ecuador - The Business Year
Transcription
ecuador - The Business Year
DIPLOMACY | ECONOMY | FINANCE | ENERGY | INDUSTRY & MINING | TELECOMS & IT | TRANSPORT | REAL ESTATE & CONSTRUCTION | AGRICULTURE | HEALTH & EDUCATION | TOURISM ECUADOR 2014 In This Issue DIPLOMACY INTERVIEW VALUE CHAIN AHOY! Jorge Glas, Vice-‐President of Ecuador, on the productive matrix 14 ECONOMY FOCUS ECUADOR’S RETURN TO THE BOND MARKET MY WORD IS MY BOND Ecuador returns to the global capital markets 28 ENERGY REVIEW COUNTING OUT CRUDE Value-‐adding seen as key for economic diversity and export performance 65 TOURISM PHOTO ESSAY DESTINATION CUENCA Ecuador’s third largest city is a hit with locals and expatriates alike 168 1/vù3/v+-*v=>H+.*v;O>+-1vMA>+0, THEBUSINESSYEAR 3 Contents ECUADOR 2014 65 ENERGY 65 Counting out crude REVIEW 68 HE Pedro Merizalde Pavón, Minister of Non-Renewable Natural Resources INTERVIEW 70 Yvonne Fabara Arias, Secretary of Hydrocarbons INTERVIEW 21 ECONOMY 71 Marco Gustavo Calvopiña Vega, General Manager of Petroecuador INTERVIEW 21 Welcome back REVIEW 24 HE Francisco Rivadeneira, Minister of International Trade INTERVIEW 26 Antonio García Ruales, Executive Director of PRO ECUADOR INTERVIEW 27 Cristian Espinosa C., Executive Director of the Ecuadorian-American Chamber of Commerce (AMCHAM Quito) INTERVIEW 45 The reform club REVIEW: BANKING 48 Fausto Herrera, Minister of Finance INTERVIEW 50 Diego Martinez V., President of the Board of Banco Central del Ecuador (BCE) INTERVIEW 28 My word is my bond FOCUS: ECUADOR’S RETURN TO THE BOND MARKET 51 Ricardo Cuesta D., Executive President of PRODUBANCO-Grupo Promerica INTERVIEW 30 Mauricio Rodas Espinel, Mayor of Quito INTERVIEW 53 Efrain Vieira Herrera, Executive President of Banco del Pacífico INTERVIEW 31 Hugo Villacrés Endara, President of the Board of the Ecuadorean Institute of Social Security (IESS) INTERVIEW 6 ¡Viva la revolución! YEAR IN REVIEW 32 María Soledad Barrera A., Chairman of the Board of Corporación Financiera Nacional (CFN) INTERVIEW 9 DIPLOMACY 34 Come talk to us B2B: CONSULTING 9 Pacific rules REVIEW 45 FINANCE 55 The future is now FORUM: TECH BANKING 56 Bond is back REVIEW: EQUITY MARKET 56 Fernando Martinez, Partner in Investum COLUMN 72 Eduardo López Robayo, President & CEO of Sertecpet INTERVIEW 73 What lies beneath FOCUS: REFINERY OF THE PACIFIC 74 Bismarck Andrade González, General Manager of Refinería del Pacífico INTERVIEW 76 Danilo Diego X. Moreno Oleas, General Manager of EP FLOPEC INTERVIEW 78 Water way to go FOCUS: RENEWABLES 78 Cai Runguo, Senior Advisor of Sinohydro COLUMN 79 HE Esteban Albornoz Vintimilla, Minister of Electricity & Renewable Energy INTERVIEW 80 Eduardo Barredo Heinert, General Manager of Corporación Eléctrica del Ecuador (CELEC EP) INTERVIEW 58 Ramiro Crespo, Senior Partner & General Director, & Eduardo Checa, General Manager of Analytica INTERVIEW 12 HE Rafael Correa, President of Republic of Ecuador PROFILE 35 Have we met? FORUM: ECUADOREAN COMPANIES ABROAD 14 HE Jorge Glas, Vice-President of Ecuador INTERVIEW 36 Roberto Dunn, General Manager of Consorcio Nobis INTERVIEW 16 The final frontier FOCUS: LATIN AMERICAN RELATIONS 37 A promising province FOCUS: MANABÍ 17 HE Enrique Peña Nieto, President of Mexico GUEST SPEAKER 39 It’s a dirty job, but… B2B: WASTE SERVICES 18 Long & winding road FOCUS: EU TRADE AGREEMENT 40 Coastal idyll VOX POPULI: MANABÍ 63 Oscar Zuloaga Ayala, Executive President of ZHM Seguros INTERVIEW 19 HE Mariano Rajoy, Prime Minister of Spain GUEST SPEAKER 42 Be here now FORUM: WHY ECUADOR? 64 Premium bonds VOX POPULI: INSURANCE 59 Pedro Ortíz Reinoso, General Manager of Fiducia INTERVIEW 60 Stay safe REVIEW: INSURANCE 62 Juan Ribas Domenech, Chairman Seguros Sucre & Seguros Rocafuerte INTERVIEW In partnership with: Ministry of International Trade and PRO ECUADOR 4 THEBUSINESSYEAR ECUADOR 2014 83 INDUSTY & 101 TELECOMS 83 Turning the screw REVIEW: INDUSTRY 101 Plug me in REVIEW MINING 87 Richard Espinosa Guzmán, Coordinating Minister of Production, Employment, and Competitiveness INTERVIEW 89 Wilson León Lee, Executive President of Grupo Öriental INTERVIEW 91 Food bar FORUM: AGRIFOOD 92 Home run FOCUS: PRODUCTIVE MATRIX 93 Nicolás Espinosa, Executive President of Automotores y Anexos (AYASA) INTERVIEW 94 Change away VOX POPULI: PRODUCTIVE MATRIX 96 Roberto Jouvin, General Manager of Mabe Ecuador INTERVIEW 97 Gustavo Iñurritegui, Executive President of the Andean Area of Franz Viegener (FV) INTERVIEW 98 Gold fingers REVIEW: MINING 100 Santiago Yépez Dávila, General Manager of Empresa Nacional Minera (ENAMI EP) INTERVIEW & IT 102 Luis Eduardo Carrión, General Manager of Binaria COLUMN 105 Jaime Guerrero Ruiz, Minister of Telecommunications & Information Society INTERVIEW 106 René Ramírez Gallegos, National Secretary of Higher Education, Science, Technology & Innovation of Ecuador INTERVIEW 107 The Knowledge City: Investigate! Innovate! Produce! FOCUS: YACHAY 109 Héctor Rodríguez, CEO of Yachay Public Company INTERVIEW 110 Knowledge cherry bite FORUM: YACHAY 111 Omar Monroy, Country General Manager of Xerox INTERVIEW 113 William Moss, CEO, & Richard Moss, President for Latin America of Cobiscorp INTERVIEW 115 Katherin Miño, General Manager of PuntoNet INTERVIEW 116 Tomislav Topic, CEO of Telconet INTERVIEW 117 Live from Ecuador B2B: MEDIA 119 TRANSPORT 119 Calibrate & fine tune REVIEW 120 Maria de los Ángeles Duarte, Former Minister of Transport & Public Works COLUMN 122 Paola Carvajal, Minister of Transport & Public Works INTERVIEW 123 Armando Castellanos Talero, General Manager of Servientrega INTERVIEW 124 Fernando Guerrero, General Manager of TAME EP INTERVIEW 125 Harmonized expansion FOCUS: PORTS 126 Land ahoy! VOX POPULI: MARITIME 127 Manuel van Oordt, CEO of LAN Ecuador INTERVIEW 129 REAL ESTATE & CONSTRUCTION 129 Place in the sun REVIEW: REAL ESTATE 130 Alfonso Jalil, General Manager, Real Estate Division, Grupo Aries COLUMN 132 Santiago Ribadeneira, CEO of PROINCO Inmobiliaria INTERVIEW 134 A place to stay VOX POPULI: RESIDENTIAL 135 Iron & stone REVIEW: CONSTRUCTION 138 Manuel Román Moreno, General Manager of Empresa Pública Cementera del Ecuador INTERVIEW THEBUSINESSYEAR 5 Managing Editor Leland Rice Regional Director Carla Alberti de la Rosa Country Editor Tyler Mattiace 139 AGRICULTURE Country Manager Yamila Ortiz Pontier 139 Farmers’ delight REVIEW EDUCATION Project Assistants María Alejandro Coello, Santiago Echeverría 140 Juan Xavier Cordovez, Executive Vice-President, EXPALSA COLUMN 145 It’s business time REVIEW: HEALTH 154 Sonia Roca, Chancellor, Universidad Del Pacífico COLUMN Managing Director $\ÞH+D]ÏU9DOHQWLQ 142 Oil & flowers B2B: GROWERS Editorial Director Jason J. Nash Commercial Director Laila Bastati 143 Profit to net FOCUS: TUNA 146 Ana Dolores Román, General Manager, Pfizer COLUMN 156 Sergio Flores Macías, President of Escuela Politécnica del Litoral (ESPOL) INTERVIEW Senior Editor Mark A. Szawlowski Web Editor Peter Howson 143 Victoria Serrano, General Manager, Seafman COLUMN 144 Jelisava Cuka Auad, General Manager of Marbelize INTERVIEW 145 HEALTH & 148 Héctor Enríquez C., General Manager of Laboratorios LIFE INTERVIEW 149 Diego Ruiz, Executive President of Novartis Ecuador INTERVIEW 157 Dr. José Barbosa Corbacho, Rector-Chancellor of Universidad Técnica Particular de Loja (UTPL) INTERVIEW Sub-‐Editors Terry Whitlam, Aidan McMahon, Michael Gibson, Lewis King, Susan Barrett 150 The place to heal FORUM: HEALTH INSURANCE 158 Fabián Carrasco Castro, Rector of Universidad de Cuenca INTERVIEW Editorial Assistant Asiye Duman 151 Guillermo Menéndez, General Manager of Grunenthal Ecuatoriana INTERVIEW 159 A cunning plan VOX POPULI: RESEARCH 152 House of healers B2B: HOSPITALS 161 TOURISM Contributors Scott Preston Transcribers Nikolai Davis, Attila Pelit, Pronto Publishing Services, Deanne de Vries, Natalia Ehrenberg Art Director Berin Cansu Zafer Jr Art Director Bahar Kara Designers Ceren Bettemir, Mine Sinal, Sérgio Caldeira, Didem Toprak Cover Illustration .UÞDWhQVDO HR Executive Ines Delgado PR Executive 6HPLKD(ONÏUDQ Operations Manager 6HUSLO<DOWDOÏHU Operations Executive g]QXU<ÏOGÏ] Operations Assistant Gamze Zorlu Finance Executive 1DPÏN$NPDQ Circulation Manager Amy Burtin Publisher Peggy Rosiak Printing: Apa Uniprint The Business Year: 78 York Street, London W1H 1DP T +44 (0)207 692 8335 F +44 (0)207 692 8336 [email protected] www.thebusinessyear.com The Business Year is a registered trademark of The Business Year International. Copyright The Business Year International Inc. 2014. All rights reserved. No part of this publication may be reproduced, stored in a retrievable system, or transmitted in any form or by any means, electronic, mechanical, photocopied, recorded, or otherwise without prior permission of The Business Year International Inc. The Business Year International Inc. has made every effort to ensure that the content of this publication is accurate at the time of printing. The Business Year International Inc. makes no warranty, representation, or undertaking, whether expressed or implied, nor does it assume any legal liability, direct or indirect, or responsibility for the accuracy, completeness, or usefulness of any information contained in this publication. ISBN 978-1-908180-38-4 153 Back to school REVIEW: EDUCATION 161 Enviable position REVIEW 164 Roque Sevilla, Chairman of Metropolitan Touring INTERVIEW 165 Gino Luzi, General Manager of Grand Hotel Guayaquil INTERVIEW 166 Gaining traction FOCUS: TRAIN CRUCERO 167 Jorge Eduardo Carrera, General Manager of Ferrocarriles del Ecuador INTERVIEW 168 Cuenca andean dreams PHOTO ESSAY: DESTINATION 168 Juan Fernando Paredes Roldán Executive Director, Municipal Tourism Foundation for Cuenca COLUMN 171 EXECUTIVE GUIDE 171 The thick of it REVIEW: LEGAL 174 Mauricio Durango Pérez, Founder & CEO of Moore Stephens INTERVIEW 175 Streamlined for success REVIEW: DOING BUSINESS GUIDE 178 When in Ecuador... 6 ECUADOR 2014 THEBUSINESSYEAR YEAR IN REVIEW ¡VIVA la revolución! C San Lorenzo PASIFIC OCEAN C I Esmeraldas In a transformed political environment, Ecuador’s economy is thriving, though major potential remains to be exploited efficiently. COLOMBIA I Tulcán GALAPAGOS ISLANDS (located 972 km from the coast) I Quito S Bahia de Caraquez C I Manta ECUADOR I Portoviejo S La Libertad C I Guayaquil I Cuenca S Puerto Bolivar PERU S Sea Port C Container Terminal I International Airport THEBUSINESSYEAR THE ECUADOR OF TODAY Length of Land Borders 2,010 kilometers Area 283,561 km2 Total Population 16.09 million Life Expectancy 73.4 / 79.46 GDP (2014 IMF estimate) $83.451 billion Unemployment Rate (2013) 4.7 % ChØ[ncih",*+-# 2.7 % =oll_hn;]]iohn>_×]cn (2014 IMF estimate) $1.106 billion Legislative Power Unicameral National Assembly Government Type Presidential Representative Democratic Republic HEAD OF STATE President Rafael Correa HEAD OF GOVERNMENT President Rafael Correa BRAZIL is radically different from that of a decade ago. As President Rafael Correa’s administration continues to explore new ways to boost the country’s economy and attract foreign investment, the success of policies implemented over the past eight years has become evident. Following a binary strategy of liberal trade policies and socially inclusive programs that aim to raise the living standards of its poorest citizens, the government has reduced the levels of extreme poverty from almost 17% to 8.6% between 2006 and 2013, and elevated the income of the poorest two-fifths of the population by over 8%. As the population continues to grow, reaching over 16 million in 2014, these endeavors have become more necessary than ever, particularly in the border regions of the north, which have traditionally suffered from conflict overspill from Colombia. A range of other programs has been implemented to improve lifestyles and edify the populace. The Plan for the Citizen’s Revolution, a comprehensive blueprint for the redirection of national resources toward education, housing, infrastructure, and healthcare for the benefit of rural and urban-dwelling Ecuadoreans, began in 2007 with the accession of the Correa administration to power. This five-year plan included additional components to ensure the rights of indigenous communities. Aspects of this more socially oriented system can be seen in the text of the new constitution, which was promulgated in 2008. Extended for a second phase to end in 2017, the scheme has also significantly improved transparency and accountability in politics and the commercial sphere, creating a more ethical environment in which to do business. This fact has not been lost on foreign investors keen to enter the Ecuadorean market. The country is now an associate member of both Mercosur 7 and the Pacific Alliance, and has enacted free trade agreements (FTAs) with numerous countries beyond the region, too. Links with Europe came to prominence over the course of the year, as a pact was signed to guarantee favorable trading conditions. The markets of Asia have a stronger presence than ever, too. Chinese capital has flowed abundantly into the economy, fortifying national infrastructure and in some cases completely funding the construction of transport projects, and reaching a total of $12 billion since 2009. The country’s reputation in the international capital markets was damaged by a default on bonds in 2008. However, this negative development has been reversed by the decision to return to the markets in 2014 with the sale of $2 billion worth of 10-year bonds at 7.95%, which will help the government to broaden its funding sources. FDI has increased dramatically under the incumbent administration, the result of its reasonable policies with regard to international trade. FDI represents more than 40% of GDP since 2012, indicating confidence in a country that has advanced its political institutions and a stable market. A steady macroeconomic performance has met with a positive response from international ratings organizations. Standard & Poors’ rating rose to B+ from B in 2014, while those of Moody’s and Fitch stand at Caa1 and B stable, respectively. GDP has risen from around $45 billion in 2007 to $83.451 billion in 2014, according to IMF data. Inflation at year-end 2013 was 2.7%, while unemployment in the same period hovered over the 4% mark. Much of the population is employed in the agriculture sector, with around 27% of the workforce making a living in the numerous rural provinces of the country. Non-traditional, value-added products such as flowers are being encouraged through the improvement of 8 THEBUSINESSYEAR ECUADOR 2014 YEAR IN REVIEW refrigeration and logistics infrastructure. The country’s unrivalled biodiversity, a result of a varied, well-irrigated topography, allows for the practice of a range of farming types. In addition, eco-tourism has emerged as a viable niche in the market. Oil and gas retains a considerable hold on the economy. Approximately 50% of exports in 2012, totaling $12.7 billion, were of crude petroleum, with refined petroleum comprising just 3.8% of outgoing trade in the same year. This figure is set to change as the Pacific Refinery comes online, overtaking the Esmereldas facility to expand the production of oil-derived products currently being imported by the country. Along with other refining projects, Ecuador’s potential in this regard is set to reach 500,000 bbl/d. The mining and extraction of minerals is another area of serious potential, with over $200 billion in reserves yet to be exploited. Energy projects such as the Coca Codo Sinclair hydroelectric plant, and a host of additional renewable resources, are planned to provide the bulk of national demand for electricity in the near future. Meanwhile, the development of port infrastructure along the Pacific coast The country is now an associate member of both Mercosur and the Pacific Alliance, having enacted numerous free trade agreements (FTAs) beyond the region, too. aims to precipitate the completion of the Panama Canal expansion, which will increase the volume of cargo along the western South American coast. Prospects are good and expectations high for Ecuador in the coming years. Now in his third term following reelection in early 2013, President Correa, Vice-President Jorge Glas, and their diverse cabinet will continue to push for progressive reforms and challenge staid concepts in national politics. Through the encouragement of healthy, sustainable, and peaceful living for Ecuadoreans, a new model for Latin American economies is being explored, in the aim of providing an open economy and robust social policy. And until the 2017 general elections, this momentum is likely to continue, bringing economic growth and further integration with the region and the world. GDP Current Prices (in USD Billion) Source: IMF 83.4 78.4 72.4 66.3 57.9 52 54.2 45.5 41.7 36.9 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 Population Pyramid - 2014 Source: US Census Bureau ECUADOR 2014 MALE FEMALE 100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 775 620 465 310 155 0 0 POPULATION (IN THOUSANDS) 155 310 465 620 775 POPULATION (IN THOUSANDS) AGE GROUP THE ECONOMY HAS BEEN OFFICIALLY DOLLARIZED SINCE 2000 THEBUSINESSYEAR 12 14 16 President Correa has sought to boost the internal economy, while looking to engage with the country’s key economic partners. Jorge Glas, Vice-‐President of Ecuador, on the productive matrix and foreign investment potential of the country. Ecuador’s dealings with its neighbors have won it support and challenged geopolitical norms. 9 Diplomacy REVIEW Not content with a solid result in the 2013 General Election, President Rafael Correa has adopted a strategy of increasing foreign trade for the benefit of Ecuadorean society. K PACIFIC RULES nown for controversial stances on diverse issues, and an uncompromising attitude toward the foreign policy of the US and other global powerhouses, President Rafael Correa has put Ecuador back on the map. However, these gestures belie an economy that has overcome the global financial crisis of 2008, opening up to international investment and the development of its vast mineral and energy wealth. The approach of the government is pragmatic, aiming to encourage open trading through a series of free trade agreements (FTAs), while investing in public projects in an attempt to nurture a more inclusive society. After decades mired by internal conflict and military governments, Ecuador has become a land of steady growth and balanced politics. GRAN ECUADOR The Republic of Ecuador was founded in 1831, emerging from the collapse of the ill-fated, post-colonial coun- The current Correa administration continues to move from success to success, attracting enthusiastic praise and interest both at home and abroad. try known as Gran Colombia. This heterogeneous union of the modern day states of Colombia, Venezuela, Ecuador, and Panama fell apart after 15 years of political infighting, leading to the establishment of the former three as independent nations. Peru, which was still under Spanish rule, became a destabilizing force in the Ecuadorean political arena, as the border had never been agreed upon. This, combined with disagreements among disparate segments of Ecuadorean society, primarily the conservatives and liberals, led to a tumultuous period for the young republic, characterized by coups d’etat and military rule. The early 20th century was a period of liberalization in Ecuador, both economically and socially. Continued disputes with Peru marred relations during World War II, but led to a framework peace agreement called the Rio Protocol in 1942. This did not fully end the conflict, however, and problems remained until the late 1990s when the Military Observer Mission Ecua- 10 THEBUSINESSYEAR ECUADOR 2014 dor-Peru (MOMEP) was set up to broker a border agreement. With the exception of a period in the 1950s when increased exports of bananas created a level of political stability, short-lived governments, many of which were of an authoritarian military bent, marred Ecuadorean politics in the 20th century. A constitution promulgated in 1978 ordered a return to civilian rule, and remained in effect until the late 1990s when it was modified. The 20th incarnation of an Ecuadorean constitution was created in 2008 following the accession of Rafael Correa to the presidency, and is still currently in force. STRONG CONSTITUTION Ecuador is divided into provinces, municipalities (also known as cantons), and parishes. Prefects manage the affairs of the former, while councilors, mayors, and parish boards are responsible for the latter two subdivisions. Within each canton, the council ensures that local needs are met, carrying out all necessary public works and administering the budget and annual expenditure for the state. These local government representatives are elected for four-year periods, and have a high degree of financial and administrative authority, guaranteed by the constitution, which outlines a vision of a decentralized and empowered nation. Above this level, ministries with specified responsibilities coordinate interactions among the regions. The 2008 constitution clearly outlines the division of power within the government. The legislative branch is known as the National Assembly, a unicameral parliament with its seat in Quito. The assembly is subdivided among 15 national representatives, and two representatives for each of the provinces, and members for each additional 150,000 citizens or more in a given area, according to the national census. The assembly comprises 124 deputies who are affiliated with 10 commissions and who serve for four years. National elections held in February 2013 demonstrated a high level of support for President Correa’s Movimiento Alianza PAIS, which won 52.31% of votes, maintaining a considerable majority. Next, the relatively new Creating Opportunities Party (CREO) garnered 11.42% of support, and stood behind the main opposition candidate for the presidency, Guillermo Lasso. The Social Christian Party, with 8.96%, followed, while the January 21 Patriotic Society Party, the Plurinational Unity of the Lefts, and the Ecuadorean Roldosist Party trailed behind with approximately 5% of votes each. The National Court of Justice is made up of 21 judges who are elected by the Judiciary Council for nine-year terms. This represents the highest tier of the judicial branch of government. The president of this court serves a threeyear term. The 2008 constitution safeguards the sanctity of transparent legal practice, ensuring strong training for professionals and aiming to increase efficiency in the system. Recognizing the country’s unique demographic composition, it also allows for the practice of indigenous traditions in the settling of disputes within their communities, provided there is no conflict between these customs and the customary law of the nation. In addition, a Constitutional Court is the authority for all legal considerations related to the electoral process. In 2012, the court took a majority vote to introduce the D’Hondt system of proportional representation. This common method places an emphasis on the highest averages for parties or candidates, and generally allows larger parties a greater share of seats, encouraging stability in parliament and government. THE BUCK STOPS HERE The executive branch of government is represented by the President of the Republic, who manages public administration and serves the dual roles of head of state and head of government. The Office of the President is complemented by that of the Vice-President, and also by the various ministries which oversee the running of the country. The president selects assorted ministers and advisors for their cabinet, and serves for a four-year term. Following the change in electoral method in 2012, and concurrent with the legislature elections in February 2013, voting for the presidency also took place, renewing Rafael Correa’s rule for a second time and guaranteeing his continued leadership until 2017. Competing with seven other contenders, President Correa and running mate Jorge Glas received 57.17% of votes, ensuring that their PAIS Alliance now controls both the National Assembly and the Executive. Opposition candidate Guillermo Lasso of CREO followed behind with 22.68%, while Lucio Gutiérrez of the PSP won 6.73%. DIRECTLY INVESTING This landslide victory speaks volumes about the successes gained by President Correa’s administration that has been governing since 2007. With his leadership, characterized by canny fiscal initiatives, outspoken and controversial diplomatic overtures, and progressive reform of the political environment of the country, Ecuador is experiencing unprecedented stability. The government has consistently foregrounded a broad strengthening of the economy and its production base, while making dramatic improvements in the lives of those in poverty across the country. Concerted efforts to increase FDI by creating a more welcoming destination for capital from abroad have allowed FDI to jump to over 40% of GDP in 2012. President Correa has a strong background in Diplomacy economics, and has leveraged this knowledge to pull the country out of a cycle of political uncertainty. The growth that has resulted has been shared among the population by boosting the emerging middle class, while the reduction of income poverty levels from 37.6% to 25.5% between 2006 and 2013, and extreme poverty from 16.9% to 8.6% in the same period, has fostered a more inclusive society. Concern for the well-being of its citizens and the country has earned President Correa’s government high praise from abroad. In particular, enlightened innovations such as the recognition of the rights of nature in the 2008 constitution have helped to establish a new reputation for Ecuador in the world of diplomacy, while domestic support remains strong and a fractured opposition fails to mount serious threats to the governance of the PAIS Alliance. Further recent amendments to the constitution, including a change that would make additional reelections possible, have generated some degree of civil dissent, despite President Correa declaring that he has no plans to do so when 2017 comes around. Additionally, the government’s dedication to more efficiently and extensively Enlightened innovations such as the recognition of the rights of nature in the 2008 constitution have helped to establish a new reputation for Ecuador in the world of diplomacy. utilizing the nation’s mining and oil potential has produced more than just revenue, as select local communities opposed to these projects voice their concerns over its effects. Ultimately, however, a large support base and stronger democratic institutions will guarantee considerable stability for the incumbent government, allowing its program of socially conscious development to continue apace. THEBUSINESSYEAR 11 12 THEBUSINESSYEAR ECUADOR 2014 PROFILE Image: Presidency of the Republic of Ecuador WHEN LIFE IS GOOD With an eye on maintaining economic and political stability, President Correa has sought to boost the internal economy, while looking widely to engage with the country’s key economic partners. Rafael Correa, who has been referred to as Ecuador’s most effective president, has certainly come a very long way from his blue-collar upbringing. Correa, who assumed office in 2006, is now serving his third term in office. As the first president in five decades to be elected to a second term, in a country that rotated seven presidents in 10 years, Correa’s long-running tenure speaks to his political and economic success. Correa has more than earned his reputation as a bold politician with an ambitious agenda aimed at reforming Ecuador’s institutions and bolstering the economy. With the backing of his party, the PAIS Alliance, which Correa himself founded, some of the President’s resume of accomplishments includes the enactment of a new voting system, the securing of a lucrative EU trade deal, and the ratification of a new constitution. Diplomacy To some extent the new constitution, which is based on principles rooted in buen vivir, is representative of Correa’s political philosophy. Buen vivir, or “good living,” comes from the worldview of the indigenous peoples of Quechua in the Andes. Nature is recognized as exhaustable, society is recognized as pluralistic, and politics are meant to be inclusive for all citizens. With these principles in mind, Correa has adopted a development approach that is ecological, community friendly, and culturally sensitive. The constitution now features the passage, “we hereby decide to build a new form of public coexistence, in diversity and in harmony with nature, to achieve the good way of living.” Before his career in politics Rafael Correa spent much of his time as an academic. After receiving a degree in economics from the Universidad Catolica de Santiago de Guayaquil in 1987, Correa went on to earn two Master’s degrees in Arts in Economics and Science in Economics from Catholique de Louvian in Belgium and the University of Illinois at Urbana-Champaign, respectively. Then, in 2001, he earned a PhD in economics from the University of Illinois as well. In contrast with prevailing Western economic theory, Correa campaigned on a platform of left-leaning, socialist policies that focus on poverty alleviation, regional integration, and principles of autonomy that derive from the country’s colonial past. He has also invested heavily in infrastructure projects developing roads, schools, and health clinics. Between 2007 and 2013, government expenditure toward public investment amounted to $34 billion. During this period the country’s poverty rate fell 10% in five years from 2007 to 2012. High oil prices and increased petroleum revenues have buoyed the massive increase in social spending, with $7.26 billion earmarked for public investment in 2014 alone. Correa’s programs have subsequently benefited rural populations and slum inhabitants, who have historically been ignored by government development schemes. This has allowed the President to achieve the largest redistribution of wealth in the country’s history. Ecuador’s egalitarian strides are partly to credit for Correa’s staggering approval rating, which has steadily climbed since his inauguration, remained above 50% and peaked at 90% in April 2013, the highest approval rating in Latin America. In September of 2014, Correa’s rating stood at a favorable 83% among respondents living in Ecuador’s largest cities. During the national address in October 2014, President Correa announced that the executive’s priorities would center on prioritizing public investment until 2017. With three years left before his term expires, infrastructure developments, social programs, and healthcare are expected to continue to take precedent among the President’s top goals. In 2015, 32% of the government’s budget is set to target strategic sectors while another 23% will be designated for production. Correa continued to undertake several major economics projects in 2014. The International Monetary Fund (IMF) was welcomed back and reviewed the government’s finances. Ecuador’s debt to GDP ratio is a healthy 24%, and ratings agencies have upgraded the state’s credit standings. In June 2014, Ecuador reestablished itself in the international market and launched $2 billion in 10-year bonds. Around the same time, Goldman Sachs provided a $400 million loan that was secured by 50% of the country’s gold reserves. As well, Ecuador also launched its first digital currency under Correa’s guidance. The use of the currency will facilitate transactions and is expected to increase monetary security and transparency. President Correa’s audacious leadership style is equally apparent in his use of soft power in foreign policy. He has been outspoken in his stance on a range of hot topic international issues, even when those issues clash with Ecuador’s largest trading partner, the US. In 2012, Julian Assange of WikiLeaks escaped extradition when Correa granted him asylum at the Ecuadorean embassy in London. The US, the UK, and Sweden levied immense international pressure on Ecuador, but Correa held his ground and reaffirmed protection for Assange in 2013. These moves were not without cost however, as the US made it a point not to renew the 22-year-old Andean Trade Preference Act. The pact allowed Ecuador preferential relief from trade duties and its cancellation is estimated to have cost the country $26 million annually in trade. In response, the government swiftly passed a new law in 2013 that allocated $23 million a year in aid to exporters. Born into a working class family in 1961, Rafael Correa has become one of the most revolutionary figures in Ecuadorean history. In 2014, he was nominated for Best Politician of the Year by the Colombian magazine Crasel. On top of his accomplishments, he has his own TV show, speaks English, French, and Quechua, idolizes Hugo Chavez, and describes himself as a “Christian leftist.” The descendant of revolutionary, Chilean politician, Correa de Saa y Lazon, Rafel Correa has stayed true to his word, and looks set to uphold the political and economic stability that Ecuador has enjoyed during his administration. THEBUSINESSYEAR 13 Ecuador’s egalitarian strides are partly owing to Correa’s staggering approval rating, which has steadily climbed since his inauguration, remained above 50% and peaked at 90% in April 2013, the highest approval rating in Latin America. 14 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW value chain AHOY! TBY talks to HE Jorge Glas, Vice-‐President of Ecuador, on the productive matrix, foreign investment, and trade agreements. Why is it necessary for Ecuador to transform its productive matrix? What does the transformation of the productive matrix mean, more practically, for the economy? The National Strategy for the Change of the Productive Matrix was a response to the prevailing conditions of our country. When the government entered office, Ecuador was a country with serious deficiencies in energy and infrastructure. There was also a lack of investment in roads, ports, and airports. We also had the second-lowest broadband penetration in all of Latin America, as well as many other challenges. Having had a dollarized economy for 14 years, we have a fixed exchange rate. As a consequence, we cannot use monetary policy as a means of generating competitiveness in the way that many other countries can. This affects our trade balance, which is why we are focusing on projects like the Pacific Refinery. We subsidize petroleum in Ecuador, which we see as part of a social transfer, but it is increasingly expensive for the country, and worsens our trade balance. We have improved the quality of life for people in Ecuador, but this has also contributed to increased consumption, which means a further increase in imports of the kinds of goods and appliances people want for their homes and daily lives. Now, our goal is to change our economic structure in Ecuador to help ensure the competitiveness of the economy and generate more wealth and opportunities for Ecuadoreans. We have traditionally been an exporter of non-value-added products, such as petroleum and agricultural goods. We need to make the leap to industrialization and Buen Vivir, while keeping in mind the protection of our environment. We are dependent on primary exports, and need to step beyond this dependence. This is why we have proposed the strategy for the change of the productive matrix. The first step is to develop industrializing industries, that is to say, the primary industries that can spur further industrialization in other sectors. These are industries, such as petrochemicals, iron and steel, copper, aluminum, and shipbuilding, among others. The growth of these industries can allow us to overcome our dependence on primary exports. Other countries, such as China, South Korea, and Singapore, have made this transition in the past, but we cannot take the same amount of time that they did to realize the transition. We need to accelerate this process and will invest in this with financing and strategic alliances with friendly nations. I have visited a number of our allies to discuss this, such as India, China, and Cuba. All of this comes down to strengthening national productivity on all levels, from micro-enterprises to large-scale industries and projects. What role can the agricultural sector play in this transformation? Agriculture will remain an important part of our economy. We need to increase productivity per hectare for our agricultural products, such as bananas. Moreover, whatever we produce in the agriculture sector, it is important that we produce much more in the agro-industrial sector as our neighboring countries do. We have defined quality standards for our national products, so that their quality can be recognized not only locally, but also internationally. More generally, the idea is that we need to look not at individual products, but at value chains in order to determine what components can generate the most profit. This will mean greater revenues for producers, al- BIO Jorge Glas studied electrical engineering at the Escuela Superior Politécnica del Litoral, and moved on to play a key role in the development of the national telecommunications and electrical sectors. From 2007 to 2009 he was president of the country’s Solidarity Fund, a public entity with assets in numerous major telecommunications corporations. He also oversaw the merger of Andinatel S.A. and J[]c×]n_fM(;(ni\_]ig_ the Corporación Nacional de Telecomunicaciones CNT S.A. In addition, he headed up the fusion of electricity generation and nl[hmgcmmcih×lgmchninb_ Corporación Eléctrica del Ecuador (CELEC) and the Corporación Nacional de Electricidad (CNEL). He has served as Minister of Telecommunications and Information Society and Minister for Coordination of Strategic Sectors, and played a key role in the renegotiation of hydrocarbon contracts and the development of the mining sector. Diplomacy THEBUSINESSYEAR lowing Ecuador to move up the value chain. Ecuador is proud to produce the best cocoa in the world. But a kilogram of chocolate sells for much more than a kilogram of cocoa. We can use technology and innovation to make the most of our agricultural strength. Biq^i_ml_acih[fchn_al[ncih×nchninbcmmnl[n_as9 We have identified that integration as an important part of this, not only in terms of political integration, but also in terms of building regional value chains. Specifically, we are looking at the integration of our energy systems and how this can be used for economic development. We recently signed an agreement with the Ministry of Energy of Chile. Ecuador will soon have an abundance of renewable energy from the eight new hydroelectric projects set for completion by 2016. This is the energy we need to sustain our development and industrialization. Looking at regional value chains, Ecuador has proposed the construction of a copper refinery. Chile and Peru export copper concentrate, but refined copper is a much more preferable export. The refining of copper involves significant energy consumption, and Ecuador will shortly have a substantial supply of environmentally friendly electricity. This is energy that can also be used, for example, for the aluminum industry, another industry that could play an important role in industrializing the country. What role can private international investment play in transforming the productive matrix? The main protagonist in this transformation is the private sector. We have decided to invest here because it is not feasible to await private sector commitment. My country lost decades though neoliberal policies that shaped our economy and lives. Much of the private sector’s investment of that time, in the energy sector for example, was costly and inefficient. These plans represent $10 billion of investment and imply many opportunities for investment for the private sector. We have seen considerable interest from investors in countries such as Russia and the Middle East, as well as opportunities to obtain both financing and expertise from other friends, such as China and Brazil, and a few European countries interested in becoming a part of the development of these new industries. Now, here in the Vice-Presidency, we receive international investors from all over the world who are interested in the opportunities that are presented by the productive matrix strategy. These include technology providers, financial institutions, and strategic partners, all of whom are waiting for us to finalize studies in many of these investment areas. At the Vice-Presidency we are working to promote investment, and seeking the technology to transform our economy. Our goal is to ensure that the private sector Ecuador is pursuing major improvements in national infastructure has the financing and the human talent available to make the necessary investments. That is why Ecuador ranks among the highest-level countries regarding investment in education as a percentage of GDP. How would you characterize the importance of the trade agreement with the EU? This agreement represents opportunities not only for our current exports, but also for export growth across new segments. The important consideration is exports with value-added. This trade agreement will allow us to export everything that represents the new industries that we are building in this country. Ecuador went into this negotiation with a number of clearly defined red lines in terms of public policy, tax policy, public procurement, and strategic areas of the economy to protect. Ultimately, I think we have achieved our objectives. The agreement has yet to be ratified in Ecuador, and during negotiations we have not lost sight of our dollarized economy. We are unable to devalue our currency to generate competitiveness, and, therefore, need to ensure no loss of competitiveness upon signing. What makes Ecuador an attractive destination for international investment? The intensity of our development objectives and our plan to industrialize the economy in the timeframe we are talking about, and with the conditions that we have already created in Ecuador, is something unique. During our time in government we have provided energy, infrastructure, roads, ports, and we have the backing of our citizens. We are proposing $10 billion in investment in basic industries, not including projects like the Pacific Refinery, or our hydroelectric, or infrastructure projects. Ecuador represents opportunities because of its geographic position, and because of its natural resources. Ecuador has $10 billion in investment planned to develop the basic industries necessary for industrializing the country 15 16 THEBUSINESSYEAR ECUADOR 2014 FOCUS LATIN AMERICAN RELATIONS THE FINAL FRONTIER Ecuador’s frank dealings with its hinterland have won it support and challenged geopolitical norms, but a long history of engagement with international organizations shows that it means business. IN 2008, as part of an intensified campaign against the Revolutionary Armed Forces of Colombia (FARC), Colombian state troops broke the basic concept of territorial sovereignty that underlines modern diplomacy. By crossing the Putumayo River, an important tributary of Latin America’s great Amazon River, the military had entered Ecuadorean territory, violating norms of international relations and sparking the Andean diplomatic crisis, which dominated both nations regional relations for some time. The previous year, the administration had begun to implement its Plan Ecuador, a multi-faceted strategy designed to develop the northern border provinces of Esmereldas, Carchi, Imbabura, Orellana, and Sucumbíos. These areas had experienced significant growth in the number of Colombian refugees settling in the area, driven out by the ongoing conflict. Their presence added to an already challenging situation in the impoverished region, and finding a resolution to this situation became a priority for the Correa government. Improving the social development of these provinces was a key element of the plan, but the critical consideration was diplomacy and an attempt to improve communication with neighbors. Relations with Peru have been historically strained, but have bettered over the past two decades. Since 1942, the contentious border between the two Andean nations had been a subject of grave dispute, a conflict that culminated most recently in armed conflict during the mid-1990s. A peace agreement brokered by the US and guarantor nations Argentina, Brazil, and Chile came into effect in 1998, surmounting one of Ecuador’s most intractable regional diplomatic obstacles. In terms of the region at large, Ecuador has been vigorously engaged in multi-lateral organizations. As an early member of the UN, it has advocated steadily on behalf of emerging nations and Latin America as a whole. In 2009, it held the rotating presidency of the Union of South American Nations (UNASUR). In addition it is a member of the Latin American Energy Organization, the Community of Andean Nations, and the Organization of American States (OAS). Ecuador has joined the Pacific Alliance, the primary instrument for managing trade between Latin America and the wider world, as an associate member, which would allow it to participate in Free Trade Agreements (FTAs) with the founding states of Chile, Mexico, and neighbors Peru and Colombia. Separately, but no less significantly, it is keeping its options open by considering a full membership offer of the continent’s other most influential trade group, the Southern Common Market (Mercosur). Also as an associate member, the country is enjoying beneficial trade regulations with the group, the members of which are closer in ideology to the government than those of the Pacific Alliance. President Rafael Correa’s immediate and indignant response to the Andean crisis was typical of a leader who has embraced an active and outspoken diplomatic policy since his election in 2007. In the wake of the incident, representation in the embassies of Quito and Bogotá were recalled, and soon Ecuador’s close regional and ideological ally, Venezuela, became involved in an act of solidarity. Despite a build up of military forces in border regions of Venezuela and Ecuador in apparent anticipation of more incursions, the situation was resolved over time as Colombia apologized for the action. Ecuador contributes much to a number of regional groups, but also receives the benefits of these countries’ support. It was the involvement of the Rio Group that resulted in the resolution of the crisis at a summit in the Dominican Republic. A conciliatory policy was adopted by all sides, and, in October 2009, full diplomatic relations were restored. Diplomacy THEBUSINESSYEAR 17 GUEST SPEAKER a shared COMMITMENT HE Enrique Peña Nieto, President of Mexico on shared goals and the significance of education for social development. My recent visit to Ecuador, without a doubt, was extremely significant, considering that it has been 10 years since a Mexican President last visited that nation. It was therefore, a great honor to visit our sister republic in order to reaffirm the desire of both governments to deepen our relationship. A relationship that can hopefully serve as a basis for cooperation, trade, the strengthening of our economies, an increased flow of citizens between the two countries, and above all, of sharing diverse experiences of success, which can allow us to truly strengthen the development of our peoples and prepare them to be part of the demanding and competitive globalized world. During my visit to Ecuador, President Correa and I expressed the desire of both governments to work towards all goals agreed upon in various memorandums of understanding and agreements, in cooperation and collaboration toward a range of objectives. Our target is a broadening of our commercial relations in order to achieve a greater equilibrium in the trade balance between the two countries and to secure the strong support and cooperation of our countries’ educational institutions with the Yachay City of Knowledge. Additionally, we aim to build the technical cooperation of the Mexican Federal Electricity Commission with electrical generation projects being developed in Ecuador. We also agreed to create a worthy space for the headquarters of the Union of South American Nations (UNASUR), which could not boast a grander headquarters, and which has the potential to become a cultural space delegated to the Cultural Economic Fund, which fosters still closer cultural links between Ecuador and Mexico. The goals that President Correa and I agreed on during my visit are more than good intentions; they are real objectives for our two countries. Beyond discussing our mutual relations, we have set tangible goals that can bring real benefits and results for the harmonious relationship between our two countries. In Mexico, we have been working to rise above the fundamental challenges that the world is facing. We have pushed forward structural reforms to energize our economy and to achieve better economic performance on which to base social devel- opment for the inhabitants of our country. Ecuador, without a doubt, has been doing the same. Ecuador has seen sustained economic growth over recent years, having promoted inspirational social policies that are, without a doubt, reaching segments of the population that previously had no support. Mexico is doing the same. What we are doing in Mexico is very similar to what Ecuador is trying to achieve. Mexico, and the administration which I have the honor to lead, has set five main national goals, oriented at national security. As a result, today we see a Mexican State of greater capacity and strength. We have detained many high profile individuals from various criminal organizations precisely because we have been strengthening the capacity of the Mexican government through greater coordination between different levels of government. Another major objective that we share with Ecuador is education. We cannot hope to be a more developed society with greater opportunities for our people if we cannot spark greater abilities and capacities among new generations. As such, Mexico is pushing forward education reform, not only to achieve wider coverage, but more importantly to improve the quality of education being provided. We have worked toward making Mexico more inclusive, through different social programs, and without a doubt, those that Ecuador has implemented have become a key benchmark for what we can achieve through the social policies that our government is implementing in Mexico. A prosperous Mexico, which is our goal in assuring that Mexico grows economically and sustainably, can provide conditions for enhanced development. This, again, is an objective that we wholeheartedly share with Ecuador. A further goal is to transform Mexico into a responsible global actor. It was for precisely this reason that I visited Ecuador earlier in 2014. Primarily, to reaffirm Mexico’s Latin American identity, and then to reaffirm the links of brotherhood and respect that Mexico has, and maintains, with all of the people of the Latin American region. I believe that we have successfully conveyed this sentiment on many platforms and forums. I therefore pledge that the goals that President Correa and I set out during my visit will be realized to the fullest extent, helping to strengthen and broaden the relationship of affection and brotherhood between Ecuador and Mexico. BIO Enrique Peña Nieto holds a Bachelor’s degree in law from Universidad Panamericana and a Master’s degree in Business from Monterrey Institute of Technology and Higher Education. Early in his career he held a number of positions within the State of Mexico’s government, including Sub-Secretary of the Interior, Administrative Secretary, President of the Directive Council of Social Security, President of the Internal Council of Health, and Vice-President of the National System for Integral Family Development. In 2003 he won election as a State Deputy in his hometown of Atlacomulco. In 2005 he became Governor of the State of Mexico. He was sworn in as President of Mexico on December 1, 2012. Extracted from a speech given fol-‐ lowing the visit of President Nieto to Ecuador on March 10, 2014. 