots needs to avoid social or environmental of visits by UK ministers to Ecuador in problems. recent months while the Ecuadorians have reciprocated and sent members Pioneers of their government.” The visits have Being one of the first in a new inflow already yielded results with Ecuador of international investors involves signing a Continuity Trade Agreement extra work. But it also comes with with the UK. perks. The principal being that there is less competition. This doesn’t just British firms can be forgiven for apply to new mining concessions or overlooking Ecuador during the past, oilfields but throughout the economy. difficult decade. However, they won’t Nick Armstrong, President of the British Nick Armstrong is the President of forgive themselves if they miss the Chamber of Commerce, Guayaquil the British Chamber of Commerce boom.

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