INTERNAL AUDITING COMMISSON for PUBLIC CREDIT of ECUADOR Attached to the Ministry of Economy and Finances Created on July 9, 2007 Executive Decree 472
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INTERNAL AUDITING COMMISSON FOR PUBLIC CREDIT OF ECUADOR Attached to the Ministry of Economy and Finances Created on July 9, 2007 Executive Decree 472 FINAL REPORT OF THE INTEGRAL AUDITING OF THE ECUADORIAN DEBT EXECUTIVE SUMMARY October 2008 Quito – Ecuador INTEGRAL AUDITING COMMISSION FOR PUBLIC CREDIT OF ECUADOR ACTIVE COMMISSIONERS Ricardo Patino, President Franklin Canelos, Vicepresident Maria Rosa Anchundia Hugo Arias Angel Bonilla Aurora Donoso Maria Lucia Fattorelli Gail Hurley Jurgen Kaiser Piedad Mancero Alejandro Olmos Karina Sáenz Cesar Sacoto Eric Toussaint Ricardo Ulcuango EXECUTIVE COORDINATION Patricia Dávila COMMUNICATIONS ADVISORY Beatriz Reyes Graphical Design Zonacuario Printed in Ecuador Issue: October 2008 Cover Illustration: Eduardo Kingman, Sísifo Mestizo, collage technique. The Kingman House- Museum Collection. CONTENTS PRESENTATION……………………………………………………………………………. 3 ACRONYMS.…………………………………………………………………………………4 I. GENERAL CONSIDERATIONS………………………………………………….….…..6 The burden of indebtedness an auditing …………….…………………….…………...6 Presidential decision and enacting of Executive Decree to create CAIC Legal basis, Objectives and Scope of Audit………………………………………..…11 II. AUDIT RESULTS BY DEBT SECTIONS……………………………………………….13 SECTION I COMMERCIAL DEBT……..…………………………………………………………………13 SECTION II JURIDICAL ANALYSIS OF THE COMMERCIAL DEBT……….……………………….43 SECTION III MULTILATERAL DEBT …………………………………………………………………….59 Credits for debt reduction (Plan Brady) and modernization / privatization..……………………………………………………..62 Credits for sectorial programs…………………….……………………………………...68 Credits utilized in the multipurpose project “JAIME ROLDÓS AGUILERA” implemented by CEDEGE………………..………....90 SECTION IV BILATERAL DEBT…………………………………………………………………………..100 PARIS CLUB………..……………………………………………………………………….119 SECTION V INTERNAL PUBLIC DEBT…….…………………………………………………………....123 III. CONCLUSIONS AND RECOMMENDATIONS…………………………………….....137 ANNEX 1 (EXECUTIVE DECREE No. 472) …………………….…..………………….....148 ANNEX 2 SECTORIAL CREDITS AUDITED: OBJECTIVES AND RESULTS……..………..…….206 ANNEX 3……………………………………………….……………………..........................153 PERSONNEL AND AGENCIES THAT WORKED ON THE AUDIT PROCESS 3 PRESENTATION The incalculable damage caused to the country's economy and the people of Ecuador by public borrowing, omnipresent as a pressure-submission system, and the consequent commitment of public resources to deliver its service, whether or not available, prompted the national government to adopt the first decision and so far unique in Latin America to create an audit to establish the legitimacy, legality and relevance of the loans, negotiations and renegotiations, which also brought responsibilities and shared responsibility of lenders, social impacts, economic and environmental impacts, and, above all, allowing the accumulation and weight of fundamentals for the country to initiate and sovereign and remedial actions regarding all payments made and future payments as well. In that context, the Constitutional President of the Republic, Economist Rafael Correa Delgado, ordered the creation of the Audit Commission for Integrated Public Credit (CAIC), with the involvement of domestic and foreign social organizations, universities and research institutions and development. After a year of hard preparatory work, which involved difficulties in gathering information especially given the period of thirty years due to cover the audit, the CAIC herewith presents an Executive Summary of the final report prepared after thorough examination by its members and teams of professionals formed for the purpose The substantive part of the audit lies in the results that contain evidence in each section of the Ecuadorian debt, structured as follows: • The commercial debt, which analyzes the entirety of borrowing by public entities of Ecuador with international private banking, in its evolution, since 1976. • The multilateral debt granted by international financial organizations, which in this work relates to credits selected as priorities and assumptions of illegitimacy. • Bilateral debt, which includes loans from governments or government agencies from nine countries. They all have been audited, especially those pertaining to the greater credits: Spain and Brazil, and those that make up the Paris Club. • Loans granted to the Commission on Guayas River Basin Development (CEDEGE) for the implementation of Multipurpose Project Jaime Roldós Aguilera, corresponding to bilateral and multilateral groups. • The domestic debt, section which includes numerous State Bond issues, State Stabilization Bonds and AGD Bonds. • The Commission's report is a first result of what must be an ongoing process –the audit- and suggests that both government authorities and society at large be aware of the truth about the way it has conducted the public debt which undoubtedly has resulted in the brake imposed on the development and the disillusionment of Ecuadorians, whose reality is far from the basic conditions for good life. 4 ACRONYMS AGD AGD Deposit Guarantee Agency AICP Public Credit Integrated Audit BCE Central Bank of Ecuador IDB Anti-American Development Bank IBRD International Bank for Reconstruction and Development WB World Bank BNDES National Bank for Economic and Social Development of Brazil BNF National Development Bank CAF Andean Development Corporation CAIC Audit Committee of the Integrated Public Credit CAS Country Assistance Strategy CEDEGE Commission for Development Studies of the Guayas River Basin CEIDEX Special External Debt Investigation Committee CEMEIN Medicines and Medical Supplies Ecuadorian Center ECLAC Economic Commission for Latin America CESCE Spanish Export Credit Insurance Company CETES Treasury Certificates IFC International Financing Corporation CFN National Financial Corporation CNRH National Council on Water Resources CODIGEM Geology, Mining and Metallurgical Development and Research Corporation COMEXI Board of Foreign Trade and Investment CONADE National Development Council CONAM National Council for Modernization ED Executive Decree DESC Economic, Social and Cultural Rights DINAGE National Directorate of Geology DINE Industry Directorate of the Army ECAPAG Guayaquil Drinking Water District Enterprise EMADE State Fertilizers Company EMSEMILLAS Seed Company ENAC National Supplies and Marketing Enterprise ENDES National Semen Enterprise ENPROVIT National Vital Products Enterprise EPAP-G EPAP-G Provincial Water Company of Guayas FERTISA National Fertilizer Company IFAD International Fund for Agriculture Development FINAGRO Financial Agro FISE Emergency Social Investment Fund FLAR Latin American Reserve Fund IMF International Monetary Fund ICO Official Credit Institute of Spain IERAC Ecuadorian Institute of Colonization and Agrarian Reform IESS Ecuadorian Social Security Institute IICA Interamerican Institute of Agricultural Sciences INDA Institute of Agrarian Development 5 INECEL Ecuadorian Institute for Electrification INEN Ecuadorian Standardization Institute INERHI Ecuadorian Institute of Hydraulic Resources LEXI Foreign Trade and Investment Law LOAFYC Organic Law on Financial Administration and Control MAG Ministry of Agriculture and Livestock MEF Ministry of Economy and Finance MSP Ministry of Public Health OCIPSE Complementary Works Infrastructure for the Santa Elena Peninsula OAS Organization of American States ILO International Labor Organization PAHO Pan American Health Organization PHASE Santa Elena Aqueduct Water Plan PRAGUAS Water and Sanitation Program for Small Towns and Rural Communities PRONAMEC National Mechanization Program PRONASAR Guayas River Rural Water and Sanitation National Program SEC Securities Exchange Commission SIISE Integrated Social and Economic Indicators System 6 I. GENERAL CONSIDERATIONS The charge of the contracting debts and the audit The resources originated from the external and internal debt have constituted one of the sources for that projects of economical and social development be financed by the Ecuadorian State. Nevertheless, in the last decades this important instrument of economical politics has been used not precisely according to the sovereign interests of the country, but under pressures and conditions of the lenders. It has been characterized by a little transparent management that has derived into the predominance of the amortization, interest and commission payments in the budgetary expenditure; into the growing necessity of new credits; and, consequently, in the recurrent dependency of the State and the national economy originated from the public and private debt. The high cost of contracting debt has been covered with State budget resources that with rigidity had to deliver huge amounts for the service of the debt, diminishing the financing of social investments and social programs and, consequently, limiting the attention necessities of priority of the Ecuadorian people. In the process of contracting debt, that begins at the end of the 70’s, even though its bigger increase is produced during the next two decades, it can be observed a structural continuity, developed with trifle in benefit of the creditors and affecting visibly the interests of the nation. In the refinancing that were made with the not variable intervention of the creditor banks, that imposed their conditions, obliging the country to surrender from all its rights, the same arguments were used: the normalization of the relationships between Ecuador and the international financial markets and the possibilities of attracting foreign investment. As the country could