18 THEBUSINESSYEAR ECUADOR 2014 FOCUS EU TRADE AGREEMENT LONG & WINDING ROAD The 2014 trade agreement will secure access to markets on both sides, while creating a stable business environment that will help expand and diversify trade and investment between Ecuador and the EU. THE EU AND ECUADOR completed negotiations in July 2014 on a trade deal that will eliminate tariffs for most products and allow Ecuador to increase its exports to the European bloc by at least $500 million by 2017. Currently, the EU is extending a system of preferential tariffs that benefit Ecuador’s exports, which had been due to expire in December 2014, until the new trade deal officially takes effect in the second half of 2016. According to the Ecuadorean Exporters’ Federation (FEDEXPOR), exports to the European market have been increasing by an average of about 4% per year. Ecuador sends about 30% of its non-oil exports to the EU—mainly to Spain, the Netherlands, Germany, and Belgium. Ecuador’s main non-oil exports include bananas, shrimp and tuna, cocoa, tropical fruit juices, nuts, and roses. In 2012, exports to the EU were worth $2.4 billion, and imports from Europe totaled $2.7 billion. Ecuador mainly supplies the EU with agricultural and fishery products, while it imports manufactured goods and processed petroleum products. There has been a constant positive trend in trade between the two parties, which should be further strengthened now that the trade agreement has been concluded. At the moment, 60% of the total exports from Ecuador benefit from Europe’s Generalized System of Preferences Plus (GSP+) system, a preferential arrangement that will lapse for Ecuador in the end of 2014. Some 30% of its exports are represented by bananas, for which the agreement signed in 2014 foresees an important preferential arrangement, which has proved a point of contention in the past. Most of the products covered under this system enter the EU with zero tariffs and pay lower taxes than would otherwise apply. Within this latter category are bananas, one of Ecuador’s main export products, whose preferential tariff is €148 per metric ton. This agreement comes at the end of a long process of debate on trade issues between the EU and the wider region. In 2007, the Andean Community of Nations (CAN)—a customs union whose main members include Colombia, Peru, Ecuador, and Bolivia, as well as a number of associate members—with the exception of Bolivia, began talks with the EU, with the end goal of signing a region-to-region trade and tariff agreement. However, due to a series of disagreements between CAN member states, and specific objections from Ecuador, CAN members Colombia and Peru decided to take up negotiations bilaterally with the EU in 2008. In July 2009, Ecuador pulled out of the talks entirely, claiming they were unfair, a view mainly based upon disagreements on the pricing of its bananas. In January 2009, trade negotiations between the EU and three CAN countries—Colombia, Peru, and Ecuador—restarted, with the aim or reaching a multiparty trade agreement. After nine rounds of negotiations a successful conclusion was reached with Columbia and Peru in February 2010, and in June 2012, the two countries signed a free trade agreement (FTA) with the EU, which took effect in 2014. Ecuador began bilateral talks with the EU in 2012, but an agreement between the two parties was hindered time after time by the banana issue. However, in December 2013, the WTO’s Dispute Settlement Body supported the claims of many banana-exporting Latin American countries—including Ecuador—that the EU was illegally discriminating in favor of bananas from its former colonies in Africa, the Caribbean, and the Pacific. The WTO ruling against the EU on the banana question removed what been an ongoing problem, and talks finally saw progress in December of 2013. Within this context, the EU renewed GSP+ status for Ecuador for one more year while the current agreement was being negotiated. During this time Ecuador and the EU have managed to reach a compromise, and have finally inked an accord that both parties could support. This recently signed trade agreement will allow Ecuador to benefit from improved access for its main exports to the EU, including bananas. The agreement will also provide improved access to the Ecuadorean market for many key EU exports, for example in the automotive sector and for alcoholic beverages. At present, both Ecuador and the EU are optimistic about their bilateral trade relationship, and all parties involved have spoken enthusiastically of the deal and their future as trading partners. Diplomacy THEBUSINESSYEAR 19 GUEST SPEAKER STRONGER TOGETHER Upon President Rafael Correa’s visit to Spain last April, he stated that relations between Ecuador and Spain were experiencing an “extraordinary moment.” How would you assess the relations between both nations, what is your vision for the future of Spanish-Ecuadorean relations and what areas have more potential for growth? I agree with President Correa and thank him greatly for valuing so positively the state of our bilateral relations. President Correa is the second Latin American president I welcomed in the Moncloa Palace, just four months after starting my mandate, in March 2012. I remember well our first meeting. Beyond ideology, we agreed on the essential, on the need to apply, above all, common sense, taking into account the circumstances of the moment and what is more convenient for citizens. Ever since then we have had a special understanding. We had bilateral meetings on a total of four occasions. President Correa is, with Colombian President Santos, the Latin American President with whom I have met the most. The last visit of President Correa was especially pleasing. He came to receive an honorary doctorate from the Universidad Autonoma de Barcelona and used his visit to drive forward the priority of his third term: human talent, science and technology. President Correa knows that Spain is always ready to provide Ecuador with all the cooperation it may need, as he could see for himself during his visits to the Institute of Marine Sciences in Barcelona, and Biomedical Research Park in Madrid. Ecuador is enjoying a great period of political stability and economical growth. The country is developing infrastructure projects that will improve competitiveness and productivity, and especially the life quality of its citizens. Projects such as Quito’s metro and Cuenca’s tram are concrete examples, but there are many more. With the recent accession of Ecuador to the Multiparty Trade Agreement of the European Union with Colombia and Peru, our trade relations and investment flows in both directions will receive a significant boost. Therefore, our relations are meant to be even more intense in all fields, but particularly in the economic and talent mobility. TBY talks to HE Mariano Rajoy, Prime Minister of Spain on burgeoning relations between two firm friends. Ecuadoreans represent the main Latin American community in Spain. How do you assess the integration of Ecuadoreans in Spain? As I said in my press conference with President Correa the first time I had the pleasure to meet him at the Moncloa Palace, relations between Spain and Ecuador are special because people are our greatest asset. The human factor is always the most enriching and the element we must look after the most in bilateral relations between countries. Ecuador and Spain are setting a good example to the world by their orderly, legal and mutual integration migration flows. In Spain we have the second largest Ecuadorean community abroad, which is here the first Latin American community: more than 400,000 Ecuadoreans live in Spain, and many more if you count dual nationals. Almost 40% of Ecuadoreans who emigrated from Ecuador to Spain have received Spanish nationality without losing their Ecuadorean nationality. Since 2000, more than 260,000 Ecuadoreans have obtained Spanish citizenship through residence. All Spaniards are truly grateful for the contribution of Ecuadoreans to our development and the fact that they choose Spain as their second home it is a matter of great pride for us. I want to emphasize that Ecuadoreans are integrated into our society with a commendable sense of solidarity, sharing our values and even fighting for freedom in the most difficult missions of our Armed Forces. Estalyn Angelo Mera, who died in combat in Afghanistan, is an example of Ecuadorean heroism, sacrifice, and values. His Majesty the King awarded him the Cross of Military Merit with Red Badge, an extraordinary distinction. I would like these pages to be a homage of them all, paying them, again, all our tributes, recognition, admiration, and respect. BIO Mariano Rajoy was born in 1955 and educated in Law at the University of Santiago de Compostela. He was Minister of Public Administration from 1996 to 1999 and Minister of Education from 1999 until 2000. He then served as Deputy Prime Minister from 2000 to 2003. He acted as leader of the opposition from 2004 until 2011. He was elected Prime Minister of Spain on December 21, 2011. 20 THEBUSINESSYEAR ECUADOR 2014 How does Spain evaluate Ecuador’s adhesion to the Multiparty Trade Agreement of the EU with Colombia and Peru, and where does Spain stand in the elimination of the Schengen visa for Ecuadorean nationals? I am extremely pleased with the accession of Ecuador to the Multiparty Trade Agreement of the European Union with Colombia and Peru. We must congratulate President Correa for this decision. He gave an example of pragmatism and political realism. A good leader is one who makes decisions based on what is best for his citizens on the long-term, not letting his ideology limit them. By becoming a middle-income country, in 2015 Ecuador will not be able to benefit from the Generalized System of Preferences of the European Union, losing the benefits of market access with zero (or very low) custom tariffs. Therefore, Ecuadorean exports would have to start paying custom tariffs if it wasn’t for the fact that Ecuador has joined the Multiparty Trade Agreement. Without this privileged access to the EU market, which is the world's largest integrated market, Ecuadorean exports would have lost competitiveness and market shares, for custom duties would have become more expensive. Ecuador would have ended up exporting less, in other words, having less national income and therefore a lower ability to redistribute income. All Ecuadoreans would have lost a lot. Thanks to the Multi-Party Trade Agreement, Ecuador goes from a limited system of market access, unilateral and temporary (GSP +), to an improved, bilateral (which takes into account the needs of both parties) and long-term (almost definitive) system. In a transitional period of 10 years, Ecuador's exports will have free access to 96.4% of the European Union market, from which significant Ecuadorean products and sectors such as fishing, bananas, flowers, coffee, cocoa, fruits and nuts will benefit. European exports, for the first time, will also improve access to the Ecuadorean market, examples being cars and alcoholic beverages (wines and spirits). However, it is not just about trade. The agreement means, above everything else, that Ecuador enters the list of the most reliable, open and safe countries to invest in, with clear rules. European investment will pay more attention to Ecuador and not only to its neighbors Colombia and Peru. With more exports and more investment, the national income of Ecuador will increase too and there- fore the capacity and ability to redistribute this income and thus social cohesion. Ecuadoreans will also directly benefit from the agreement, for they will be eligible to travel to the EU without a visa. The main argument of my Government in asking the European Commission and Member States to withdraw the Schengen visa for Colombia and Peru was the entry into force of the Multiparty Trade Agreement of the EU. I hope that the agreement will soon be signed and ratified, so that with its entry into force we have a new ambition in our relationships. Ecuador can always count on Spain so that the efforts of Ecuadoreans are recognized and its policies of trade liberalization and legal security are rewarded without discrimination. Those are the sound policies the European Union applies and wants for its partners. How do you envision Ecuador’s economic future? I am very optimistic. I believe in Ecuador; first of all in the capacity of Ecuadoreans, but also in the country’s new political stability and its economic future. The fact that the Ecuadorean government has been pragmatic and has acceded to the Multiparty Trade Agreement of the European Union with Colombia and Peru inspires me with much confidence. The figures of our trade and investment flows show that Spanish companies are also increasingly turning to Ecuador. Between 2009 and 2012 Spanish exports to Ecuador increased by 222%, from €184 million to €593 million. Spanish investment has also been gradually increasing, from an aggregate of €742 million in 2010 to €998 million in 2012, which means an increase of 34%. The crisis has not stopped Spanish investment in Ecuador. It is worth remembering the success of the Hispano-Ecuadorean Business Meeting held in 2012 and closed by the then Prince of Asturias, King Felipe VI today. In addition, Ecuador is addressing with ambition the bottlenecks of its economic development, as evidenced by the development of infrastructure and creation of alternative sources of income to oil. Exporting more and with a greater diversification of products and markets, receiving more investment, developing infrastructure, collecting more tax revenue for other complementary policies such as education, science and technology, Ecuador has become an example of change and pragmatism. Ecuador is on the path of progress and as Prime Minister of Spain this gives me great satisfaction. Ecuadoreans deserve this. Ecuador is enjoying a great period of political stability and economic growth. The country is developing infrastructure projects that will improve competitiveness and productivity, and especially the life quality of its citizens. THEBUSINESSYEAR 27 28 37 Cristian Espinosa, Executive Director of the Ecuadorian-‐ American Chamber of Commerce, on bilateral agreements. Rafael Correa’s signalling toward the international bond market in June 2014 has attracted global attention. Manabí is shaping up to be at the core of many of the government’s development initiatives. 21 Economy REVIEW Ecuador hit the headlines this year when it finally struck a trade deal with the EU and made a triumphant return to the international markets. But for how long can high public spending keep the train rolling? WELCOME BACK S ince President Correa took office, he has promoted a program of high public spending, for which Ecuador’s return to the international markets following default in 2008 is especially significant amid concerns that the Andean nation had become too reliant on Chinese funding. Elsewhere, a July 2014 deal with the EU to guarantee continued preferential access to the bloc provided cause for celebration among exporters, and particularly banana producers, and secures a destination for at least $3.5 billion worth of Ecuadorean goods. According to the Wall Street Journal, Ecuador’s economy grew 4.5% in in 2013, above the government target of 4.05%, but below the 5.1% clocked the previous year. Services dominate the economy, at 50.2%, with industry representing 39.9% and agriculture the remaining 9.9%. And while oil export revenues continue to account for over onethird of government revenues, it is the non-oil sector that was Image: Indurama With a return to the bond market, and significant plans underway to build solid and sustainable economic growth, Ecuador has signaled to the world that it is back in the game. the star of 2013, growing 4.9% compared to the hydrocarbon sector’s 1.4%. The fiscal deficit remains a key concern, however, and stood at 4% of GDP at end2013. For end-2014, the government expects a fiscal deficit of some $5 billion, with $7.26 billion earmarked for public investment over the year. And it is in this context that Ecuador’s return to the international markets, in June 2014, is so significant; the country sold $2 billion in 10year bonds at a yield of 7.95%, according to the Finance Ministry, in a move that heralded the welcoming back of the IMF and an unofficial recognition that the economy had become too reliant on Chinese liquidity. Indeed, since 2009 Chinese funding to Ecuador has reached $12 billion, a trend that began following the 2008 default. In other indicators, GDP per capita stood at $5,943 as of end-2013, up from $5,637 in 2012 and $5,226 in 2011. In trade terms, Ecuador displayed a dramatic turnaround in 1H2014, posting a surplus 22 ECUADOR 2014 THEBUSINESSYEAR @cm][f>_×]cn (As a Percentage of GDP) Source: Focus Economics 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2009 2010 2011 2012 2013 GDP by Sector Source: European Commission DirectorateGeneral for Trade MIND THE GAP 70 60 50 40 30 20 10 0 1993 of $483 million for the first five months on the back of export growth—in the same period the year before there was a deficit of $626 million, the country going on to post a balance of negative $1.4 billion for year-to-November 2013. Aside from policies that have introduced quality controls for imported products and supported domestic industry, PRO ECUADOR, under the Ministry of International Trade, seeks to boost the country’s trade profile and attract FDI, with $476.7 million of the latter hauled in in 2013, up 41.1% in 2012. Approximately 80% of foreign investment is made in the oil sector, in spite of the fact that the private sector represents just 25% of the strategic oil sector. But despite some positive cash flows, current account deficit (CAD) worries continue, the gap standing at 1.3% of GDP as of end2013. It was the announcement that a new digital currency, the sucre, would be launched in October 2014, which caused surprise, the government seemingly hoping that it could help to fund the deficit. For use alongside the US dollar, and if implemented properly, the sucre, the first ever digital currency to be backed by a national government, has the chance to surprise. That said, some observers maintain concerns that it could create inflationary pressure when coupled with the fiscal deficit. In 2013, inflation ended the year on 2.7% in CPI annual variation terms, the lowest in eight years. In other good news, the National Institute of Statistics and Census (INEC) reported unemployment of 3.91% in June 2013, the lowest rate in Latin America. And according to the Ministry of Planning and National Development (Senplades), full employment exceeded underemployment for the first time, at 52% and 43%, respectively. According to Focus Economics, the unemployment rate ended the year on 4.7%. 2003 2013 Agriculture Industry Services In 2008, Ecuador defaulted on $3.2 billion in global bonds, buying back 93% of the sum at 35 cents on the dollar a year later. The development severely limited the country’s access to the capital markets and allowed China to capitalize on the country’s new liquidity shortfall by offering up attractive financing in return for a supply of crude oil. But in 2014, Ecuador made its return to the international markets, selling $2 billion in 10-year bonds at a yield of 7.95%. According to the Finance Ministry, demand was in excess of $5 billion and among the over 200 participants were institutional investors and private banks in the US, Asia, Europe, and South America. The additional liquidity will help Ecuador continue its program of high MARCO CARRIÓN VUELE Vice-‐President, Chamber of SMEs of Pichincha We organize numerous fairs and sector events with a clear emphasis ih]ihnlc\onchaninb_^cp_lmc×][ncih process. For example, at the end of 2013 we organized a fair for the productive sector, which the VicePresident of Ecuador and other ministers attended. We aim to organize activities that contribute to the process of changing the production matrix of the country with our knowledge and expertise. public investment, with $7.26 billion having been earmarked for investment in 2014 alone out of a total spending budget of $34.4 billion. Between 2007, when Correa came to power, and 2013, public investment totaled $34 billion, a staggering figure considering that just $6 billion was invested in the preceding eight years. The country’s return to the international bond market, in that respect, also represents a diversification in fund sourcing, many having warned that Ecuador had become too reliant on China for loans. With the Far Eastern giant having invested $12 billion since 2009, it is prudent of the authorities to seek alternative funding to hedge against a drop in global oil prices, a wave upon which Ecuador has become accustomed to riding. Economy In 2014, Ecuador made its return to the international bond markets, selling $2 billion in 10-year bonds at a yield of 7.95%. According to the Finance Ministry, demand was in excess of $5 billion and among the over 200 participants were institutional investors and private banks in the US. TRADE ON The headline trade news for 2014 was the signing of a pact with the EU to allow Ecuadorean exporters continued preferential access to markets in the bloc. Signed in July, Ecuador came within months of the end of a previous deal, which was set to expire in 2015. The deal, affecting a number of goods including shrimp, canned tuna, and oil, revolved primarily around bananas, with the EU wanting a guarantee that Ecuador would not flood the market and create problems for the bloc’s other trade partners. In response, Ecuador agreed to the triggering of a tariff on bananas should an annually established limit be reached. In 2013, Ecuador’s exports to the EU totaled $3.5 billion, with $630 million in banana exports. In the same year, the country imported goods worth $2.9 billion from the EU. In other trade news, 1H2014 was full of good news for Ecuador following a disappointing 2013, when the country posted a trade deficit of $1.4 billion in the year to November. However, the introduction of new quality controls on imported goods and government support for domestic industry, as well as higher oil revenues, led to the turnaround in 2014. For the January-May period, Ecuador posted a surplus of $483 million, with exports up 9% and imports down 2% YoY, according to the Central Bank. Exports were worth $11.1 billion over the period, while imports were worth $10.61 billion. The about-face can also be somewhat attributable to a program of import substitution, and the import of a number of goods, including those deemed harmful to public health as well THEBUSINESSYEAR 23 GDP Per Capita (in USD) Source: Focus Economics 2009 2010 2011 2012 2013 1000 2000 3000 4000 5000 6000 as those that could be produced domestically, has been restricted. But it was oil that really did the trick, leading exports to the tune of $5.74 billion over the period, followed by bananas at $1.12 billion, shrimp at $1.09 billion, and flowers at $344.31 million. In non-oil terms for January-May, the balance came in at negative $2.76 billion, while the oil sector posted a surplus of $3.25 billion. Ecuador has done much to ease the concerns of spectators over 2014, taking bold steps to diversify the government’s funding basket, while closing a trade deal with the EU that will be a huge relief to exporters both small and large. Heading into the future, it is yet to be seen for how long President Correa’s penchant for public investment can last, but with a number of large projects drawing to a close, including the Refinery of the Pacific, the seeds of investment could be about to bear fruit. 24 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW trading PLACES TBY talks to HE Francisco Rivadeneira, Minister of International Trade, on the EU trade agreement, bilateral and multilateral pacts, and increasing links with the Middle East. BIO Ecuador recently concluded its negotiations for a nl[^_[al__g_hnqcnbnb_?O(Qb[ncmnb_mcahc×cance of the agreement for Ecuador? The negotiation of a trade agreement with the EU concluded in July 2014, after nine rounds of negotiations from bloc to bloc. The process started in 2007 together with the Andean Community countries. The result of this process is an agreement that meets the needs of Ecuador in relation to access to the European market and the protection of sensitive domestic production sectors. Ecuador requested special and differential treatment due to the size differences of the economies; Ecuador is more vulnerable to international prices due to its dollarized economy. Undoubtedly, the negotiations represent a win-win scenario. Do you feel that the EU has been receptive to providing special and differential treatment, which acknowledges the different challenges Ecuador will face? We feel the EU has been receptive; however, its first option was to negotiate an association agreement. In addition to bilateral trade talks, the EU also maintains agreements between specific trade blocs and, as such, negotiations for an agreement between the EU and the Andean Community was initially proposed. Unfortunately, due to the fact that we could not carry out this negotiation in a mutual manner as a bloc, Ecuador decided to continue unilaterally. The primary objective is still the same; however, this agreement deals not only with trade, but development in general, as well as helping regional economies and creating welfare. Francisco Rivadeneira graduated in International Relations and specialized in international economics, political science, international trade, economic and legal integration, ]ihØc]nl_mifoncih&[h^ negotiation. He has attended prestigious centers such as the University of Geneva, the Graduate Institute of International and Development Studies in Switzerland, Universidad Andina Simón Bolívar, Jihnc×]c[Ohcp_lmc^[^ Católica de Quito, and the University of Barcelona. After that he served on several public and private entities, including the Ministry of Foreign Affairs and Human Mobility of Ecuador, the Export and Investment Corporation of Ecuador (CORPEI), and Citibank. He has been professor of international economics, international trade, economic and legal integration, and international relations, among others [nJihnc×]c[Ohcp_lmc^[^ Católica de Quito, Universidad San Francisco de Quito, Universidad Andina Simón Bolívar, and Facultad Latinoamericana de Ciencias Sociales (FLACSO). Do you see it as something positive that Ecuador is negotiating an agreement on its own rather than as part of a bloc? Every bloc negotiation has its positive and negative aspects. When you secure a trade deal as a single country, it is adapted to meet the specific needs of that state. As a bloc, the interests of some countries are sacrificed for the good of the group. On the other hand, it is notably better to negotiate as a bloc, because you have more power and influence in the negotiation process. In that respect, during these negotiations, we have certainly gained in terms of certain specific interests for Ecuador, but we have also lost some negotiating capacity. What is the current importance of trade with the Gc^^f_ ?[mn& [h^ mj_]c×][ffs nb_ O;?& [h^ qb[n role do you see it playing in the future? Currently, our trade with the Middle East is not very significant. However, the importance of this region lies in its potential for greater opportunities. The Middle East has enormous consumer capacity, especially in regard to our products, and there is a significant market demand in this region for high-quality products, which Ecuador can provide. The market demand for food exports is particularly high, due to the lack of capacity that many Middle Eastern countries have to grow local crops. Countries like Ecuador can provide high-quality food products, year-round. There is also huge immediate potential for Middle Eastern countries to invest in Ecuador, as the country provides a strong, structured option for countries seeking to diversify their risks following the fi- Economy nancial crisis, which made a significant impact on much of the Western world. Ecuador can fill this portfolio gap, primarily because of its political, economic, and social stability. The country has developed interesting high-value projects in both the public and private arenas. We are working to incentivize countries like Qatar, Kuwait, and Saudi Arabia to invest in Ecuador’s energy, physical infrastructure, telecommunications, food, and industrial sectors. It is also worth mentioning that Ecuador is looking to utilize the city of Dubai as its main economic hub for the Middle East and nearby regions, such as Africa and India. How is Ecuador responding to the suspension of preferential access to the US trade market? The US market will remain a crucial partner for Ecuador, and we are keen to increase investment opportunities between the two countries. Ecuador has opened four trade offices in the US located in New York, Miami, Chicago, and Los Angeles, and the country is looking to open another office in Houston, in 2015. The possibility of negotiating a trade agreement with the US does exist, and Ecuador has a significant interest in this; I made this point quite clear in meetings with the US government in 2013. The real question lies in what type of agreement this will be. In our previous experience negotiating with the US, we found that many times the asymmetries between itself and its negotiating partners are not properly taken into account. It negotiates as if other countries are on the same level, which is unacceptable. If the US is willing to take Ecuador’s unique economic situation into account, then negotiating a new trade agreement could be an option. Biq qcff nb_ Nl[hm'J[]c×] J[lnh_lmbcj "NJJ# [`fect Ecuador, considering that the country is not participating? Ecuador is well aware that the Asia-Pacific region is the most important area in the world today. It is also the most strategic, because the countries that will exhibit the highest growth rates in the coming years are found in this region. Ecuador is also a part of the Pacific Rim and, as such, participation in any process related to developing economic trade in this region is important for the country. We are examining whether we should integrate ourselves into Asia-Pacific Economic Cooperation (APEC), an organization that helps to create a type of economic synergy among regional actors. How- ever, for the moment, we have decided not to officially take part in this forum primarily because, from a trade perspective, the region is too liberal. This does not mean we aren’t keeping up with what is happening with this mechanism, in fact, we may seek to become part of this agreement in the future. If the TPP comes into force, Ecuador will re-evaluate its role in this forum; however, I am not optimistic about the outcome because interests are quite varied at this moment. What are your key priorities for Ecuador’s trade policy over the coming years? We hope that the conclusion of the agreement with the EU will help our country close other pending deals and lead to negotiations for agreements with Canada, the European Free Trade Association (EFTA), Turkey, and South Korea. In Latin America, we are in the process of finishing negotiations with El Salvador and Nicaragua, and are commencing negotiations with the Dominican Republic and Honduras. We also hope to reach a more comprehensive agreement with Mexico in the near future, and we are working to finalize and sign an agreement with Venezuela in 2015. Ecuador is also launching a powerful campaign next year to improve the country’s image by promoting various sectors, including tuna, shrimp, and flowers. We want to boost our exports in terms of both value and volume; however, this requires a change in our export tendencies. Finally, our goal is to increase foreign investment into the country. The past few years have not been positive in terms of multilateralism in world trade. Is the future of international trade going to be in bilateral agreements? The position of the Ecuadorean government is that multilateralism is the best option. We believe in the WTO and its purpose. Unfortunately, the reality is that it is extremely difficult to reach result-oriented agreements in the WTO. The last meeting in Bali was more successful than Doha in reaching certain trade agreements, but was still not sufficient. What role should international trade play in developing the Ecuadorean economy? The role of international trade is essential in developing the economy. When you have a dollarized economy, there are only three ways of bringing in currency: debt, foreign investment, and exports. THEBUSINESSYEAR 25 Ecuador’s Ministry of International Trade was created in 2013 In July 2014, Ecuador concluded its final round of negotiations for a bilateral trade agreement with the EU 26 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW TBY talks to Antonio García Ruales, Executive Director of PRO ECUADOR, on export promotion, attracting foreign investment, and developing Ecuador’s global image. come see US NOW What is the number one mission of PRO ECUADOR? How do your export promotion strategies differ by market type? PRO ECUADOR, in reality, has two main objectives. One is the promotion of our consolidated export offer, and we also play a role in the promotion of new value-added products from the country. A second goal is the attraction of investment to Ecuador. There are two basic kinds of strategies supported by different tools or activities. We have image creation tools and sales development tools. They are related to the specific kind of activities we do in any of those markets. In a market that in which we are just beginning commercial relations, like Turkey for example, we mostly do image development activities. In intermediate markets, we do a mixture of image creation and sales development. In fully developed markets, we basically concentrate our activities and strategies on implementing incremental export sales from Ecuador. We also have more specific tools that are developed to help SMEs and major companies. What kind of support does PRO ECUADOR provide for exporters? BIO Antonio García Ruales has previously worked as Vice-Minister of Foreign Trade and Economic Integration of Ecuador, he was head of the Commercial I`×]_i`JLI?=O;>IL in Chile, and Ecuador Commercial Counselor in Peru. He has also worked as Regional Director of the University of Loja, he was a professor at Florida Atlantic University, and also contributed as an external consultant on foreign trade for SMEs in Ecuador. One of the main features of PRO ECUADOR is the fact that we have 32 business offices around the world, working in about 1,000 activities related to the promotion of exports and investments in any given year. That means that every day, we have at least three or four activities going on somewhere in the world. I consider it vital that we offer the export sector such global promotion. We also have several tools that can be used in the promotion of Ecuadorean goods to the world, and these tools are basically designed in relation to each country where we have a presence. This strategy has been designed simply because we have different degrees of commercial relations with different countries. We can basically divide our consumer markets or targets into three groups: the countries with which we are just beginning to develop relations, those where we are at an intermediate stage, and those in which we enjoy fully developed commercial relations. What would you say are the challenges for Ecuadorean companies looking to export? We try to identify “complementary production platforms” in order to do business with them, because we produce what they don’t. A company’s first strategy should be to identify sectors in which it does not compete with that country. The same applies to the goods that we produce. In that sense, we rely heavily on the help that we get through our international officenetwork, which provides the cure strategic intelligence used in entering those markets. Another challenge that companies face is fostering an export culture to begin with. PRO ECUADOR b[m-,i`×]_m around the world working on more than 1,000 activities related to export and investment promotion What are the key areas in which Ecuador should be promoting investment? I guess one of the main concerns of the government has been to develop Ecuador as a modern society and robust state. I do not know of any developed country that has achieved that stage, unless they have developed three basic areas: a solid infrastructure, a healthcare system capable of satisfying the population, and also a quality educational system. Those objectives are the main concerns of our government; we are working on achieving them to propel Ecuador into the future. I was recently contacted by a large foreign investor who said that they had selected Ecuador over another Latin American country because we have better highway infrastructure. We have chosen the right path to develop the Ecuador of the future. For the first time, this government knows exactly what we have to do and how to support the projection of our exports around the world. PRO ECUADOR is an example of that. We have only been here for three years, but we have opened up the world to Ecuadorean exports as never before. Economy THEBUSINESSYEAR 27 INTERVIEW the DEAL maker TBY talks to Cristian Espinosa C., Executive Director of the Ecuadorian-‐American Chamber of Commerce (AMCHAM Quito), on trade with the US, supporting Ecuadorean and US companies, and bilateral agreements. =ig\ch_^ US-Ecuadorean trade totals around $19 billion ;fgimn/* of Ecuadorean exports go to the US Qb[n cm nb_ mcahc×][h]_ i` ?]uador’s trade with the US? For Ecuador, close to 50% of exports are bound for the US, which is in turn one of the main suppliers for Ecuador. There are many US companies present in Ecuador, involved in production, trade, and sales, and re-exporting from Ecuador. This is particularly important for the banana industry. Bananas are exported by large US multinationals to markets such as Europe, Turkey, and even New Zealand. These companies play a vital role in our economy, and we enjoy excellent business relations with the US, despite a certain tension in the past arising from our diplomatic support for WikiLeaks. The private sector has remained robust despite these issues, and we liaise with ambassadors and officials so that private contacts have been able to sustain bilateral relations. Our combined trade of almost $19 billion is set to increase, while our population is 15 million, which means that for almost every person there is close to 20% of GNP per capita with the US. It is vital to keep trade flowing and pursue more markets. It will take a while for some to realize that these bilateral relations are crucial not only for businesses, but also for individuals, as almost 10% of the population lives abroad, with most residing in the US. Should it be a priority for the government to renegotiate a bilateral agreement? It is arguably ill-advised to reach an agreement with a nation that is much larger than yourself as you run the risk of asymmetrical trade. The counter argument is that it is good BIO Cristian Espinosa C. is currently the Director of International Affairs of the Municipality of Quito. He served as Executive Director of the Ecuadorian American Chamber of Commerce between 2011 and 2014, and as President of the Ecuadorian Council Chambers and Production Associations of Ecuador. He has been a Career Diplomat since 1987 (currently on leave). Between 2003 and 2005, he served as Vice Minister of Trade and Integration and as the Chief Negotiator of the free trade agreement (FTA) between Ecuador and the US. He has also led negotiations between Ecuador and the EU, and presided the negotiations on behalf of the Andean Community countries for the existing trade agreements between the CAN and MERCOSUR. He served as Director General of the Andean Community between 2006 and 2008. His diplomatic postings have been in Tokyo and Geneva where he was Ecuador’s representative to the WTO and served as President of the Antidumping Committee. Espinosa teaches at various Universities in Ecuador and has undergraduate and graduate degrees in Economics, Philosophy and Public Administration from Boston University and Harvard University. to partner with a large country in that it can open the door to large investment possibilities. The government is looking into an ideological agreement that deals with the difficulties of a bilateral agreement with the US, because for us this trade is crucial. Half of our exports are destined for the US, while just a fraction of US exports come here. Also, trade is focused on certain parts of the US. For example, Ecuador is an important trading partner for Florida, but wholly irrelevant to Washington, DC. Meanwhile, Texas exports many products for the oil and gas industry to Ecuador; therefore, it is vital to address diverse perspectives when considering such questions. How would you describe the focus of AMCHAM Quito’s work? We work both domestically and internationally, and have taken many Americans who have long worked here to Washington, DC. When businessmen who have worked in a specific area visit the capital, their cases are listened to carefully. For example, when we were lobbying for an extension of the ATPDEA, we lobbied on six separate occasions due to the number of updates. We have authorities here in Ecuador who are trying to impose restrictions, or pass new provisions on intellectual property that will affect new members. Sometimes, we are successful and sometimes we are not, but we do raise issues and then come back and provide other opportunities to move agendas. We are often grouped together with Venezuela, Cuba, and Argentina as anti-trade, but we respond to this by saying that we are not anti-trade and it is a mistake to put us in the wrong group because you lose business opportunities. No matter how much Correa supports Maduro in a speech, if you walk down the street and talk to business owners, general managers, and other people involved in commerce, you get a different view. 28 THEBUSINESSYEAR ECUADOR 2014 FOCUS ECUADOR’S RETURN TO THE BOND MARKET MY WORD IS MY BOND In the 1980s, Ecuador’s main export product, oil, failed to generate sufficient revenue to repel national debt that bond defaults had left in 1993, 1995, and 2000. Meanwhile, structural repayment agreements with its main international creditors prioritizing financial obligations from the state over social obligations for the Ecuadorean community jarred with Rafael Correa, then Minister of Economy and Finance. His view was that 80% of the spoils of Ecuadorean oil should benefit Ecuadoreans, with the remaining 20% to address debt. This conflict of opinion prompted his resignation from the Ministry. THE “D” WORD Fast forward to Correa’s assumption of the presidency of Ecuador, as the global financial crisis ravaged oil exports in 2008, the state’s foreign debt rose from $1.17 billion, to over $14.25 billion. Correa’s special debt audit commission ultimately declared Ecuadorean debt illegitimate and resulting from the misdemeanours of previous administrations, and that repayments (which required the assigning of 50% of economic resources) were tantamount to neglecting the fundamental needs of education, health, housing, and infrastructure. Enter the “D” word, when at the end of 2008 he declared that Ecuador would not make a $3.2 billion payment on foreign bonds. Bondholders sold these instruments at rock bottom rates, and soon after, Ecuador bought 93% of its own debt at 35 cents on the dollar. I’LL BUY THAT Yet today, Ecuador has broadly regained investor confidence. As a result, President Correa walked Ecuador onto to the international stage by selling $2 billion of bonds in June 2014. The 10-year bonds were offered at a yield of 7.95%. The deal saw lower borrowing costs when compared with the $650 million of 10year bonds priced to yield 10.75% in December 2005. Correa first estimated that Ecuador would gain $700 million in bonds, and asset managers and buyers seemed more than willing to welcome him back into the capital markets. This change reflects, too, government awareness of the need to diversify financing sources and loan requests, beyond Chinese funding of an estimated $12 billion since 2009. Ecuador only received 0.4% of total FDI in Latin America and the Caribbean at that time. If the Andean nation follows the same performance as other “frontier” markets, its bonds and stocks could log better performance than its peers on greater investor inflows. The transaction has attracted over 200 institutional in- The long expected change in Rafael Correa’s approach toward the international bond market in June 2014 caught the attention of 200 international investors, and underlines Ecuador’s projected public investment in its ‘Buen Vivir’ project. vestors and private banking from Europe, Asia, the US, and South America. And confirming a preference for realpolitik over rhetoric, Correa has since given the green light to annual IMF reviews of the economy. WHAT TO BUY? Revenue generated by the bond deal will partially fund Correa’s ambitious infrastructure and transportation projects. The National Investment Plan (PAI) of 2014 has determined that the government will make significant public investments worth $7.26 billion in the Ministry of Transport, the Ministry of Electricity and Renewable Energy, and the Ministry of Public Health and Education. In fact, the government’s investment goal by 2017 is $47.6 billion, while the 2014 budget alone calls for spending of $24.3 billion, including a deficit of $4.94 billion. SEE-THROUGH ECONOMY Ecuador’s return to the bond market has won the interest of investors, less wary of a repeat appearance of ideological rigor than aware that times change, along with circumstances. Meanwhile, Ecuador’s parallel return to transparency can only further attract alternative sources of financing to the local private sector, benefitting the nation overall in their wake. The World Bank predicts that Ecuador’s economy will expand by 4.3% in 2014, which would be among the best growth performances in Latin America. 30 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW a CITY on the RISE TBY talks to Mauricio Rodas Espinel, Mayor of Quito, on the challenges facing Quito, promoting the city to tourists, and facilitating economic development. Three main goals for Quito are improving mobility, boosting competitiveness, and fostering innovation. To what extent does a local government actually have the power to facilitate such economic developments? BIO Mauricio Rodas Espinel was born in Quito in 1975. He holds a JD degree from Jihnc×]c[Ohcp_lmc^[^ Católica del Ecuador. He has two Master degrees in Government Administration and Political Science from University of Pennsylvania. After that he was a consultant for the UN Economic Commission for Latin America and the Caribbean (ECLAC) in Santiago de Chile and advisor for several local and federal government ministries in Mexico. In May 2014 he was sworn in as Mayor of the Metropolitan District of Quito, after winning the general elections of February 2014, becoming the youngest mayor elected in the history of the city. In July 2014 he was appointed Provincial Councilor of Pichincha Province. As you begin your term as the Mayor of Quito, what do you see as the biggest challenges facing the city? One major challenge is improving our citizens’ quality of life. This involves a number of things: improving mobility, transportation, and traffic, which is a major problem here in Quito. The other is competitiveness. We believe that Quito’s potential competitiveness has not been taken advantage of in the past. This is because the previous administration believed the municipality had to do everything on its own, and regarded the private sector with skepticism. We believe that the private sector should generate wealth and employment, and that the municipality should be a partner in achieving these goals. In order for this to happen, we need to establish a clear and solid rule of law. This will create an environment that fosters entrepreneurship, local and foreign investment, and industrial areas with clear rules where new businesses can develop. Local governments have many tools at their disposal. Many industries have been leaving Quito for neighboring cities in Ecuador, which shows that the problem is on a city level. If you compare the investment coming into Quito with other cities in the country, you can see that we have been losing our position over the past few years. Investment is stagnating because local taxes in Quito are up to six times higher than in Guayaquil and Cuenca. Our response will be to reduce local taxes for the lower and middle classes. That will also create a much friendlier environment for entrepreneurship and investment. We are also eliminating bureaucracy and red tape, municipal licenses, and permits required to operate a business in the city. In the past, red tape prevented many new businesses from setting up in Quito, and these are steps we can take on a local level to stimulate growth and investment. We must establish a clear set of rules regarding land use. Establishing specific areas within the city for industrial development and applying the right kind of incentives for industry in such areas will foster competition and investment. We have also identified three main economic areas in which we see significant potential for Quito in the future. The first is tourism, which Quito has an innate potential for developing. Quito was designated as UNESCO’s first world-heritage city in 1978. We have also won the World Travel Awards for the best South American Touristic Destination two years in a row. Quito is also one of the 21 semi-finalists for the seven new wonders of the world process. All these factors have been useful in terms of promotion. Quito now receives 630,000 tourists per year, and we are hoping to double that number during my term. We are already establishing incentives for more investments in tourism such as hotel projects and programs that foster tourist activity. The second area we have identified as strategic is our logistics export activity around the new airport. The airport is located in rural Quito. The location is quite isolated, so there is potential for development around the airport with a focus on logistical and export-related activity. Thirdly, we want to develop the economy of creativity and technological development. We are working on a new innovation district in Quito with professionals from MIT. These are the same people who developed the innovation districts for Medellín, Barcelona, Singapore, and other cities around the world. There is great potential in this arena because young professionals will take Quito into the future. We will advance not only by leveraging software and technological development, but also through innovative solutions to everyday urban problems. So, in these three economic areas, we have created specific tools to foster entrepreneurship and drive foreign and local investment. Economy THEBUSINESSYEAR 31 INTERVIEW SOCIALLY secure TBY talks to Hugo Villacrés Endara, President of the Board of the Ecuadorean Institute of Social Security (IESS), on national development, the state of the economy, and public-private partnerships. The IESS provides social healthcare services in Ecuador The Bank of the IESS invests money in mortgages and consumer credits to spur economic development What do you see as your mission and goals as president of the board of the Ecuadorean Institute of Social Security (IESS)? We have some important goals in health and banking, and we are trying to improve public healthcare by bringing more doctors into the system over the next few months. We will be hiring approximately 900 family doctors and 600 specialist doctors, who will work around the country at 96 hospitals and health centers. We are trying to improve the way that we serve our members nationally, and to generate a new system based on value. We want to bring a more human face to our health services, while improving the How could the public and private sectors best cooperate in Ecuador? manner in which we provide access to medicine. There are three ways to do this: we can do it ourselves, which is what we have been doing until now; secondly, we can distribute medicine through private pharmacies, and thirdly, we have a public business called Enfarma, which is a government enterprise, through which we also distribute medicine. We work with both private and public hospitals, and are keen to link them in a broader, stronger system. In terms of banking, we work with mortgage credit and consumer credit, with a value of $1.32 billion in the former and $1.44 billion in the latter. IESS is involved in the Ecuadorean economy. How important is its role in funding national development? One of the key ways in which we improve the rate of national growth is through construction. If we can increase construction credit then we can expedite growth, which naturally is of direct benefit to the national economy. We have a productive relationship with the private sector, and utilize its services for the benefit of our members. We also work together with private banks for access to credit. We are not trying to increase our market share, but rather to improve the quality and value of our service offering. We have also worked with the private sector on construction projects, building hospitals, and housing. The best path for us, for the country, and for our members, is for the private and public sectors to work in tandem, because there are certain areas in which the private sector is stronger, and others better suited to the public sector. We also need to increase the quality of human value we give our members, in terms of transparency, honesty, and good service. What role would you like IESS and BIESS to play in the Ecuadorean economy over the coming years? I envisage a social security system in which people have confidence, and one able to give members all the services they need in terms of healthcare and pensions. It will be a system that can work for everyone from the beginning of their working lives right through to retirement. BIO Hugo Villacrés Endara was born in Quito and graduated in Economics `ligJihnc×]c[Ohcp_lmc^[^ Católica del Ecuador. He has a Master’s of Science in Economics (MSE) from University of Lausanne in Switzerland and an MBA from Universidad Carlos III de Madrid. He has taken several courses on governance, public policy and marketing management from the George Washington University and one in Development Planning for Developing Countries in Beijing. He began his career in the public sector as Manager of Mercado Mayorista de Quito. In 2009, he joined Banco del Estado where he held various management positions. He was appointed Deputy General Manager of the Central Bank of Ecuador in 2013, where he served until March 2014. 32 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW BIO María Soledad Barrera A. studied business administration at the Jihnc×]c[Ohcp_lmc^[^ Católica del Ecuador in Quito, and went on to work at Financiera Manabi, Fundación Natura as an independent consultant. Throughout the 1990s and until 2007 she served as Junior Executive of Mercados de Capitales and in other positions in Caracas, Venezuela, taking time out to complete an MBA in International Management at the American Graduate School of International Management in Arizona, US. Two more senior positions, one in Brasília and one again in Caracas for Corporación Andina de Fomento followed. In 2010, she moved to Quito to join the <[h]i^_f?mn[^i&×lmn[m General Coordinator, then as Assistant General Manager, [h^×h[ffs[mA_h_l[f Manager in 2011. an emerging HUB? TBY talks to María Soledad Barrera A., Chairwoman of the Board of Corporación Financiera Nacional (CFN), on economic development, capital markets, and internationalizing Ecuador’s economy. President Correa recently said in an interview that his number one goal for the country was social and economic development. What role does Corporación Financiera Nacional (CFN) play in that? CFN is more active on the financial and economic development side. The government has always been trying to foster a stronger relationship with the private sector. Most of the infrastructure and investment is at an adequate level, and our roads, airports, and energy infrastructure is in place. Education and healthcare are also crucial areas for further investment, and once we have all those basics set up we can invite the private sector to join us in making this model sustainable. Their role is really important. We want at least to maintain the current level of investment, not relying only on the public sector and government side. You have to invite other partners to help us deal with this model. In terms of CFN’s role, we are an economic group; not just a financial institution or a bank. We recently went to market with a program called Progresar, which comprises three products. The first one is the National Guarantee Fund, which is essentially an engine for SMEs. The second is long-term financing for fixed assets. Both products already have clients. The third one we are working on is seed capital for entrepreneurs. We will also likely offer venture capital. Once these programs start up and evolve they can enter the market. Those are the three major projects we plan to offer to foster the transformation of the country’s productive matrix. Do you think that the current level of development of Ecuador’s capital markets is a challenge that is holding back economic development? The agricultural sector remains a key source of employment for many Ecuadoreans Unfortunately, it is. We now have a new law that we hope will encourage new investors to tap the market. We perceive the capital markets as a financing tool, which is why CFN also helps by buying papers. Of course, it is a shallow market, but at least we are helping at a modest level. The idea is to introduce more players and to get more people to invest in the capital markets and local companies, or any companies that are listed. The secondary market is of paramount importance to deepen the market. We foresee companies not only relying on loans, but also tapping the capital markets. Economy What is your vision of the Ecuadorean economy and its international role over the coming decade? I am really confident in what we are doing, and we should continue on this road. Both the government and the private sector have made helpful contributions to developing the national economy. Over the coming years, there will be more Ecuadorean companies exporting value-added goods, and the most relevant element, over 5,000 Ecuadorean students that are studying abroad, at some of the best universities in the world, will make a world of difference. The country will be on the path to becoming a knowledge hub a decade from now. Even today, without that superb benefit, we have a different approach to life. Citizens have improved their living standards, and have developed a better attitude toward education. CFN is the Ecuadorean development bank that lends resources and provides technical assistance to the private sector for the transformation of the productive matrix What are the strengths of Ecuador as an investment destination? Investment in human capital and knowledge should come first. Back to 1997, when Intel was trying to establish a plant in Latin America, its staff visited Chile, Brazil, and some other countries in Central America. They had WWWCFNFINEC THEBUSINESSYEAR 33 We believe the capital markets are a ×h[h]chaniif&[h^nb[ncmqbs=@H also helps by buying papers—the idea is to introduce more players and to get more people to invest in the capital markets and in local companies. been considering Chile, but they ended up going to Costa Rica, since the country was committed to preparing engineers and had established technical institutes and universities that would make Intel’s investment sustainable by providing human capital. Educated people will always make the difference. Of course, many other conditions had to be met as well, such as a safe and secure environment and adequate regulations. 34 THEBUSINESSYEAR ECUADOR 2014 B2B CONSULTING GINO ERAZO Partner, KPMG come TALK TO US Consultancies in Ecuador are an essential part of the country’s recent drive to internationalization and sustained economic growth. ROLF STERN President, BDO Ecuador Over the past decade, Ecuador has seen an economic transformation. How has that changed the nature of your business in the country? GINO ERAZO The world is rapidly changing and Ecuador has tried to keep pace. We are facing challenges on all fronts: increased competition, ongoing regulatory developments, decreasing perceptions of the value of our services, and margins under pressure. Therefore, we believe that the consulting firms also need to reassess their business model to be more global, more efficient, and more customer-focused so that they can enhance quality of advisory and audit services and drive value to better meet the needs of investors and other stakeholders. The current marketplace requires KPMG to refocus efforts to diversify our services beyond those related to the core services. Currently, the firm is pursuing a transformation to drive increased quality and sustainable and profitable growth in light of high competition and the plethora of regulations and standards set worldwide, which Ecuador also seeks to comply with. KPMG Ecuador is seeking to align to market expectation and strengthen other service areas, such as advisory, tax, and legal, and generate further business, a task that demands the employment and development of highly skilled people. ROLF STERN The growth of the middle class in Ecuador has been important, and the strong middle class acts as a political stabilizer in the country. Adopting the US dollar as our currency has changed the way that business is conducted by eliminating currency fluctuations. This has led to an increasing demand for our services, which we have met by growing our capabilities and business. In 1973, BDO was only one person, but today we have 150. We expect to continue with this level of growth. Our success has also made it possible to hire and train the best talent available. It also means that the nature of the services that we provide has expanded. Initially, we specialized in consulting but as we grew, we branched out into auditing, taxation, and recently outsourcing. Today, we have about 150 people working from our offices in Quito and Guayaquil. Our clientele has also diversified as we expanded. In 1973, we did not have any petroleum clients, but now we audit Petro Ecuador. Today, we also audit one of the largest shrimp businesses in Ecuador. There were very few NGOs in 1973, but now we audit NGOs supported by the European Community, and the US and the Ecuadorean governments. We have diversified in response to attending to our clients’ needs. While we always had clients in the commercial sector, the industrial sector, and the banking sector, our clientele base now is much larger and more diversified. We also audit banks now. What does the market expect to^[s`lig]ihmofncha×lgm9 GB Today’s unrelenting pace of change means our stakeholders are facing equally challenging pressures. And they want more from us, they want us to add value to their business. They also want our insights, in particular on the risks we identify while rendering our services, and they are seeking broader assurance. At a time when the volume of data is expanding daily, I would predominantly refer to the use of technology. Many of our clients are introducing sophisticated technological capabilities to address increasing challenges and opportunities around the velocity and volume of data. In KPMG, we are focused on driving quality and relevance by developing innovative, technology-enabled capabilities that will transform the way we conduct our services. RS We are the fifth largest firm in the world; however, our priority is not size, but rather excellent customer service. The senior partners of our firm routinely get together and work with our clients, and we strive to foster active relationships. While we are part of a worldwide firm, much of our decision-making takes place at a local level. This lets us work faster, and be agile, and flexible, qualities that we strive to maintain. Economy THEBUSINESSYEAR 35 ECUADOREAN COMPANIES ABROAD FORUM HAVE WE MET? Ecuador is powering forward economically, and as a result, Ecuadorean companies of all sizes and varieties are making their presence felt abroad. EDUARDO PÉREZ JUAN PABLO VELA WILSON LEÓN LEE President & CEO, Adriana Hoyos General Manager, Indurama Executive President, Grupo Öriental E cuador is not well known as a country that promotes design. However, we have taken this to our advantage, because our furniture and design combine the best of Ecuador—the resources, and the identity of Latin American design. Today we are well known across Latin America. We have expanded in the US, and have also been pursuing further expansion there, too. We are exporting products made in Ecuador to the US since 2001. We have around 10 active dealers and many other design firms in the US, which is currently the largest market for our brand. We also have distribution in Mexico, Guatemala, the Dominican Republic, Panama, and Costa Rica, and are starting to do some business in Dubai, too. We have two licenses in Venezuela, but that is slightly different. The license is more like a franchise as with here. We recently opened a showroom in Chile, and are opening one in Peru in October 2014. I would say that about 60% of our business is international. W e are expanding to Latin American markets and export to around 20 countries in the region. Meanwhile, we have our own operations in Peru, Colombia, and in Central America. We make products for brands like Whirlpool that are sold in Colombia, Chile, and Central America. In Ecuador, we hold a 70% market share in stoves and 65% in refrigerators. I know home appliances well, which will allow us to build on our strengths in the local market and also in Peru, where we are already in a strong position. We are also growing in Colombia and in Central America, but the ultimate goal is to have a presence throughout Latin America, where our target is do the same that we did in the Ecuadorean market. We need to establish industrial clusters linking the suppliers of the product, which will give us productivity and curb transport costs in the supply chain. We need the government to incentivize innovation to develop the national knowledge base. W e are an Ecuadorean brand born in Ecuador and sustained by Ecuadoreans. But what is more important for us is to emphasize that we use Ecuadorean raw materials, produced locally, to create Oriental food products using our knowledge. We want to show Ecuadoreans, Latin Americans, Europeans, and even Chinese people that Ecuadorean raw materials can be used to make healthy and delicious Oriental food. Some of our sauces are actually being exported to China now, such as our chili sauce, which is made with Ecuadorean chili. Ecuador can produce chili sauce all year round because of our equatorial location. We see this as an opportunity for export. More than 10% of our products are currently exported within the region, but also to Europe and China. You have to pursue your goals every day and adapt when needed by developing new technology and products. You also need to encourage your employees to pursue growth, adapt to change, and innovate. JELISAVA CUKA AUAD General Manager, Marbelize M arbelize is the fourth largest exporter of tuna in Ecuador. We are also the first to develop new kind of products. We are innovative; we invest in research to develop new products and create new trends. We were the first company in Ecuador to package tuna in a glass container. Our largest export market is Europe. Asia is our main competitor. To compete with them is a big challenge. Their prices are very low, at around $10 per box. The challenge is to give the end consumer an excellent product, but to have them pay for it is difficult. We try not to compete on price, but rather on quality. That is why we have diversified. That is why we don’t sell a lot of canned tuna, but instead pouch packs. We sell these in a catering size that is intended for hotels, hospitals, and schools because they value good quality. My biggest challenge is to open up new markets. We are working with the government to open up markets because there are customs duties everywhere. 36 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW READY FOR the future When you say, thinking more about long-term planning, does that mean larger investments? TBY talks to Roberto Dunn, General Manager of Consorcio Nobis, on the transformation of Ecuador, increased investment in the country, and transforming the productive matrix. How has the profound economic transformation of the past decade changed the focus of Consorcio Nobis and the way the company approaches the economy in Ecuador? For the consortium, the past 10 years have been a time for development based on a specific strategy. We are now in a position whereby the economy has helped us prepare a long-term investment strategy, in order to reach goals in specific areas. We are a highly structured consortium, but at the same time greatly diversified. As such, any hiccup in the economy could affect one of the many industries that we handle, including agriculture, energy, the commercial sector, and real estate. We are, therefore, highly exposed, but Ecuador’s sustained economic health allows us to undertake larger challenges. These will bring more jobs and opportunities for the people and third parties involved in our projects. BIO Roberto Dunn obtained an MBA in Finance and Administration and a BSBA in Finance and Marketing from Boston College. He has also completed several courses on internationalization, ]iljil[n_×h[h]_&\omch_mm competitiveness, upperlevel business management, analytic and strategic planning, and aviation costs. Before joining Nobis he was Manager of BESA – Bebidas Sabrosas, General Manager of Ecuadorian Sociedad Ecuatoriana de Transporte Aéreo, Saeta S.A, and Commissioner at Fideicomiso Air Ecuador. He began his career at Nobis as General Manager in 2008 and became Executive Director of the consortium in 2012. Yes it does, an example being our real estate developer company. Formerly, we had projects for one or two specific buildings, while subsequent growth has seen us look into the niche of a city within a city: a microcosmic zone of five to 10 buildings. And now we are moving on to having a larger city beyond Guayaquil. This is a project that over the span of eight years will be an investment of $700 million. It will feature between 35 and 40 buildings, with comprehensive services: from dining to commercial, to sustain around 3,000 families. Do you feel there has been a change in the international perception of Ecuador? Ecuador has had political stability, which is important for economic stability. That is what we as entrepreneurs and investors need, because in order to grow and see the future and keep growing, we need clear rules of the game. Therefore, stability gives us the capacity for strategic investment either through the owners’ money, external investors, or seeking credit lines. What is the main focus sector for Consorcio Nobis currently? We have learned to pay attention to what the government has envisioned in its strategic plan for Ecuador. We are involved in all of the sectors where the government is gathering the strength for you to go and invest. We are looking at tourism, to go along with one of our real estate units Consorcio Nobis is currently in talks with DP World to develop a new private port and hotels that we manage. We are also looking at energy, in terms of ethanol production, which is a sector on the government’s strategic agenda. Meanwhile, we have major port project that remains a key focus for the next five years because of it logistical significance. With the roads that we now have, logistics will be the next threshold for the country to cross. What role do you see for Consorcio Nobis in Ecuador’s efforts to transform the productive matrix? We are doing this on the energy front. We are going to look more closely at contributing through the production of ethanol, so that there will be less reliance on imported gas. For each gallon of gasoline consumed, 70% is imported. And that goes into subsidies and cost, which costs the country. If we can help with the local production of ethanol, then we will retain revenues in our own economy. This will mean more jobs, new developments in a proactive sense with new plans, and meanwhile, the economy will move along more quickly. Economy THEBUSINESSYEAR 37 MANABÍ FOCUS A PROMISING PROVINCE Manabí is shaping up to be at the core of many of the government’s development initiatives, and transforming into a new powerhouse for the economy. Ecuador’s Manabí Province, with a population of over 1.3 million, covers an area of around 18,900 square kilometers adjacent to Ecuador’s central Pacific coastline. The province has 22 cantons and Portoviejo is its capital and largest city with around 250,000 residents. Despite its good connectivity to other parts of the country, and buoyant aquiculture (shrimp), fishing (tuna), and tourism industries, Manabí has the dubious honor of being Ecuador’s poorest province, with 26.8% of the population receiving the federal government’s so called poor payment that goes to those citizens most in need. The rural-based existence of much of the province’s population is largely the cause of this. In particular, Manabí’s economy has historically been heavily based on the cultivation of coffee beans, with over half of Ecuador’s beans grown in the hilly inland areas of the province, and coffee exports departing from the province’s Manta Port. Unfortunately, declining world prices for coffee in the 1980s led to crops in the province being left unharvested by famers, which in turn saw a rise in agricultural pests and diseases. Further, much of the coffee is still produced on small, low-yield farms of one to 10 hectares with other crops such as cocoa, bananas, or citrus fruit being grown alongside it, meaning that coffee production in the province is still a near subsistence industry for many farmers. The Mayor of Portoviejo, Agustín Casanovas Cedeño told TBY in his recent interview that, “Agriculture and agribusiness are two of the economic drivers of this canton… However, our agricultural producers need to double production volume to achieve the desired levels of development.” To this end, Portoviejo Canton has passed legislation affording a 50% reduction in taxes for five years to investors committing over $1 million. This move is aimed to kick-start FDI in the region in the hope of addressing some of the current agricultural and standard of living issues that the people of Manabí Province face. At the other end of the investment scale are the SMEs hoping to contribute to the Province’s economic development. Banco Comercial de Manabí is a regional bank owned by a group of businesspeople from Manabí that is specifically tailoring its services to the needs of companies in the province. In a recent interview with TBY the bank’s Manager, Walter Andrade, explained that the bank is focused on providing credit lines to SMEs that make up around 60% of its corporate clients, and need this support to grow and compete in the region. TOURISM TO THE RESCUE Manabí Province also has another ace up its sleeve. The region’s coastline extends for 350 kilometers and the province boasts numerous beautiful recreational beaches. These include San Vicente, San Lorenzo, El Murciélago, Los Frailes, and the 17-kilometer Canoa Beach, which is the longest beach in Ecuador. Aside from swimming and sunbathing, Manabí has excellent surfing, wind surfing, and kite surfing beaches, such as San Mateo, which is famous for its world-class surfing breaks of up to 300 meters in length. The attractive and tranquil Pacific Coast resort city of Bahía De Caráquez sitting on a dramatic peninsula also draws visitors to the region. The city has transformed itself into an eco-tourism destination in recent years, with a predominance of hotels and also numerous holiday homes, many of which are only occupied during the January to April high season. The city has styled itself as an “ecocity,” also by establishing its own paper recycling plant, banning plastic bags, and setting up initiatives for reforestation and organic agriculture. Visitors looking for a different and active holiday experience can walk along the beach to the Punta Gorda Reserve, where they can do voluntary work in the tropical dry forest. They can also visit nearby islands, such as the national heritage site of Isla Corazon, to see local flora and fauna, or visit the area’s organic farms to experience coffee and chocolate production, and other local organic craft industries first hand. Manabí Province is also home to the Machalilla National Park covering 60,000 hectares, of which 20,000 hectares are a marine reserve. The park is immensely important to the ecology of Ecuador, being one of the few areas of coastal tropical dry forest remaining in the country. Los Frailes, rated as one of Ecuador’s most beautiful beaches, is situated within the national park. As well as being an excellent, safe swimming beach with fine white sands, tourists can take a boat out to go diving on the reef, or do some whale watching in season. Tourism also injects much needed capital into Manabí’s economy via the cruise ship industry. Manta Port is on the cruise ship route, with vessels calling at the port during the season that runs roughly from October through to April. Some of the largest cruise shipping lines, such as Holland America and Princess Cruises, call at Manta. The ships dock close to the center of Manta, with a free shuttle service lasting 15 minutes taking passengers and their tourist dollars into town. And it is not just temporary visitors aiding the province’s economy. There is a growing trend for foreigners to choose Manabí for their retirement, either along the coast in places such as Crucita Beach, or in the provincial capital of Portoviejo. The city is situated 30 kilometers from Ecuador’s Pacific coast, and was founded by the Spanish in 1535. Portoviejo is now the country’s sixth largest city. Its Mayor, 38 THEBUSINESSYEAR ECUADOR 2014 Agustín Casanovas Cedeño, is acutely aware of the need to work on urban planning and mobility issues within the city to attract and retain more overseas revenue from segments such as international retirees and Ecuadoreans living abroad. As he told TBY, “We must provide more parks, and build more housing, conference and convention centers, and shopping malls, as well as enhance services, hospitality, and entertainment, to attract higher levels of foreign and private investment.” INFRASTRUCTURE DEVELOPMENT According to Ecuador’s President Correa, Manabí Province is “the Province of the Millennium” because of the infrastructure projects currently being developed in the region that he hopes will shape Ecuador’s social and economic future. Of these projects, the Pacific Refinery is billed as the most expensive in the history of Ecuador. The construction of the new refinery in coastal Manabí is expected to cost around $13 billion, with a planned completion date of 2017. In addition to central government funding, the China National Petroleum Corporation and Petróleos de Venezuela are investing in the project. On its completion, Manabí Province will be home to the largest refinery in the country processing over 300,000 barrels of crude oil per day and employing an estimated 1,300 workers. In the meantime, 20,000 workers will be needed in the refinery’s construction phase, which is a huge injection of economic activity for the province. Other essential infrastructure projects include improvements to 7,000 kilometers of rural roads so far by the provincial government over the past eight years. However, the scale of work still to be done is significant. Manabí Province’s Prefect, Mariano Zambrano Segovia, told TBY in a recent interview that, “…our province requires almost 15,000 kilometers” of road improvements. Health services are another area where Manabí Province is in need of further infrastructure and resource input. One recent example of this is the aid organization Supplies Over Seas (SOS) “Mission to Manabí” initiative carried out in conjunction with Manabí Province officials over 2011-2013. Three containers of medical supplies and hospital equipment were shipped to the province from the US, and a team of 20 medical personnel visited remote rural areas of Manabí to carry out operations in villages where healthcare facilities are still basic or altogether lacking. Having said this, the President’s recent focus on funding infrastructure development initiatives in Manabí has to be taken as a positive sign that the province will be propelled forward in the long-term. Economy THEBUSINESSYEAR 39 WASTE SERVICES B2B IT’S A DIRTY JOB, but… CARLOS SAGASTI former General Manager, Empresa Metropolitana de Aseo de Quito (EMASEO) JUAN GONZÁLEZ President, Intercia Revolutionary changes in the ways Ecuador deals with waste, recycling, and cleanliness are helping transform the capital and the country. How has the transformation of the waste management system ch Kocni \_h_×nn_^ nb_ j_ijf_ of Ecuador, and could more be done? What was the state of Quito’s waste management system over past decades? CARLOS SAGASTI Quito, for the past 40 years, has managed its waste through the public sector. In 2003, the city government decided to split Quito’s waste management system into two halves. The south and central parts of the city would be managed by a private company, while the northern part of the city would be managed by EMASEO. So after seven years, the city increased in population, in waste generation, and the problem was there was no one in the municipality who was planning for, or thinking about, waste. When we arrived in 2009, there was no installed technology in the company. Every day, we would collect an average of 1,800 tons of waste. We had around 150 vehicles, trash collectors, and 1,300 employees. Despite the size of the operation and the intensity of the work, there was no technology, no data collection, and no way to measure what we were doing. Additionally, at that time EMASEO only provided three types of services: collecting, sweeping, and washing the streets in the colonial center of the city. JUAN GONZÁLEZ We were initially involved in the paper business, and starting from the year 2001, we began collecting predominantly used cardboard cartons for recycling. In 2003, we established plants at various locations in Ecuador to collect both paper and carton, and in the year 2005 began to manufacture and recycle plastic bottles and export plastic flakes. We also began to wash soiled plastic with specialized technology during this period. We export to the US and Asia, and operate out of two plants in Quito, one in Manabí, and three here in Guayas. Besides that, we have warehouses in almost every city of the country. We plan to increment new lines of recycling such as light bulbs, rubber tires, metals, and home appliances. We are increasing process capacity on the lines we are already working on. At present, we are on the final mounting process of a new washing line for plastics, this would triple our capacity to process PET bottles. CS Yes, because the city has been selected as an important tourism destination, with its cleanliness being an important part of that. I cannot imagine a world-class tourism destination that has dirty streets. We had this system in Quito as well. Yet, since most people in Quito need to leave for work in the morning, this meant that there was a period of about four hours with garbage sitting on the streets every morning. In addition to 2.3 million people, Quito has 250,000 stray dogs, which enjoyed their breakfast from these garbage bags. To solve this, we began installing large steel bins to collect waste. The other benefit of this was that it reduced the number of people working the trucks. JG We aim to encourage people working in this area and nurture their entrepreneurial drive, teaching them to manage their finances and assisting them in entering the formal economy. We provide start-up money to purchase machines to pack collected waste into bales, which are then returned as raw material to us. Some people go out to the landfill and collect the materials, later renting a space to turn into a warehouse and finally hiring other people to help with collection. About 10,000 families are involved in this collection business. 40 THEBUSINESSYEAR ECUADOR 2014 VOX POPULI MANABÍ AGUSTÍN CASANOVAS CEDEÑO Mayor, Portoviejo COASTAL IDYLL The coastal province of Manabí is known for its natural beauty and resources, and is currently in the midst of a period of vibrant growth and development. VICTORIA SERRANO General Manager, Seafman W W e are a city with a strong agricultural character and tradition. We also have a strong commercial character and over the past few years have focused on the development of services, especially education and health. Much of this city’s growth was unplanned and as a result, there is a high level of informality. Our canton suffered from improper planning during its economic and industrial development, causing it to be less developed than other cantons in Ecuador. At the moment, we are planning our municipal goals for 2025. This process must involve both the public and private sectors. We have great potential as a canton, but need to unite in our efforts to address the disorganization of previous years. e are a particularly productive province thanks to our highly skilled workforce. However, as a region we have suffered from severe climate conditions, which has affected our productivity and reduced our industrial output. Nevertheless, we have played an important part in Ecuador’s development. One of our major achievements has been consolidating our long-term productive vision, as well as developing our road infrastructure plan, the latter being some of my early programs. We have improved the quality of the national roads in our province, and extended their reach to underserved rural communities. While we have already invested in over 7,000 kilometers of road infrastructure, our region requires more than 15,000 kilometers. Therefore, we have taken important steps toward developing the road infrastructure to best serve our industrial and agricultural producers. MARIANO ZAMBRANO SEGOVIA Prefect, Manabí Province T he tuna industry is alive and well in Ecuador. We are currently constructing new facilities to accommodate our expansion. We also expect our production capacity to increase by 10% as a result of the new EU trade agreement. In fact, our expansion plans were based on the assumption that the trade agreement would be signed. Europe accounts for 70% of Seafman’s sales, even though we do not have our own brand there. We were active before anyone thought tuna was economically viable, and have remained in operation as the industry evolved. Seafman is known in Manta, and in the industry, as a school because we put a tremendous emphasis on the training and education of our employees. If you visit other plants, you will always find people who started at Seafman. Our training programs even extend into the universities. WALTER ANDRADE Manager, Banco Comercial de Manabí W e have developed a series of business products that suit the region and its unique characteristics. We understand the mindset of our people, and that also means that we know the needs of the enterprises here, and is why we have been able to support them throughout the disparate economic situations the country has experienced. Another way in which we play a key role in regional development, while setting ourselves apart from the competition, is through our agility in meeting the client needs. Our role here has changed over the years, too. We have provided funding channels to a wide variety of economic sectors, and that is the best example of how we have contributed to the development of the region. We have to keep in mind that the country itself has developed, and with it Manabí. Arguably, the region has not grown to the same extent as Guayaquil, Quito, and Cuenca, but it has notably expanded. Bumper years, growth years, record-breaking years, challenging years. The key players and their stories are all in The Business Year. The Business Year is also available on tablet, giving you an insider track into the country’s most dynamic sectors—in the palm of your hand. w ww. th ebu sinessy ea r. com 42 THEBUSINESSYEAR ECUADOR 2014 FORUM WHY ECUADOR? be here NOW Across any number of sectors, Ecuador is increasingly seen by regional and international companies as a key place to be doing business. DIANA TORRES CARLOS VANEGAS, Managing Director, Citibank Branch Ecuador Executive President, Liberty Seguros C itibank started operating in Ecuador in 1960 with a clear goal: to facilitate trade activity between Ecuador and other regional countries through our large branch network. In this context, one of our main focuses over the years has been local and multinational corporate companies in Ecuador, as well as the other markets in which we operate; we provide them with the right tools to develop their business activity, which enables them to take advantage of the synergies between Citibank branches in several countries. The government and the institutional sector is another one of our main focuses of activity. All in all, I think Citibank has contributed to the development of Ecuador from several points of view by providing finance tools to companies operating in the country, bringing in international banking practices and standards, boosting technology and knowhow transfer, and playing an active role in the professionalization of the banking industry. Finally, we have also adopted an active role when it comes to social responsibility, engaging in activities to boost financial education and entrepreneurship in Ecuador. L iberty has a large footprint in Latin America. We started operations in the region in 1995-1996 by entering Venezuela and Colombia. We subsequently entered Chile, Brazil, and Argentina. The intention of the group is to keep developing its footprint not only in Latin America, but in emerging markets worldwide, for example in Asia and Europe. The Ecuadorean market has been of great interest to the group for a number of years. In 2012, the regulator essentially divested the insurance business from the banking sector in Ecuador, which created an opportunity for Liberty to enter the market. Also, the market has grown significantly over the past decade, in fact exceeding GDP growth, although it is still a small market. Premiums in Ecuador border $1.7 billion today, which makes it an interesting niche market to enter. Therefore, a combination of factors was involved in our decision to enter the country. I think it is preferable to maintain our momentum and keep entering additional countries in Latin America because having a greater footprint is beneficial. Another positive about the Ecuadorean market is that the insurance penetration level remains low. EDWIN CHÁVEZ ZAVALA CEO for Perú, Ecuador & Bolivia, Siemens E cuador is a highly attractive country for doing business; the government is keen to open the doors to foreign investors, and we are also talking about a country that needs infrastructure for its development. For Siemens, it is vital to take part in Ecuador’s largest infrastructure projects, especially those related to the government’s plans to shake up the national energy and electricity matrix. I believe that Siemens can play a leading role in this process, saving the country significant expense over the long term. The Pacific Refinery is another top priority for Siemens, because in the future it is set to become a key element in the broader economic development of the country. Overall, Siemens is eager to participate in Ecuador’s high-tech projects of social and economic merit. Finally, the high levels of investment in education and public health committed to by the incumbent government also interest Siemens as a leading manufacturer of medical equipment and technology. Siemens is well equipped to leave its social footprint on Ecuadorean society through the strength of its leading-edge technological offering. Economy THEBUSINESSYEAR FERNANDO AGUDELO OTTO ICAZA LEGARDA ENRIQUE PONCE DE LEÓN ROMÁN Executive President, GM Ómnibus BB General Manager, 3M General Director, Decameron Ecuador E cuador is an important market for the company. It is a market in which the automotive sector has undergone regulatory changes and the imposition of quotas. In response, GM has ramped up investment in Ecuador over the past few years. Ecuador is a market with opportunities that warrant this increased investment. Our medium- to long-term strategy in Ecuador is proven by our commitment to industrialize the country by developing a solid auto parts supplier base. As part of our efforts to help transform the production matrix, we have increased investment in our plant to maximize its potential. In 2014, we will complete the final expansion stage, where a $70 million budget has been allocated over the past three years aimed at productivity and quality, the development of new products, and attracting new investors to the auto parts segment. By attracting new investors, we hope to increase the number of Ecuadorean parts in vehicles. Since we are a multinational company, we also boost know-how transfer by providing regular training courses to our staff, other companies of the auto industry and even other industries. E cuador is a great place for developing our global solutions. It is part of the Andean region, which is formed by Peru, Ecuador, Bolivia, and Paraguay. Ecuador represents a huge opportunity for the company especially because government investment here is huge. In every segment, the government is our biggest client. The main segments that will be affected are health, domestic security, traffic, mining, and industry. The company realized that having a local person is good for the business. For countries in Latin America, 3M and similar companies tend to be more open to working with local people. Being a local allows for a better balance between what the company wants you to do, and the reality of what you can do in the country. Over the next three years, we want to break the $100 million barrier, which would be a significant milestone for the company and would position us as one of the most important of the 95 subsidiaries that 3M has across the world. This year the target is to surpass the $60 million mark. We are 75% of the way there, but need to increase our efforts. W 43 e saw great potential in Ecuador due to the growing interest of its citizens in travel—the all-inclusive product Decameron offers proved highly attractive for Ecuadoreans. Choosing a location for our hotel was a tough task, because Ecuador is a beautiful country and each region has something special to offer. In the end, we decided to set up operations in the Esmeraldas region—one of the most paradisiac destinations in the country. Later on, we opened another establishment in Santa Elena, near Guayaquil. At the same time, I would add that the government is highly attentive and supportive to foreign investment activity, and provided us with all the facilities needed while taking our first steps here. All in all, Ecuador is a country of great natural beauty that offers plenty of opportunities for foreign investors; in addition, support from the authorities and the hunger of Ecuadoreans for travel encouraged us to establish a presence here. From that moment, our activity in this market went from emissive to receptive. THEBUSINESSYEAR 50 56 63 Diego Martinez V., President of the Board of Banco Central del Ecuador (BCE), on the benefits of financial inclusion. Ecuador’s capital markets would benefit from greater interest as a financial instrument, and a broader buy-‐sell culture. Oscar Zuloaga Ayala, Executive President of ZHM Seguros, on the importance of industry consolidation. 45 Finance REVIEW BANKING The government is adamant not to see a repeat of the local banking crisis that crippled the economy, and moreover, has honed the banking sector both for fiscal prudence and social value. THE REFORM CLUB T he Ecuadorean banking sector saw its nadir in the 1998 to 1999 period when a crisis fueled by a collapsed banking system ultimately cost the nation $8 billion. Close to half of the then 40 banks fell by the wayside, and in January 2000, the prospect of hyperinflation led to the declaration of a state of emergency by President Jamil Mahuad, who adopted the US dollar in place of the sucre, the local currency at the time. Determined never to see such days again, subsequent reforms under the Correa administration have led to a stable banking landscape underpinned by the government’s insistence on prudent solvency measures. IMF numbers point out that the average bank assets to GDP ratio from 1961 to 2011 was at 21.04% with a minimum of 13.12% in 1990 and a maximum of 39.66% in 1999. Meanwhile, the official bank capital to assets ratio for 2011 (latest data) was 8.6%. Average non-performing loans as a percentage of total bank loans from 1998 to 2011 was at 9.19%, with a minimum of 3.2% in 2011 and a maximum of 31% in 2000. THE NEW BANK CODE Having a dollarized economy limits Ecuador's recourse to monetary policy. Instead President Correa is relying on strategies such as banking reform and import substitution. The Correa administration has made systemic reform of the banks the cornerstone of its broader economic development plan. As a result, ideologically motivated steps have seen greater state involvement in banking policy. Understandably perhaps, private banks have been concerned that shareholders would become vulnerable to government policy. To counterbalance such accusations, the government insists its new banking code is vital to generating employment and supporting broader economic growth and social welfare by swelling state coffers. The government built up a liquidity fund to safeguard against repeat banking crises that was funded by taxing the banks. Assets in the fund have risen 36% since 2012, according to Ecuadorean Central Bank (BCE) data, and stood at $1.64 billion by the end of 2013. 46 THEBUSINESSYEAR ECUADOR 2014 Furthermore, the government has ensured that the BCE worked in step with its social and economic development policies. Thus, the BCE, formerly an independent entity, post-crisis became subsumed within the executive branch’s economic team, and fortified with a new Economic Planning Ministry. Commenting on Ecuador’s financial landscape, Diego Martinez V., President of the Board of the BCE told TBY that, “Our new policies make it more attractive to keep money here. This has increased liquidity in the economy, which encourages further investment. Credit policies are also important, be it via the private or public banking sector. Total credit increased from 20.3% of GDP to 28%. In nominal amounts, credit growth has been at 109% over the past five years, while private credit rates have grown by 92%, and the public banking figures are at 356%.” With 516 articles, the banking bill has its detractors, who are concerned that its new Political Board for Monetary and Financial Regulation consolidated power in political hands in contravention of free market economics. The Board features five government officials, comprised of the Minister of Economic Policy, the Minister for Production, the Minister of Finance, the Secretary for Planning, and a representative of the President. The new bank code is just the latest installment in a long line of banking sector reform, where a 2011 referendum barred legal representatives, board members, and shareholders of financial institutions from business activity beyond the financial sector. As a result, these individuals divested or liquidated, among others, their stakes in insurance, brokerage, and pension companies. The code also bolstered requirements for private banks to retain their assets and investments in Ecuador. And in 2012 the BCE raised the mandatory rate at which private banks kept their assets and investments in Ecuador from 45% to 60%. Since November 2012, the BCE has obliged all international cash transfers to Ecuador to flow through central bank accounts, and some observers perceive such currency control as a potential precursor to a new Ecuadorean currency to replace the US dollar. Meanwhile, at the retail level, current reforms have limited borrowers’ liability in case of default on mortgages and auto loans. Official data indicates that reforms have impacted banking sector performance, and the total net profit of all private banks in Ecuador stood at $268 million in 2013 marking a 15% YoY decline. Private Banking Association of Ecuador data points to an average return on equity (ROE) of 10.15% for the banking industry as a whole in 2013, down from 12.79% in 2012, and 18.91% in 2011. The government insists its new banking code is vital to generating employment and supporting broader economic growth and social welfare by swelling state coffers. The government built up a liquidity fund to safeguard against repeat banking crises that is funded by taxing the banks. Assets in the fund have risen 36% since 2012, according to Ecuadorean Central Bank (BCE) data, and stood at $1.64 billion by the end of 2013. STAY MOBILE A full 60% of Latin Americans remain unbanked. Meanwhile, industry data indicates that Ecuador has a mobile phone penetration rate of 113%. This presents an excellent opportunity for greater financial inclusion that the Correa administration has not ignored as part of sweeping banking reforms. Accordingly, the BCE is set to run a pilot project for transactions in electronic money from late October to mid-November of 2014 with eight credit cooperatives. The idea is to test the smoothness of purchases at establishments such as garages, pharmacies, and supermarkets. The BCE aims to bring around 200,000 unbanked citizens in remote rural areas into the fold, with a target in excess of 2.8 million new financial transactions by 2016. Electronic money is a part of President Correa’s wider financial reform that he has defined as, “a code that finally puts the banks at the service of society unlike now, when society is at the service of banks. This is 21st century Socialism.” SELECTED PLAYERS Private Banking Association of Ecuador (ABPE) data indicates that the banks in 2013 registered a return on equity (ROE) of 10.15% down from 12.79% in 2012, 18.91% in 2011, and 14.32% in 2010. According to the Wall Street Journal, as President Correa was elected in 2006, the figure was at 24.21%, more than double last year’s print. The Superintendency of Banks puts the combined 2013 net profit for Ecuador’s 25 private banks, and state-run Banco del Pacifico, at $268 million, down 15% YoY. For the year the largest slice, at $53 million, went to Banco del Pichincha, followed by Banco del Pacifico with $41 million, Banco de Guayaquil with $40 million, and Produbanco with $29 million. The four alone thus accounted for 63% of the total assets of the Andean nation’s banking sector. Foreign-owned banks in Ecuador, including Citigroup, Dutch-German Procredit Bank, and Panamanian Promerica had an 8% share of the sector’s total earnings in 2013. BANCO DEL PICHINCHA Established in 1906 in Quito, Banco del Pichincha is Ecuador’s largest private bank. It posted 2012 net assets of $8 billion and liabilities of $7.3 billion. Bank data for 2013 indicates total assets of $9.02 billion, total equity of $780.44 million, and net income of $53.54 million. The ratio of net income to total equity was at 6.86%, that of net income to total assets at 0.59%, and that of equity to total assets at 8.65%. A comprehensive offering of retail banking services is facilitated by an ATM network of over 700 units, and it has also led the field in electronic banking. Finance In 2007 the institution launched a network of customer service centers in Spain to serve the three quarters of a million Ecuadoreans living there. The bank also has representative offices in Shanghai, Panama, and the US. Meanwhile, it is a pioneer in electronic banking. BANCO DE GUAYAQUIL Ecuador’s second largest private bank, established in 1923, is Banco de Guayaquil, and today operates around 200 branches and 800 ATMs. Its comprehensive service features corporate, personal, private, and transaction banking. Like rival Banco del Pichincha, Banco de Guayaquil opened its doors in Spain in 2007 to leverage bilateral relations with Madrid, followed by Panama City in 2008. As of June 2014 net assets stood at $3.6 billion, with respective total income and total expenses of $203 million and $176 million. The return on assets (ROA) was at 1.41%, and the return on equity (ROE) at 14.45%. Impressive ratios include coverage of the commercial portfolio of 206%, while that of consumer loans, its mortgage portfolio, and microenterprise portfolio were at 112.6%, 146.3%, and 88%, respectively. PRODUBANCO–GRUPO PROMERICA A major name in the Ecuadorean banking arena, Produbanco has made strong use of automated systems, and assesses over 4,500 consumer credit and mortgage applications per month. In 2013 it registered a net profit of $28.7 million. It was also the purchase story of the year, when in March Panama-based Promerica Financial Corp. picked up a 56% stake for $130.3 million (108.6 million Produbanco shares for $1.20 each). Given its status in the local market and AAA- rating by Bank Watch Ratings, the Produbanco brand remains unchanged. BANCO DEL PACÍFICO The pioneer of Ecuador’s first cashpoint in 1979, at the retail level Banco del Pacífico offers saving and current accounts, as well as familiar investment instruments. It has a network of 1,077 service points and 218 ATMs. Also, the institution, incorporated in 1972 and headquartered in Guayaquil, is designs and manages financial advice programs and meets the investment banking needs of business of all sizes. As of June 30, 2014 it had an asset coverage ratio of 275.74%, and a solvency ratio of 14.47%. The non-performing loans (NPL) ratio was at 1.37%, fractionally down from 1.38% in 2Q2014. THEBUSINESSYEAR 47 48 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW TBY talks to HE Fausto Herrera, Minister of Finance, on promoting growth and improving Ecuador’s economy. THE basics Ecuador is looking to re-enter the international bond market, and has spoken with representancp_m`lig=cnc\[he[h^=l_^cnMocmm_[\ionØi[ning around $700 million in bonds. What steps are being taken in that regard? Recently, President Correa said that his top goal for Ecuador is to promote social and economic development. What role does the Ministry of Finance play in that? BIO Fausto Herrera graduated `ligJihnc×]c[Ohcp_lmcdad Católica del Ecuador with a degree in economics. He also has an MBA and a Master’s degree in Economics, Finance, and Sustainable Development. During his 10-year career in the public sector, Herrera has served as Vice-Minister of Finance, Subsecretary of Fiscal Relations, Subsecretary for Macro-Fiscal Consistency, Subsecretary for Macroeconomic Policy, and Coordinator of Macroeconomic Planning and Studies. Additionally, he has been an advisor to the National Secretary of Planning and Development (SENPLADES), an advisor to the Minister of Finance, and a consultant to the Inter-American Development Bank (IDB). First of all, we are a growing economy. Over the past five years, we have grown by an average of 4.2%. In our national development plan, we have two clear objectives. The first is to change the energy matrix, and the second is to develop the productive matrix. My role as the Minister of Finance is to secure the necessary financing to achieve these goals. For example, the plan to change our energy matrix will cost approximately $8 billion. The result of this change will mean that, from 2016, Ecuador will save $1.2 billion annually. This is 1.2% of our GDP. Obviously, to do these major infrastructure projects requires a lot of funding, and our goal is to find the best sources of financing to fund public investment. You recently signed an agreement with the Inter-American Development Bank (IDB). What is nb_mcahc×][h]_i`nb[n[al__g_hn9 My responsibility as Minister of Finance is to find the best sources of financing with the best terms from sources all around the world. A few years ago, we negotiated a special agreement with China. However, it’s not good for an economy to be reliant on only one creditor. Therefore, we are also looking to Russia, Brazil, and multilateral lenders, such as the Corporación Andina de Fomento (CAF) and the European Investment Bank (EIB). We recently opened a new line of credit with the Abu Dhabi Development Fund. We believe the Ecuadorean development policy should be by Ecuadoreans, for Ecuadoreans. For this reason, we don’t accept any conditionality on loans or financing. In April 2014, I met with institutional investors in Europe and the US to discuss Ecuador’s return to the capital markets. International investors have seen the economic growth that Ecuador has experienced in recent years, as well as the current economic health of the country. But, of course, the question is: what is different now? The difference is that we are now a country that knows where we are going, and what we want for the future. We are a country that will not be an exporter of commodities, but a producer of high value-added goods. With respect to the default in 2008, the important thing to emphasize is that these bonds were not created by the Ecuadorean state. They were bonds that we had taken over as a result of the nationalization of private accounts. Private debts were taken over by the state and then restructured. Now, the new Ecuadorean constitution prohibits the nationalization of private debt, which removes the danger of this. The important point is that Ecuador is experiencing strong economic success and, in order to achieve the economic transformation we want, we need stronger financial muscle. Ecuador has seen strong growth fuelled by a high level of public investment. What is the plan to ensure this translates into longer-term sustainable development? This depends on evolution over time. If you had asked me in 2007 if Ecuador was an attractive destination for international investment, I would have told you yes, for oil and gas and for mining. Now, after the changes we have experienced over the past seven years in terms of infrastructure, energy, human capital, and the judicial system, we are facilitating new forms of investment. Ecuador is now an attractive destination for investment in non-traditional sectors, not just natural resources, and we are seeing investment from Mexico, the US, Finance Colombia, and Peru in non-traditional sectors like food and industry. Furthermore, we have seen growth in private investment. We hope that, by the end of 2014, we will have investment in exploring our mineral resources. We have $220 billion in proven mineral resources, and private investment will play its role. FDI is not an end in itself, but it is a means to achieving development by allowing companies to create jobs and bring in their knowledge. Our development plan is something comparable to what the Asian tigers did. However, we don’t have as much time as them. What they achieved in 30 years, we need to do in 10. To achieve this, we need stronger financial muscle. That is why Ecuador is working to control its current account and public spending. We have the highest level of public investment in Latin America to develop the infrastructure necessary to attract foreign investment. You compare Ecuador’s growth model with that of the Asian tigers. One of the important elements of that growth model was technology transfer. What role does that play in Ecuador’s model? To attract technological investments, we have been working to transform our education system in Ecuador. The city of Yachay is an ambitious plan in this regard, as it combines a technology-based university and a destination for international technological investment. We have created many advantages for technology investment, but the most important is investment in human capital. For this reason, we currently have 8,000 Ecuadorean students studying abroad on government scholarships to ensure that we have prepared the right human capital. Additionally, we have both tax incentives and a good legal framework for technology investments. We don’t have the same amount of time as the Asian tigers, and for this reason we need to use what we have. What we have is natural resources, so we are using money from natural resources to fund this technology development. What has been the most important public sector investment Ecuador has made over the course of your term? Right now, the most important public investments we are making are in two areas. First, in the petroleum sector, we are spending around 4% of GDP in working to maintain and grow Ecuador’s petroleum production. We are upgrading all of our petroleum infrastructure. These can have a return of more than 130%. The other area is the energy sector, which right now consumes 2% of GDP. We are channeling around 8% of GDP into energy investments, such as hydroelectric development, which is expected to produce a return of 1.2% of GDP from 2016 or 2017. What are your top policy priorities for the coming year? Our top priority will be to reduce the level of poverty in Ecuador. However, if we don’t start to more aggressively transform the productive sector in the country, we cannot effect this economic change. That is why the President is looking to deepen the transformation of the productive matrix by creating more incentives for investment, using public investment to accelerate growth, and creating clear rules for investors. We are also working to ensure that the financial sector can provide the necessary resources to the productive sector to effect this transformation. We recently announced that this year we will be passing a new financial code, which will try to bring the financial sector in line with our development strategy to provide cheaper long-term financing for productive investment. Why Ecuador? What has been the most important FDI in Ecuador in recent years? The most important investments have been in our industrial sector, unlike our neighbors, which have seen major investments in the mineral resource sectors. However, in the future, we are expecting to see more investments in the mining sector. This is a sector where we need foreign investors who can bring in better know-how to help us make the most of our resources. Ecuador has a different model of development than its neighbors. We believe in our people and what they can do for Ecuador. We are not making superficial changes; we are making deep structural changes to the country that make Ecuador a favorable destination for investment. All foreign and all private investment is welcome in Ecuador as long as it respects three fundamental things: the rights of workers, payment of appropriate taxes, and respect for the environment. THEBUSINESSYEAR Ecuador is re-entering the international debt market, and will \_Øi[ncha1** million in bonds 49 50 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW Concerning dollarization, do you have concerns that you are using a currency over which you have no control, while at the same time engaging in high levels of public investment? quite MANAGEABLE TBY talks to Diego Martinez V., President of the Board of Banco Central del Ecuador (BCE), on the benefits of high public spending, promoting financial inclusion, and re-entering the bond market. What is the government’s strategy to ensure that public investment translates into sustainable development? BIO Diego Martinez V. graduated from the Catholic University of Ecuador and has a Master’s in Development Economics from the Institute of Social Studies (ISS) in the Netherlands. He has held several important public positions, and has been a member of the Boards of Petroecuador, Petroamazonas, the Electricity Corporation of ?]o[^il&[h^nb_J[]c×] L_×h_ls(B_cm]oll_hnfsnb_ President of the Board of Banco Central del Ecuador (BCE). The goal of our government is to promote a change in how the country produces goods and services. We want to change the country from being mainly a primary goods producer to one that has a significant industrial and services sector. In 2013, Ecuador’s economy grew by 4.5%, and over the past four years it has recorded average growth rates of 5.2%. This is quite stable, not just for Latin America, but globally. But more importantly, the manufacturing sector and the non-oil economy grew considerably. The non-oil sector has grown by 5.8% since the world economic crisis of 2010. Our aim is to transform Ecuador into a non-oil and knowledge-based economy, although it remains in need of generating foreign exchange. These foreign exchange revenues are being used to promote a different growth and development pattern. Public investment has to underpin a basic infrastructure that allows the non-oil industries to shift their costs to become more profitable. This has been happening heavily over the past five or six years. This is because, from a cost structure perspective, it would not be possible to bring about the changes needed solely through private initiatives. Ecuador is implementing new methods of electronic payments to jligin_×h[h]c[f inclusion The government must provide the infrastructure, roads, electricity, education, healthcare, and higher education. These are all crucial to changing the relative costs of industry over time. Today, all non-oil sectors are growing faster than in the past, in a highly stable economy. Ecuador has solid growth, low inflation and unemployment, stable interest rates, and increasing human talent, all conducive to private sector investment. We do have a current account deficit, since we are investing and importing raw materials and capital goods to support production and these investments, but the current account deficit is still only 1.3% of GDP, which is quite manageable. Our financial system is also stable. We have the highest liquidity rates in our history since becoming a dollarized economy, having increased from 29% in 2009 to 37% in 2013. This concern explains why we place great importance on stability and responsibility, and accounting for every dollar. As we lack a national currency, each US dollar that goes out means less money to fund Ecuadorean growth, while each US dollar that comes into the country promotes growth, spurring greater investment opportunities and aiding the financial system in general. Three years ago new policies allowed us to control the volume of money in the economy, helping to attract money to Ecuador. In the past it was common for bankers and citizens to save money abroad. Our new policies make it more attractive to keep their money here. This has increased liquidity in the economy, which encourages further investment. Credit policies are also important, be it via the private or public banking sector. Total credit increased from 20.3% of GDP to 28%. In nominal amounts, credit growth has been at 109% over the past five years, while private credit rates have grown by 92%, and the public banking figures are at 356%. We have followed a deliberate policy of increasing credit to keep the country going and the economy running smoothly. In 2013, FDI accounted for 0.8% of GDP, or $702 million, which many consider low, although FDI in Ecuador is a net provider of foreign exchange, and those rates are still the highest Ecuador has seen in the past five years. What are your key priorities for the BCE over the coming years? Providing sufficient liquidity for the economy and making sure it stays stable with an adequate growth rate for credit, and making sure loans are repaid are all key priorities for us. We also have to be careful about spending quality, as we are obviously trying to make sure we have a net increase in the amount of money coming in. Finance THEBUSINESSYEAR 51 INTERVIEW TBY talks to Ricardo Cuesta D., Executive President of PRODUBANCO-‐Grupo Promerica, on growth strategies, regional banking, and the middle class. What motivated Grupo Promerica’s acquisition of Produbanco in Ecuador? There were several factors behind this very important decision. Banco Promerica has been present in Ecuador for 14 years in what has been a successful experience. It rose from a small finance company to the eighth-largest bank in a very competitive environment. Another reason was that Grupo Promerica was looking to expand its banking business, and Central America is already concentrated and saturated. The third reason is that Produbanco was the fourth largest bank and was considered one of the best operators in Ecuador. Additionally, Grupo Promerica decided to increase its presence in this market; combining both banks gives us around a 12.3% market share. I would also have to add that Ecuador is a dollarized economy with a healthy macroeconomic performance, and the fact that it has a hard currency is also crucial in making such decisions. Qb[ncmnb_mcahc×][h]_i`nbcm[]kocmcncih`ilAlopo Promerica? Grupo Promerica is a Central American banking group with over $10 billion in assets. Promerica is present in nine countries in Latin America: Ecuador, Panama, Costa Rica, El Salvador, Honduras, Nicaragua, Guatemala, and the Dominican Republic. Additionally, the principal shareholders of Promerica Financial Corporation own Terrabank N.A., a community banking operation in south Florida, US. Produbanco and Banco Promerica combined will represent approximately 39% of the group’s total assets. However, one of Promerica’s initiatives is to ensure that no country represents more than a 25% share of the group’s assets. So in essence, the banking operations in all other countries will continue to grow in order to balance out this 39% share. Grupo Promerica grows approximately $600 million in assets per year across the nine countries. Eventually we will reach this goal, where we (Produbanco) should account for no more than 25%. BIG PLAYERS thinking small Would you now consider Produbanco to be an international player in Ecuador’s banking sector? Produbanco is a local bank with international shareholders. Produbanco is the fourth largest bank in Ecuador, and has a solid and impeccable reputation over its 35 years of operations in this market. Grupo Promerica’s strategy in the nine countries it operates in is to promote itself as a local bank. Part of Promerica’s success has been based upon being close to the client. You can have a regional umbrella, but not necessarily be viewed as an international global bank. We compete against that view. We like to be considered local and we want to be very close to our clients. What does being local mean for the way you do business in Ecuador? First of all, we are in a country witnessing the burgeoning presence of local corporations and entrepreneurs. What we are doing with the Promerica umbrella here is giving local corporations an alternative view of banking not only in Ecuador, but also outside Ecuador. Produbanco joining Promerica thus widens the umbrella of opportunities for these clients. Produbanco is the key corporate bank in Ecuador. In that role, we can also help corporate clients to ex- BIO Ricardo Cuesta D. pursued an MA in Business Administration at the Florida International University before going on to hold numerous positions through out his career at companies such as Motorisa S.A., Citibank, Banco Aserval, Thompson <[heq[n]b=[fc×][^il[ de Riesgos, Asociación de Bancos Privados del Ecuador, and many others, as well as his current position as CEO–President at Banco de la Producción (Produbanco). Delgado also held instructive positions for VISA International’s Latin America Division, and Citibank N.A., where he was Director and Instructor for Corporate Seminars. 52 THEBUSINESSYEAR ECUADOR 2014 Qb[nlif_][hnb_×h[h]c[fm_]niljf[schmojjilning the transformation of the productive matrix? pand their business. For example, Ecuador is an importer of many products including consumer goods and other raw materials. We need increasingly large lines of credit for trade finance. Produbanco and other competitors are subject to country risk and its limits. Grupo Promerica has a definite advantage as our credit limits are in line with our presence in nine countries and thus we, internally, can compensate with the excesses experienced in the other markets. In essence, we have introduced this value-added strategy into what is already a solid bank. This is propelling it into an international arena that Produbanco was not previously a part of. How has growth of the middle class changed the banking sector in Ecuador? First of all, it allowed banking to become national. Originally, the banks were either from Quito or Guayaquil, and they stayed within their regions. Since 2001, inflation rates are obviously closer to those observed in the US, so actual growth in income has clearly benefited lower income groups, which, in turn, have advanced into this growing middle class. Once basic needs are met there is the will to direct excess funds elsewhere. That has transpired into housing and auto loans, credit cards, and other consumer products. It helped people start to experience a better quality of life, as the banking sector was there with products that allowed them to purchase new consumer and household products. It does make a large contribution to the success of that venture. However, there are major industries that greatly exceed our capacity to fund; the large hydroelectric projects, refinery, petrochemical projects, and so on. We already fulfill our social responsibilities within the banking industry, which is to recirculate and be an intermediary for funds. The main issue for the banking sector revolves around how everyone can work to increase the short-term nature of Ecuadoreans’ savings into a longer-term scenario where funding becomes available for expansion. Today I would say, being responsible, we are probably at the limit of what that gap should be. We should not take any further risk engaging in long-term financing with short-term funding. We also need to work with the authorities toward a consensus. The ideas being proposed are excellent, and we want to play our part in any subsequent transition, but in a technical and professional manner. My responsibility and the responsibilities of everyone at Produbanco today are mainly directed towards our depositors. I have to make sure that we have sufficient liquidity to operate the bank safely. This is a highly important issue that we need to look at from a technical perspective. The ultimate responsibility of a bank’s CEO is toward the depositors, not credit, the latter being a matter of fact. If I offered a 10-year credit facility at 1% interest, I would have a line of keen customers from here to Colombia. But taking long-term deposits requires confidence, and involves the building up of a bank. It is a question of assuring your depositors that money is always available. IN NUMBERS PRODUBANCO-‐ Grupo Promerica 4th Largest bank in Ecuador 39% Account of the ×h[h]c[faliojÎm business across Latin America The combined entity will have a 12.3% Market share in Ecuador Finance THEBUSINESSYEAR 53 INTERVIEW VAULT INTO the breach TBY talks to Efrain Vieira Herrera, Executive President of Banco del Pacífico, on funding development, and getting loans and technology into the hands of customers. As a publicly owned private bank, how would you ]b[l[]n_lct_nb_lif_nb[n<[h]i^_fJ[]×]ijf[sm in Ecuador’s banking sector? BIO After majoring in electrical engineering as an undergraduate, Efrain Vieira Herrera earned a Master's degree in business administration in 1991, and a second in business economics in 1994. Herrera’s academic career also included a position as senior lecturer at the Escuela Superior Politecnica del Litoral and Professor of Finance at the IDE Business School. His professional experience includes positions such as Director and President at DATAFAST, Vice-President of Business at Diners Club, General Manager at BIESS, and his current position as Executive President at <[h]i^_fJ[]×]i( Banco del Pacífico is a private bank that was purchased by the Central Bank of Ecuador after the financial crisis in 1999, meaning that today the state is the owner of Banco del Pacífico. However, we have preserved our independence and our activity does not depend on the national budget. In a way, the bank has become a channel to comply with the public delineation of economic policy. For example, we have been active in financing activity within the transformation of the production matrix. We have also played an important role in providing funding for strategic sectors, and in 2013, we provided credit lines worth $350 million to strategic sectors. This has represented a shift in terms of earlier priorities, as we used to have a stronger focus on retail banking. What is the balance between corporate and individual clients in your portfolio? Today, 90% of our clients are from the corporate segment. However, if we add the activity of Incorporar, a company engaging in retail banking and the credit cards business, the balance would be 55% corporate and 45% individual. The vision of the company is to further increase the percentage of the corporate segment, as well as achieving a greater share of financing within the SME segment. Finally, our main aim is to provide high-quality products and services so our clients feel satisfied with us. What are the competitive advantages of Banco del J[]×]i`il]iljil[n_]fc_hnm9 We offer competitive and attractive terms for credit lines according to their specific nature. Our interest rates are also competitive for these products. In addition, we offer role man- agement through electronic systems for our corporate clients, and financial and technical consultancy services. Our credit lines are flexible in all senses. This is all part of our business strategy; to prioritize global profitability over basic economic profitability. How do you see the bank contributing to the national economy? We do not see our contribution to the country’s development strictly from an economic point of view, but as a concatenation of the different economic sectors that contribute to the development of the country. We are active in credit lines for the construction sector as well as for the purchase of housing units. We know the construction sector is important for the national economy, and as a result we offer credit lines to people constructing housing units and to those who are purchasing them. We try to do the same in other economic sectors. We also try to invest in government bonds and treasury certificates; though this is not our priority, we also take part in these types of investments. How would you assess the presence of international banks in the country? At the moment their presence is relatively small, especially if you take into account that in the past it was much larger. This is because the economy is still in a process of expansion into the regional arena, and is attempting to improve the position of local banks. At the moment, there is not much space for foreign banks, as large local banks manage the sector well. This means that local banks are meeting the demand of those multinationals present in Ecuador. For example, one of our main clients is Holcim, and we have strong and productive ties with it, meaning that we always come up with new products to meet its needs. 54 THEBUSINESSYEAR ECUADOR 2014 <[h]i^_fJ[]×]i has allocated $400 million in credit for strategic sectors of the Ecuadorean economy in 2014 Banco del Pacífico aims to reach $200 million in SME loans and mortgages in the next 10 years What are some of the key measures the bank implements to support SMEs? SMEs have traditionally been a strong segment for us. However, over the past few years their importance has decreased. We want to change these dynamics again, and we are set to implement a series of strategies to regain our market share in this segment. We have a $150 million budget to use until the end of the year for specific actions aimed at this segment. We want to revive and revitalize this part of the bank with a medium- to long-term vision. I also think there is a huge opportunity in this segment, as SMEs are to be the main economic drivers of our future economic expansion. What role do new technologies play in Banco del J[]×]iÎm\omch_mmmnl[n_as9 We were the pioneering bank in the development of new technologies in the banking sector in Ecuador. However, as occurred with the SME segment, this was gradually forgot- ten and we are attempting to bring it back, as I believe that the future of the sector is based on electronic channels. We were the first banking institution to introduce so-called recycler ATMs, which enable our clients to do other transactions and make payments 24 hours a day, seven days a week. We have also provided our clients with the tools at the local level (in small shops and pharmacies) to pay their bills and other invoices in those physical spaces. What is the bank’s future strategy? We have allocated a budget of $400 million for credit lines for the strategic economic sectors over 2014. In 2015, this figure should reach the $500 million mark. Our challenge is to continue growing in the student loan segment, as well as in mortgages and SMEs, and we hope to reach $200 million in credit lines. I want to make this bank into Ecuador’s leading banking institution within five to 10 years. Finance THEBUSINESSYEAR 55 TECH BANKING FORUM the future IS NOW ALEJANDRO RIBADENEIRA General Manager, Banco General Rumiñahui (BGR) T echnology is a basic issue that every bank has to deal with to operate successfully. You have to understand our target market, which is military personnel. It is like a huge company with offices all over Ecuador and in certain other countries. They need a bank with a national presence, and we are a medium-sized institution. We have dealt with this reality by joining forces with Banco Pichincha. Between 2008 and 2012 we were perfecting our financial ratios, so we were not paying much attention to IT. In mid-2012, we decided to change that. We started to invest a lot of money improving our IT, and in 2014 the vast majority of our projects are IT based. We are buying new BPM and CRM software, analyzing the core software we use to attain customers and register transactions. We improved our webpage, too, but there are still many areas to be improved. We need it to be more efficient, to save money, and to better serve our customers. They need electronic payments and other technologies to perform transactions. Improving our IT will allow us to introduce products and services that will hit our target market. The modern banking industry is increasingly becoming dependent on high-tech solutions to reach out to customers. LUIS JAVIER LOPEZ JANET PACHECO Executive President, Banco Capital General Manager, Banco ProCredit W e want to be a multi-banking institution capable of offering integrated services and solutions, for example, we need to improve our technological processes to offer our clients alternative banking tools. My appointment was also part of the bank’s strategy to diversify and expand its operating segments, while giving the institution a more pluralist character with additional products and services, as well as higher levels of technological sophistication. Technology is essential, as today we would be incapable of offering all the services and products we have, while also reaching higher banking penetration levels domestically. New technologies enable us to be faster and more efficient in our activity. I think one of the challenges facing emerging economies is the low banking penetration level, which sparks further problems. I think technology plays a key role in increasing banking penetration; nowadays it eases many processes and people can perform any process on a computer or mobile phone. Moreover, new technologies enable the faster launch and implementation of products, services and strategies, reaching clients more efficiently, too. I think this is the road to follow in Ecuador, both for us and for the other banks, as the current banking penetration in the country barely reaches 40%. W e operate 22 banks on three continents. Of these, six are considered the largest banks, and in Ecuador one of these is ProCredit—among the top six. I think, on the one hand, that the financial resources SMEs need in order to increase their investment pose a challenge. In addition, the human resources component can be challenging, and that in many cases their performance could be enhanced through greater technical knowledge. Our clients have many strategies for their businesses; however, they don’t always have the technological knowledge to back it up. Both aspects are related to the efficiency that these enterprises need for the future. Efficiency is important because Ecuador is a relatively small market, compared with its neighbors. We need to improve efficiency and quality. Meanwhile, as a private bank, we were the first to service the agricultural sector, and also the first to launch special credit—EcoCredit—to invest in measures to protect the environment. 56 THEBUSINESSYEAR ECUADOR 2014 While well regulated, Ecuador’s capital markets would benefit from greater interest as a financial instrument, and a broader buy-sell culture. Review EQUITY MARKET bond is BACK Ecuador has two stock exchanges, namely the Bolsa de Valores de Quito (BVQ) and the Bolsa de Valores de Guayaquil (BVG), created in 1969. The BVQ ECU Index (Global) traces the trajectory of listed companies on both the Quito and Guayaquil stock exchanges. The Ecuindex is a key national indicator portraying the rise and fall of the national stock market overall. Liquidity remains an issue as many opaque family-owned businesses shun listing and the obligatory transparency that goes with it. Therefore, the exchange has yet to wrest capital from traditional investments such as real estate to become a more dynamic financial instrument. As of September 1, 2013, the Global Ecuindex had peaked at 1,100.52 on April 2013. Official data indicates that the market capitalization of listed companies in Ecuador had climbed from $690 million in 1992 to $6.10 billion by June 2012. Meanwhile, World Bank data puts Ecuador’s market capitalization of listed companies as a percentage of GDP at 7% for 2012, down from 7.5% in 2011 and 7.8% in 2010. The 1993 Capital Markets Law sets the regulatory tone, availing stock market trading to banks and other firms, and fostering the development of mutual funds. Activity on the two stock exchanges is ostensibly in short-term commercial paper, bank obligations, and government debt, with less than 10% in equity trading. The main regulators of the securities market are the National Securities Council and the Superintendency of Companies, the former responsible for establishing the general policy of the stock market, and the latter tasked with the implementation and regulation of trading activities. FERNANDO MARTINEZ Partner in Investum What is the company’s current lif_ch?]o[^il!m×h[h]c[f sector? Q_[l_[]iljil[n_×h[h]_ ×lgnb[nb[mnbl__g[ch[l_[m of business: structuring and ×h[h]cha&g_la_lm[h^[]kocmcncihm&[h^×h[h]c[f[h[fsm_m( Nb_×lmnih_cmnb_gimncgportant service we have, and we have generated over $92 million in the brokerage market, and more than $60 million for the banking market over the past three years. What is your primary client jli×f_9 We have concentrated on helping companies obtain as much money as they can over the past three years. We started with transactions of $500,000, and then obtained $1 million, $2 million, $6 million, and $7 million of business. The latest transaction we realized was for $15 million and now we have been mandated for a $200 million project ×h[h]_nl[hm[]ncih(Ch?]o[^il ]iljil[n_×h[h]_jl_^igch[n_m ip_ljlid_]n×h[h]_(Ch]iljil[n_×h[h]_&sio][hao[l[hn__ [fi[hqcnb][mbØiq[h^ assets of the company, whereas qcnbjlid_]n×h[h]_&sio^ihin have the assets. Finance QUITO & GUAYAQUIL Quito’s benchmark index is the Ecuindex, although two others are in play. The IVQ is a statistical measure of monetary value, while the IRRF is an index of bond performance. Currently, the BVQ has 44 (in 2012) listed companies and 35 brokers, all authorized by the Superintendency of Companies. The average capitalization of the exchange for 2012 was $1.167 billion. The total traded value for the year was $104 million, where the private sector trumped up $0.64 billion and the public sector $0.25 billion. As of Friday, October 3, 2014, the benchmark Global index had declined to 1193.81 points from 1194.86 in the final session of September of 2014. The BVG, Guayaquil’s bourse, has over 45 listed companies serviced by 20 brokers. To render the two exchanges more appealing to international investors, as of January 2012, the BVQ and the BVG unified their trading systems with the Unique Interconnected Trading System (SIUB). The stock exchange, a tax-paying limited company, is also a beacon of transparency in the private sector. INVESTMENT FUNDS Investment funds must be registered with the Securities Market Registry, which is an organ subordinate to the Superintendency of Companies. The largest investor class is the government of Ecuador, acting through the Ecuadorean Social Security Institute (IESS), followed by banks and local equity funds. International equity funds are a rarity on the Ecuadorean stock exchanges. THEBUSINESSYEAR As of September 1, 2013, the Global Ecuindex had peaked at +&+**(/,ih;jlcf,*+-(I`×]c[f^[n[ch^c][n_mnb[nnb_g[le_n capitalization of listed companies in Ecuador had climbed from $690 million in 1992 to $6.10 billion by June 2012. BONDS Ecuador is keen to re-enter the international bond market. The investment community appears warm toward a dollar-denominated bond rumored to offer rates of 7%-8%, with a 10-year maturity, geared at raising $700 million. According to The Economist, “Although such interest payments would be slightly higher than the rates China has demanded for its bilateral loans, some of which are tied to oil shipments, they are lower than the bonds that the country defaulted on.” In 2008 President Correa’s administration defaulted on $3.2 billion of sovereign bonds from ideological motive, since which time Quito has sourced Chinese credit to finance infrastructure projects. In a TBY interview, Fausto Herrera, Ecuador’s Minister of Finance dispelled any thought of a repeat performance, stating that, “the important thing to emphasize is that these bonds were not created by the Ecuadorean state. They were bonds that we had taken over as a result of the nationalization of private accounts. Private debts were taken over by the state and then restructured. Now, the new Ecuadorean constitution prohibits the nationalization of private debt, which removes the danger of this.” Creating value. Managing risk. For M&A in Ecuador or the region, savvy investors turn to Analytica for local knowledge and world-class execution. Some of our recent transactions: t-JCFSUZ.VUVBMBDRVJSFT1BOBNFSJDBOBUIFMFBEJOHMPDBMJOTVSFS t(SVQP.ÏYJDPCVZT3VUBEF$PCSFJOBDPVOUSZUSBOTBDUJPO t&EFTBQVSDIBTFTUIFTBOJUBSZXBSFBSNPG$IJMFT$FNFOUPT#ÓP#ÓPJOBDPVOUSZEFBM At Analytica, we understand the risks—and rewards—of investing in emerging markets like ours. Ask us how Analytica can help you. Analytica. Ecuador’s Investment Bank. ."%FCU4USVDUVSJOH#SPLFSBHF3FTFBSDI Av. 12 de Octubre # 1942 y Cordero, World Trade Center, Tower A, Of. # 1505, Quito, Ecuador T. +593-2-222-6640 F. +593-2-222-7015 www.analytica.ec 57 58 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW dollar for your THOUGHTS TBY talks to Ramiro Crespo, Senior Partner and General Director, and Eduardo Checa, General Manager of Analytica, on international investors and capital markets. Analytica is looking to continue expanding its international reach and client base What is the key focus of Analytica’s business? EDUARDO CHECA We have several threads operating simultaneously. We are active in debt structuring, with the broker dealer house, and we work on prime Ecuadorean corporate issues. We also undertake mergers and acquisitions, which is another key area of our group. In addition, we provide either the sales side or buying side for companies within Ecuador, or for those being bought or sold by foreign companies. We also provide equity research services. What are the primary sectors that attract interest from international investors? EC We have seen considerable interest overall. Ecuador is a country that has grown from $400 million in insurance premiums to well over $1.3 billion, which made it an important player in the insurance arena. We have also seen interest in mining, while the retail business and food and beverages are also appealing. These mostly comprise Ecuadorean companies being acquired by foreign companies. Eduardo Checa graduated from the University of Wisconsin Stout with a Major in Business Administration and a Minor in Economics. In addition to his position at Analytica, he is a board member at a number of institutions, including the Quito Stock Exchange, Grupo Moderna, and Latino Insurance Line. Ramiro Crespo graduated with a Master’s degree in Economic Development from Georgetown University. A recognized economic and political analyst, he is currently General Director and Senior Partner at Analytica. Previously he had been Vice-President of Corporate Finance at ING Bank Ecuador for nine years. How would you characterize the development of the capital markets within Ecuador? RAMIRO CRESPO One of the problems with the Ecuadorean capital markets has been over-regulation. The capital markets in the 1980s were at the same level of development as Colombia, Peru, and Chile. Today those markets are much more developed. If they are ranked out of 10 as a 10, we would be at a five in terms of emerging markets. Before they were all equal, but Ecuador has not improved sufficiently. RC When we originally dollarized, many people said that in order to do it successfully, we needed a solid financial system and fiscal environment. In Ecuador we had neither of those things, but it still worked well. If you lacked a good financial system and solid fiscal accounts, you absolutely needed sound money. Ecuador cannot issue its own currency or dollars, which means that we have sound money, which promotes stability. It also helps with the development of the financial markets because, since dollarization, long-term financing and loans, such as mortgages, have developed quickly. You are able to issue 15-year loans in the knowledge that the dollar you recover will still have strong purchasing power. Today we use import substitution, tariffs, and quotas to restrict the volume of imports so money will not leave the country and liquidity will go down and with it economic activity. The answer is to export more, more FDI, and access to the international capital markets. What effect has dollarization had on the appeal of Ecuador? EC Dollarization has had an excellent effect on the economy by helping to stabilize it. In order to be successful in dollarization, very few things need to be done; you have to export more than you import, and you have to be highly productive. You also need access to foreign borrowing and investment. If you have those four things, you have a ladder with which to climb to development. Finance THEBUSINESSYEAR 59 INTERVIEW A CAPITAL IDEA TBY talks to Pedro Ortíz Reinoso, General Manager of Fiducia, on managing regulatory changes, impediments to foreign investment, and asset allocation strategies. What role does Fiducia play in ?]o[^ilÎm×h[h]c[fm_]nil9 Fiducia began its active presence in the financial sector in Ecuador in 1994. Initially, we positioned ourselves as one of the first providers of financial services for real estate projects. Later, we expanded to defeasance trusts, administrative trusts, and then securitization. We created the first securitization system in Ecuador, which consisted of the value of the cash flows resulting from the money spent by foreigners in Ecuador using MasterCard credit cards. MasterCard decided to securitize these flows, and we realized this transaction in 2003. This opened up an expanded method for us to participate in Ecuador’s capital markets. What is your current characterization of Ecuador’s capital markets? From our point of view, in order for Ecuador’s capital markets to play a more significant role in the country’s financial sector, the two sides of the capital markets, the issuers of non-bank securities on one side and the institutional investors that are going to purchase these securities on the other, need to be compatible. Securities being issued need to be designed for the investors who are going to invest in them. Speaking about capital markets in Ecuador, it is important for us to talk about the legal reform that took place in 2012. Until 2012, banking institutions were allowed to own brokerage houses and insurance companies and have fund administrators. In that year, the law that required that any shareholders of banking institutions to divest any ownership of investment or insurance companies was amended. As a result, new Ecuadorean capital markets were born without the participation of commercial banks. Another important factor in Ecuador’s capital markets is the fact that the majority of the country’s pension funds are concentrated in the IESS. This limits the role of pension funds in the country’s capital markets, which presents a challenge for the country, because the existence of institutional investors with a high level of technical capacity is a fundamental factor in the development of capital markets. What is your asset allocation strategy? The portfolio structure of each of our funds depends on the objective of that fund. Currently, the assets in which we have been investing are fundamentally domestic. This is for two reasons; the first is be- cause Ecuador is a dollarized country, which is an important advantage, and the profits from local investments are in US dollars. Secondly, as Ecuador has taxes on foreign capital flows it is more difficult to move money in and out of the country. As a result of these fees, the Ecuadorian dollar is only worth about 95% of the dollar internationally. This means that it makes more sense to invest in Ecuador and keep profits in the country. As a result, this makes foreign investments less competitive because it is more difficult to invest in them and repatriate the profits. This is a secondary factor though. The primary factor is that in Ecuador, there is still a great need for the availability of better financial instruments through the capital markets. This need exists on two fronts. On one side, it is necessary for companies that are looking for long-term financing for new business ventures of the kind that are usually not financed through bank loans. On the other side, the deposit rate that financial institutions are paying for savers is not appealing when inflation is factored in. Have you seen interest in your funds from international investors? Yes, we have hosted institutional investors, who usually manage family wealth funds. It appears to me that they are looking for low-risk funds in emerging markets. They come to us because we administer the only fund in Ecuador that has a risk rating of AAA-. They are looking for good risk ratings and, of course, profitability. Our funds yield such high profitability because they include corporate securities with positive interest rates. In 2003, the company had its ×lmnm_]olcnct[ncih and began its involvement in the capital markets BIO After studying business at the Universidad Tecnología Equinoccial de Quito Ecuador, and marketing [h^×h[h]_[nnb_Chmncnoni Tecnológico Monterrey de México, Pedro Ortíz Reinoso pursued his graduate studies at the Universidad Católica de la Plata, Buenos Aires, and the Universidad Autónoma de Occidente, Cali, Colombia. He later went on to represent Ecuador in the Iberoamericano Congres of Investment Funds in Brazil in 2010, and the Congress of Latin American Trusts in 2011. In a professional capacity, Reinoso has held positions chnb_×_f^mi`]l_^cn& treasury, and investment funds from 1984 to 1999. In addition to a number of other leadership position in Ecuadorean and Latin American associations and committees, Reinoso has served as the director of the Association of Fund Managers and Trustees of Ecuador from 2001 to the present. Since 2002, he has held the position of General Manager of Fiducia. 60 THEBUSINESSYEAR ECUADOR 2014 New regulations introduced in 2011 are still shaping the sector, but growth remains brisk. Review STAY SAFE Low penetration and increasing foreign interest are a recipe for future growth in the insurance sector. INSURANCE THE IMPACT OF REGULATIONS that put an end to bank participation in the insurance sector, opening the floodgates to foreign involvement, is still being felt in Ecuador. Despite the entrance of a number of foreign insurers looking to take advantage of a number of selloffs, the sector remains fragmented; there are 36 insurers and two reinsurers in the country. That said, the trend is toward consolidation in this fast-growing industry, the sector is also helped along by a 75% urbanization rate and rising middle class. Indeed, the insurance sector in Ecuador is the region’s third fastest growing, after Brazil and Peru. In 2012, premiums grew by 9.8%, almost twice the rate of GDP, to reach a value of $1.5 billion. That put the value of the sector at 1.8% of GDP, a figure that remains low compared to Peru’s 4.9% and Colombia’s 6%. And then in 2013, net premiums came in at $1.7 billion, with foreign companies accounting for 35.4%. Foreign firms are certainly raking it in, with the top three—Pichincha, AIG, and ACE— bringing in 58% of the sector’s total net profits of $42 million for the year. According to EIU Viewswire, the industry registered a net outflow of $386.8 million in 2013, including payments to foreign reinsurers. In conversation with TBY, ZHM Seguros Executive President Oscar Zuloaga discussed the rise of foreign insurers; “Before 2011, an estimated 40% of Ecuadorean premiums were in the hands of financial bank-led holdings. Regulations over market power and control came through during that year banning all banking institutions from the ownership of any business aside from the banking business itself,” continuing that then, “a swift sale process began taking shape very quickly, with interest from the big names wanting to come in, either buying in through the acquisition of bank-owned insurers or landing a spot through local privately owned companies at the time when the market would present them with much more attractive conditions and opportunities.” And just like that, big names such as Liberty, Mapfre, and QBE joined the likes of AIG, Generali, and ACE in the sector. From a competitiveness perspective, Zuloaga believes “this trend will continue and… will have a positive impact.” But not everyone shares his sentiment, with Enrique Talbot, Executive President of Vaz Seguros, suggesting that the big foreign players lack that local touch; “The arrival of these companies into the Ecuadorean insurance market has led to a loss in the quality of service and relations between compa- Finance nies and clients. For these large insurance companies, clients are merely statistics. We have the advantage of knowing the particularities of the Ecuadorean market.” But for the smaller player, consolidation is a distinct possibility. According to Gal Semblantes Vorbeck, General Manager of Universal Compañia de Reaseguros, “Ecuador has 38 insurance companies, which is a relatively high number given the size of the market, and this spells tough competition.” Some spectators warn, then, that local companies could be squeezed out amid tough competition, with industry insiders also worried over talk of tighter regulation on premiums and possible caps on executive salaries in the sector, according to EIU Viewswire. In reinsurance, there are two companies at work in the sector, the state-owned Seguros Sucre and Seguros Rocafuerte. They are tasked with ensuring that the entire public sector is insured. Discussing their importance, Juan Ribas Domenech, Chairman of Seguros Sucre and Seguros Rocafuerte, commented that, “all in all, it is important for the government to have a state-owned insurance company in order to protect its vast public structure and insure its properties.” As of end-2013, reinsurance cessions were approximately 50%, a figure that is only just behind the average of 55%-60% in Latin America. But with the two reinsurers in Ecuador ceding much business to reinsurers abroad, a drive is now underway to ensure more retention in the sector and possibly develop a deeper domestic reinsurance business with a view to keeping more dollars at home. According to a new code, the minimum capital for insurers could be increased to $8 million and $13 million for reinsurers. QBE Seguros’ CEO Diego Sosa Villaquirán delved deeper into the matter in an interview; “With motor insurance, for example, business can be retained within the country; THEBUSINESSYEAR 61 DIEGO SOSA VILLAQUIRÁN CEO, QBE Seguros Latin America represents for QBE almost 8% of the group premium, which is hugely relevant. Ecuador is our third-largest operation in the region, although it is obviously a still relatively small one in Latin America. In general terms, we have a leading position here. We are the third largest company in Ecuador. The government operates two insurance companies in Ecuador, Sucre and Rocafuerte, and most government businesses go directly to them. We are the largest multinational company in Ecuador. We are fully aware of our brand, and I believe that our clients perceive us as one of the best options in the market in terms of service, with a good claim payment process. however, this is not the case for insurance related to earthquakes or other disasters,” he said, adding his take on the need, or lack of need, for more reinsurance; “A local catastrophe requires payments from abroad, and I do not agree that establishing reinsurance within the market is necessarily the best idea. We and other multinational companies are offering reinsurance products, meaning we are acting as both insurer or reinsurer.” While it isn’t clear how the sector will look in just a few years, what is clear is that there is plenty of margin for growth. With penetration levels still low, increased foreign interest in the sector will result in stronger awareness and more robust premium offers. The problem of making sure the money stays in the country, however, is the medium-term challenge. 62 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW TBY talks to Juan Ribas Domenech, Chairman Seguros Sucre and Seguros Rocafuerte, on the state of the country’s insurance industry, increasing insurance penetration, and plans for the future. underwriting GROWTH What is required to increase the social penetration of insurance products? What role do Seguros Sucre and Seguros Rocafuerte play in Ecuador’s insurance sector? Today, there are two stateowned insurance companies in the industry, Seguros Sucre and Seguros Rocafuerte, and we both currently work to ensure that the entire public sector is insured. Both companies are led by two highly experienced professionals, who have both worked in the insurance sector for over 25 years. These are two key elements for both the sector and the state. All in all, it is important for the government to have a state-owned insurance company in order to protect its vast public structure and insure its properties. How would you characterize the insurance market in Ecuador? Today, the sector is gaining relevance, experiencing the growth and expansion we all expect. However, Ecuadoreans are not yet fully culturally aware of the importance of insurance coverage. This is something we all need to work on in the industry. At the moment, there are around 40 insurance companies operating in Ecuador, and they will all need to fulfill the requirements of being stronger in terms of capital adequacy and equity, as stipulated by the government. We need high levels of innovation and hard work with products for the mass consumer segment. Also, insurance companies must be creative enough to develop new products and strategies to target alternative market niches. Ecuador lags behind in terms of premium level and share of GDP, or in other words, the penetration of the insurance sector in society, as compared to other regional countries like Colombia, Chile, and Costa Rica is lower. This difference is mainly related to the way each country has developed its insurance industry—Ecuador has definitely not developed its insurance sector as far as the aforementioned countries. Looking forward, what are the greatest challenges facing Ecuador’s insurance industry? We have to be able to increase our penetration, culturally educate people in the importance of insurance products, and also increase our share and role in the national economy. I think the greatest challenge by far is to increase the share of the insurance sector in GDP. However, let me say that over the past few years we have received more foreign investment in the sector—today, numerous multinationals operate in the industry, and I believe we are in the process in which local players must become more competitive to survive and as the level of professionalism increases, so too does the awareness among people of the need for insurance. What is the balance between public and private companies in your client portfolio? Around 80% to 85% of our client portfolio is composed of public entities. In this context, one of our main challenges is to become more competitive and transparent in order to better target the private sector in the near future. 85% of Seguros Sucre’s clients are state-owned companies What are your goals looking ahead? Seguros Sucre is the leading insurance company in Ecuador, whereas Seguros Rocafuerte is among the top 10. Our goal is to consolidate the operations of both companies in order to increase our solidity and reliability, which will enable us to increase our share of the market. Also, we need to increase the number of services offered to our clients. These two elements will enable us to become a more relevant player in the private sector. If we want to increase our reliability in consumer perception, we must become a more transparent company. In this context, we have already taken important steps toward achieving this; we have traveled abroad with our largest clients when negotiating their reinsurance contracts, so they can be part of the entire process, knowing exactly where we stand at each particular moment. BIO Juan Ribas Domenech graduated from the University of Denver with a degree in Economics and started out his professional career at Banco Del J[]c×]i&[m[=iljil[n_ Chp_mng_hnI`×]_l(B_ went on to serve as the Commercial Director for Techniseguros, Regional Deputy for Seguros Equinoccial, Branch Manager and later General Manager for Seguros Unidos, and then as General Manager for Cia. de Seguros Ecuatoriano Suiza, before assuming his current position as Chairman of Seguros Sucre and Seguros Rocafuerte in 2013. Finance THEBUSINESSYEAR 63 INTERVIEW the local HERO What distinguishes ZHM from other providers in Ecuador’s insurance sector? TBY talks to Oscar Zuloaga Ayala, Executive President of ZHM Seguros, on the importance of specialized service, changes in regulation, and consolidation. BIO After studying Law and the Universidad Catolica de Guayaquil, and Television at TCC London, Mr. Ayala worked as Anchorman and News Manager for Ecuavisa. Then, in 1992, he started fundoZHM, a personal insurance brokerage. Throughout his career, Ayala has conducted numerous seminars and training programs. During the administration of President Gustavo Noboa, he served as Minister, and Government Spokesperson before returning to the private sector at the end of the term. Ayala leads a group of professionals based in Guayaquil, Quito, and Cuenca that offer professional consulting and risk analysis services to multinationals and local companies. Since 2000, ZHM Seguros has ranked as one of the 10 largest insurance providers in terms of volume and premiums in the national insurance market. We present an alternative to the larger networks, and place a strong emphasis on personal service and high-quality technical solutions by having a clear understanding of how the global market and the large corporations work from an insurance perspective. We have been able to establish a matrix of service that works well for large- and medium-sized Ecuadorean corporations and at the same time for major international firms. We are brokers for SABMiller, América Móvil, Arca Continental Coca-Cola, and Bimbo among the top Ecuadorean industrial firms. What constitutes good service for an insurance broker? You first have to understand the nature of the business your client is involved in and begin assessing their risk exposure to determine and advise on the required coverage. In our line of business, we have to make sure we are aware and ready for more than meets the eye. Planning for the future is also another key factor to develop value-added partnerships at a whole different level with clients; it’s imperative that we can guide them through mid-term and longterm growth and expansion. Once you understand that, you can start looking for adequate insurance partners to provide them with solutions to their needs. When I speak about service, it is because our clients are accustomed to having close connections with their partners throughout the processes of underwriting policies and claims management when needed. ZHM Seguros is an Ecuadorean insurance broker with a number of major multinational clients measured on premiums per capita. But most importantly it will raise the level of awareness among clients of the true need to count on a professional and specialized perspective for their insurance needs. This situation will also present brokers with a major challenge; to rethink ways to align ever more demanding offers with a new wave of solutions being offered by new players, while maintaining an added value concept for both of them simultaneously. Do you think that is going to lead to consolidation within the rest of the market and among smaller Ecuadorean players? B[mnb_l_]_hnchØori`chn_lh[tional companies into Ecuador changed the insurance sector? Before 2011, an estimated 40% of Ecuadorean premiums were in hands of financial bank-lead holdings. Regulations over market power and control during that year banned all banking institutions from the ownership of any business aside from the banking business itself. A swift sale process began taking shape, with interest from the big names wanting to come in, either buying in through the acquisition of bank-owned insurers or landing a spot through local privately-owned companies at a time when the market would present them with much more attractive conditions and opportunities. As a result, household names like Liberty, Mapfre, and QBE have positioned themselves alongside already established names like AIG, Generali, and ACE. We believe this trend will continue and have a positive impact on competitiveness, the supply of new insurance solutions, it’s penetration We must take into account the previous sale process started back in 2011, and the new regulations in force will require a substantial increase of capital for most companies, and tighter management of assets and reserves. All players will face the added burden of raising their capital adequacy levels and margins, which will undeniably have a negative impact on their profitability and make further consolidation inevitable. Do you consider regulatory reform of the insurance sector to be positive? The new regulations have the virtue of placing more emphasis on the strength and viability of the insurers that will carry on doing business in the next 18 months. But it presents a challenge to the new authority in allowing the companies to continue with sound business practices without overregulation and interference. It’s too early to measure the full impact of the amendments just executed. 64 THEBUSINESSYEAR ECUADOR 2014 VOX POPULI INSURANCE ENRIQUE TALBOT Executive President, Vaz Seguros PREMIUM BONDS RAFAEL MATEUS PONCE General Manager, Seguros Unidos A highly competitive environment means Ecuador’s insurers must always be on their toes. I W e were established in 2002 and are the only company in the insurance sector headquartered in Cuenca. We have offices in Quito, Guayaquil, and Loja, and are set to open operations in Machala. We believe that we must provide the market and consumers with something new; otherwise, there is little chance of surviving the intensely competitive environment. From 2003, we experienced a growth rate of 25%, thus greatly in excess of the 11% insurance market average. personally founded Aseguradora del Sur with several partners, most of whom were from Cuenca, which is why our first registered office was in that city. Later on, I purchased all the shares from the other partners, and I now own 100% of the company. Over the years, the company has set itself apart from the competition thanks to the services it provides to its clients through its 300 brokers. These have a high level of satisfaction and identification with our company, and as a result we enjoy an elevated level of diversification in our business activity. RODRIGO CEVALLOS BREILH Executive President, Aseguradora del Sur W e are a local company ranked among the top 10 in terms of sales, while seven of those 10 companies are multinationals. We are one of the most financially solid and consolidated companies in the industry. Also, we have the structural support of over 110 companies—those belonging to Grupo Eljuri. The growth and expansion of Grupo Eljuri has fueled our company over the past few years, and we have basically grown in step. In this context, the automotive industry deserves a special mention. Grupo Eljuri has a strong market share in this industry, thanks to which we have been ranked among the leading companies for vehicle insurance. GALO SEMBLANTES VORBECK General Manager, Universal Compañía de Reaseguros A s a local reinsurance company, Universal is a very small operation compared to the international reinsurance entities, although we believe that we help the local market to solve certain capacity problems. For example, certain large reinsurers request a minimum premium, which could be between $10,000 and $15,000 depending on the company, and that means that if a certain business isn’t going to produce that minimum premium for the reinsurer they are not going to settle it. THEBUSINESSYEAR 65 68 73 79 The Minister of Non-‐Renewable Natural Resources on the restructuring of national oil companies. With over $9 billion in Chinese loans, the Pacific Refinery has widespread political and economic implications. The Minister of Electricity and Renewable Energy on the energy matrix, power consumption, and the use of renewables. Energy REVIEW With crude oil representing over half of Ecuadorean exports, the sector remains a major source of state revenue, while new facilities are set to supply domestic demand. COUNTING OUT CRUDE E cuador is an oil producing country, though its electricity requirements are not met by domestic production. Approximately three-quarters of its electricity is supplied by imported petroleum derivatives, with the remainder covered by renewable sources such as hydropower. The country’s petroleum refining segment, while presently insufficient, is being dramatically expanded. Currently it is spread across its Esmereldas, La Libertad, and Shushufindi refineries, at a total capacity of 176,000 bbl/d, and operated by state-owned company Petroecuador. Its extraction activities are managed by Petroamazonas, again a government-controlled firm. Ecuador’s proven oil reserves are in the region of 8 billion barrels. In 2012, Ecuador produced 18.26 bcf of natural gas for domestic consumption. After a decade and a half break, Ecuador rejoined the Organization of the Petroleum Exporting Countries (OPEC) in 2007, and currently Image: Petroecuador Refinery capacity in Ecuador is set to jump to 500,000 bpd in 2017 when the Pacific Refinery comes online. About 45% of the new capacity will supply the domestic market with transportation fuels and petrochemical feedstock. stands as its smallest member. Under its relatively small territory lies considerable reserves of oil and gas, though much of this has not yet been exploited. The country produces approximately 500,000 bbl/d, and crude petroleum makes up 50% of exports. In 2012, revenue generated by the trading of this commodity, primarily with the west coast of the US, reached $12.7 billion, while refined petroleum represented just a fraction of this at $960 million. This relatively low level of production makes it the fifth largest producer in Latin America; however, the income garnered from its sale has funded much of the present administration’s political activities and improved the lives of many Ecuadoreans through the construction of new infrastructure and social facilities. With a 2014 budget of $34.3 billion, a government price of around $86 per barrel was set. Since 2010, when the Correa administration renegotiated hydrocarbon contracts with the 17 firms that were present ECUADOR 2014 Source: OPEC 16 14 12 10 8 6 4 2 2013 2012 2010 2011 0 Wells Completed 350 300 250 200 150 100 50 2012 2013 2012 2013 2011 0 Producing Wells Source: OPEC 3500 3250 3000 2750 2500 2011 billion expected to follow. This financing will go towards the construction of the refinery, which is expected to cost around $13 billion upon completion in 2017. In return, China is guaranteed preferential sales of Ecuadorean petrochemical products and partial ownership. As part of the financing deal, the China National Petroleum Corp. will take a 30% stake in the refinery, and Petróleos de Venezuela will reduce its stake to 19% from 49%. Petroecuador will retain its 51% controlling stake. Upon the completion of the Pacific Refinery, Ecuador’s total refining capacity will reach approximately 500,000 bbl/d. Around 45% of this output is expected to supply the domestic market with petrochemical feedstock and transportation fuels, and the remainder will be absorbed by China. TRANSPORT OPTIONS Source: OPEC 2010 The Pacific Refinery, targeted for completion in 2017, should correct Ecuador’s reliance on imported petroleum derivatives, and reposition the country as a supplier of petrochemical products, rather than a consumer. The Pacific Refinery is expected to process 300,000 bbl/d at maximum capacity. Whereas the country historically imported more complex petroleum products, the Pacific Refinery will allow it to sell to China, and process a significant part of Venezuela’s crude output from the Orinco Oil Belt. Under this scenario, Ecuador will add value to its economy, while simultaneously reducing its trade deficit. Rather than selling crude, the refinery will process crude into petroleum derivatives including high and low octane fuels, diesel, lubricants, polypropylene, benzene, xylene, and ethanol. The refinery will come at a cost however. A group of Chinese banks, led by the Industrial & Commercial Bank of China disbursed $2 billion in loans in mid-2014, with another $7 Value of Petroleum Exports (in Thousand USD Millions) 2010 REFINED TASTES With a 2014 budget of $34.3 billion, a government price of around $86 per barrel was set. 2009 in the country, a profit limit of $32 a barrel has been in place. Though this initially discouraged operators, the majority have remained, accepting the state’s policy of resource nationalism and the full sovereignty of the state over national resources. However, the gradual diminishing of the reserves being processed has necessitated a search for other forms of revenue, and Ecuador’s return to international bond markets. For the energy sector, this has led to an expanded exploration in more remote provinces for their untapped potential, and the pursuit of advanced technologies to bolster the refining segment. In the regions of Morona Santiago and Pastaza in the heavily forested southeast of the country, areas have been designated for exploration, while substantial reserves are present in the Ishpingo-Tambococha-Tiputini (ITT) fields in Yasuní National Park, an estimated 900 million barrels of oil. However, the exploitation of many of these new areas is fraught with difficulties concerning the protection of the environment and the various indigenous communities scattered throughout the area. Far from insensitive to the issue, the government in fact imposed a ban on extraction and exploration in the area during its first six years in power. In 3Q2013, this was overturned, and efforts are being undertaken to minimize any potential environmental impact from the new search for reserves. Nonetheless, the situation has triggered protests in support of the local populations who argue that they receive too little in exchange for the construction of processing facilities on their land. 2009 THEBUSINESSYEAR 2009 66 The national pipeline infrastructure has for a long time been working at full capacity. The OCP pipeline transports crude oil from the northeast of the country to the Esmereldas refinery and port, and is the primary link from the interior to the coast. Completed in 2003 after four years of work, it transformed the segment by facilitating the movement of heavy crude oil. For now, petroleum products imported from abroad meet the bulk of domestic energy demand. Hydroelectric generation represents over half of national energy production, though this is still far from sufficient. Ultimately, hydroelectric power is envisaged to account for 90% of electricity produced nationally within the current administration’s term. Blessed with over 2,000 rivers or waterways starting in its high-altitude mountain ranges, Ecuador has long been seeking to exploit its topography to generate low-cost, non-polluting energy sources. Of the facilities in operation at present, the largest is the 1.1GW Paute-Molino plant. This will be overtaken by the Coca Codo Sinclair plant, which has been under construction since 2010. Though initially proposed decades ago, the project is seen as a clear success of Correa’s government. At a cost of $2.6 billion, the project is expected to be complete by 2016, and will add an additional 1.5 GW of Energy capacity to the current 5.3 GW. Eight other hydropower projects are in progress at present. Coca Codo is representative of the influence of foreign capital—particularly from China—in the Ecuadorean energy sector. Since the 2008 global financial crisis, the government had limited options for accessing foreign capital, and eventually accepted heavy investment from across the Pacific. Though Cocasinclair EP is a fully state-owned company, the project is funded primarily by the Export-Import Bank of China. Also, its engineering, construction, and procurement (EPC) contract is mainly the business of Sinohydro, a Chinese corporation, while additional Chinese firms and companies from Mexico and Ecuador control other contracting interests. Most crude petroleum shipped from Esmereldas and Guayaquil is sold to Petrochina. However, Russia also has considerable interest in the energy sector, with state-giants Gazprom and Rosneft conducting business directly with Petroamazonas. An announcement in late 2013 confirmed that Gazprom will invest $1.5 billion into energy projects. THEBUSINESSYEAR 67 MAURICIO ZANELLA General Manager, Poweron Approximately 60% of our clients are in the oil and gas, and mining sectors. We run the power for our customer’s operations in different applications in almost all industries. In the Amazon and coastal regions of the country, where the oil and gas sector is focused, we have to keep our operations safe and clean developing environmental and socially responsible solutions to run our power, so we have carried out new technologies in our equipment that our customers value. We combine experience, human talent expertise, leading-edge technology, and innovative design that become in costeffective solutions for our customers. 68 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW GAS master TBY talks to HE Pedro Merizalde Pavón, Minister of Non-‐Renewable Natural Resources, on the production matrix and national oil companies. What role can the Ministry play in the transformation of the production matrix in Ecuador? We have many opportunities to play a key role; for example, the generation of electricity with natural gas. Ecuador has reserves of up to 60 million cubic feet of natural gas. Natural gas is also expected to play a key role in boosting the development of the local pottery industry, which is internationally competitive. The Ecuadorean government is also developing the Pacific Refinery, an infrastructure project set to drive growth in the petrochemical sector. These two segments, along with oil and mining are our main contribution to the transformation of the productive matrix. The main focus of our Ministry and the government will be in the generation of electric energy and the refinery project. Qb[ncmnb_cgjiln[h]_i`nb_J[]c×]L_×h_lsjlidect for the country? BIO Prior to his current role as Minister of Non-Renewable Natural Resources, Pedro Merizalde Pavón, worked as General Manager of L_×h_l[^_fJ[]×]i?fis Alfaro RDP-CEM. His educational background is in energy and management, having studied Petroleum Engineering at the Universidad Central in Quito, and later completing an MBA at the Escuela Politécnia del Ejército. He has extensive expertise in the management of engineering and construction projects. The Pacific Refinery will help to meet domestic demand for oil and diesel products in Ecuador. At the moment, we import about 40% of these products. The refinery will enable us to produce these products, reduce our imports, and use our resources more efficiently. The refinery also means that $5 trillion of natural resources will stay in our country, while increasing the export profile of Ecuador, which will make us a leading regional exporter. This project sets Ecuador on the path to energy independence. We have located and cleared the area and began building key infrastructure projects related to the refinery. The aqueduct, which will provide the refinery with water, will be completed in late 2014, and the design of equipment to be installed is also completed. What is the potential of Ecuador to develop a competitive petrochemical industry as a result of the l_×h_lsjlid_]n9 The development of a vibrant petrochemical sector is the main objective of the Pacific Refinery project, and we will progressively add prod- ucts to our portfolio as we expand. We are able to offer and provide foreign investors with raw materials for the manufacture of their products, industrial facilities for operations, fiscal and legal incentives, and basic services. How can the restructuring of Petroamazonas and Petroecuador increase the competitive level and _`×]c_h]si`nbim_nqi]igj[hc_m9 Petroamazonas and Petroecuador were restructured to be more efficient, as the two were involved in similar activities. Now, exploration and production is handled exclusively by Petroamazonas. This decision has already created positive results. For example, in early 2013, we produced an average of 505,000 barrels per day (bbl/d). In late 2013, production had increased to an average of 550,000 bbl/d. This growth is the result of the introduction of new technologies by Petroamazonas and increased investment in its workforce. Meanwhile, Petroecuador now manages refineries, transportation, distribution, and marketing. This restructuring has allowed the two companies to specialize, and has strengthened its business profile and efficiency. What are the challenges facing the oil and gas ch^omnlschn_lgmi`nb_mojjfsi`bcabfsko[fc×_^ human resources? The development of human resources is a high priority for the sector. We have established strategic partnerships with leading universities to build bridges between industry and higher education in the preparation and training of future technical workers for our country. We estimate that when the Pacific Refinery is fully operational, it will employ more than 22,000 people at its facilities, which means we will need many more skilled workers in Ecuador. We have also conducted research with international experts to predict future developments in the petrochemical sector, allowing us to properly develop and train our workforce for the future. Energy THEBUSINESSYEAR 69 The government is promoting exploration for new energy deposits What are some of the main measures implemented by the Ministry to protect the environment in some of the most controversial projects? In your opinion, do regulatory reforms adopted in 2013 in the mining industry in Ecuador make the industry attractive to investors? We conduct exploration and production in line with international environmental standards. We also collaborate with international experts to reduce the environmental impact even further. For example, we give priority to the construction of underground pipes and secure platforms. All infrastructure projects are also built according to the standards set by the Ministry of Environment. When it comes to the construction of offshore platforms, we build according to strict international requirements. We also use very strict processes for disposal and recycling, which removes all contaminated elements from the production centers to areas where they are treated and safely recycled. Finally, we also seek technical advice from biologists, zoologists, and other specialists in flora and fauna, in order to protect ecosystems around the areas in which we produce. We are still working on the full implementation of these amendments, but in the last couple of years we have built bridges with the private sector and the mining industry. At the moment, there are two Chinese companies operating in Ecuador, which have had a very active role in conducting research on the profitability and feasibility of developing large copper mining projects in Ecuador. We should note that large mining projects require long-term vision. Large investments are required, and the return is often realized only after 10 or 15 years. Mining is an attractive sector in Ecuador today, but there are some segments that require large investments that have adopted regulatory changes to ensure that the sector realizes its potential. What are some of the main advantages of Ecuador’s barrel system tariff for investors? We have a very attractive investment structure where the government recognizes the return on investment made by the companies, plus interest, and the costs of operation. This has generated a lot of interest from overseas, and we have a waiting list that includes companies from around the world. We provide these incentives in the context of a stable business environment, and the strengthening of our political and legal framework. Ecuador has areas of high development potential in the near future, and the arrival of even more international investors is expected. What are some of your main priorities as Minister for the next few years? One of my priorities is to promote exploration in southeastern Ecuador, and to better identify the resources available there, especially hydrocarbons. We must also continue to develop existing mining projects and boost exploration activities along the Andes. While countries like Chile, Peru, and Colombia have active copper mines, Ecuador does not have them. The same applies to the gold mining industry. These are all areas that require greater investment. We plan to conduct research along the Andes to establish the true potential of the area, and we will use this data to attract foreign investors to Ecuador, a country that enjoys political and economic stability, and where a legal framework has been established. IN NUMBERS Non-‐Renewable Natural Resources Average oil production in late 2013 550k BBL/D Estimated number of qile_lm[nnb_J[]c×] L_×h_ls 22k 70 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW full BURN What is the importance of the Secretary of Hydrocarbons in the oil and gas sector of Ecuador and in the broader economy? In 2010 a legal reform was introduced that brought about a significant change in Ecuador’s hydrocarbons sector, particularly regarding its structure. Since then we have been a dedicated agency removed from the operational component of the business, and responsible for overseeing the sector, as well as awarding and managing oil contracts. This marks a key improvement by introducing a climate of impartiality, and has importantly provided comprehensive legal security for investors. What is the advantage of the tariff per barrel system that Ecuador uses today? The tariff per barrel system is based on a service contract, and has replaced the production-sharing contract. Given Ecuador’s circumstances, namely its reliance on oil income, it has secured civil control over oil income. Today, all oil is owned and managed by Ecuador, whereby what benefits the industry benefits the country at large. However, there is some misunderstanding. It is believed that production-sharing contracts are attractive for the oil companies. I always invite them to consider the real economic model, which proves much more profitable. Oil companies in that system are gaining more than they would have previously in a deal where they assume no risk given the nature of a service contract. We need to better communicate precisely how the system actually works to their advantage. TBY talks to Yvonne Fabara Arias, Secretary of Hydrocarbons, on the energy production matrix, the domestic tariff system, and Ecuador as a destination for international investors. BIO Yvonne Fabara Arias graduated in Social and Political Sciences and has a dichn^_al__`ligJihnc×]c[ Universidad Católica del Ecuador. She obtained a Master’s of Science from the London School of Economics and a diploma in International Law from the Sociedad de Estudios Internacionales (SEI) in Madrid. Since then she has aquired 25 years of oil and gas industry experience in Ecuadorean and foreign companies. Among others, she has advised the Minister of Non-Renewable Natural Resources of Ecuador and participated in the construction, operation, maintenance, and management of major oil infrastructure projects such as Oleoducto de Crudos Pesados, Villano project, Poliductos de la Costa, Papallacta potable q[n_ljlid_]n&[h^L_×h_l[ ^_fJ[]×]i&[gihainb_lm( She is a member of the Association of International Petroleum Negotiators (AIPN). Is it an incentive to increase production? Will there be production sharing in the contract? Not really, because the economic model is based on free cash flow. It is the production model itself that generates the income to meet required investments. The fundamental difference with the production sharing contracts is that the oil companies obviously have ownership over the oil they produce. Now however, they make no investments and provide a service throughout the lifespan of the contract. They have special terms for producing particular oil products, such as enhanced oil recovery. In my view, it is in the interest of the country, and as such has been a political decision. What is the case for developing the Yasuní-ITT Field, and can it be done without an environmental impact? I think it can. The field is located in one of the regions of greatest biodiversity in the world. It has to be preserved for humanity. These are the values that Ecuador has to respect. The government has done its best to do so. Unfortunately, we were unable to receive the compensation that Ecuador required to avoid exploiting its resources. It might be controversial, but, obviously, the government has obtained authorization from the legislative body. There is a commitment that we have to assure. The operatorship will be on behalf of the government of Ecuador through its public companies. They will be overseen and the works will comply with all the requirements to preserve the environment. Ecuador absolutely needs the resources of this field, but must develop it responsibly. The Secretary of Hydrocarbons (SHE) was created in 2010 How important is the developg_hn i` nb_ J[]c×] L_×h_ls `il Ecuador? We are building a new refinery not only for local consumption, or for export, but moreover, for a petrochemical complex that will change the entire local production chain. The other refineries in Ecuador were built 40 years ago and are costly to maintain and less than reliable. Without its own refinery, Ecuador is destined to remain dependent on the import of fuel from the international market. Having a refinery is therefore fundamental to national security, as the basic component of a major change in our production matrix. What makes Ecuador an attractive destination for international investors? In comparison with certain other countries, Ecuador provides a more secure geological environment. This means that while we have the resources there is less associated risk in exploiting them. Potential investors examining the contract system in Ecuador will surely find the sector a tempting business proposition. Moreover, we now have in place an independent agency tasked with working closely with investors, and dedicated to the signing of fruitful deals. Energy THEBUSINESSYEAR 71 INTERVIEW ENERGIZING the nation TBY talks to Marco Gustavo Calvopiña Vega, General Manager of Petroecuador, on transforming the production matrix, recent restructuring, and alternative fuels. BIO Marco Gustavo Calvopiña Vega is a chemical engineer, with special expertise in l_×hcha(B_al[^o[n_^ from the Universidad Central del Ecuador, and went on to complete a Master’s degree in Business Administration with a `i]omih×h[h]_&[nnb_ Instituto Centroamericano de Administración de Empresas (INCAE) in Costa Rica. He has held a number of management and technical positions in the petroleum industry, including periods as General Vice-President of Petroecuador, Head of Production at the Mbombo×h^cCh^omnlc[f Complex, Assistant Manager of Operations for Petroindustrial, and Manager of Petrocomercial. He has offered consultancy services to the Ministry of Non-Renewable Natural Resources, the Presidency, and the Directorate of Petroecuador. In addition, he has been involved in major projects such as the ]ihmnlo]ncihi`nb_J[]×]i [h^;g[tih[ml_×h_lc_m( Petroecuador is the public company responsible for Ecuador's downstream petroleum sector What is the role of Petroecuador in Ecuador’s efforts to transform the energy and production matrices? We play a key role within the energy sector, as part of the decision-making process, and we provide advice on the business to the public authorities. Ecuador currently imports large volumes of diesel for power generation. Once projects like the Pacific Refinery, in which we also play a substantial role, are on course, Ecuador will become self-sufficient in diesel for its industrial needs. We are also involved in efforts to change consumption patterns in terms of electricity and gas, areas in which Petroecuador also has several projects. We also have close ties with other economic sectors to better assess their fuel needs. Petroecuador not only produces fuels, but also many other products such as asphalt, an essential element in the large infrastructure projects the country is set to implement. Again, we have close ties with public authorities and the relevant ministries in order to better orientate our projects and business activity toward the main objectives of the government. What analysis has the company made in terms of producing and marketing alternative fuels such as ethanol and biodiesel? We have conducted technical analyses and studies in order to start biodiesel production. Technically speaking, we are ready to produce biodiesel, but this is not a decision we can take unilaterally, as it also requires infrastructure such as service stations, and the vehicles need to be prepared for this type of fuel. Currently, Ecuador produces palm oil, which is transformed into biodiesel, and so far there is just one biodiesel producer in the country. However, a tariff scheme has to be set up. In the meantime, we already produce several types of fuel such as fuel with ethanol. Over the final months of 2014, we will be providing this type of fuel to all of the Guayaquil city area and we plan to expand nationwide. I should also note that for us to fully cover the Ecuadorean territory with such fuels, we require substantial sugar cane production. How has the restructuring of Petroecuador made the compahsgil__`×]c_hn9 This restructuring, which also involved Petroamazonas, took place a year and a half ago. It has been a positive decision for both companies. Before, there were two companies engaging in duplicate activities: production and exploration. The restructuring implied greater efficiency and more synergies. Petroamazonas has increased production and we have a stronger focus on the activities we do, namely, refining, logistics, distribution, and supply of hydrocarbons. Biq cgjiln[hn cm nb_ J[]c×] L_×h_lsjlid_]n`ilnb_h[ncih[f economy? Ecuador produces 550,000 bbl/d of crude oil and the national refining capacity only reaches 175,000 bbl/d. The remaining production is exported, and we import industrialized products such as diesel, gasoline, and LPG. One should bear in mind that the gap between exported oil and imported products is significant. We have a strong dependence on fuel imports. The Pacific Refinery will redress this situation, augmenting the economy and boosting development of the whole country. This refinery will also help us to improve the quality of our fuels. It should become fully operative within five years, as key steps have been taken over the past few months. Our company and the country itself are making large investments in infrastructure and other projects such as the storage and transporting of LPG. We also have ambitious projects regarding the storage and handling of diesel and gasoline, as well as petrochemicals, including several key pipelines and oil distribution centers. We have invested in the latter areas over the past few years to make our infrastructure more efficient. We are also modernizing and making much more efficient use of infrastructure at the Esmeraldas Refinery. At this facility investment is exceeding $1 billion. 72 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW energetic remedies What differentiates Sertecpet in an industry dominated by foreign players? TBY talks to Eduardo López Robayo, President & CEO of Sertecpet, on the challenges of being internationally competitive, and demonstrating Ecuadorean expertise. BIO Eduardo López Robayo holds a Bachelor’s degree in Commercial Engineering from Javeriana University of Ecuador. He also graduated in Geology, Mining, Petroleum, and the Environment from the Department of Engineering at the Central University of Ecuador, and studied Management in Petroleum Negotiations. A prestigious ][l__lchbcm×_f^b[m included representing the Presidency of the Republic of Ecuador during liaison with PETROECUADOR in 2003 and being a Presidential Advisor in Petroleum matters in 2004. In the same year he became Minister of Energy and Mines of the Republic of Ecuador, where his tenure ran until 2005. He was appointed to his current post of International CEO and President of Sertecpet Holdings S.A. Ecuador, in 2010. Sertecpet’s principle characteristic over its 23 years of history is innovation; we have developed technologies and services that are patented and internationally certified. Additionally, the value our company generates with its products and services allows us to stand apart. Our integrated solutions are efficient and profitable, and today our clients consider us partners, rather than contractors. These features have enabled us to internationalize our services and products, and are the basis of our success. What challenges have you faced as an Ecuadorean business expanding internationally? Our company has operated in the industry for the past 23 years; however, the real technological and innovative development of Sertecpet has taken place over the past 14 years. It is not easy for a company from a small country to sell its products and services abroad, especially in our industry, which hosts large and highly experienced players. Our company has lowered these barriers, confirming that not only large countries and multinationals create technology and generate value-added for other companies. We have demonstrated that Ecuadorean expertise is as valuable as any other, registering our own R&D advances. We have always had a clear market niche; mature and low production oil fields, where our solutions boost efficiency and competitiveness. For example, we have taken 15 closed fields from PEMEX to a current production level of around 6,700 bbl/day. Initially, we focused our strategic plan on the Middle East, but socio-political turbulence prompted a shift to the American continent, today our key focus. Our aim is to consolidate regional operations from Alaska to Patagonia by 2020. We also plan to widen our area of activity to both non-renewable and renewable energy. Overall, we have a more global and integrated strategic plan for the near future based, again, on our know-how, technologies, and capacity to reach new levels. How can Ecuador sustain its impressive social and economic development? I believe that the public and private sectors, as well as the education sector—with emphasis on tertiary education—should together analyze national needs for the public good. I think this is essential to achieving the much desired change in the production matrix—establishing the role of each sector in the process. Sertecpet is an exemplar in terms of commitment to R&D and innovation, underpinned by an Ecuadorean workforce and registering great success abroad. Today, we are talking about an organization of 1,800 staff, which makes a tangible economic contribution. Sertecpet is an Ecuadorean oil and gas technology company present in 19 countries What is your outlook for the energy sector? Ecuador has a suitable regulatory framework and the resources to boost the development of solar energy projects over the coming years; it also has the potential to double current production figures, and will increase hydro-electric energy generation in the short term through ongoing projects. Overall, the country is well placed to become a regional energy exporter. Ongoing energy projects will reduce costs and boost industrial competitiveness. In this context, Sertecpet has quite a role to play in Ecuador, but also regionally. We will continue investing in R&D and rely on innovation to generate value-added, forging strategic alliances with local and foreign players, and contributing to the development of Ecuador and any other market we operate in. Having said that, our goal is to consolidate our activities on the entire American continent, requiring important changes to include corporate governance and listing requirements. Energy THEBUSINESSYEAR 73 REFINERY OF THE PACIFIC FOCUS CHINA’S EMERGENCE as the largest outside investor in Ecuador’s oil sector has positive and negative implications. A group of Chinese banks, led by the Industrial and Commercial Bank of China disbursed $2 billion in loans in mid-2014, with another $7 billion expected to follow. These loans will go towards the construction of the Pacific Refinery, which is expected to cost around $13 billion upon completion in 2017. The size of the current deal is a dramatic increase from the initial projections of $5 billion that President Correa put forth in 2007. Oil is Ecuador’s main export, and revenues from oil sales finance about 35% of government spending. As part of the financing deal, China National Petroleum Corp. will assume a 30% stake in the project, and Petróleos de Venezuela will reduce its holding to 19% from 49%. Petroecuador will retain a 51% stake. However, the ecological implications of the deal have alarmed activists who have warned that Chinese funding is linked to extraction from the Ishpingo, Tambococha, and Tiputini Fields under the Yasuni National Park. Upon completion, the Pacific Refinery is expected to process 300,000 barrels per day (bbl/d), as well as Venezuelan oil from the Orinoco Oil Belt, or around 16% of Venezuelan crude output. Plans are to use 17% Orient crude, 66.5% Napo crude, and 16.5% Venezuelan crude; however, Venezuelan crude could increase if necessary. The refinery, located in Manabí, takes up 500 hectares, in addition to a buffer zone of 3,300 hectares that surrounds the refinery. Currently, Ecuador spends around $3 billion a year importing oil-derived products despite the fact that it is an oil producing country. The facility will change this by processing crude oil into petroleum derivatives including high and low octane fuels, diesel, lubricants, polypropylene, benzene, xylene, and alcohol. The refinery is also expected to employ 1,300 workers when it comes online, not to mention the 20,000 workers involved in the construction of the plant. With over $9 billion in Chinese loans, the Pacific Refinery has widespread political and economic implications. WHAT LIES BENEATH As part of the ×h[h]cha^_[f&=bch[ National Petroleum Corp. will assume a 30% stake in the project, and Petróleos de Venezuela will reduce its holding to 19% from 49%. The Pacific Refinery will replace the Esmeraldas Refinery as the largest refinery in the country. The Esmeraldas Refinery has a 110,000 bb/d capacity. The refinery also recently underwent an overhaul, including a renovation to achieve greater energy efficiency, at a cost of $750 million, as well as an upgrade using high-quality, low-sulfur content products, at a price tag of $600 million. While the refinery will eliminate Ecuador’s reliance on imported oil-derived products, observers worry that the financing deal will increase the country’s reliance on a single creditor. The deal requires that the bulk of Ecuador’s output be sold to China, which reduces the maneuvering options of Ecuador in the event of a decrease in oil prices, or a downturn in the Chinese economy. Others point to the link between the financing deal, and decisions to exploit highly sensitive ecological areas. And while the Chinese stress their commitment to harmonious development of the local economy, environment, and community when operating abroad, environmentalists are not convinced. In addition the region is home to two indigenous groups that live in voluntary isolation, which raises concerns about disruption by operations. Ultimately, Ecuador’s options were limited given the size of funding required. Bismarck Andrade, the General Manager of the refinery assured TBY that Ecuador has strict environmental regulations in place to prevent the kind of degradation that worries environmentalists. In addition, close attention from environmentalists should help keep the industry in check. Following the completion of the Pacific Refinery, and other upgrade projects under way at the country’s other refineries, Ecuador’s total refining capacity will reach approximately 500,000 bbl/d. Around 45% of this output is expected to supply the domestic market with transportation fuels and petrochemical feedstock, and China will absorb most of the remainder. 74 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW black GOLD TBY talks to Bismarck Andrade González, General Manager of Refinería del Pacífico on the developing petrochemical industry in Ecuador, and the importance of the sector for both local and national development. What would you say is the importance of the Pa]c×]L_×h_ls[m[jlid_]n`il?]o[^ilÎm_]ihigs9 The Pacific Refinery is the largest project in the history of Ecuador. The purpose of it is to meet the internal demand for hydrocarbons in Ecuador and export the extra. By doing this, the country will be saving over $4 billion that it now has to spend or invest in the importation of these products. The refinery will also provide some basic petrochemicals, which will trigger the development of the petrochemical industry in Ecuador, contributing through this aspect of the project to a change in the productive matrix. The petrochemicals scheduled for production around the refinery will be vital for the national economy. We are also constructing a modern school for the neighboring community of El Aromo. We have thus far invested over $13 million, and have committed around $40 million mj_]c×][ffs`ilnb_j_ijf_[lioh^ nb_J[]c×]L_×h_ls(?hpclihg_hn[f regulations in Ecuador are stringent and we have all the requisite licenses already in hand. $10 billion. We are now working on the preparation of the shareholder’s agreement, which will be Petroecuador with a 51% stake, CNPC with 30%, and PDVSA with 19%. What is the current timeline for project completion? In June of 2013, a framework agreement was signed between the government of Ecuador and China National Petroleum Corporation (CNPC), one of China’s largest oil concerns, and the Industrial and Commercial Bank of China (ICBC), the largest bank in China and one of the most important worldwide. This framework agreement indicates that the refinery was originally set for the production of 300,000 barrels per day (bbl/d), and is to be constructed in two phases: one of 200,000 bbl/d and one of 100 000 bbl/d. A feasibility study has already been conducted for the 200 000 bbl/d phase. At the moment, we are at the final stages of concluding the financing for 70% of the project cost with ICBC. The project is estimated to cost around What makes Chinese companies sound partners in this venture? The Chinese were willing to finance a project on this scale. Another important consideration was that the refinery specifications are internationally compatible with specific nations, and the licenses for the refinery are all American or European. Therefore, the refinery will be constructed with cutting-edge technologies. We will produce products that meet strict Euro 5 specifications. We will also contribute to the welfare of the people around the project because with the construction of the refinery, at the peak of construction we will employ over 20,000 workers. With the operation of the refinery we will employ around 1,300 workers. BIO Bismarck Andrade González studied at the Faculty of Distillation, M_j[l[ncih&[h^L_×h_ls Technology in the Institute of Petroleum, Gas, and Geology in Bucharest, Romania. In addition, he received a Bachelor’s degree from the University of nb_J[]c×]ch=[fc`ilhc[&OM( Following studies, he went on to represent Ecuador in the Economic Commission of OPEC in Vienna and to work for the Corporación Estatal Petrolera Ecuatoriana (CEPE). Later, he held positions with Petroecuador as Manager of International Trade, and with the Ministry of Energy and Mines in an advisory role. Most recently, he has worked as International Director of the Ministry of Non-Renewable Natural Resources, and as Technical Manager i`nb_J[]c×]L_×h_ls?fis Alfaro RDP-CEM. Energy Biq^isiom__nb_l_×h_ls^_p_fijchanb_j_nrochemical industry in Ecuador? We will be providing the basic petrochemicals. Around the refinery, the government is implementing a Special Development and Economic Zone with the aim of attracting national and international companies to develop petrochemicals and pharmaceuticals. This will take the form of an industrial park, and the setting will provide the basic supplies for these companies, such as water and telephone communications. Companies will benefit from tax exemptions and ultimately the city of Manta and the province of Manabí will get a lot from this project. With $40 million commited to mi]c[fjlid_]nm&nb_l_×h_lscm changing local communities What is being done to meet the human capital challenge that comes with developing such a high-technology project? This is something that we have to do as the project leaders. We have to establish the workforce, by talking to the universities, firstly the local institutions, and then on a national level to source the skilled workers that will ultimately operate the refinery. We still have time for this, and are already taking care of the matter. The petrochemicals produced at nb_l_×h_lsqcff\_]lo]c[f`ilnb_ national economy Biqqcffnb_l_×h_ls]ihnlc\on_nifi][f^_p_fijment in Manabí? We have been working solidly toward this, investing in social projects related to the refinery with the local communities. We have already supplied potable water to some of these communities, and are in the process of finalizing two health centers. We are also constructing a modern school for the neighboring community of El Aromo. We have thus far invested over $13 million, and have committed around $40 million specifically for the people around the Pacific Refinery. Environmental regulations in Ecuador are stringent and we have all the requisite licenses already in hand. We are diligently implementing the terms of the license. THEBUSINESSYEAR 75 Jlid_]n_^ capacity of 300,000 bbl/d Ni_gjfisip_l 20,000 workers in construction and 1,300 workers during operation Jlid_]ncm jointly run by Petroecuador, CNPC, and PDVSA 76 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW TBY talks to Danilo Diego X. Moreno Oleas, General Manager of EP FLOPEC on the strategic role of hydrocarbons, international expansion, and transforming Ecuador’s energy matrix. national TREASURE BIO How has EP FLOPEC’s role in the economy developed over the years? EP FLOPEC has transported hydrocarbons overseas to and from Ecuador. Considering that Ecuador’s key export product is petroleum, EP FLOPEC has an important role in that strategic sector. At the beginning, we ensured that the oil shipping companies fulfiled the Ecuadorean regulations by controlling the suitability and technical conditions of the vessels. Subsequently, we were granted the exclusive right to transport hydrocarbons to and from Ecuador. In the Pacific, Ecuador is the largest petroleum producer exporting mainly to the Americas, but also to Asia and Europe. EP FLOPEC has expanded over the years to keep up with Ecuadorean petroleum production, purchasing and leasing additional vessels. In accordance with our strategic planning, EP FLOPEC has taken responsibility for 100% of hydrocarbons transportation, both in terms of exports and imports, until 2017. One of the major consequences of this has been the need to grow the fleet; therefore, EP FLOPEC continues in the process of developing commercial agreements with other companies to expand the capacity and efficiency of the company. Often, our ships make the return journey to Ecuador empty, and so today to ramp up efficiency we are combining the cargoes of various companies. Danilo Diego X. Moreno Oleas studied business administration and economic science in Marseille and Nice, France, before going on to complete studies at the Universidad Católica del Ecuador. In addition, he earned an MBA in Business Administration with a major in Finance from the University of San Diego. Following this, he held a range of ×h[h]c[f[h^g[h[a_lcal positions throughout the 1990s for a range of companies, including Cigna International Insurance Company, Ecuasanitas SA, and UNICEF. From 2000 to 2005, he worked as a consultant with the UN Development Programme (UNDP) and for various oth_ljo\fc][h^jlcp[n_×lgm( Prior to his current position, he served as General Manager of Jardines Santa Fe in Mexico and then Cementos Chimborazo in Ecuador. How do you see the company developing looking ahead? EP FLOPEC’s main responsibility is to transport 100% of Ecuador’s crude exports, as well as its imports of refined petroleum products. As new projects occur a potential market is in process to transport clean petroleum products into Ecuador. EP FLOPEC is open to participate in other sectors too, for example when the mining industry begins to expand in Ecuador, we can also transport mining products. Actually, EP FLOPEC increased its participation in the regional market, not only with Ecuadorean products, but also with those of the region. The goal is to have a strong position in that market in the coming years. Currently, we already operate mainly in Panama, the US, Chile, Peru, and Colombia. Those countries require maritime transportation in tankers, so we are looking to reach an agreement to undertake this on their behalf. We also have business with Mexico, Canada, and others, for which we have commercial relationships with a range of companies. What are the challenges of expanding internationally? EP FLOPEC has operated in the market for over 40 years and we provide a reliable and first class service to our customers. Our challenges are to develop commercial agreements and Energy EP FLOPEC cm[mn[n_iqh company with the exclusive right to export and import petroleum products from Ecuador by ship bij_mniqile with the local mining sector once it develops strategic alliances with specific companies to increase our participation, and provide an adequate price structure to our potential partners. We are focusing on new segments to attend the large petroleum companies’ needs, considering an adequate portfolio with own, leased and associate vessels. Finally, we are constantly committed to keep all ships well maintained, providing experienced and well trained crews, and keeping onshore personnel with high standards of service. THEBUSINESSYEAR 77 EP FLOPEC’s main responsibility is to transport 100% of Ecuador’s crude exports, as well as its imports of l_×h_^j_nlif_ogjli^o]nm(;mh_q projects occur a potential market is in process to transport clean petroleum products into Ecuador. Why is it important for Ecuador to have a public company playing this role? For Ecuador, hydrocarbons constitute a strategic commodity and EP FLOPEC’s role falls on the expeditious and appropriate fleet to lift the oil in a secure and timely manner. To achieve this purpose, we have a law which allows State companies to provide the maritime transportation of hydrocarbons. Many countries in the world have the same regulations restricting maritime transportation. In the US for example, they have the Jones Act, which states that only ships built and owned by US companies, can move cargo within US ports. EP FLOPEC supports the local maritime industry, hiring Ecuadorean officers and crew on board our own ships, creating extensive jobs either on board and shore, such as agency services, husbandry or on ship chandler services. In addition, by the end of this decade, Ecuador is planning to develop a modern shipyard to build new tankers. EP FLOPEC will be the first secured and important customer in a position to put future orders on about 20 aframax tankers over the five first years. We will also engage in the maintenance of current and new ships. In this way, our company will support one of the new government projects with a strong impact on the economy, creating thousands of new jobs along the commercial and production chain. Biq^isiom__nb_J[]c×]L_×h_ls]b[hacha?J FLOPEC’s role in the economy? The new refinery is going to change the energy matrix in Ecuador, shifting our historical trend of oil exporters and product importers to be self-producers of clean products. This refinery will create a petrochemical industry and new opportunities to operate different sizes of ships in order to transport a diverse range of products. What role does EP FLOPEC play in Ecuador’s efforts to change the productive and energy matrices? I think there are considerable opportunities to take advantage for EP FLOPEC. First of all, we will continue transporting all hydrocarbon requirements to and from Ecuador, in accordance with the new energy matrix and effects of the Pacific Refinery. We also have the opportunity to develop the Ecuadorean maritime industry by the support in the new shipyard. We are going to invest more than $400 million in this project and we are going to put orders for about 20 Aframax tankers. As per above, we are involved in the shift to make Ecuador an industrialized country, instead of a historically agricultural country. What is your vision for EP FLOPEC within Latin America and within Ecuador in 10 years’ time? Now we have the opportunity to expand our goals, not only attending to our domestic needs, but also to take advantage of the market and increase our participation. Our vision consists of attending to 100% of the Ecuadorean market and holding 25% of the regional market; and leading tanker transportation in the Pacific basin in the next 10 years. The expansion plan also takes into account the diversification of services, such as into some port agency, oil storage facilities, and additional logistic operational businesses along the maritime transportation chain. 78 THEBUSINESSYEAR ECUADOR 2014 FOCUS RENEWABLES WATER WAY to go ECUADOR HAS LONG BEEN an oil country, both in production and consumption terms, with 76% of the energy consumed in the country coming from petroleum and 4% from natural gas. However, the government has set new plans in motion to redefine the electricity production matrix, which could make it one of the most green countries in the world when it comes to electricity. When it comes to power, hydro is the crown prince waiting to be king. The government announced in March 2014 that by 2016 approximately 90% of the country’s electricity will come from hydroelectric power plants. The bulk of this will come from eight hydroelectric megaprojects, which include the Coca Coda Sinclair, Cardenillo, Sopladora, and Minas-San Francisco. The government even hopes that it will be able to export surplus electricity to neighboring countries. Currently, hydroelectric accounts for around 50% of Ecuador’s electricity generation and it produced 11 billion kWh in 2011. At the moment, the largest plant is located in Azuay province. Paute-Molino is the country’s single largest complex with a capacity of 1.1 GW, one-fifth of the total capacity of the country at 5.3 GW. However, there are six more mega-hydro plants on the way, with Coca Coda Sinclair the largest with a predicted capacity of 1.5 GW alone. “Coca Coda is of national interest for Ecuador to help solve its energy problems. Out of the eight hydroelectricity projects The age of hydrocarbons for electricity production in Ecuador is coming to an end, with hydro set to take center stage in a new drive by the government. underway in Ecuador at the moment, Coca Coda Sinclair is the most important,” Cai Runguo, Senior Advisor of Sinohydro, explained to TBY in an interview. The project has been underway for four years, and while it has run into a couple of problems during construction, the plant is expected to come online in 2016. It is hoped that once more hydropower plants come on stream, the price of electricity will fall, which could have an environmental impact on the country. “We are hoping to encourage Ecuadorean families to switch to using electric cookers to promote cleaner, cheaper electricity usage. As a result, the project not only has an economic significance for the country, but also an environmental one,” Runguo explained. With the introduction of cheaper electricity, it is also hoped that more rural areas will be able to connect to the grid. Currently, nearly 8% of the population, who mostly live in rural areas, are without electricity. Due to Ecuador being a tropical country, hydro is a logical step for its electricity production matrix due to the country’s high amount of rainfall in the right areas. However, the government does not wish to put all its eggs in one basket and is investigating the possibility of wind power as well. In March 2013, the government studied the landscape of Ecuador and found that it has a potential to produce 884 MW of wind energy. The greatest potential was along the western edge of the Andean spine at high altitudes. The province of Loja was also pinpointed as a high potential area with a possible capacity of 520 MW identified. The province was actually home to the first onshore utility wind farm, which produces 16.5 MW in the Vilonace development. The site is 2,700 meters above sea level and came online in January 2013. CAI RUNGUO Senior Advisor, Sinohydro What is the current status of the Coca Codo Sinclair project? This is a corner stone project for Ecuador, which is why we have had strong support from the government. Right now, there are around 1,000 Chinese workers and 5,000 Ecuadorean workers on site, because at the moment we are at the peak of the work for the project. Starting from 2015, we will begin reducing the number of workers, assuming we can continue on schedule. This project is of national interest for Ecuador to help solve its energy problems. Right now, Ecuador needs to import energy to satisfy the demand. This project will radically change the situation. Out of the eight hydroelectric projects underway in Ecuador, Coca Codo Sinclair is the most important. The plan is that by 2016, Ecuador will b[p_mo`×]c_hn_h_lasnihinihfsg__n^ig_mnc]^_- mand, but to also be an energy exporter. As a result, nb_jlid_]nhinihfsb[m_]ihigc]mcahc×][h]_`il nb_]iohnls&\on[fmi[h_hpclihg_hn[fmcahc×][h]_( Ecuador has a plan to change its economic matrix, and energy is an important part of this. Sinohydro is the 20th largest contractor in the qilf^(Qb[ncmnb_mcahc×][h]_i`?]o[^il`ilnb_ company globally? Sinohydro has more than 400 projects around the world. However, Coca Codo Sinclair is the most important project for us outside of China. Furthermore, South America is an important new market for us. We have a large presence in Africa and Asia, but we still have very few projects in Latin America. This project is a way for us to introduce Sinohydro to the Latin American market. Energy THEBUSINESSYEAR 79 INTERVIEW How has the Ministry of Electricity and Renewable Energy contributed to the transformation of Ecuador’s energy matrix since its founding in 2007? all FIRED up TBY talks to HE Esteban Albornoz Vintimilla, Minister of Electricity and Renewable Energy, on the energy matrix, power consumption, and the use of renewables. Before 2007, there was no Ministry of Electricity and Renewable Energy in Ecuador to regulate this strategic sector of the economy. As a result, prior to 2007, the energy sector had experienced a number of complications, and in fact, was on the verge of collapse as a result of inadequate investment. This was exacerbated by the fact that a move toward privatizing the sector was hamstrung by legal uncertainties and internal complications. Therefore, in 2007, the Ministry was created to spearhead sector recovery and growth, which since then has been pronounced. In 2009, we saw a few problems in terms of poor supply, but those were basically related to the prior lack of investment. Starting in 2007, we set out a plan to swiftly reinvigorate the sector. The first idea was to take advantage of the country’s huge water potential, which is why we conducted studies to build hydroelectric projects. Currently, Ecuador has eight large hydroelectric projects under development. At the same time as we developed these projects, it was necessary to invest in conventional thermal power generation using national fossil fuel reserves. Previously, thermal power generation had used imported fuels. We have developed nine thermal plants, with around 600 MW of capacity, as well as four hydroelectric plants of around 460 MW of capacity, in addition to the eight under construction. Finally, we have taken the important, symbolic step of developing a wind farm with a 16.5-MW capacity. Overall, we have achieved an increase of almost 1,100 MW in capacity over a very short period of time. IN NUMBERS Ecuador Plans to generate 93% of its energy from renewable sources by 2016 What is the status of power consumption in the country’s energy strategy? We have also been focused on improving efficiency in power consumption since 2007. The main segment of energy consumption in Ecuador is domestic; 35% of electricity consumed is residential, and this is where we have focused our attention. The first program involved the replacement of incandescent bulbs with compact florescent lamps and energy saving light bulbs. Today, incandescent light bulbs are no longer available in Ecuador as all bulbs are fluorescent. This is a high-impact project that involves a ban on the importation of incandescent lamps, which is key to managing energy consumption. We have another ambitious project geared at getting people to use electricity for cooking instead of LPG, whereby the public would be both washing and cooking using renewable, domestically generated electricity. We are also working to replace inefficient refrigerators; we plan to replace 330,000 refrigerators in Ecuador. Finally, the other major axis has been to restore and strengthen the management of electricity companies’ distribution and transmission systems. We have had problems in this area, especially relating to network losses and low revenue collection, and we have worked hard and we can now safely say that one of the great achievements of the national government has been the reduction of loss. When the government took office, the loss of electric power was above 22%, but with the efforts we have made the loss rate is now at 12.6%, and many international eyes are looking at what we have achieved in just a short period of time. Ecuador saves $20 million per year for each percentage point of reduction, which means that the country has saved hundreds of millions of dollars in lost electricity. We have substantially improved the issue of collection as well; we formerly had a recovery rate of 93% and now are at 98% or 99%. That’s a more complex issue because the electrical distribution networks are very large and we have improved the quality of service. That is why we have worked throughout the electrical industry chain, meaning generation, distribution, and transmission, but also in energy efficiency. BIO Esteban Albornoz Vintimilla was born in Cuenca in 1967, and has an undergraduate degree in electrical engineering as well as a doctorate from the University of San Juan in Argentina. He has been a professor at Universidad de Cuenca and Universidad Politécnica Salesiana and also served as manager of the Corporación Eléctrica del Ecuaodor (CELEC) and President of the Colegio de Ingenieros Eléctricos y Electrónicos del Ecuador. 80 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW PRODUCE & RENEW TBY talks to Eduardo Barredo Heinert, General Manager of Corporación Eléctrica del Ecuador (CELEC EP), on geothermal power, renewable energy, and energy independence. BIO Carlos Eduardo Barredo Heinert was born in Guayaquil and studied at the Escuela Superior Politécnica del Litoral and completed graduate studies in the Escuela de PostGrado de Administractión de Empresas (ESPOL). Additional education has included courses at INCAE, ESPOL, and INECEL, and he has attended a number of prominent conferences run by the Presidency, OLADE, ACCE, and CIER. A varied career in management has included positions in INECEL, and DEMAC during the 1970s, EMELRÍOS and EMELGUR over the course of the 1980s and 1990s, and additional executive management positions in TRANSELECTRIC, CNEL, and CELEC EP over the past 15 years. He has also served as a member of the boards of ECUACIER, HIDROPASTAZA, CONELEC, and CENACE. What are the primary strengths of Ecuador’s energy matrix? Ecuador has remarkable hydroelectric resources, which are of primary importance for the national matrix. The other energy resource is gas; either LPG or the natural gas from the coasts of Ecuador, Peru, or Monteverde. Fuel oil will be substituted by that gas and the energy produced by hydroelectric power. Meanwhile, another component of the energy mix is geothermal power. We need to increase the share of electricity generation in the entire energy sector from 15% to 40%, which means cutting down on the share of energy required for transportation. Currently, the share used in the transportation sector is about 75% of total energy production. Do you see much potential for geothermal power in Ecuador? Definitely, and in fact the company is considering geothermal energy and has already initiated studies that have identified a number of prospects. CELEC EP is focusing its efforts on the development of four specific prospects, one located on the border with Colombia, and we expect to establish facilities with a total capacity of over 500 MW. This will bring us closer in scale to some of the largest geothermal power producers. In El Salvador for example, geothermal power represents 25% of total electricity production. We intend for geothermal power to meet around 10% of Ecuador’s requirements. When we met with the Minister of Electricity he stated that Ecuador’s goal was to raise the renewable energy component in total power production to 93% by 2016. What strategies are in place to achieve this goal? These are the numbers for hydro energy, and to date, there are eight hydroelectric projects in operation. CELEC EP has seven of them, and Coca has one. The total capacity of these projects exceeds domestic demand. We may be able to export this energy as a result. Currently, we are making arrangements for other projects. For example, the largest current project is the Coca Codo Sinclair Hydroelectric Project, with a planned capacity of 1,500 MW. We are now making arrangements for another hydroelectric project with even more impressive capacity of 6,000 MW. We have two projects in Zamora and Santiago, one at 3,600 MW and the other at 2,400 MW. In 2015, we will start the construction process, and when we talk about capacity, it is important to note that hydroelectric energy is not stationary, but variable. Sometimes, we may need to produce a certain amount of power by gas, or to import power from Peru or Colombia. We may be able to export power, but the fundamental idea is not to use oil to produce power. Energy CELEC EP is the public company responsible for electricity generation and transmission in Ecuador Hydroelectric generation is set to contribute thousands of MW to Ecuador's energy grid THEBUSINESSYEAR 81 What contribution is CELEC EP making toward achieving energy independence? CELEC EP is an executive arm of the government. The minister decides on the policies to be implemented by the sector and on the timeframe, and CELEC EP works to achieve these. We set up, operate and, eventually, contract private companies. For example, in Mexico, the Federal Electricity Commission (CFE) is the only company in the country holding complete control of the generation, transmission, and distribution of power. However, CFE contracts quite a few private companies for the construction of its facilities and operations. CELEC EP utilizes a similar business model in the execution of these objectives. It is important to understand that the production and energy matrices are part of the same system. Within the productive matrix is the energy matrix, and within that is the electricity matrix, while within that in turn is hydroelectric power. When we say that we are increasing hydroelectric power to 93% of the total, it should be understood within this framework. If the productive matrix grows, and the energy and electricity matrices grow in turn, then New energy investments will eliminate Ecuador's reliance on imported energy products 93% is proportionally greater than what it was before. We need to increase the share of electricity generation in the entire energy sector from 15% to 40%, which means cutting down on the share of energy required for transportation. Currently, the share used in the transportation sector is about 75% of total energy production. THEBUSINESSYEAR 87 92 98 Richard Espinosa Guzmán, Coordinating Minister of Production, Employment, and Competitiveness, on promoting inclusiveness. Ecuador is moving toward a more complex production system based on human resources and technology. Large gold deposits in Ecuador await sufficient expertise and foreign investment. 83 Industry & Mining REVIEW INDUSTRY Import substitution is opening up Ecuador’s market to local producers, and playing a crucial role in changing the production matrix. TURNING THE SCREW F or Ecuador to change its productive outlay to a more complex system based on human resources and technology, its manufacturing sector will need to grow. This in turn will require the opening of new markets, which may prove complicated given the defensive nature of Resolution 116, which restricts imports on 293 items in an effort to prevent capital flight, while reducing the country’s reliance on foreign imports that can be produced locally. In 2012, measures were passed to reduce the import of foreign cars by 30%, abolish mobile phone imports, and institute a slew of other protective measures, much to the chagrin of the country’s trading partners. And while these changes have many business owners expressing concern, the changes are a crucial part of President Correa’s plans to stimulate manufacturing in the country. With oil prices far below their 2008 peak, local manufacturing could shave billions from Image: GM Omnibus BB The manufacturing sector represents one the key sectors targeted for economic development, with the auto industry playing a major role in promoting a higher level of value-added and diversity. Ecuador’s trade deficit over the years. This revival will not happen overnight, however, as the manufacturing sector’s recent contributions to GDP growth have been limited. In 2011-2012, most of the country’s growth was driven by the utility industries and construction sectors. During this same period, the manufacturing sector contributed only 7% to total growth. Building on manufacturing’s importance for economic growth and stability, the government’s policy focuses on expanding domestic supply capacity to correct Ecuador’s lopsided productive outlay. The successful implementation of industrial policy should strengthen supply, and raise demand due to an increased income from higher-value labor. BURN RUBBER For many industrializing nations, automobile assembly or manufacturing plays a crucial role due to the number and complexity of components required. Given Ecuador’s tight import restrictions 84 THEBUSINESSYEAR ECUADOR 2014 and pro-manufacturing stance, an indigenous car industry could bolster growth across the sector. In addition, an established car culture could spur the growth of related financial, service, and leisure industries. However, this scenario is predicated on access to a large enough market, sufficient investment, and the presence of skilled workers and engineers. According to some in the Ministry of Production, this scenario is not only possible but also imminent. The country already has local auto manufacturing capabilities with the capacity to produce 80,000 units per year, as of 2013. The car manufacturing landscape is further broken down into three major players: Aymesa, which assembles for the likes of Hyundai; Maresa, which works with Mack, Fiat, Mitsubishi, Ford, Toyota, and Mazda, in a wide variety of models; and Omnibus BB, which produces for GM and Chevrolet. In 2013, car sales fell by 6% to 113,812 units, but of these sales, 55,509 were assembled domestically from completely knocked down (CKD) kits, according to the Asociación de Empresas Automotrices del Ecuador. However, the Economist Intelligence Unit expects these numbers to pick up again in 2014-2015. Production from Ecuador’s four assembly plants, which hit a record high of 81,398 units in 2012, fell 16% in 2013. In 2012, Ecuador exported $265 million worth of delivery trucks, and GM has a facility in Quito that assembles vehicles for the local, and export market. Speaking to TBY, Fernando Agudelo of GM Ecuador explained that in 2014, GM would complete the final expansion stage of their manufacturing and assembly facilities, where a $70 million budget has been allocated over three years to boost produc- Textiles have long been a stable aspect of the industrial sector tivity and quality, develop new products, and attract investors to the auto parts segment. As part of this initiative, GM is increasing the production of local parts, including axles and drive shafts, but local industry is not yet at the level required to meet the demand for newcar sales. However, GM is no longer alone in the national market place. Hyundai’s mid-size Mighty truck was launched into CKD-based production in April 2012 at the Aymesa plant near Quito. The plant is expected to reach production of 3,500 units this year. The trucks will also be sold in neighboring Venezuela, and production is slated to expand to 8,000 units by 2017. As well, the Great Wall company from China is also looking to start CKD production in Ecuador over 2014. HELLO, IT’S ME With Resolution 67 of 2012, the Ecuadorean market is effectively closed to imports of most mobile phones, which has opened up space for domestic manufacturing. In 2014, Yezz unveiled the first smartphone manufactured in Ecuador. The Andy 3.5 is a 3.5-inch phone that runs on the Android operating system. The Andy 3.5 boasts up to 1 Gb of memory, a 5 mega-pixel rear camera and a 2 mega-pixel frontend camera, all for around $200. The phones are made at the Ecuadorean Development and Electronic Manufacturers (DMEE) facility in the industrial sector of Carcelén. While current capacity is limited to 35,000 units per month, the goal is to reach 70,000. According to El Commercio, Yezz phones are produced using 13% local components, while lower end phones are comprised of up to 24% local parts. With the Andy 4 and Andy 5 expected to start LETICIA MACÍAS ZAMBRANO General Manager, Almacenes La Ganga The country has enjoyed positive economic expansion over the last decade, especially since adopting the US dollar as our currency. The administration of President Correa has pushed forward the development of the country over the last seven years. Before dollarization, our company underwent a tough economic period in which, for example, we stopped imports and had to reduce personnel. However, we managed not to close any of our stores, and we were the only chain keeping open all of our stores. In the next few years we doubled the volume of sales and expanded our business activity. 86 THEBUSINESSYEAR ECUADOR 2014 With Resolution 67 of 2012, the Ecuadorean market is effectively closed to imports of most mobile phones, which has opened up space for domestic manufacturing. production by the end of 2014, up to $1 million more in investments is expected. While Yezz is grabbing headlines, a total of six local manufacturers are working to establish their presence in the newly created national market. Lidenar manufactures phones and other communications equipment. The company has invested over $1 million and started operations in Cuenca, with 30 new employees including graduates from the universities of Azuay. As of late 2014, the plant was producing 15,000 units monthly at 30% capacity. Another Ecuadorean firm, Alphacell, opened a plant in 2014 that will boost its output of lowend phones. This new venture is a departure from the company’s previous line of business, which previously focused on importing and marketing. Developments at companies like Alphacell seem to indicate that President Correa’s policies are receiving a response from the business community. GIRD YOUR LOINS In 2012, Ecuador exported $156 million worth of textiles, driven in large part by the country’s proximity to major North and South American markets. In Ecuador, the region of Atuntaqui is renowned for its textile and garment production, where 80% of the region’s employment is tied to textile production. In 2013, the government announced that it would be investing $2.6 million to set up a Center for Development of Textiles and Apparels at Atuntaqui. The establishment of the center is part of Ecuador’s efforts to strengthen the technical capacity, productivity, efficiency, and competitiveness of the country’s textile and garment industry. The move is also a response to a steady decline in textile exports since 2011. This decrease is reflected in jobs numbers in the industry, which only grew by 1%, to 123,044 in 2012, up from 121,850 direct workers in 2011. Meanwhile, imports outpaced exports, which suggests room for growth in domestic production. Beginning with textile imports of around $400 million in 2009, imports have grown to $500 million in 2010, and $785 million in 2011. In 2012, however, textile imports dipped to $741 million in conjunction with a dip in exports, and a reduction in the overall textile trade imbalance. At the same time, Ecuador’s primary competitors are seeing their production costs rise. In China, minimum-wage increases pushed up labor costs by 5% to 15% in 2010. Meanwhile, the Chinese government has set a target for annual minimum wage increases of 13% until 2015. These numbers have led the Asociacion de Industriales Textiles del Ecuador (AITE) to call for more government spending to promote Ecuadorean products abroad through ProEcuador or the Institute for the Promotion of Exports and Investments. Using these organizations, and establishing more free trade agreements (FTAs), Ecuador can capitalize on its comparative advantage in textiles to increase employment and reduce its deficit. GUSTAVO ORDÓÑEZ TOBAR General Manager, Laboratorios Cosméticos TARSIS Our business activity covers the entire spectrum of beauty, hygiene, and makeup products. I personally believe that cosmetics and makeup products have over the years become ×lmn'h__^jli^o]nmchiol society; we would include toothpastes, shampoos, shower gels, and all such products within cosmetics. I can say that consumer \_b[pcilb[mmcahc×][hnfs changed in Ecuador over the last decade, as has the sector itself. In general, Ecuadorean society has seen a change in the way products are consumed. What’s more, global trends have also had their effect on the Ecuadorean market; people tend to buy more bio and natural products than before. (PPEUIJOHTBMXBZTTUBSUBUIPNF 8IFOZPVSIPNFXPSLT FWFSZUIJOHTXPSLT Industry & Mining THEBUSINESSYEAR 87 INTERVIEW EVERYONE involved TBY talks to HE Richard Espinosa Guzmán, Coordinating Minister of Production, Employment, and Competitiveness, on the development of Ecuador’s production matrix. What role has your Ministry played in Ecuador’s economic development in recent years? Ecuador’s economy is doing well right now— you can see many new infrastructure projects such as roads, airports, and hydroelectric plants being built across the country. By 2016, we will have eight new electric plants operating in Ecuador thanks to the largest investment ever made in the country’s history. The situation has changed so much that we even foresee Ecuador exporting electricity to the region by 2016. Some seven years ago, many areas in the country suffered from daily blackouts. The efforts of the public and private sectors to transform the energy system in the country have made this possible. We plan to become one of the leading producers of electricity in the world by 2016, and 93% of this electricity will come from hydroelectric plants. Also, it is important to mention that we already started the tender process for the first highway in Ecuador—the Santo Domingo-Esmeraldas highway. Regarding airports, as many as 21 have been renovated. One such infrastructure project that we can highlight is the Galápagos Airport, which is the first airport in the world to be run completely on renewable energy. On top of all this, we have to praise the political stability the country has attained over the last few years, because it has made possible the implementation of all these projects. We have also achieved the lowest unemployment rate in the history of the country, being one of the lowest in the region, too. Ecuador currently experiences growth rates above the average in the region, and we have controlled inflation. What role does the Production Code introduced by this government play in its efforts to change the production matrix in the country? The 2008 Constitution brought in the new Production Code, a regulatory and legal framework for productive industries in the Ecuadorean economy, which has also boosted the diversi- BIO The Coordinating Minister of Production, Employment, and Competitiveness, Richard Espinosa Guzmán graduated in business administration and marketing from San Francisco de Quito University. During his time in the public sector, he has served as Coordinating Minister of Social Development, Minister of Labor Relations, National Secretary of Human Resources Development and Public Sector Remuneration, National Director of Generational Change, and National Coordinator of the Ecuadorean Food Program as part of the Ministry of Social Wellbeing. fication of the economy, the country’s export profile, the value-added of those products manufactured in Ecuador, and the inclusion of the private sector in the country’s overall productive chain. Investments such as the Pacific Refinery, as well as in productive areas like metal and steel, energy, and shipbuilding, are ongoing efforts to change the productive matrix in the country. These have helped to bring the public and private sectors in Ecuador closer; there are over 400 companies that have stated their interest and willingness to increase production volumes and expand their export profile to contribute to such strategic efforts. There are both large- and medium-sized enterprises among these companies I mentioned. For example, three years ago Nestlé made the commitment to invest $450 million in Ecuador over five years. It wants to make Ecuador its operational base for exporting a wide range of local produce to other regional markets. We have seen interest from many multinational companies in establishing local production in order to reduce imports. In the next few years, we will also, for example, boost the consumption of ethanol as a fuel source for vehicles. To that end, we plan to increase sugar cane production to 36,000 hectares across the country, which will create increased job opportunities in the agricultural sector. How have you been working with the automotive industry to boost local production? We have been holding talks with many companies for this purpose, and we have seen interest from foreign companies planning to establish production operations in Ecuador. I believe that over the next few years we will have many more vehicles available in the market made with parts that have been produced in Ecuador. We want to increase efforts to introduce electric cars in Ecuador, and we have held talks with companies like Nissan to take advantage of our energy matrix and gradually incorporate electric vehicles into taxi fleets for example, as well as encouraging private consumption among the population. This first stage of a broader strategic plan would be followed by a second one in which we would assemble electric batteries in the country, and a third one in which we would actually assemble entire electric vehicles in Ecuador. The implementation of the second and third stages are subject to the success of the first stage. There are many more projects we foresee in this and other economic sectors over the medium term that are envisaged to contribute 88 THEBUSINESSYEAR ECUADOR 2014 Production lines are a much more common sight in Ecuador these days to the reduction of imports and the increase of exports in sectors and segments where the country has strong potential. We have to keep in mind that we are already a leading exporter of cacao, bananas, shrimp, wood for rafts, and many other products—most of them primary products. What role will innovation and projects such as Yachay play in the future development of Ecuador? Innovation will definitely play a major role, and the City of Yachay project is an important step toward the development of our R&D capabilities. We hope to see the project taking important steps forward during 2014, a year in which we hope to attract investment to this area of our economy by sharing risks with those willing to invest. This would be a way to show our confidence and our conviction that what we do will definitely succeed. The City of Yachay will considerably improve our R&D and scientific capacity in the near future; however, we expect the project to contribute in particular to fields such as nanotechnology and biotechnology. All in all, these initiatives are aimed at transforming the economy of Ecuador and boosting local production by generating greater value-added. What are the challenges that still face Ecuador in its efforts to transform the productive matrix? The challenges are many; however, we have started out on the right path. The experience of the so-called Asian tigers in transforming their own economies can be useful for Ecuador. We are convinced that we will continue to attract foreign investment into Ecuador, which should be another key driver in this process. However, as a challenge in this context, we have to make sure that these foreign investors promote the transfer of knowledge in their operations. Another challenge lies in ensuring that we properly reinvest the profits from Ecuador’s natural resource wealth into the development of technology and human resources. We welcome all foreign investors, and invite them to consider the comprehensive list of incentives and the clear legal framework we have in place for their benefit. In this context, we are in a good position to become an entry point for Asian companies looking to expand into Latin America. What role can SMEs play in the transformation of the productive matrix? SMEs already play a hugely important role in our economy, and I believe this will only become more relevant in the near future. We have always said that nobody will be left aside in the transformation of the production matrix. In this context, the government is trying to provide an array of tools to aid their development. We are working to strengthen the ties between SMEs and the public sector in order to do this. Ecuador is currently working with Nissan-Renault on a project to develop electric cars in Ecuador to help reduce the country’s dependency on fossil fuels Industry & Mining THEBUSINESSYEAR 89 INTERVIEW ecuadorean SPICE TBY talks to Wilson León Lee, Executive President of Grupo Öriental, on challenges of growing an Ecuadorean food brand, product innovation, exporting internationally. Why did you enter the food sector upon arriving in Ecuador in 1975? When I arrived in the town of Quevedo, I was considering potential business opportunities. I started working in a restaurant with a Chinese partner, and I saw that Ecuadorean cuisine uses color for the palate, such as sauces, but I noticed that it was difficult to find soy sauces in Ecuador. We had to import soy sauce and other sauces from China. In the absence of choice, we often ended up with products that were expensive but of low quality. I then realized that we could have better sauces if we produced them ourselves. Therefore, I started making a new sauce condiment with my own recipes. This unique sauce that I make is my own recipe, unavailable anywhere else—including sauces imported from China. The sauce is now known in Ecuador as Oriental Chinese Sauce, but actually it is a sauce that is uniquely Ecuadorean, not just because it is only made here using local ingredients, it also has a different texture from other soy sauce as it has a higher yield. I started out selling my products to Chinese restaurants, but because they were few in number at the time, I began selling to stores and supermarkets as well. From there, we have continued growing over the past 39 years. Now, because of our sauce, Quevedo is known throughout Ecuador for its Chinese rice dish know as chaula-‐ fan,”and the main seasoning is prepared with Oriental Chinese Sauce. Now we have distribution throughout 10 offices with own sales force around Ecuador. What role has Grupo Öriental played in the economic development of Quevedo? We are the main agro-industry in Quevedo. We were founded here, and buy our agricultural products locally, also employing local people, and exporting our products throughout Ecuador and around the world. We have two main plants in Ecuador: one for beverages, and another for sauces, noodles, and other flourbased products. In total, we employ around 450 people in Quevedo city. Grupo Öriental now has two factories employing over 450 people, in Quevedo city. And around Ecuador 700 total direct employment What is the importance of having an Ecuadorean identity for Grupo Öriental? We are an Ecuadorean brand born in Ecuador and sustained by Ecuadoreans. But what is more important for us is to emphasize that we use Ecuadorean raw materials, produced locally, to create quality Oriental food products using our expert knowledge. We want to show Ecuadoreans, Latin Americans, Europeans, and even Chinese people that Ecuadorean raw materials can be used to make healthy and delicious Oriental food products. Some of our sauces are actually being exported to China now, such as our chili sauce, which is made with Ecuadorean chili. Ecuador can produce chili sauce all year round because of our equatorial location. We see this as an opportunity to export. More than 10% of our products are exported currently within the region, but also to Europe and China. What challenges have you faced growing as a food brand in Ecuador over the past 40 years? You have to pursue your goals every day and adapt when needed by developing new technology and products. You also need to encourage your employees to love your company, to pursue growth, and to adapt to change and innovate. In Ecuador, we have seen considerable political change over the years, but for the past seven years we have enjoyed stability. BIO Wilson León Lee was born in Hong Kong, but came to Ecuador to investigate opportunities in the agro-industrial sector in 1975. Since then, he has developed a distribution network across the whole country offering diverse food options for differing segments of the market. He has also developed subsidiaries and sister companies such as the Clínica de Medicina Natural y Acupuntura China (CHINAMEDIC) in Guayaquil, and the Restaurante Cantonès Internacional, in addition to the new Borojó Amazónico (Borama) agroindustrial plant. 90 THEBUSINESSYEAR ECUADOR 2014 Grupo Oriental produces many Chinese-style food products What role do you see for companies like Grupo Oriental to contribute to Ecuador’s efforts to change the productive matrix? The key word there is change: we all need to change. For Grupo Oriental, we saw the opportunity to change by working to integrate plantain flour into our products rather than traditional wheat flour. Everyone knows that Ecuador produces plantains in great volume, and that plantains boast many benefits both for people and for the economy. Historically, in Ecuador, plantain used to be the main source of food, and an important source of nutrition. We realized that we could take advantage of this. We are now developing an instant plantain flour product that can be used for soups, breads, any main dishes, and other foods. For us, we started from making Chinese sauce, to noodles, to spices, to healthy beverages, to healthy products. What role can Grupo Oriental play in Ecuador’s economy in the future? We decided in 1975 to invest in Ecuador because we believe in the people and the possibilities of the country. We also believe in Ecuador’s agricultural potential. I started a business here with nothing but a vision. Now our aim is to establish an international Ecuadorean brand. We want our brand to transmit the idea that with Oriental products, you can experience Asian flavors using Ecuador’s natural agricultural wealth. We want to be recognized internationally as an Ecuadorean brand with Oriental values and culture. The group has been in Ecuador manufacturing food products since the 1970s We are the main agro-industry in Quevedo. We were founded here, and buy our agricultural products locally, also employing local people, and exporting our products throughout Ecuador and around the world. Industry & Mining THEBUSINESSYEAR 91 AGRIFOOD FORUM FOOD BAR Ecuador’s agribusiness sector is looking to add value to the already strong agriculture sector through higher standards, different product lines, and advanced equipment. JUAN FERNANDO MAYA RODRIGO CAMACHO General Manager, Alpina Executive President, Nestlé Ecuador I n Ecuador, Alpina has a 40% share of the formal cheese market and 20% of the formal dairy market. However, only 30% of cheese is sold in the formal market in Ecuador, while informal producers account for 70%. In many cases, we are working with informal producers to help them develop better safety and quality standards. One example is a small dairy cooperative in Ecuador, named Quesinor, located close to our plant in Carchi. We have been working with them to help integrate standards for technology and hygiene and generate business value to commercialize their products. We feel that we have a social responsibility to ensure that there is a harmonious environment for business. Alpina buys more than 170,000 liters of milk every day. We have been working with the Ministry of Agriculture to source much of this milk from small farmers. By guaranteeing a buyer for these farmers, we can help support the market, and by working to identify the many cooperatives and associations and agreeing to purchase milk from them under formal conditions, we are helping to bring them out of informality. T here are three areas that we are going to focus on for the future. The first is our people. We really work hard and will keep working in Ecuador for our people, in terms of their development and training. In 2013, we increased our investment in training and development five fold. We care about our people, and we feel that we should give the best conditions to them, meaning quality, tools, technology, facilities, and opportunities for personal development. The second area is our product and brands portfolio, which we want to expand further and faster. You will see many innovations in the coming years aimed toward improved nutrition. Also, affordable and premium products are areas where there are still plenty of opportunities. And third, I can say that we want to grow also in new and different categories, which means investing in equipment, machinery, and different lines, but also looking at mergers and acquisitions. DAVID VERGARA Executive Director, Corporación Superior SA E cuadoreans are ready to take on a challenge, and our collaborators and team members are skillful, hard working, and quick learners. In this context, many of our management positions at the production plants and commercial areas are occupied by Ecuadoreans who have previously worked for other leading companies in the food industry elsewhere in region, which is more common today. The new productive matrix adopted by the government has brought many opportunities for local producers. In this context, we search for new market niches that can help us expand our business activity. For example, in 2014 Superior’s portfolio has expanded significantly in order to offer more alternatives to local consumers. I perceive many growth opportunities, and we are determined to take advantage of them to expand into new segments of the food industry. We want to double our operational size over the next five years. Today, we are on the right path and convinced that we will continue playing a major role in Ecuador’s food industry. JEFFERSON SANTANDER General Manager, Universal Sweet Industries (La Universal) E cuador is one of the leading exporters of cacao; other markets do not currently pay at a premium for Ecuadorean cocoa, and the country needs to further invest in international brand building, as we still live off past successes. I also think that Ecuador should increase the production of fine aroma cacao and start working to generate value-added from the product through a strong brand, by promoting it and make it more competitive worldwide. We expect to reach a 20% export level within four years—we started exporting two years ago and exports currently represent 10% of our business activity. There are several lines that offer interesting business opportunities. For example, the country still has a long road ahead regarding healthy food products in order to catch up with more advanced markets. Also, Colombian companies sell products worth $150 million using technology that has yet to be introduced here. Once this is done, there is another market niche to explore there. 92 THEBUSINESSYEAR ECUADOR 2014 FOCUS PRODUCTIVE MATRIX HOME RUN DESPITE its complicated sounding name, Ecuador’s production matrix simply means the outlay of the country’s productive sector. When President Correa advocates changing this outlay, he hopes to change the economy from the one based on the sale of natural resources to a more complex system based on human resources and technology. For example, rather than selling oil—which made up over 50% of the country’s 2012 exports—Ecuador hopes to manufacture and sell end-use petrochemical products for both the national and international market. And while critics level accusations of protectionism, President Correa contends that an over reliance on imports is preventing Ecuador from investing the profits of its natural resources back into the national economy. In December 2013, Ecuador’s Foreign Trade Committee issued Resolution 116, which restricted imports on 293 items in an effort to prevent capital from escaping, while reducing reliance on foreign imports that can be produced locally. In order to promote technological innovation, quality employment, and import substitution, the government has rolled out a series of tools and incentives to support entrepreneurship and productive investments in Ecuador. In late 2010, the President’s cabinet agreed to a 3% cut in the corporate tax rate, down to 22%, in order to incentivize investments. This reduction is in conjunction with Ecuador is moving away from an economy based on the sale of natural resources, toward a more complex system based on human resources and technology. a 10% reduction in taxes if firms reinvest earnings within a year. In addition, a capital outflow tax of 5% penalizes companies that move their earnings abroad. Another new policy has been the creation of Special Zones for Economic Development (ZEDE), which function similar to economic free zones. If a company is established in a priority industry within a ZEDE, it is eligible for a five-year exoneration from corporate taxes. Moreover, foreign capital goods enjoy a waiver of duty payments and tariffs, as long as the goods remain within the ZEDE. Companies are also eligible for exoneration from the 5% Capital Outflow Tax for goods imported and payments made on foreign loans and stockholder earnings. Lawmakers in Ecuador are banking on these, and other incentives, to draw the kind of investment and development that will enhance the value of human resources and technological holdings. The cornerstone of President Correa’s ambitious transformation is developing the petrochemical industry in Ecuador, as the current refineries are outdated and incapable of the capacity required by the national economy, and the emerging petrochemical industry. A joint investment by the Industrial & Commercial Bank of China, Ecuador, and Venezuela on a refinery that will process 300,000 barrels per day (bbl/d) is set to address this paucity. The new refinery will also correct the country’s reliance on imports by processing crude oil into petroleum derivatives including high and low octane fuels, diesel, lubricants, polypropylene, benzene, xylene, and ethanol. Given that Ecuador had a negative trade balance of over $687 million in plastics in primary form alone, enhanced petrochemical capabilities could go a long way toward correcting the current account deficit. As Ecuador ramps up its productive capacities, making its human resources capabilities internationally competitive will present a challenge. While high school enrollment rates are low at 62.5%, they are more reflective of an overall lack of enthusiasm and opportunity, both of which are already changing. When compared to enrollment rates of 48.9% in 2006, current enrollment rates are a positive signal. Higher education is getting a makeover as well. Higher education enrollment has increased from 22.9% in 2006 to 30.1% in 2011, and is expected to increase over the years. One university in particular, Yachay, is set to impart the skills necessary to drive the kind of development that President Correa aspires to achieve. With over $1 billion in total investments, the project will attract talent and companies to Ecuador, with President Correa calling it the most important project of the last 100 years. Industry & Mining THEBUSINESSYEAR 93 INTERVIEW How has the economic transformation of the past decade changed the automotive industry? We are a company that believes in the potential of the country, which is why we implement investment plans every year. Over the last few years, we have focused on introducing better production processes to increase capacity and become a more efficient and competitive company. For example, we have successfully maintained the leading position of our brands—Nissan and Renault—in the market. Also, we emphasized the need to improve the quality of our services. For example, AYASA currently reinvests 70% of its profits back into the country. These elements position our company as a leading player in the sector. On top of that, Ecuador has enjoyed a stable political and economic environment, and the automotive industry has benefited from this. The industry has also paid special attention to the post-sales service segment over the last few years, a segment in which we have positively grown. The future will follow such trends, and we believe we have plenty of room to continue expanding our activity in this segment in particular and the sector in general. How has AYASA adapted its business strategy in accordance with the government’s new production goals? We are a very flexible and dynamic company, and we saw the new industrial production approach by the government as an opportunity in itself. For example, we have been closely working with the brands that represent Nissan and Renault in Ecuador to implement an electric car project. The government has already carried out research on the potential implementation of this ambitious project and its profit- ADDED buzz TBY talks to Nicolás Espinosa, Executive President of Automotores y Anexos (AYASA), on the automotive sector, the government’s production goals, and developing electric cars. Local representative of NissanRenault in Ecuador AYASA has operated in Ecuador's automotive sector for more than 50 years Aims to be the leading automotive company in Ecuador by 2020 BIO Nicolás Espinosa has experience as an Industrial Chemical Engineer, Industrial Engineer, and in Financial Management. He has been Executive President of Automotores y Anexos (AYASA) since 1992. In addition, he is Director and Vice-President of the Board of Directors at CONCLINA, as well as President of Consejo Consultivo Grunenthal. ability, apart from the positive environmental impact of it. We have to keep in mind that Renault and Nissan have been worldwide leaders in the mass production of these vehicles for similar projects in northern Europe, and this is a competitive advantage for us, because we see there is huge potential in Ecuador for such a project. All in all, we align ourselves with the production policies of the government, especially in the segment of electric cars. What is the status of the electric car project? We have already conducted all the relevant studies on the mass utilization of these vehicles for public company fleets. In this context, some of these companies, for example, Correos del Ecuador, have already carried out tests with these vehicles. At the moment, the government has already taken the steps to set up the regulatory framework for the implementation of this project, and the importation of these types of vehicles. Additionally, several private companies have already shown their interest and commitment to implement such an ambitious goal. AYASA will soon hand in the draft of the Memorandum of Understanding (MoU) between the government and the brands we represent in order to take a step forward in this entire process. This is an important opportunity to change the mobility culture in Ecuador and boost local production in the automotive industry through different stages—a battery recycling plant first, followed by a production and assembly plant. Future prospects foresee a potential market for electric cars of around 60,000 units per year. Does Ecuador have the level of human capital and technological expertise to implement such a project? In this context, Nissan has already offered to the Ecuadorean government to train local technicians on new technologies within the automotive industry, including electric technologies. I think the challenge could come from how to link such an offering with the development of the city of Yachay, because I believe that would be the ideal framework to make the offer come true. Renault has also made such an offer to the authorities, and we have to highlight that this offering does not only apply to research, but to the final consumer, too. 94 THEBUSINESSYEAR ECUADOR 2014 VOX POPULI PRODUCTIVE MATRIX CHANGE AWAY Ecuador is capitalizing on changes in its productive matrix, and many of the biggest players are focused on the task at hand. Image: Continental Tire Andina JAIME MANTILLA W e establish assembly plants in almost every country in which we operate. The growth and development of the plant in Ecuador has been stable and consistent. The plant has manufactured innovative and topclass models that are highly acclaimed. Over the past decade we have supported the government’s efforts to substitute imported products for locally produced ones. As part of our efforts to help transform the production matrix, we have increased investment in our plant to maximize its potential. In 2014, we will complete the final expansion stage, where a $70 million budget has been allocated over the last three years aimed at productivity and quality, the development of new products, and attracting new investors to the auto parts segment. By attracting new investors, we hope to increase the number of Ecuadorean parts in vehicles. Since we are a multinational company, we also boost know-how transfer by providing regular training courses to our staff, other companies of the auto industry, and even other industries. FERNANDO AGUDELO Executive President, GM Ómnibus BB Country Manager, Sony Ecuador S ony has 15 offices in Ecuador, and was in fact the first brand to have its own premises here, believing in the need to keep in touch with the consumer. We have just started producing in Ecuador, manufacturing two television models, and in 2014 the number will rise to five. We attribute this to Ecuador’s growth, and are confident of the high-quality proposition Sony brings the country. We have two direct Sony stores, and two franchises, in Ecuador. Franchising allows us to reach more people beyond the city centers. Currently, we have 150 direct employees, and are developing other sub-brands in Ecuador, such as PlayStation. Sony’s presence in Ecuador speaks volumes in terms of its importance as we only have a limited number of television production operations in Latin America, namely in Mexico, Argentina, Brazil, and now Ecuador. Televisions account for 70% of Sony sales in Ecuador. The manufacturing operation is relatively large, which is important for the national market and the wider region. Industry & Mining THEBUSINESSYEAR W MARCELO CHICO CAZORLA Vice-‐President of the Board of Directors, Continental Tire Andina e are a competent player in the government’s plans to transform the country’s production matrix; our main objective is to increase the national production of natural rubber conterminous to reduce our dependence on imports of natural rubber from Asia. Moreover, we want to boost our exports and with this we contribute more to the economic and social development of Ecuador. At the moment, 50% of our production is distributed in our domestic market, whereas the remaining 50% is exported. Over the past decade, we also have developed three retread plants (Quito, Guayaquil, and the last one was set up in Cuenca). At those centers, we mainly work on large truck tires. These efforts are part of our profound commitment to the environment; moreover, we conduce saving costs and improving tire life. Ecuador lacked a culture of tire retreading and only recently we can see an increasing awareness of this opportunity. PATRICIO CÁRDENAS Business Manager, LINDE Ecuador L INDE is the world’s leading player in the gas industry, with a presence in around 100 different countries. In this context, Ecuador’s relevance within such global operations is certainly important; we have always seen growth potential and business opportunities in this market. Despite what many might say about the size of the country, LINDE has always seen a growing and promising market in Ecuador. In this context, one of our strongest points is that we are involved in several economic sectors, and not only in the gas industry. This is one of the most attractive things of our operations in Ecuador, which began over 52 years ago. In this context, over the past two years we have implemented investment plans worth $50 million, and we have committed to broaden our business activity in the country in coming years. 95 96 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW utility MAKERS TBY talks to Roberto Jouvin, General Manager of Mabe Ecuador, on the transition from gas to electric stoves, growth, and human capital. What would you say distinguishes Mabe products? We make sure all of our products are manufactured in a high-quality way, and our standards of production are high. Our plants are well positioned. We have local brands, and we have GE as a partner in Latin America. How is the current government effort to switch the country from gas stoves to electric stoves affecting your operations? It has been a temporary challenge for us at the moment, because we manufacture and sell gas stoves, and as a result,sales of these have fallen by 60%. However, we are participating actively with the government in this plan. We are ready for the production of electric stoves, and we will expand our portfolio in this industry. The transition is a good idea because subsidies for gas right now cost the government around $800 million a year. It is great for the country’s economy, and it is popular as well. The way to do it is to offer people a new product that cooks better and is more efficient. We are willing to do it. The government over the past few years has been encouraging applicants to become more efficient. We have also been participating in making that the norm. In the past, an air conditioner probably broke down in six months. We want them to be more efficient. Which segment of the economy do see as the main driver of future growth for you in Ecuador? The low- to middle-income sector, as the mid-high sector is probably 10% of the market. Almost 70% of the market is the middle class, and their income per capita is on the rise. They want houses, appliances, and cars. Around 15 years ago, many people didn’t have air conditioners or washing machines, and some didn’t have fridges. The market has increased significantly over the past decade. How would you characterize the level of human capital in Ecuador? One of the things that makes Mabe special is its post-sales service. If you buy one of our products, you can be sure that the company will take care of it. People don’t hesitate to buy any of our products. If there is a problem, we fix it. No questions asked. As far as the level of technical education, I think it has been increasing. When I hire someone for middle management, they all have a Master’s degree, while 15 years ago you didn’t see that. Now, everyone has undergraduate degrees and at least one Master’s degree. Everyone is trying to speak a second language as well. I am 44 years old. When I graduated 29 years ago, I studied in the US when I had the opportunity. No one spoke English then. It is different now. People in their 20s all speak English. The level of competition has increased greatly. This is in the lower class as well. It’s a different country. Why Ecuador as a destination for international investors? We came here in 1994. Since then, Ecuador has been an excellent operation for Mabe. Ecuador is a stable country with a good income per capita. It is a small country; however, if you compare it to a similar country like Guatemala, the income per capita here is much higher. Companies in Ecuador are much more profitable. It is a good country to do business in, but you have to know that the rules can change. Mabe has a plant in Ecuador, which manufactures products for export across Central America and the Andes BIO Roberto Jouvin graduated from Colegio Javier as a Bachelor in Physical Mathematics, before going to Eckerd College in Florida, US to study Management and Finance. He later acquired his MBA from the Universidad Federico Santa Maria de Chile with a specialty in Marketing. He began his career at Kimberly-Clark as a Marketing Manager in 1994 before moving to Plasticos Industriales as a Commercial Manager in 1998. In 2002, he moved to Mabe Ecuador as the Commercial Manager before taking his current position up in 2003 as General Manager. Industry & Mining THEBUSINESSYEAR 97 INTERVIEW ANDEAN TIGER uador and the region for 37 years already. Over the years, Ecuador has become more relevant to the group. This relevance has been all the more important over the past five years due to the change in the productive matrix currently underway in Ecuador. TBY talks to Gustavo Iñurritegui, Executive President of Andean Area of Franz Viegener (FV), on the strengths of the Ecuadorean market, changes in the productive matrix, and future challenges. What part of production in Ecuador is reserved for the domestic market? I am going to divide my answer into two parts. In terms of water management and faucets, 90% of the production is for Ecuador, and 10% is for the export market. In terms of toilets and accessories, the contribution to the commercial trade balance is even greater. In the toilet segment, 70% is for the national market, while 30% is exported. Qb[n cm nb_ mcahc×][h]_ i` nb_ Ecuadorian market for Franz Viegener (FV) as a group with a presence across Latin America? FV Group has a major presence across all the major countries of Latin America, and it is divided into three parts: the plants in Argentina, which cover and service the MERCOSUR market, and which include all the countries bordering Argentina, Uruguay, Paraguay, Bolivia, and, of course, Argentina itself; the plants in Ecuador, which service the Andean market of Ecuador, Colombia, Peru, Central America, and the Caribbean; and finally the plant in Brazil, which covers that market. The importance of Ecuador is its service to the Andean market, and our position as leader and sole manufacturer of faucets, toilets, and bathroom accessories. We also aim to become the market leaders in Colombia and Peru. Over the past seven years, Ecuador has seen a marked economic transformation. Has that ]b[ha_^nb_mcahc×][h]_i`?]uador for the company? Since 2000 and the economy’s dollarization, the role of Ecuador has been different. The company has been in Ec- How large is the Ecuadorean market for FV Group? BIO Gustavo Iñurritegui obtained his professional education at the Universidad Católica de Buenos Aires. He began his career in FV Argentina in 1984 at an entry level position, and gradually rose up through the ranks thanks to a combination of hard work and the will to do things better. In 1996 he came to Ecuador to help run the subsidiary there. In 2008, he was selected as successor to the Chief ?r_]oncp_I`×]_l( The group has annual revenue of $600 million, and the local operations in Ecuador represent 12%; therefore, approximately $70 million a year. The group has approximately 6,000 employees worldwide, and in our local operations, we employ around 1,200 people. What would you say are the strengths of Ecuador as a manufacturing base? First of all, I would highlight its geographic location at the center of the Pacific coast of Latin America, and second, its two great commercial neighbors, namely Colombia and Peru. Those two factors make it an interesting proposition. What kinds of challenges have you faced in growing your operation in Ecuador? One of the challenges is being able to conquer the Ecuadorean market with qual- ity products, something that the country was not used to. The second challenge was the presence of the two great neighbors of Colombia and Peru. People usually opt for price, although price and quality do not go hand in hand. It has taken many years of work to provide technical support to constructors and installers. The experience of FV as a company has leant much support to this process. What role do you see for FV in Ecuador’s efforts to transform the productive matrix? The change in the productive matrix for Ecuador is important, and we support the government’s initiative. However, the importance of generating exports is greater than the importance of substituting imports. It is important for the government to monitor production quality and to ensure that it meets international standards. The local manufacturing system also needs to produce at reasonable prices. This is a highly complex and difficult issue, and demanding for the government in terms of the details and the changes that it implies. However, there should be coherence in the government’s message. It is vital for the government to say that it wants to substitute imports, and also to act accordingly. IN NUMBERS Franz Viegener (FV) Ecuador domestically represents 12% of FV’s global revenues 98 THEBUSINESSYEAR ECUADOR 2014 Ecuador has a huge amount of resources waiting to be exploited; however, a lack of expertise and willing foreign investors has hampered development in the past, but hopefully this is all about to change. Review MINING GOLD FINGERS After a rather unsuccessful set of reforms in 2009, which lumbered companies with massive taxes and tangled them in red tape, the government announced a new set of reforms in 2013 aimed at freeing up the companies and attracting more FDI into the mining sector. When Kinross canceled the $1.2 billion concession it had won to tap Ecuador’s largest gold reserve in June 2013, the government realized it needed to take a look at mining laws to attract more investment. Kinross was actually charged $720 million for walking away from the project. “Ecuador, as a mining country, is trying to understand how the mining sector operates here. During this process, some mistakes have been made,” said Santiago Yépez Dávila, General Manager of Empresa Nacional Minera (ENAMI EP), to TBY. “However, the government has done its research and understands how it operates in the world and in the country.” Because of this, Ecuador’s mining industry still remains largely unexplored and unexploited. President Correa is hoping that the mining sector can reduce some of the economy’s dependency on oil; however, the country will need outside help. In the new reform package, the government set a new royalties ceiling of 8%, which was previously open-ended. Small mining operations will pay a minimum of 3%, medium-sized operations 4%, and large-scale mining operations will pay 5% in royalties. The government is hoping to attract more small- and medium-sized companies to take up concessions by having lower royalty payments and allowing the signing of flexible concession agreements, meaning they do not need to negotiate exploitation contracts with the government. It also streamlined the permit application system, removing many of the time-consuming processes. Still, while the government has made some much-needed changes to the sector, many companies feel that it did not go far enough in its reforms. The windfall tax is still seen by many as a possible deterrent to investors, and some say it should have been lowered. The windfall tax can be as high as 70% on revenues for mining companies; however, this comes into action only after the company has recouped its initial investment. While the new reform may need some ironing out, overall the industry seems pleased with the direction that the authorities are taking, and the government is almost fully behind President Correa’s leadership, with the reform passing 105 in favor and 14 against in the local parliament. RESERVES Ecuador has a vast amount of reserves, mainly gold, silver, copper, and zinc. The latest estimates by ENAMI EP places Ecuador’s gold reserves at 39 million ounces and USGS places the country’s silver reserves at 17 million troy ounces. When Kinross backed out of its concession, it created quite a headache for the government; yet, the $720 million charge would have gone some way to alleviate this. However, Ecuador’s minerals still remained in the ground, Industry & Mining and someone new needed to be found to take over the project. In August 2013, only a month after Kinross walked away, Codelco, Chile’s largest copper mining company, stepped up to the plate. Codelco will be able to bring its vast experience and knowledge to Ecuador, something at the moment that the country lacks. ENAMI EP will own 51% of the joint venture and Codelco the remaining 49% to work on the Llurimagua reserve. It is estimated that the reserve could be worth as much as between $200 billion and $220 billion in total, depending on the viability of some of the deposits. The joint venture is expected to receive its environmental license by the end of 2014, and Codelco has committed to invest $28 million over five years to explore the 4,956-hectare reserve. It is hoped that commercial mining will begin by the end of the decade; however, it could be up to eight years before any mining begins, depending on the exploration results. Another major deposit that is currently being explored is El Hito, which is located in southeast Ecuador in the Santa Barbara area. The deposit, under the concession of Ecuador Gold & Copper Corp., has estimated reserves of 161 million tons of copper and exploration is well underway to find the most viable way to exploit the mineral. El Hito is a part of the large Zamora Gold and Copper Belt that runs for 40 kilometers and holds a vast amount of reserves. The total belt is thought to hold 8 million ounces of gold at 0.56 g/ton in the inferred category and 2.6 THEBUSINESSYEAR 99 Ecuador has a vast amount of reserves, mainly gold, silver, copper, and zinc. The latest estimates by ENAMI EP places Ecuador’s gold reserves at 39 million ounces. million ounces at 0.4 g/ton in the indicated category, as well as 800 million pounds of copper in the inferred category and 1.5 billion pounds in the indicated category. SELLING UP Even though Ecuador has an enviable amount of resources in the ground, unfortunately it is suffering from something of a liquidity problem at the moment. To try and resolve this, in June 2014 the government decided to sell 1,165 gold bars from its reserve for $580 million to Goldman Sachs to increase the country’s liquidity issues. The country has borrowed over $12 billion from Chinese banks to fund infrastructure development, and has now re-entered the global bond market after a near half-decade hiatus. Also, with Ecuador one of the few countries on the continent to use the US dollar, liquidity issues have their own unique challenges. Under the deal, the country will get the gold back in three years time and, in theory, make a profit of $20 million. 100 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW dig for VICTORY Do you think the way Empresa Nacional Minera (ENAMI EP) approaches mining in Ecuador is different to the way private sector companies do? TBY talks to Santiago Yépez Dávila, General Manager of Empresa Nacional Minera (ENAMI EP), on the role of a publically owned mining company, its role in the productive matrix, and legislative reforms in the sector. Definitely, yes. ENAMI EP, as a public company, has two big duties. The first is to produce income for the government, and the other is to provide wealth to the communities. A private company does not have as much of a social focus. One important part of ENAMI EP’s activities is to provide communities with all the requirements needed to maintain artisanal mining. We have two social projects in the country. ENAMI EP also has partnerships with associations to reduce the use of mercury. Ecuador has a lot of mining potential, but the country has struggled to get the mining industry to play the role in the economy that it could. Why do you think this is? Probably because the economy has been based on oil for the past 40 or 50 years. It was a mistake to focus solely on this sector. Of course, this sector provides the country with a lot of wealth. However, this sole focus is the reason for the country’s problems at the moment. The mining activity in this country cannot just be about finding these resources and selling them. It has to be a process that provides the country with the possibility of adding value, diversifying sectors, and contributing to communities. This is the main reason for the change in the productive matrix. What role can the mining sector play in changing the productive matrix? It is important that the mining sector plays a role in this change, because we need to be responsible to the people of this country. We need to show that the country can do more than find minerals. We need to create new processes BIO Santiago Yepez Dávila is currently CEO at Empresa Nacional Minera (ENAMI EP). He is a mining advisor with over nine years of _rj_lc_h]_[h^mj_]c×] expertise in developing the mining business in Latin America. He was previously the President at the Ecuadorean Chamber of Mines and a Member of the Board at the American Mining Association. His professional specialties include: Mining Financing, Project and Business Development, Relationship Building, Strategy Management, Negotiation, and Government Relations. He holds a Doctor of Law (JD) and Master of Finance degrees `lignb_Jihnc×]c[Ohcp_lsidad Católica del Ecuador, and a graduate degree from the Universidad Central de Chile in the Management of Mining Projects. and industries. Mining activity creates more decentralization, because you invest a lot of funds into communities. Especially in the mining sector, food, transportation, goods, and housing are required, which then contributes to the overall economy. Due to the nature of the mining sector, it can also contribute to rural development. The sector also provides a lot of work for people. The sector needs to learn about new technologies, which then provide income for the government and the communities with part of the royalties. The mining law of Ecuador says the government needs to reinvest at least 60% of mining royalties into communities. Oil companies are used to producing substantial volumes of oil, and investing generated revenue solely in the capital, Quito. Do you think the reforms made to mining legislation in 2013 enhanced the abilities of the country to attract FDI? Ecuador, as a new mining country, is trying to understand how the mining sector operates here. And during this process, some mistakes have been made. However, the government has done its research and understands how it operates in the world and in the country. Some important changes are coming, because the government knows mining is a high-risk activity. Exploration also needs to be better supported, and the government is working on this. ENAMI EP cm?]o[^ilÎm national public sector mining company cmfiiechani jointly develop projects with international mining companies to bring in needed expertise Is Ecuador now an attractive destination for international mining companies? Yes definitely, because of the country’s considerable potential. The grade of minerals in Ecuador is interesting, the cost is low, and the country is competitive in the mining arena. The country has political stability, and the most important thing is that our President is greatly supportive of this industry, which shows in the highway, water, and electricity infrastructure. This may be contrasted with to a country like Chile, where one has to pump water from the ocean into mining projects. The government is preparing for this industrial era by building roads, ports, airports, and hydropower plants, all of which are attractive to investors. THEBUSINESSYEAR 101 105 107 111 The Minister of Telecommunications and Information Society on improving access to technology. Alongside encouraging research and innovation, one of Yachay’s primary goals is the development of human talent. The Country Manager of Xerox on the company’s contribution to the economy and its move into the services sector. Telecoms & IT REVIEW The national uptake of technology is central to Ecuador’s broader social inclusion, wealth generation, and international competitiveness. P resident Correa’s “socialism for the 21st Century” is geared toward social inclusion and the sustainable alleviation of poverty. The proverbial path to this is paved with technology, as the government pushes toward universal of access to communications. A recent initiative currently in the pilot project stage is introducing electronic payment to leverage high mobile penetration and address low financial participation. Yet, at the heart of the National Plan for Good Living 2013-2017 is socio-economic development, whereby Ecuadoreans become educated contributors to national wealth and a competitive industrial matrix. Naturally enough, education is the primary recipient of attention, and Correa’s IT program, Digital Training through Mobile Classrooms, is taking ICT beyond urban areas. The National School Connectivity Plan targets connecting over 9,700 schools nationwide by 2015, with related technology to be largely financed from PLUG ME IN the Fund for Development of Telecommunications in underprivileged areas (FODETEL). FODETEL itself receives funds from contributions stemming from a state levy of 1% of telecommunications operators’ turnover. THE AUTHORITIES The Correa administration is focused on bringing Ecuador to the forefront of the Andean region, and has specifically indentified the ICT sector as a prime driver for this goal. The drafting and execution of ICT policies and regulation of telecommunications and ICTs falls to four state agencies. CONATEL, the sector watchdog, the National Television and Radio Broadcasting Council (CONARTEL), which regulates and authorizes radio and television broadcasting services, the National Secretariat of Telecommunications (SNT), which actions telecommunications policies, and the Telecommunications Superintendent’s Office (SUPERTEL), which has final say on telecommunications services and the use of the airwaves. The pace of technological advance picked up in 2006 when CONATEL canvassed public and industry opinion on a national ICT strategy. As Global Information Soci- 102 THEBUSINESSYEAR ECUADOR 2014 ety Watch put it, “CONATEL acknowledged the lack of a comprehensive state policy, and in doing so, it predefined a thematic agenda that sought to align efforts in the ICT sector with broad socioeconomic and developmental goals.” That was a wakeup call the current government, in power since 2007, has built on. The government aims to ensure universalization by increasing teledensity, yet certain trends borne out by industry data—and familiar to many emerging markets—suggest there is still some way to go. The market penetration rate for mobile phones according to BuddeComm is high, at 113% (2014e); this is also due to less than universal landline (16% penetration) provision in the mountainous Andean nation. YACHAY René Ramírez Gallegos, National Secretary of Higher Education, Science, Technology and Innovation in a TBY interview spoke of, “increasing [education] expenditure budgets— from 1.1% to 2% of GDP,” since 2007. Ecuador has also upped its research, innovation, and technology budget from 0.2% to 0.72% of GDP. Meanwhile, the poster-boy for Ecuador’s scientific leap forward is the Yachay “City of Knowledge,” the word borrowed from the indigenous Kichwa language. With a land allocation of 44 square kilometers, the scheme has at its core a university, and is envisaged being a home for diverse incubator companies, and a lightning rod for innovation. “Yachay will be the innovation center of Ecuador; a city, a company, and a university representing the innovation system of the country,” Ramírez Gallegos explained. “It has to work also as a specialized cluster where people will live and generate innovation, knowledge, research, and future developments for Ecuador.” Meanwhile, Héctor Rodríguez, CEO of Yachay Public Company, describes the project as more of an industrial paradigm shift. “In the 1970s, we developed Petroecuador to create an oil-based economy, and in the 1980s we created Corporación Nacional de Telecomunicaciones (CNT) to develop the ICT sector. We have developed Yachay because technology and knowledge underpin the future.” In that sense, “Yachay University bridges the gap between basic and applied research and the end product.” INTERNET Broadband penetration is estimated at just 7.7%, although dial-up services have a rate of around 70% according to Jaime Guerrero Ruiz, Minister of Telecommunications and Information Society. He told TBY that, “We currently have the fastest internet in the region at 3.6 Mb/s,” adding that, “five years ago there was only 3,000 kilometers of optic fiber in the country, whereas today the figure has reached 35,000 kilometers.” Internet service providers as of June 2013 numbered 327, and SENATEL data put the number of internet cafes as of February 2014 at 2,386. SIZE MATTERS During 3Q2013, Ecuador clocked an average connection speed of 3.6 Mbps, hitting the global average, and registering the second fastest internet speed in Latin America after Mexico, and showing 53% YoY growth over nb_-K,*+,×aol_(;h^qbcf_nb_m_hog\_lm[l_\_bch^=[h[^[Îm[p_l[a_ connection speed of 8.8 Mbps and the 9.8 Mbps recorded in the US, Ecuador is catching up. The two existing submarine cables servicing the country are the Pan American (PAN-AM) cable, which was launched in 1999 and is nearing the end of its lifespan, and the South America-1 (SAm-1) cable laid in 2001, which serves the entire South American continent. Nb_J[]c×]=[lc\\_[h=[\f_Msmn_g"J==M#mo\g[lch_bcab'mj__^fche& which is expected to be online by 3Q2014, will give Ecuador a massive increase in internet connectivity speed and vault it ahead of Mexico and other Latin American countries. According to the Ministry of Telecommunications, the 80 Tbps 6,000 kilometer-plus Florida-Ecuador PCCS cable will improve connectivity speeds by 1,600% in Ecuador. The submarine cable system is the most advanced of its kind on the market. LUIS EDUARDO CARRIÓN General Manager, Binaria How has Binaria adapted to the needs of Ecuador’s technology sector over the past 35 years? Binaria has changed its core business every four years for the past 35 years, and every four or ×p_s_[lm&q_b[p_nil_nbcheiol_hncl_\omch_mm process. Technology is always changing. As the cost of PCs fell, private ownership rose; therefore, we shifted to selling computers instead. Next, we redeveloped our infrastructure with new servers and storage. Our latest challenge lies in transforming into a service company. As computer use rises, we have to give customers added value, which we do by delivering quality service. Our focus today is on providing knowledge and training. The four components of our businesses are cloud services, mobile, security, and big data. We are also investing heavily in data mining and extraction transfer load (ETL). Binaria has created a company dedicated to providing these solutions. How would you describe the level of human talent available locally? Because Ecuador is a small country, there is less room for specialization in certain areas. For example, there are a relatively low number of banks in the banking sector. Companies must expand to other regions in search of customers. The challenge is to create specialization here, and that requires delivering a product with broad consumer appeal. Qbcf_cncm_[msni×h^ko[fc×_^n[f_hnb_l_ch?]o[dor, it is harder to create the experience. Qb[n[l_siolai[fm`il<ch[lc[ip_lnb_h_rn×p_ years? Binaria needs to continue consolidating as a service business. Infrastructure as we know it is about to change, as more companies migrate to the cloud. 104 THEBUSINESSYEAR ECUADOR 2014 Meanwhile, total internet subscriber numbers had reached 4.69 million, of which 996,217 were fixed-line users and 3.69 million mobile users, while the teledensity ratio stood at 29.96%, almost double the 2011 figure of 14.58%. And in a landmark development late 2014 is set to see the completion of the Pacific Caribbean Cable System (PCCS) submarine high-speed link. With existing links short on capacity, the new line, at 6,000 kilometers, and running from Jacksonville, Florida to Manta, Ecuador, will boost Ecuador’s internet capacity by an estimated 160 times. TELEPHONY There are seven fixed-line operators in Ecuador. State-owned CNT, in commanding the fixed-line market, by extension also rules the roost for ADSL delivery, the service becoming available to Ecuadoreans in 2009. MOBILE Ecuador’s telecommunications sector has grown rapidly since 2000, when the telecommunications market was liberalized. Central Bank of Ecuador (BCE) data puts overall sector growth at 22.7% from 2004 to 2005, which contrasts starkly with sector growth of 11.2% from 1999 to 2000 and just 0.1% in 1994. Yet the most outstanding statistic is that of mobile phone use, which rocketed 9,970.4% from December 1996 to December 2005. According to SUPERTEL, which monitors and regulates the national telecommunications and radio frequency spectrum, by November 2006 there were 8.19 million mobile phone users among a population of 13.52 million. Official data for 2012 reveals a higher print of 16.39 million total subscribers, of which the vast majority, at 13.62 million were pre-paid users, and just 2.77 million post-paid. Number portability in Ecuador was introduced in October of 2009, and readily taken up. National Telecommunications Secretariat (SENATEL) data puts the cumulative total of ported mobile phone numbers as of Oct 6, 2014 at 1.125 million users. In pursuit of greater sector accountability, as of July of 2014 according to SENATEL, Ecuadorean mobile operators are obliged to meet stipulated customer service quality parameters updated by CONATEL. These also encompass the aspects of cost and coverage. In 1Q2014, a $138.5 million fine levied by the Superintendency of Market Power Control on number one mobile provider Claro for anti-competitive practices was overturned. NOT JUST CONSUMING According to the Ecuador Times, the Florida-based company Yezz—present in 12 Latin American markets—in October 2014 introduced its first Android smartphone, the Andy 3.5, assembled in Ecuador. Costing less than $200 in the local market, the brand hopes to cash in on high mobile penetration and subsequent data sales. Its Development and Manufacturing Electronic Ecuadorian plant (DMEE) located in Carcelén, has a monthly capacity of 35,000 units, but ultimately aims at 70,000. THE PLAYERS Effectively a duopoly, Ecuador’s mobile sector is shared among América Móvil’s Conecel (trading as Claro), Telefónica’s Otecel (trading as Movistar), with CNT (previously Telecsa/Alegro) holding a slender market share. Late in 2013, the industry watchdog granted additional spectrum to CNT enabling the delivery of LTE services. Reaching around 85% of the population according to BNAmericas, Conecel (Claro) offers both pre-paid and post-paid wireless services, as well as internet, paging, and data transmission. In 2012, Movistar gained some ground on market leader Claro, despite having less than half of the latter’s subscriber base. SUPERTEL data put Claro’s share modestly down from 70.0% to 69.0% for the year, while Movistar rose to 29.3% YoY from 28.4%. State-owned CNT retained its 1.7% market share at the end of 2012. For the year the mobile market registered subscriber growth of 7.7%. The government aims to ensure universalization by increasing teledensity, yet certain trends borne out by industry data— and familiar to many emerging markets— suggest there is still some way to go. Telecoms & IT THEBUSINESSYEAR 105 INTERVIEW What have been the main achievements of the Ministry since it was `ioh^_^×p_s_[lm[ai9 Our Ministry is rather young and has just 100 people working in it. The core reasons behind its establishment were the importance of new technologies and the information society in the development of Ecuador. Some of our top priorities back then were the modernization and upgrading of certain institutions linked to the sector, such as the Civil Register, which deals with the identification of Ecuadorean citizens, Correos del Ecuador (the national postal company of Ecuador), Corporación Nacional de Telecomunicaciones (the public telecommunications corporation of Ecuador), and the National Register of Public Data, among others. Therefore, we can proudly say that the Ministry has become rather iconic within public administration, having performed vital tasks in this sphere. We have updated services, boosted technology, and changed old patterns. In sum, I believe that we have achieved much over the past five years, leading key transformational processes for Ecuador through innovation and our flexibility as an organization. How have these achievements impacted the economy? According to available data, we have achieved significant change during a period of unprecedented growth for Ecuador. Internet penetration rose from 6% to almost 70% during this period when we went from being the bottom country in terms of broadband access to topping the table, according to US research. We currently have the fastest internet in the region at 3.6 Mb/s. Overall, our work has been constant and steady, as we had to create all the infrastructure and then provide services that today are available to Ecuadorean society. In another example, five years ago there was only 3,000 ki- SYMBOLIC development TBY talks to HE Jaime Guerrero Ruiz, Minister of Telecommunications and Information Society, on the achievements of the ministry, and improving access to technology. lometers of fiber optic in the country, whereas today the figure has reached 35,000 kilometers. What has been the Ministry’s approach to improving access to technology in Ecuador, and what programs have you implemented to achieve this? We have implemented many nationwide programs to democratize technology services such as internet access For example, we have created the socalled “Info Centers,” spaces to provide training, equipment, and tools to democratize internet access in Ecuador. Today, we are nearing 2 million visits to these centers in a country of 14 million inhabitants. In this context, we have seen a boost in entrepreneurship among citizens of rural Ecuador thanks to these Info Centers, and they can now utilize the network to advertise and sell their products by leveraging the infrastructure that we have installed. Approximately 500 such centers have been established nationwide. Additionally, we have seven mobile classrooms, whose main aim is to reach remote areas of the country to provide internet training and access to people living in remoter areas, which tend to be those on the lowest income. This program received international recognition for its efforts to build an inclusive system for new technologies. Over 250,000 people have already benefited from this program. We have also established the School Connectivity The Ministry was founded in 2009 to modernize the role of technology in Ecuador Over the past ûYH\HDUV internet penetration has risen from 6% to 70% BIO Program, the aim of which is to interconnect all public schools across the country by setting up a special lab within the school with computers and internet access. Currently, 7,000 schools are connected, while at the beginning of our term there were none. Our goal is to reach 9,000 schools by the end of this government’s term. Also, we have already started providing schools with Wi-Fi areas for students, staff, and even parents. So far, the eight largest public schools in the country already have Wi-Fi, and we aim to ensure that all public schools across the country become Wi-Fi spots. This project, alongside the two I mentioned before, impact as many as 5 million people in Ecuador. Jaime Guerrero Ruiz has been the Minister of Telecommunications and Information Society since April 2010. He also presides over the National Council of Telecommunications, which oversees the telecommunications market. He is an electrical engineer specializing in electronics. He completed his graduate studies at Escuela Politécnica del Litoral (ESPOL). He attended secondary school at Liceo Naval de Guayaquil. He holds a postgraduate degree in Administration of Telecommunications Systems and Services and has taken various courses in management. 106 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW get ONLINE TBY talks to René Ramírez Gallegos, National Secretary of Higher Education, Science, Technology and Innovation of Ecuador, on technology parks, Yachay, and international partnerships. What would you say is the role science and technology play in Ecuador’s efforts to transform the productive matrix? It has an essential role, for technology and science contribute to strengthening the quality of human resources. The government has a vision that the transformation of the country’s production matrix has to be based on the development of the finite resources in society, meaning the development of a society of knowledge through innovation. In this context, the country invests large amounts to make sure that the main value added to society is knowledge. To achieve this, it is necessary to develop, on the one hand, a strong education and culture system, and, on the other hand, a strong science, technology, and innovation system. We are at this particular stage right now. What is the importance of Yachay in these efforts? In the higher education segment, we still engaged in a nationwide reform since 2007 that entails the adoption of a new organic law, a restructuring of the system to eliminate lower quality higher education centers, and increasing expenditure budgets—from 1.1% to 2% of the GDP since 2007. In fact, we are the country with the largest expenditure on education in the region. We also put a lot of emphasis on human talent, and this is why we set up a Bachelor’s degree in teacher training and education. We have also become the country with the best remuneration for researchers. We are in the process of developing four new universities, while also restructuring the network of technology institutes. We aim to build closer bridges between the private sector and the higher education system. We increased the budget for research, innovation and technology from 0.2% to 0.72% of GDP. We have also started strengthening the degree courses related to the pedagogical and educational sciences, because we believe the structural change has to do with childhood, primary, and secondary education. We want to further push the role of innovation and creativity through technological and industrial parks. Regarding Yachay, it is the physical space that will contribute to these and other developments, creating economic environments within research institutes, universities, and other such centers. Yachay will be the innovation center of Ecuador; a city, a company, and a university representing the innovation system of the country. It has to work also as a specialized cluster where people will live and generate innovation, knowledge, research, and future developments for Ecuador. What is the importance of international partnerships for the development of education and research in Ecuador? One of our first duties has to do with catching up, and we know international partnerships can give us that knowledge transfer we need. Ecuador’s current stage of development requires that knowledge transfer right now. We need to boost ties between local universities and the main research and innovation centers around the world, for this is key for the development of a knowledge-based society. We also bring our view into it with several programs such as scholarships—at the moment, we grant over 9,000 scholarships for Ecuadorean students and researchers to study in the best universities in the world. What are the main objectives of the Secretariat for the next few years? Our top priority has been to strengthen the innovation system in Ecuador. Before the presidency of Correa, no government had the vision to guide its development. We also must make sure that innovation, technology, and education have sufficient financial resources for their development. The Yachay Project will be a “city of knowledge” constructed on 4,500 hectares in the north of Ecuador BIO René Ramírez Gallegos’s graduate studies are comprised of a MA in Development Economics from the Institute of Social Studies, the Hague, an MA in Government and Public Affairs from the Facultad Latinoamericana de Ciencias Sociales Sede (FLASCO), Mexico, and graduate studies in quantitative methodology at the University of Michigan. Prior to his appointment to the position of National Secretary of Higher Education, Science, Technology and Innovation, Gallegos served as the National Secretary of Planning and Development, Content Coordinator for the Ecuador National Development Plan, and President of the National Council for Modernization. In addition, he was an associate professor at FLASCO-Ecuador Economics Department, Coordinator for the Millennium Center for Social Research (CISMIL), as well holding professorship [nnb_Jihnc×]c[Ohcp_lmc^[^ Católica del Ecuador, and the Universidad Andina Simón Bolívar. Telecoms & IT THEBUSINESSYEAR 107 YACHAY FOCUS THE KNOWLEDGE CITY: INVESTIGATE! INNOVATE! PRODUCE! Alongside encouraging research, innovation, and entrepreneurship, one of Yachay’s primary goals is the development of human talent, for both Ecuador and beyond. The $1.04 billion initiative, Yachay University for Experimental Technology and Research— also known as Yachay Tech, or just Yachay—is meant to be a world-class, globally linked, and nationally transformative center for research and education. It will be a core element of the Yachay City of Knowledge, which the Ecuadorean government envisions as a forward looking, hi-tech, and vibrant metropolis developed around the idea of sustaining start-up incubators, world-class R&D units, and industrial production facilities. A research university and planned city in Urcuquí, in Imbabura Province, Yachay is to function as an academic, technological, entrepreneurial, and scientific hub. The campus extends over an area of approximately 12,000 acres and plans to host 4,000 students when it is fully up and running. Internationally recognized academic institutions such as Stanford, Cal Tech and Kansas State University are already deeply involved and plan to offer academic instruction in English as well as Spanish. Comparisons are being made to similar, admittedly better-known, innovation and ICT hubs such as Silicon Valley in Palo Alto, South Korea’s Incheon development, Dubai, and the Shenzhen Special Economic Zone in China. As far as the story goes, the original idea for Yachay was developed in 2013 after President Correa toured Asia, and was so impressed with the technologically advanced research and business clusters in the countries he had toured in South Korea and Singapore, that he wanted to import a similar model to Ecuador. Yachay was designed from the outset to be a highly interdisciplinary institution and to have a world-class guiding concept and administrative/research structure. Also known as the Ciudad de Conocimiento, or City of Knowledge, the official motto— Investiga! Innova! Produce! (Research! Innovate! Produce!)— succinctly sums up the goals and aspirations of the wider project. Although Ecuador is rich in oil and gold deposits, President Rafael Correa wants to diversify and move his country away from an economy that is largely based on oil-extraction and mining. He wants to take Ecuador through an academic and technological revolution with Yachay; hence, his initiative to build a research university surrounded by labs, ICT facilities, industrial parks and, eventually, a full-service city. The university is strategically placed right at the heart of the Yachay City of Knowledge, an overarching idea that is meant to promote technology transfer, the stimulation of creative business innovation, and the sharing of knowledge, which is ultimately designed to address social development in Ecuador and the wider world. According to José Antonio Olivares, General Manager of IBM del Ecuador: “I have never seen any project like this in my 17 years working for IBM. We have to keep in mind not only the technological production of such an ambitious project, but its future educational contribution to a country such as Ecuador and a region like Latin America.” Yachay is designed around what is known as a “triple helix” model, which blends together elements of the public sector, academia, and the private sector to create a network for interaction among scientists, researchers, and entrepreneurs to create a self-reinforcing ecosystem of internationally recognized research, business innovation, creativity, and productivity. According to plans released in 2013, the university was meant to open in 1Q2014, and is in the process of doing so on a revised timeline. Microsoft, Cisco Systems, and China Telecom have already set up units in Yachay. The city is centered around the university, and it’s also meant to function as a special economic development zone. There will also be other public research institutions as well as industrial parks for knowledge-based industries such as ICT and biotech. There are also planned incubators for innovation and centers of research. Yachay is expected to play a fundamental role in the construction of a national innovation system. It is an incubator for higher education and public and private research institutes, but also for other associated knowledge-based industries. Hector Rodriguez, Yachay is designed around what is known as a “triple helix” model, which blends together elements of the public sector, academia, and the private sector to create a network for interaction among scientists, researchers, and entrepreneurs. 108 THEBUSINESSYEAR ECUADOR 2014 General Manager of Yachay, told TBY, “Yachay bridges basic and applied research, and the end product. We leverage human talent, superlative infrastructure, and the valuable incentives [such as lower transaction costs], to create a bank of innovative ideas. The state is a promoter of these initiatives; it has the will to advance into the knowledge-based economy, and the government has invested what was necessary to guarantee that workers’ skills are nurtured.” Caltech in the US is helping to design the overall plan for implementing Yachay University and the overall strategy that will help innovations developed within the City of Knowledge grow from research concepts to finished products, which could be manufactured in an attached industrial park. Yachay will focus on five strategic areas: life sciences, IT, nanotechnology, energy, and petrochemicals. The government and senior administrators hope that world-class scientists and researchers will be drawn to this to this new Latin American take on the Silicon Valley model. One hope is that Yachay will be able develop and patent new medicines from the remarkably bio-diverse Amazon rain forest. Other nearby abundant natural resources are planned to aid in the development of cutting-edge solar power cells and new petrochemical technologies. It should also be a fertile ground for attracting talent from Latin America and across the world, and hopes to become Latin America’s first truly international academic cum business innovation institution. The Yachay concept is however loaded with possible risks and pitfalls. “Money can buy infrastructure,” says Academic Secretary of the Board and Caltech Professor Jose Andrade, “but it can’t buy you excellence or international relations with strategic partners that make The success of the City of Knowledge is critically dependent on the quality of both its people and the national—public and private— support provided, leading to the creation and development of a generation of human, business, and research talent. things happen.” A great test for Yachay will be in drawing in the type of global level talent needed to bring the idea into reality. Moreover, Yachay could also run the risk of being seen as a university catering mostly to the needs of the Ecuadoran (and beyond) elites, isolated and removed from the rest of the country, operating in a vacuum while much of the country is struggling to meet basic development goals. Many would also question as to why the significant amounts of money and energy being spent on building Yachay is not being invested into Ecuador’s existing—and often under funded—public universities. Yet at its best, it aspires to develop a new and talented generation of technology experts and business leaders, which would enable the establishment of an effective knowledge-based economy in Ecuador and the wider region. The success of the City of Knowledge is critically dependent on the quality of both its people and the national—public and private— support provided, leading to the creation and development of a generation of human, business, and research talent. To this end, Yachay has the ambition and resources to create a new type of Andean revolution. Ecuador and the region are banking on its success, and the world is watching. Telecoms & IT learned DREAMS THEBUSINESSYEAR 109 INTERVIEW TBY talks to Héctor Rodríguez, CEO of Yachay Public Company, on the Yachay University project and promoting the knowledge economy. Yachay University styles itself as the City of Knowledge. What does that mean? Yachay University’s concept involves the creation of a science and technology park. A global city is going to be built where people can experience the latest technology and world-class companies can maintain permanent communication and exchange businesses. Its full name is Universidad de Investigación de Tecnología Experimental, and it is a fundamental part of our overall project. National public-sector research centers are based across the university, and we are also partnering with a number of enterprises around the world in projects to develop R&D facilities within the city. From an economic perspective, one of the most important aspects of the city is entrepreneurship. As we seek investment from established companies, we offer them a complete business system to allow for the creation of new enterprises and start-ups. Essentially, Yachay is an ecosystem for innovation, with all systems, public services, and high-quality, advanced technologies in place. It is also important that we are not competing in the way China did in the international market 20 years ago, on the basis of having the lowest labor costs in the world. Rather, we are trying to develop a system Yachay means “knowledge” in the indigenous Kichwa language and is being constructed on 4,500 hectares of land north of Ibarra known for having the most qualified engineers and scientists available. Classical academia in Latin America is not traditionally about connecting entrepreneurs and the industrial sector. We have a triple-helix concept, which aims to coordinate the relationship between the public sector, academia, and industry. The public sector and academia used to invest heavily in basic research, while industry, in contrast, pursued margins. Therefore, Yachay University bridges the gap between basic and applied research and the end product. How will you facilitate the transfer of knowledge between social segments? The national constitution recognizes three subsystems in our economy. The first one is the private sector, which guarantees the rights to private property, which is far removed from the model of the traditional socialist regime. The second subsystem is the state sector. And in Ecuador, we have another one, the popular solidarity economy, which involves communal and cooperative property. Ecuador is home to 14 nationalities, each with their own understanding of the law and the economy. Yachay University cannot merely develop a strategy that guarantees the active role of public enterprises. Its role is to develop the city holistically, and to commercialize technology. In the 1970s, we developed Petroecuador to create an oil-based economy, and in the 1980s we created Corporación Nacional de Telecomunicaciones to develop the ICT sector. We have developed Yachay because technology and knowledge underpin the future. The private sector is the developer of these new businesses, along with established companies. Our role as the state is to enable knowledge transfer from Yachay to the private companies that are developing the sector. The popular solidarity economy, which consists of cooperatives, such as collectives of banana farmers, is also important in Ecuador. One of the commercial failings of this sector is its lack of access to technology. This represents the difference between, for example, an Ecuadorean banana cooperative and Dole. Dole obtains its seeds from Monsanto; it purchases them at a low price and has its own laboratories. A banana cooperative may have 10,000 farmers, but lacks such technology, so it has to buy seeds from abroad. They are, therefore, tied to the technological package of fertilizers and pesticides that they have to import. The final price is also quite different. This type of business has no way of developing its own technology in order to be competitive. Yachay’s role is not only technological, but also social and educational when it comes to offering new opportunities to the community and introducing new ways to generate income. BIO Héctor Rodríguez was born in Quito in 1980, and graduated from the Universidad Católica del Ecuador, where he studied Social Sciences as applied to International Relations. After later obtaining an MSc in government and public affairs from the Facultad Latinoamericana de Ciencias Sociales, he has taught public policy courses in the Universidad Internacional del Ecuador and the Altos Estudios Nacionales (IAEN). He has also served as Executive Director of the Ecuadorean Agency for International Cooperation (AGECI) and as assessor for the National Secretariat for Planning and Development (SENPLADES). In addition, he has worked as President of the Directorate of the Ecuadorean Institute of Education Credit and Scholarships (IECE), and as General Subsecretary for Science, Technology, and Innovation. 110 THEBUSINESSYEAR ECUADOR 2014 FORUM YACHAY knowledge CHERRY BITE JOSÉ ANTONIO OLIVARES Ecuador’s Yachay - City of Knowledge project, inspired by the Silicon Valley concept, is set to get underway blending higher education with an applied technology think-tank approach to learning. ERNESTO KRUGER CEO, Kruger General Manager IBM, Ecuador T he government of Ecuador is highly invested in technology, and it has set the tone for the private sector on how they should allocate their budgets to this field. The best example of this is the City of Yachay, which is known as the “City of Knowledge” in Ecuador. In my 17 years at IBM, I have never seen such an ambitious and sizable investment in technology from the government. This investment also encourages local technology firms, especially those engaged with software production, to develop themselves. Ecuador is a leading software developer in the region if we bear in mind the size of the country, its economy, and its population. Ecuador has local software companies exporting regionally with a high level of reputation. In this context, Ecuador is firmly moving toward becoming a regional referent in the software industry thanks to the economic and industrial developments in the country over the last few years. And we have to keep in mind not only the technological production of such an ambitious project, but its future educational contribution to a country such as Ecuador and a region like Latin America. Ecuador is set to become a producer of IT talent from which the government, as well as the public and private sectors, will benefit. In this context, the City of Yachay will bring together the public, private, and academic sectors. JUAN CARLOS CISNEROS General Manager, Alcatel-‐Lucent E cuador has many entrepreneurs, and 20 years ago many people started technology companies. The problem was that we did not have a government that understood technology. We did not have a market or laws for entrepreneurs. Today, the new economy that the government has established has integrated well. A market needs to speak about innovation and entrepreneurship. Today, it is as if the stars have aligned and now entrepreneurship is possible, which is fantastic. I believe Ecuador was reborn, and became a new country. To this end, I think Yachay is important in the educational system because it is about research and new technologies, but it is only about applied research. Research needs to connect to reality. Reality is the companies, the enterprises, and the necessities. It is possible for Yachay to have incubators and accelerators, which is great. If Yachay has accelerators, this is good for us, because we need more help to do more with entrepreneurship and start-ups. Moreover I believe Yachay is doing well in involving the private sector. It is not possible to do only public work; that is not good. Good examples of this include Ireland, Israel, South Korea, Malaysia, and, of course, Singapore. These are examples of start-up nations. They have blended the public and the private sectors. E cuador has experienced significant changes in its IT industry, not only in terms of the advancement of its infrastructure, but in demand patterns and market trends too. These have been linked to generational changes in Ecuadorean society. I believe that today Ecuadorean human capital in segments such as software and applications is highly qualified and skilled. We have software developers that have worked with well-known multinationals in the development of new apps and software. However, our segment in particular still requires know-how and technology transfer from the main multinational companies operating in Ecuador. As an Ecuadorean, the Yachay project will be good for the country and the industry, positively contributing to building up such expertise and bringing even faster technological developments to both Ecuador and the sector. All in all, I think that the city of Yachay will better position the industry as one of the main drivers in Ecuador’s efforts to change its production matrix, while boosting the export profile of this industry. I think higher education centers in Ecuador should follow the trend that Yachay will set, boosting cooperation between all parts and involving the private sector. The effect of the city of Yachay will impact not only the IT sector, but the entire economy of the country and its people too, because it will boost innovation in other key economic sectors for the country. Telecoms & IT THEBUSINESSYEAR 111 INTERVIEW evolving LEGACY TBY talks to Omar Monroy, Country General Manager of Xerox, on the company’s economic contribution and its move to the services sector. How has Xerox contributed to the economic development of Ecuador? While Xerox has been growing annually, our goal has also been to promote our team’s efficiency and productivity as much as needed to achieve the right goals. In that sense, for many years, we have set out our expectations according to a number of metrics such as customer and distributor satisfaction, which are both on the rise. Paper use is decreasing daily due to several environmental factors, adding up to efficiency and cost savings. For many years, this has been a negative trend for us, because we have been focused on printing paper. Now, we have recognized that the only way to survive in this multimedia world is by concentrating on creating efficient solutions in document management. Therefore, Xerox has always been a partner for our customers and not just a retailer. We focus on a few different market segments, including SMBs and top-tier corporates. On these three levels, we have always made an effort to provide efficiency through consulting to our business partners. Our consulting services are based on managing their documentation processes to better understand how we can assist them. Being a business partner implies generating networking relations at all corporate levels and investing money, time, and technology. After all, we have a similar approach to smaller businesses. As a result of our consulting services, we have transformed our business model. At the same Xerox Ecuador has been the best operation model around the globe ip_lnb_j[mn`iolil×p_s_[lm( time, we have promoted the digital document process geared toward customer productivity. What is the importance of Ecuador within Xerox’s global portfolio? Xerox Ecuador has been the best operation model around the globe over the past four or five years. There are four main regions, including the US and Canada, Asia, Europe, and the emerging markets such as Latin America, Africa, the Middle East, and the CIS. Among these 180 countries, Ecuador has delivered the best performance and YoY growth. We have also had the largest market share increase and have implemented many unique services over the past three years. Why is the Ecuadorean market such a strong performer for Xerox? There are several reasons behind this, one being that Xerox has been here for around 48 years. For instance, our success is our passion; BIO Omar Monroy has a diploma in business management from the Monterrey Institute of Technology and Higher Education (TEC Monterrey), and has studied at American Junior College and the Escuela Politécnica del Ejército E.S.P.E, both in Quito. Before assuming his current position, he served as manager of corporate accounts sales, managing both sales and operations in this area, as well as other notable positions within Xerox. Since 1994, he has received numerous awards including the highest grade of recognition within the ]igj[hsih×p_i]][mcihm& and was responsible for Xerox Ecuador being awarded Best Emerging G[le_n;`×fc[n_ih`iol occasions. 112 THEBUSINESSYEAR ECUADOR 2014 we’re proud to be Ecuadorean and hard workers. Also, our customer’s trust due to our value proposition is key. In 2013, you mentioned that Xerox still faced the challenge of being perceived to be focused on paper. What have you been doing to change that? This has been hard for us to be honest. We’ve been emphasizing Xerox’s involvement in digitalization and the outsourcing of technology business processes, including the banking segment. Our communication to top executives is that Xerox offers IT services and more. We are now closing deals on this matter with some of the largest companies in the region. This organization is divided horizontally and vertically, meaning that we have units that focus on specific segments such as electronic archiving and banking and education services. One of our projects, Yachay Laboratories, is where we’re investing to develop new service technologies. Xerox has been in Ecuador for 48 years The bulk of Xerox’s business is now focused on electronic document management and business process consulting How important is the public sector for Xerox in Ecuador? The government in Ecuador is an important customer that has multiple service requirements. There are around 6,000 companies in this segment, meaning the government is our biggest client. Looking forward, what are your major goals for the next few years? First of all, our customers are our main focus. Xerox is doing well in terms of revenue, profit, market share, inventory, and collections. However, our purpose is to leave a legacy based on more than financial results. Secondly, our customers are going to receive fewer documents printed by Xerox, because we are corporate citizens, and conscious about the environment. Consequently, we develop software, technology, and electronics in order to cut down on paper use. Success is a mixture of skill, training, teamwork, and passion Telecoms & IT THEBUSINESSYEAR 113 INTERVIEW smart way TO PAY TBY talks to William Moss, CEO, and Richard Moss, President for Latin America of Cobiscorp, on the intersection between microfinance and ICT development. William Moss has been Cobiscorp’s President and CEO since 2005. He became the Company’s Executive Vice-President and COO after serving since 2001 as EVP, Founder, and COO of Microbanx Systems, LLC, which merged with Cobiscorp. He is a founding member of Washington Capital Partners and of Inter-American Merchant Investors, LLC. William Moss has served as Vice-President and Chief Ch`ilg[ncihI`×]_l`il the Overseas Private Investment Corporation (OPIC) in Washington, DC; and Vice-President for Investment Management of Commercial Materials, LLC, and an international private equity fund. William graduated from Cornell University with an MBA (1984) and a BS in Economics (1977). Richard Moss graduated with a degree in Economics and Japanese from Cornell University, and later received a Monbusho Scholarship to do graduate work at Keio University in Tokyo. He holds an MBA in Finance from the University of Pennsylvania’s Wharton School of Business and an MA in International Studies, also from the University of Pennsylvania. He is currently CEO of Cobiscorp Latin America. He has also served in diplomatic and government functions as Director General of the Andean Community, and was the Minister of Trade, Industry, and Fisheries in the government of Gustavo Noboa. Do you think that Ecuador’s reputation falls short i`l_Ø_]nchanb_mnl_hanbi`nb_n_]bhifias[h^nb_ software sector generally? WILLIAM MOSS I think all small countries that are under-capitalized have difficulties playing in the software business. That is why it is relevant that we are an inter-American company. As a software company, Cobiscorp needs access to the financing required by this business, and that kind of financing has not generally been available in Ecuador. When countries face a shortage of capital, it tends to be particularly lacking for businesses like ours that create intangible products. We have our roots here, and at the same time we want to be presentable and grow internationally. That is what gives us that inter-American focus. We do not consider ourselves to be a global player. There is some use of our software in places such as Japan and Africa; however, those were ultimately serendipitous opportunities that arose without precedent. We do see growth opportunities in Latin America. We also see that our base market, which is this region, has expanded into a whole new region, the US. What kind of challenges have you experienced in entering the US market? WM We are growing in Latin America, and have our eye on the US market. Our priority was to move to where we could have access to capital. We have been executing a strategy with a long-term vision, and moving some strategic pieces of our organization to be localized where investors need to see them. As a software company, if you want to be funded in Silicon Valley, the first thing venture capital or private equity investors will say is that they want the senior leadership of the company to be based there, too. As a result, we have been proactive in establishing our operations in the US. Now that Cobiscorp is present in the US, the strategy has worked because in 2013 we received major financing from an internationally renowned private-equity company, which is part of the Tem- 114 THEBUSINESSYEAR ECUADOR 2014 pleton Group. This has boosted our ability to work and also enables us to do things such as recognize some of the opportunities in the US and aim to bring our product up to the standard of such a demanding market. RICHARD MOSS We are a well-established company in the IT sector, with access to top talent and the ability to interest that talent on a long-term basis. At the same time, we have the ability to work with the major universities here and to influence the development of their programs. However, our R&D work also has to take place within the realities we face in the international market. We are working with world class consulting firms who can tell us what the market trends are. We are global players but the R&D is done locally with top talent. What technologies developed in the Ecuadorian context is Cobiscorp implementing in more developed banking markets? WM There is microfinance, for example, also known as small-dollar lending in the US. We are in an environment now where the demand for this type of financing is growing. Importantly, Cobiscorp has the technology that allows it to undertake large-scale micro financing in a way that is economically feasible, even in places such as the US where labor costs are much higher, which is something that no US financial technology provider has really had much experience in. We do individual microfinance, solidarity groups, and village banking. We have just taken on a client in Bolivia with close to one million microloans, where loan officers transact business via mobile devices. We also have several banks in Colombia using our technology to do several million microloans. This expertise is necessary now for a whole new set of reasons. For example, regulators in the US are pushing programs to attend to the underbanked. I also think that when you work in these environments it is important, even just with microfinance, to push the business out to mobile devices for payments and so forth. Being able to make mobile payments is the leading trend at the moment. That is the reason why, through a combination of circumstances, we ended up being the technology provider for one of the largest telecommunications companies in Japan that wanted to enable immigrants there to send money by mobile phone. Given your international presence, what is the sighc×][h]_i`?]o[^ilninb_]igj[hs9 RM The government is focusing on the IT sector. There are major changes taking place in the world of payments, with digital money coming onto the scene, which is being sponsored by the central bank. Those are all areas where I believe there is enormous potential to increase the volume of business in Ecuador, and that will have an impact on the change that is occurring in both the productive matrix and in this new digital payments world. What is next for Cobiscorp? WM Our next step is to leverage our expertise in what we call ubiquitous finance. This means the ability to make the technology that enables financial services work anytime, anywhere, for anyone. This is bringing in inclusive banking capabilities that are frictionless and borderless. We want to become a recognized player in the enablement of ubiquitous finance to satisfy that need, also we are focused in our “digital banking product portfolio.” Cobiscorp is a pan-American ×h[h]c[fmi`nq[l_ provider with roots in Ecuador and the US The company is looking to leverage its expertise in mobile services `ilgc]li×h[h]_ providers to grow in the US market Telecoms & IT THEBUSINESSYEAR 115 INTERVIEW THE IT crowd TBY talks to Katherin Miño, General Manager of PuntoNet, on improving internet penetration, streamlining installation, and promotions, and staying responsive to consumer trends. How would you describe PuntoNet’s role in Ecuador’s internet sector? PuntoNet’s role is vital, as we help companies to develop their activities and integrate different applications around Ecuador and the world. Telecommunications is a crucial tool that enables companies to optimize their time and resources and dedicate themselves to developing their core business without worrying about such activities as telecommunications Over the past seven years, the country has seen a profound economic transformation, with internet penetration jumping from 6% to 70%. How has this changed the internet business? BIO Katherin Miño, General Manager of PuntoNet, studied Business Administration Engineering. Afterwards, she earned an MBA at the International SEK University and a MSC at the ADEN Business School. Sánchez complemented her studies with management and coaching programs at the Florida International University (FIU). She is an accomplished negotiator, as well as knowledgeable ch[^gchcmnl[ncp_&×h[h]c[f& [h^n_]bhc][f×_f^m( Her professional career has focused primarily on the development of telecommunication companies. In the past we lacked the tools to provide good coverage and could not reach all segments. With government support to develop telecommunications and create regulations, coverage in Ecuador today is good. We can provide internet to people and to companies with many kinds of systems, including satellite, fiber optic, wireless, copper cable, and more. How did that transformation change the way PuntoNet approaches the market? We have two different segments, each with a special focus. The first segment is home broadband. For this segment, PuntoNet created and implemented a large wireless network around Ecuador, building a dedicated product that was more cost effective than other methods. Our strategy was to form close Galápagos, being islands, exclusively have satellite coverage. In the key cities, we have a fiber-optic or wireless network. In the smaller cities, we only have a wireless network because its implementation is more convenient. What distinguishes PuntoNet from some of the larger names in the market? relationships with our clients since in the early days many were unfamiliar with internet usage, perceiving it as largely a medium for entertainment. At that point, the government supported the use of the internet to develop and spread knowledge. Then, there is the corporate segment, where the key consideration is innovation and the renewal of technology. We want to give companies the entire IT infrastructure they need to facilitate the running of their business. Companies do not have to spend money on servers, or telephone systems, so we provide this. Our business is 65% corporate and 35% home clients. Our focus is on the corporates because by the nature of business they have the most urgent requirements. We are fourth in Ecuador in terms of corporate market share, but we do not count Claro or Telefonica because their core businesses are somewhat different from our own. How large is PuntoNet’s network coverage, and what challenges have you faced in building network infrastructure from scratch? We have commercial offices in 13 cities, but provide 100% nationwide coverage of Ecuador. The difference is in the kind of technology employed in each city. For example, the We are fundamentally different from other companies for two main reasons. Firstly, our service is easy to install. Other companies take between 10 or 15 days to activate. We can install it within four or sometimes three days. We also run campaigns with a same-day installation service. People do not like to wait, so this makes a real difference. Additionally, the larger companies have many internal processes and inevitable bureaucracy. We are a private company and it is a simple task for us to optimize the process. If I want to run a campaign this weekend in some neighborhood or other, I can offer to install the service the same day. It makes a big difference. Another thing is that we do not contract work out to third parties. We want to be a company that creates jobs, our entire team belongs to PuntoNet. We create a culture of belonging, and our employees are motivated to do the job right. What are your goals for Punnih_nip_lnb_h_rn×p_s_[lm9 We have two goals. One is to keep a long relationship with our home clients. The other is to improve our relationships with our corporate clients and provide them with a greater range of tools so that they remain with us. I anticipate us becoming a large company recognized for its human talent and committed to its mission. 116 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW cheap & CHEERFUL What kind of challenges are faced by an internet service provider in Ecuador? TBY talks to Tomislav Topic, CEO of Telconet, on targeting corporate internet subscribers, the internet and economic growth, and navigating localized impediments to growth. Over the past seven years, internet penetration in Ecuador has grown from 6% to 70%. How has that changed the sector and the way you do business? The internet is becoming commonplace nowadays, and the industry is becoming more mature. We have grown significantly in both urban and rural communities, not only in terms of the total user numbers, but also in average internet speed. We can safely say that Telconet and its brands are by far the greatest contributors to the average speed of connections in Ecuador, which has the fastest speed after Mexico since January 2014. In mid-2014, we will surpass Mexico with an offering of 100 Mbps for less than $40. Coverage has increased, and we have grown to 60,000 registered users, while adding 3,000 to 4,000 users a month. We stand to become the Latin American leader in broadband speed. How does Telconet approach today’s market in Ecuador? We go after the customers who need more bandwidth in a more secure manner; that is our market. We are not very active on the low-end residential market, instead we are focused on the corporate market That being said today Megadatos through the Netlife brand is targeting the residential market with fiber optic to the home, and we provide services to Megadatos. How has the growth of internet speed transformed how Ecuador does business? It helped to reduce entry barriers to the cyber market. Most of our customers, direct and indirect, now have very good access to information, and now small producers can position and advertise their products. Many studies have tried to establish the relationship between broadband internet use and the national economy. Some suggest that it might be responsible for 1%2% of GDP growth. The Minister of Telecommunications has provided an open field so that companies can provide their best services. As long as the government does that we will grow, but the minute the government tries to control the market, the nation will suffer. Some governments try to favor their state-owned companies, but this is short sighted because the whole country will suffer for the benefit of few. The municipalities now have broad powers to issue taxes on cables; we have identified five municipalities that charge unreasonable or wild sums for this. One small municipality has charged us $1.2 million for a small segment of fiber-optic cable. Even if you lawfully argue against it, they dismiss your arguments and order the banks to collect the money. We are actively trying to counter those unreasonable charges. Telconet Jlipc^_mnb_ fastest internet connection in Ecuador cmnb_f_[^cha ISP in the corporate segment What does Telconet do to invest in people? We provide people with training and funding for education, and we also finance 50% of their career. If there are courses directly connected to their work, we cover 100% of the cost. We spend perhaps one of the highest shares of total revenues in the industry on training. What are the differences in the way you need to approach the corporate and residential segments of the market? Of our total business, 75% is corporate and indirectly 25% is residential. We are the leader in the corporate market, and through the Netlife brand we expect the residential segment to become equally significant. In the corporate market you have to take care of every customer individually, as each has particular requirements that demand personalized attention. The residential component is a massive market where the focus is on the significant majority. You cannot be certain that everyone is satisfied with the service. BIO Tomislav Topic studied Electrical Engineering at the Escuela Superior Politécnica del Litoral (ESPOL) in Guayaquil, before completing a Master’s in business administration at INCAE. He has more than 30 years of experience in the IT sector in Ecuador. He has been involved in the creation of the most important, world-class data centers constructed in Ecuador. As Founder and President of Telconet, the largest private data carrier in the country, his company has been responsible for the construction of ×\_l'ijnc]ch`l[mnlo]nol_& ^cacn[f]_lnc×][ncih&[h^nb_ provision of data center and cloud computing services throughout Ecuador. His expertise has been shared through his presentations at major forums and panels across the region. Telecoms & IT THEBUSINESSYEAR 117 MEDIA B2B JOSÉ DANIEL GÓMEZ ORLANDO PÉREZ Director, El Telégrafo President, DIRECTV live from ECUADOR The local media landscape is evolving with the times, and there are plenty tof options, from TV to newspapers. What role has the company played in Ecuador’s media landscape? JOSÉ DANIEL GÓMEZ DIRECTV operates in the Americas, principally in the US, where we have over 20 million subscribers. Our Latin American operations are based on two services: Sky in Mexico, Central America and Brazil, and DIRECTV in a region we call PanAmericana, which has nine countries, mainly in South America and the Caribbean. Official data from Supertel, the official data provider, shows we have 335,000 subscribers in Ecuador as of end-2013. Meanwhile, in Latin America, we have 17 million subscribers overall, which includes Brazil and Mexico, and features all Sky and DIRECTV operations. Ecuador had a small market before we launched DIRECTV Ecuador in September of 2008. It was a small enterprise handled by local partners, with 26,000 subscribers, which we have grown to 335,000 in six years. ORLANDO PÉREZ El Telégrafo has a long tradition in the Ecuador's media industry. At the beginning, it was a local private newspaper based in Guayaquil and, today, with public management, it is one of the most important national newspapers. One of El Telégrafo's strengths is that we think of information as a process, and we follow every important news item and its consequences and explore what is behind it. Also, we have ambitious editorial projects at the national level. On the other hand, we compete against strong media outlets in Guayaquil and Quito, the main cities in Ecuador. For this reason, over the past few years, we have published local and regional editions to get closer to these realities and we tell stories that any other big media outlet tells. Credibility is our main quality in comparison to our competitors. What are your goals? JDG The market is still at the growth stage, and I foresee no deceleration in the near future. The market is growing as a whole, and still less than one out of every five homes has paid TV. Hence, it is quite feasible to reach five out of 10 homes within the next five to 10 years. With a population of around 15 million, and around 4 million homes, the market is there. Of course, it gets progressively more difficult to win new cus- tomers as the competitive environment becomes crowded, but we are in a solid position for growth on the strength of our technology, service, and content. We hold the rights to a wide array of sports, and offer something for the whole family. OP We have two main goals. First, we want to become a leading national newspaper in Ecuador with coverage in all points of the country that reflects the reality of the nation. In second place, our purpose is to publish the economic, social, and industrial growth that the country experimented and will continue to do. At this time, our priority is to train a staff with better skills, and we want to become a leading newspaper with our information and our professionals. We will achieve these goals in the next five years. The government is renovating the once neglected railroads to revitalize communities throughtout the Andes. Image: Ferrocarriles THEBUSINESSYEAR 119 122 125 127 Paola Carvajal, Minister of Transport and Public Works, on investment in transportation infrastructure. The expansion of the Panama Canal has the transport sector scurrying to accomodate expected increases. Manuel van Oordt, CEO of LAN Ecuador, on commuting culture and anticipating market developments. Transport REVIEW The government has realized the importance of an effective and efficient transport system, and has been investing billions to renovate and expand old networks to boost economic activity. CALIBRATE & FINE TUNE T he topography of Ecuador means establishing an effective transport system is no easy task. However, with a considerable amount of investment and planning the country is well on its way to achieving its goals. Under the Strategic Mobility and Transport Plan (PEM), initiated by the Ministry of Transport and Public Works and run by Ineco, the sector has been working to set up a comprehensive multimodal transport system to connect the entire country. The plan is set to influence all infrastructural investment related to transport from 2013 to 2037 and cover all modes of transport. It is based on a similar strategy carried out by Spain, and will link territories and provinces to make them more competitive on land, sea, and in the air. ROADS In total, Ecuador has 43,197 kilometers of road, of which 6,467 kilometers are paved. Even though air and rail have made huge improvements The government is investing large amounts of money in the country's transport infrastructure. The idea being that a sophisticated and expanded transport network will allow better access to markets and attract more FDI. over the last few years, the road is still the main form of transport for many of the country’s inhabitants. The main reason it is still such a dominant force in the transportation sector is because of the reach of its network. It is able to connect 82% of the country’s population. However, while the network is extensive, large parts of it are generally unusable for any significant commercial use, and tend only to be used by private automobiles and public buses. Under the PEM, the sector aims to create a series of hierarchical hubs that will provide access to ports, airports, and other areas of public interest. As of July 2013, the Correa administration had invested $800 million in upgrading and extending the road network, with a further $5 billion earmarked for future investment. Some of this investment is aimed toward local farmers to help them transport their goods more effectively to international markets. In April 2013, the Development Bank of Latin America (CAF) signed a loan 120 THEBUSINESSYEAR ECUADOR 2014 agreement with Ecuador for $75 million to partially fund the Public Investment for Road Infrastructure Program. The main focus behind the program is to promote the conservation of the road network while also making a positive impact on traffic, road quality, and safety. The program is a part of the National Development Plan, which one of its aims is to create a sustainable and improved cargo and transport network, through programs and planning, and the reduction of transport and travel costs. RAIL Under the Strategic Mobility and Transport Plan (PEM), initiated by the Ministry of Transport and Public Works and run by Ineco, the sector has been working to set up a comprehensive multimodal transport system to connect the entire country. Ecuador has an old railway dating back to the 1800s that used to spread over 1,000 kilometers; however, over many years of neglect, a lack of investment, and the harsh weather conditions Ecuador experiences, by 2008 only 10% of the original track still remained. It was in this year, however, that the government embarked on a massive restoration plan with an aim to return it to its former glory. Today, the country has 966 kilometers of working track after an extensive amount of work was put into the network. The railways are state owned and mainly used for tourism, the most iconic being the Tren Crucero, or Cruise Train. Since 2008, the government has invested $280 million in this 400 kilometers of track, which connects Quito in the Andean mountains to Guayaquil on the Pacific Coast. Since the renovation, the line has boosted economic activi- ty in many villages along the track, which were for a while, largely cut off from the outside world. As Eduardo Carrera, General Manager of Ferrocarriles del Ecuador, put it to TBY, “The communities on the train lines are the ones in charge of managing them, so we will increase their level of participation, generating job opportunities with as many as 5,200 direct employment positions and around 16,000 indirect ones, as well as providing economic alternatives to these communities.” While the current rail network is largely used for tourism purposes, the government is investigating the possibility of increasing its role as a freight carrier. In December 2013, Ecuador’s National Pre-investment Institute (INP) commissioned Barcelona’s metro operator, TMB, to carry out a feasibility study for the construction of an electrified rail network connecting key mining centers with the country’s ports on the Pacific Coast. The 10-month study will look into the viability of connecting the mines in the southeastern part of Ecuador with Puerto Bolivar. In addition to this, the study will also consider the possibility of installing a passenger line from Quito to Guayaquil; however, unlike the Tren Crucero this will be aimed at the high-speed transfer of passengers between the two cities, unlike the four-day journey taken by the Cruise Train. The TMB will look to find the best economic, technological, financial, and environmental options for the project and deliver its results toward the end of 2014. MARIA DE LOS ÁNGELES DUARTE Former Minister of Transport and Public Works What role can foreign investment play in the development of future projects? We still have much to do, and opportunities abound for foreign investment. In fact, it is required in order to realize building such large infrastructure projects as the super highways. The Strategic Highway Plan is set to become a very attractive proposition for foreign investors. Also, Ecuador’s ports need more investment to develop key projects to increase their capacity and capabilities. For example, the Port of Guayaquil needs to be dredged to become a deep-water port to accommodate larger vessels; we are also advancing the tender process for the operation of the Port of Manta, another key infrastructure project for the country’s future, because it can further boost Ecua^ilÎm_rjilnjli×f_(Chnbcm]ihn_rn&nbcmcmnb_×lmn maritime port to be operated on a concession basis by a third party, and we expect to do the same with the other Ecuadorean ports. What are the main competitive advantages of Ecuador? Ecuador is located in a geostrategic position to become a leading logistics player in the region, close to the Panama Canal. Additionally, the Port of Manta is a deep-water infrastructure that does not need dredging in order to accommodate large vessels. In this context, we enjoy a closer position to Asia than many other countries in the region. Ecuador is also the country with the widest and richest biodiversity in the world; we have many different climate zones and highly diverse fauna, unique traditions, culture, and communities, and we also boast the Galápagos Islands. The country has a unique potential to boost its tourism offering and become a top worldwide destination, and in this context Ecuador also has great potential for culinary tourism. Whatever the essential investment already made in infrastructure, that earmarked for the future will play a key role in l_f_[mchanb_jin_hnc[f?]o[^ilb[mch[ff×_f^m( Transport N?OJilnNl[`×]"chNbiom[h^m# PORTS Source: World Bank Being so close to the Panama Canal and having such a large coastal stretch, Ecuador’s ports have always been important for imports and exports. The main ports in the country are Esmeraldas, Bolivar, Guayaquil, and Manta, which are all state owned. According to the World Bank, TEU traffic is increasing in Ecuador, up from a little over 1 million in 2009 to 1.12 million in 2012. This increase is somewhat different to Ecuador’s neighbors, which mainly saw decreases in port activity, with Colombia falling 6.9%, Venezuela 8.2%, and Panama 4.1% in 2013 compared to 2012. The government wishes to continue this growth, and has decided that certain reforms will be the best way to achieve this. One of the main changes will be the abolishment of the four separate port authorities managing the ports, with the Ministry of Transport and Public Works taking over control. By doing this, the government hopes it will be able to specialize each port and have them cooperate to create a more efficient and effective import and export system. “The government aims to boost maritime and port activities to develop the production matrix and open new business channels. Ecuador’s ports will play a major role in the national effort to change its trade balance, positioning the country as one of the main regional ports,” Rocío del Pilar Proaño Villareal, Sub-secretary of Ports and Maritime Transport, explained in an interview with TBY. 1400 1200 1000 800 600 400 200 2012 2011 2010 2009 0 While the TMB looks into the country’s national network, Metro de Madrid was selected to carry out technical studies to build the Metro de Quito. Plans to build a metro system in Quito were first drawn up in 2009 and the design was completed in 2012. In January 2013, construction began on the $1.68 billion Line 1 that will run from Quitumbe bus station in the south of the City to Mariscal Sucre Airport in the north. The line will have 15 stations and it will take 34 minutes to complete the 22-kilometer trek. Plans for three additional lines are being considered; however, work is unlikely to begin before the completion of the first line in 2017. It is expected that by 2030 the metro system will handle 500,000 daily commuters, up from an initial expected demand of 378,000 daily commuters in 2017. THEBUSINESSYEAR 121 AIR One of the biggest projects in recent times for Ecuador has been the construction of its new international airport in Quito. The $700 million Quito International Airport was officially opened to commercial traffic in February 2013. The airport boosts the longest runway in Latin America at 4,100 meters, some of the most sophisticated air-traffic control technology around, and 38,000 sqm of terminal space with an annual capacity of 5 million passengers. The airport also includes an additional 34,000 sqm of additional buildings, which include the control tower, cargo space, hangers, catering, and ancillary aviation services. Now that the country has the infrastructure, it is looking to increase its connectivity. According to Paola Carvajal, Minister of Transport and Public Works, “In accordance with the investments that have been made, the Ministry is updating the Air Services Agreements with our sister nations in order to improve international air travel connectivity and attract a wider network of transport services to benefit passengers and improve our export capacity.” EDITH VILLAVICENCIO General Manager, DHL Express DHL Express is focused on international express services. We are not developing our local business in terms of domestic delivery, which is the key difference. We are international specialists in imports and exports for companies here in Ecuador. We have the infrastructure, have been working here for 30 years, are the only multinational company present, and are a part of Deutsche Post DHL. No other courier here can boast this asset and all the knowhow that comes with it. 122 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW the road home In your capacity as Minister, what do you currently identify as the greatest strengths and weaknesses of Ecuador’s transport infrastructure? Our greatest strength right now is that the national government and the Ministry finally have an integrated vision that takes into account all modes of transport and the connections between them. During the term of this government, as part of the “citizens revolution,” there has been increased investment in multi-modal transport infrastructure, which for many years had been unattended to, or non-existent, in order to provide the most modern transport and logistics systems, as well as promote greater regional integration for Ecuador. Furthermore, Ecuador has a national road network of the first order, which serves as a base for maintaining high levels of service, allowing conservation of the network. Finally, we have airports that can meet the needs of our economy with modern systems of navigation. With the implementation of the National Strategic Plan for Mobility and Transport, we are working to overcome many of the weaknesses that persist in our transport system. We will have a balanced and integrated road system, which will connect the entire country with infrastructure that is modern, and fit for purpose, for all modes of transport. We will also have secure roads that meet inter- TBY talks to HE Paola Carvajal, Minister of Transport and Public Works, on investment in transportation infrastructure, responding to changes in the maritime industry, and developments in the aviation industry. national standards allowing us to increase capacity. Additionally, our airports and seaports will be standardized to international norms, and our railways will have an integrated automated signaling system. Finally, overall, we are working to develop improved multi-modal transport integration between all forms of transport. What efforts is the government making to ensure that Ecuador’s maritime sector remains competitive with the expansion of the Panama Canal? Our three priorities in this area are to define a national vision and policy for our ports, to develop the Sectoral Port Plan, and to continue investing according to the needs of each port. In addition, the development of the Port of Manta will permit ships of a greater draft to come to Ecuador’s ports, which will allow us to receive vessels whose only other option is Panama. What is your vision for the air travel sector in Ecuador? The vision of the Ministry with respect to the air travel sector is based on coordinat- Ecuador is seeing historic levels of investment in its transport infrastructure ed investment in infrastructure and services, as much in the air travel sector as in the airports themselves, in order to develop national destinations and bring benefits to the regions located within the area of influence of these airports. This has motivated the gradual growth in routes and frequencies within the country. In accordance with the investments that have been made, the Ministry is updating the Air Services Agreements with our sister nations, in order to improve international air travel connectivity and attract a wider network of transport services to benefit passengers and improve our export capacity. What role can the private sector have in the development of Ecuador’s transport infrastructure? By using public-private partnership (PPP) models, we can increase investment in infrastructure in Ecuador. It should also be mentioned that the construction sector, specifically relating to transport infrastructure, has benefited from a historic level of investment in recent years. What are your priorities for transport and infrastructure policies? Our top priority is to guarantee access to transport and mobility services that are inclusive, secure, and sustainable on a local and international level. I also want to use transport policy to promote the conditions of competitiveness and productivity that are necessary to enable the transformation of the productive matrix, and the consolidation of the most equitable structures for the generation and distribution of wealth. Overall, my goal is to enable connectivity through different modes of transport at the highest standards of quality. BIO Paola Carvajal was born in Guayaquil and graduated in Civil Engineering from the Instituto Tecnológico y de Estudios Superiores de Monterrey in Mexico. She has a Higher Diploma in Occupational Health and Safety Management, and is currently working on her doctoral thesis in civil engineering with a focus on transport at the Universidad Politécnica de Cataluña in Spain. She has ]_lnc×][ncihch[o^cncha[h^ urban planning, and has participated in a training program for administrators of public transport along with numerous other courses. Since 2006 she has served as a Professor at the Universidad Católica de Guayaquil, introducing ideas and courses from other countries and systems. Most recently, she worked as Executive Director of the Agencia Nacional de Tránsito from December 2012 to March 2014. Transport THEBUSINESSYEAR 123 INTERVIEW TBY talks to Armando Castellanos Talero, General Manager of Servientrega, on developments in the logistics sector, staying competitive, and navigating new markets. ket players by surprise, as they found they had no local alternatives, whereby many made strong short-term commitments. What role can the logistics sector play in the transformation of Ecuador’s production matrix? always COMING THROUGH What is the role of Ecuador in Servientrega’s international operations? Ecuador plays a major role in Servientrega’s global operations, because it was our first experience abroad. This in itself is an important factor for our Colombian headquarters. We arrived in the Ecuadorean market 20 years ago (1994), at a time when the country enjoyed an oil boom, making it attractive for investment. It was in fact a situation reminiscent of what the country is enjoying today. Servientrega saw Ecuador as a strategic market to enter; it has similar characteristics to that of Colombia, whereby our competitive advantages offered new services to the market. On top of that, we share the same language, which also facilitates business. How have Servientrega’s activities evolved since the dollarization of Ecuador? The country has evolved considerably since the establishment of local operations, and also in the light of political and social events. Over the past few years, the country has gained political, economic, and social stability, which has enabled companies to formulate longer-term strategies and better predict economic performance. This environment has strengthened us, as we gradually consolidated our operations in Ecuador. Over the years, we have learned to diversify our activity here, expanding to new segments. Also, rising purchasing power and the expansion of many economic sectors have helped us to increase our role in this market. Servientrega emphasizes maintaining highquality trained staff as a key part of its operations Qb[nnl_h^mb[p_sioc^_hnc×_^ in the market over recent years? This is a transition period for Ecuador, an important moment in which it is set to show foreign markets the real competitive level and added value of its production. This production requires high-quality standards and competitive prices. The government implemented a strong program to substitute imports for local production that supports this transition process. This has caused some economic turbulence in terms of the performance of companies during 1H2014, which will gradually pick up during 2H2014. It is an ambitious plan that the government supports with tax and other legal benefits. This process took many mar- BIO Armando Castellanos has worked with Servientrega Ecuador since 1994, in the positions of National Logistics Manager, Financial and Administrative Manager, and currently as General Manager. Prior to working with the company, he was employed as the Manager of Colombian Operations for Servientrega in Tolima from 1989 to 1994. He graduated with a degree in Political Economy from the Universidad Libre de Pereira in Colombia in 1988. Nowadays, a more integrated logistics industry with better products and solutions has allowed for a higher degree of specialization and professionalization in the sector. Many players have learned to adapt themselves to the real needs of clients. We have seen improvements in the quality of services, storage services, and cargo handling, and also in the utilization of technology. We have also seen an improvement in the human capital of not only this sector, but all sectors in general. What are the competitive advantages of Servientrega? We built the company from nothing, which means that we know in detail what we do and what our clients require. We provide personalized and integrated products and services to meet their demands and standards. We hold several ISO certificates. We have also started a specialization process to become a leading company offering solutions for the transport and distribution of hazardous substances and goods, as there is an interesting market niche there with a very low offering at present. This requires strong external preparation in terms of certification, licensing, and staff training. Currently, we are training our personnel, obtaining the pertinent environmental certificates and licenses, and preparing our facilities and fleet. We always prioritize the implementation of solutions according to what our clients need, as we develop an integrated plan along with them. 124 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW MOVING on up TBY talks to Fernando Guerrero, General Manager of TAME EP, on competition and pricing, the new hub in Quito, and adding international flights. What is the importance of TAME for Ecuador’s transportation system? TAME connects the country. If you compare TAME to other airlines in Ecuador, such as LAN or AeroGal—AeroGal belongs to Avianca Group—you will see that TAME’s coverage is much wider. Other companies tend to focus on highly profitable destinations, such as the Galápagos Islands. The basic principal of TAME is to fly within our home country. We connect almost 15 different destinations in the country, including the Amazon region, the Galápagos Islands, and coastal Ecuador. We have nine international destinations that connect Ecuador to other Latin American countries and the US. TAME has flights to São Paulo, Buenos Aires, Lima, Panama City, Caracas, Havana, and New York. Is part of TAME’s mission to act as a representative for the country internationally? There is an interesting development happening all over the world. Larger airlines are disappearing because of the economic downturn. Fuel, pilot training, and aircraft are becoming incredibly expensive. In Southern BIO Fernando Guerrero studied sales engineering at the Escuela Politécnica del Ejército, followed by an advanced English program for graduates at Texas A&M University, and an MBA in business administration with a specialization in logistics and international commerce at Loyola University in Chicago. His career has included such positions as Manager of Sales and Operations for Challenge Air Cargo (UPS) from 1992 to 1997, Senior Consultant for Deloitte & Touche, and Director of Business and Logistics Project Development for TAGSA-CORPORACIÓN AMERICA in Guayaquil. In addition, he has served as Regional Director of EMSA-SERVISAIR and Director General of Civil Aviation in Ecuador. America, international airlines are leaving the market. They have left a duopoly in the airline sector in Latin America with only LAN and Avianca Group. Recently, Avianca Group started a joint venture with TAM from Brazil. TAME plays a major role in attracting tourists to Ecuador and helping to keep prices competitive. Before TAME launched regular flights to Bogotá, you would possibly pay $800 for a onehour flight from Quito to Bogotá. In 2007-2008, if you wanted to travel from Quito to Buenos Aires, you would pay $1,500. Today, the prices have reduced considerably— now you will only pay $400 for a flight from Quito to Bogotá—it is half of the price you had to pay before TAME launched this route. In 2011, TAME became a public company. What was the importance of this transition for TAME? Before 2011, TAME belonged to the Ecuadorean Air Force. In 2011, it became a 100% state-owned company. The Ministry of Transport, the institution responsible for delivering government policy in the transport industry, has jurisdiction over the company. The Ecuadorean Air Force was focused on offering transport services within the country and didn’t consider the international market. Another major change concerns our commercial strategy. The price of tickets is now related to the time you are buying them, and changes if you buy the tickets a day or a month before the scheduled flight. The image and branding of the company has changed, too. TAME was part of the Ecuadorean Air Force until 2011, when it became a separate public company What does TAME do to compete with the duopoly in the airline business? We have a number of distinctive features. Our key advantage is the connectivity between Quito and the rest of the country. In the summer of 2014, we are establishing a huge hub in Quito. It will stand in line with international hubs in Lima and Bogotá, and will have a very short transiting time of 30 to 60 minutes. Is New York important addition in the transition of Quito into a hub? Yes, because currently, the flight to New York departs from Guayaquil, and soon it will depart from Quito. As a part of this strategy, we will also have a flight to Ft. Lauderdale. It is both cheaper and faster to fly there than to Miami, although Miami Airport is convenient for transit passengers. However, there are many flights, and sometimes you need to wait for three hours or more in transit. The headquarters of many major North American airline companies are also located in Ft. Lauderdale. Transport THEBUSINESSYEAR 125 PORTS FOCUS HARMONIZED EXPANSION The potential for larger ships requiring deeper ports following the expansion of the Panama Canal has seen both operators and the state swing into action. Ecuador currently has four large stated-owned commercial ports, Esmeraldas, Bolivar, Guayaquil and Manta, as well as three other smaller ports, namely La Libertad Port with a maximum draft of 12 meters, and Bahia De Caraquez and San Lorenzo Ports that are both small river ports with maximum drafts of 7.8 meters and 6.6 meters, respectively. At one time Bahia De Caraquez was in fact Ecuador’s largest port; however, the focus there now is on eco-tourism activities. In terms of overall container traffic using the standard unit of measurement, equivalent to containers of 20 feet or 6.25 meters (TEUs), Ecuador was ranked number 54 in the world in 2012 with a world share of only 0.2% according to Fact Fish data. However, TEU traffic increased from 1,000,895 TEUs in 2009 up to 1,124,415 TEUs overall for Ecuador’s ports in 2012 (World Bank figures), somewhat bucking the global trend for deceleration in port activities. Of its near neighbors, Colombia suffered a 6.9% decline in port trade, Venezuela was down 8.2%, and Panama dropped by 4.1% in 2013 compared to 2012 figures. In contrast the latest report released by the UN’s Economic Commission for Latin America and the Caribbean (ECLAC) shows that Chile’s growth was up 6% in 2013 compared to 2012 figures, Brazil was up 6.2%, and Ecuador’s trade rose by a more modest 3.9%. The best results were experienced in Uruguay and Argentina where port trade rose by 9.7% and 9.8%, respectively. BANANAS FOR SALE In terms of specific areas of trade, Ecuador is the world’s largest exporter of bananas and they make up a whopping 22.3% of the country’s exports. Some 40% of this trade goes through the Port of Bolivar in El Oro Province, where 92% of the port’s activities relate to banana exports, while the remaining activities include the export of other perishable goods such as broccoli, pineapple, mango, and passion fruit, as well as cocoa. Between January and October 2012 a total of 1.26 million tonnes (1.38 million tons) of fruit were exported through Bolivar Port. By way of comparison over the same period in 2013, 1.29 million tonnes (1.42 million tons) of bananas alone left via the port thanks to infrastructure improvements worth $51.2 million, according to figures from Fresh Plaza Global Fresh Produce and Banana News. RESTRUCTURING TO IMPROVE GROWTH One of the maritime policy issues Ecuador’s government is wrestling with currently is rivalry between the state-owned ports of Esmeraldas, Bolivar, Guayaquil, and Manta. To this end, in 1H2014 Ecuador’s President Correa passed a decree abolishing the four port authorities and centralized their administration under the Ministry of Transport and Public Works instead. The government’s intended strategy is to develop each port’s area of specialization in the hopes of forming a complementary countrywide port infrastructure capable of future growth. There is also a desire to capitalize on Ecuador’s geostrategic position with a view to benefiting from the current Panama Canal expansion program. Of Ecuador’s four stateowned ports Esmeraldas, situated at the mouth of the Esmeraldas River, is the furthest north and serves the country’s northern hinterland including exporting its agricultural products, wood, and wood chips. The Port of Manta positioned at the center of Ecuador’s Pacific Ocean coastline is the country’s deepest port. It has an international terminal and also has a niche as the hub for Ecuador’s tuna fishing industry and related export trade for which the port has a second fishing terminal. In terms of international trade, Manta competes with Guayaquil Port, which is only 200 kilometers away and accounts for the largest volume, some 90%, of both inbound and outbound cargo in Ecuador despite not being as deep as Manta Port. Bolivar Port dominates the country’s banana trade. As Rocío del Pilar Proaño Villareal, Sub-secretary of Ports and Maritime Transport told TBY in a recent interview, “Our concern leans more towards specializing our ports for greater dynamism and activity.” To this end there is a twostage development plan to increase the water depth at Manta Port from its current 12 meters to 14 meters, then 16 meters to allow larger vessels in. With further government investment earmarked to create another port beyond the Gulf of Guayaquil to allow for increased shipping traffic without the need to dredge the existing Guayaquil Port channel. FERNANDO VELA HOLGUIN Country Manager, Cotecna Ecuador doesn’t export many commodities. We don't have wheat, so we import it from Argentina and Canada. Ecuador produces corn for its own necessities, as well as rice, but not for export. We do have a surplus of cocoa beans, and so our company performs some inspections for cocoa and coffee. We also perform [mcahc×][hnhog\_l of banana inspections. We trace the containers for export with GPS to eliminate any risk of contamination. We additionally offer a trade ×h[h]cham_lpc]_`il international banks. 126 THEBUSINESSYEAR ECUADOR 2014 VOX POPULI MARITIME JUAN CARLOS JAIRALA REYES LAND ahoy! JUAN JURADO VON BUCHWALD President, Cámara Marítima del Ecuador Being so close to the Panama Canal, Ecuador’s ports play an important role in its economy, one which many would like to expand. T T he need for deep-water ports has long been on the agenda, for both the state and private sectors. With ships of deeper drafts coming our way, we are facing an interesting challenge in regard to Ecuadorean ports. While the port of Guayaquil has the market, services, and infrastructure to handle commerce with these new vessels, it temporarily lacks the draft in its access channel. On the other hand, there are other ports of deeper draft, but that lack the connectivity and the hinterland that makes attractive for shipping lines to call there. The government’s response to that call is the creation of another port beyond the Gulf of Guayaquil. That solution is disputed by many official and private sector players in Guayaquil, who believe that a channel could be dredged in order for Guayaquil to be able to receive the traffic. RODOLFO CANO MURE General Manager, Autoridad Portuaria de Manta Manager, Autoridad Portuaria de Guayaquil he idea to develop the Port of Manta is not directly related to competing with the Port of Guayaquil, or simply to building the deep-water port, but is geared to making the entire maritime and port network more competitive. Today, we have four main ports: Esmeraldas, Manta, Guayaquil, and Puerto Bolivar, all of which have their own hinterland and characteristic features. Our concern leans more toward specializing our ports for greater dynamism and activity. Manta will offer alternatives within Ecuador that are more in line with maritime transportation with large vessels. This will be the first deep-water port in Ecuador and the concession will be granted in 2014. It does not mean that it will be the only one, but for now, we are aiming to increase industrial activity related to the maritime industry around Manta, and stimulate the industrial and economic development of Ecuador. ROCÍO DEL PILAR PROAÑO VILLAREAL Sub-‐secretary, Ports and Maritime Transport T he port of Manta has two terminals— the international terminal and the fishing terminal, which is mainly to meet the needs and demands of the tuna industry. The concession is for the infrastructure and facilities of the international terminal. The idea behind the concession is to find a strong international partner to achieve an established expansion, which aims to boost the transfer of knowledge, and bring their international expertise into Ecuador. We want to specialize this terminal so it can accommodate deep-water vessels. Right now, we have a deep-water port G uayaquil is, in itself, a key city for the country; it has traditionally been a maritime port city with a strategic location that put it at the forefront of commercial development in Ecuador. Guayaquil has long led the development of foreign trade in the country as a consequence. For this reason, Guayaquil has always hosted the foreign communities in our country. However, I should add that Ecuador’s other maritime ports are also of importance for the country; Manta, Esmeraldas, and Puerto Bolivar all have their own importance and market niche. We all complement each other and form a crucial network of maritime ports that underpins national development. The Port of Guayaquil at the moment accounts for the largest volume of imported and exported cargo, and there’s a nationwide strategy to complement the role of the Port of Guayaquil with a higher specialization among the other ports. Guayaquil today enjoys many benefits in term of infrastructure and logistics facilities due to its leading role. that lacks the infrastructure to welcome those types of vessels. We have received interest from several large export companies in the agricultural industry that as soon as we start operating the new facilities, they will make Manta their natural port. All in all, the concession aims to develop the necessary infrastructure to make the Port of Manta a deep-water port, making our infrastructure more competitive and efficient; we will have a 400-meter long dock for containers, two carrying cranes with all the necessary associated infrastructure, and a partner in the concession will bring knowledge, expertise, and contacts. Transport THEBUSINESSYEAR 127 INTERVIEW feet off the GROUND TBY talks to Manuel van Oordt, CEO of LAN Ecuador on the commuting culture, being proactive to improve flight efficiency, and new cargo markets. You became the head of LAN Ecuador at the beginning of 2013. What has been your perception of Ecuador’s airline sector? The airline sector is very modern featuring the latest generation aircraft, which is not typical of many airlines in South America. It is an industry that has high standards in terms of safety and airport infrastructure. It is a dynamic market because of the country’s geography, which makes it very decentralized. The size of the market is also large considering the size of the country and the per-capita level of travel is very high. There is a culture of air travel in Ecuador because the corporate sector is used to high-frequency travel. They demand fast and high-quality service, which makes the market very fluid. How does that compare to the last market you worked in, Peru? Peru was much more centralized with domestic traffic flying through Lima, and much less traffic between other cities. In Ecuador, there is a higher rate of flights in the corporate sector. The new airport in Quito is somewhat farther from the city, so people plan their trips more. A lot of people just get on a plane to have lunch with their client, and then return to the office in the afternoon. People are used to the flexibility of commuting between cities. What does good service from an airline mean to you? Good service is a combination of attributes: modern airplanes, proper maintenance, scheduling, and rigorous training standards. We have also worked hard to enhance cooperation with the authorities, the government, the airports, and our suppliers. In BIO Manuel van Oordt is CEO of the airline LAN Ecuador, a subsidiary of LATAM Airlines Group, Latin America’s largest airline. He has had a successful career with LATAM Airlines Group in Peru and Chile, where he started in 2004 as International Sales Manager for LAN Airlines. Prior to that he held management positions at telecommunications multinational company Telefonica in Peru, was a management consultant with AT Kearney in Brazil, and participated in the start up of Peru’s ×lmn]l_^cnch`ilg[ncih bureau, Riesgo SA. Manuel holds a Bachelor of Science (BS) degree in Electrical Engineering from Worcester Polytechnic Institute (WPI), Massachusetts, and a Masters of Business Administration (MBA) from the Ross School of Business, University of Michigan, both in the US. Quito for example, there is an issue with turbulence during the summer due to the mountains situated near the landing path. We found out that most of the turbulence comes from a certain area, and is caused by volcanic activity and air rising from the Amazon, so we mapped out a different route. This change has reduced the number of canceled flights at Quito airport by 20%-30%. We also worked with the Quito airport to make an alternate plan to land from north to south because sometimes the wind changes direction. We have also improved efficiency with a larger runway. The old airport was at a much higher altitude, and required more distance for take off, while the new airport is built at a lower elevation making it more efficient and safer. LAN is also working with the Fundación Municipal de Turismo para Cuenca. What is the mcahc×][h]_i`nb[n`ilsiolijerations in Ecuador? Our business depends on tourism, and we work closely with the tourism authorities, with Quito Turismo, and the Ministry of Tourism, with whom we recently signed an agreement to promote Ecuador. We are trying to promote more international and Ecuadorean travel. We work with the Ministry of Tourism on marketing campaigns to bring in tour operators and to learn how to promote Ecuador through training and educa- LAN Ecuador is part of LATAM, the Latin American Airline Group, which was formed by the merger of Chile’s LAN and Brazil’s TAM tion. We also work with tour operators internationally for very specific marketing campaigns. We have quotas for certain places, like Barcelona and have sales teams all over the world. How much of your business is in cargo here? Cargo represents about 25% of our business, and the growth of the flower sector has played a large part. Ecuador has become one of the world’s greatest exporters of roses. Growers here have introduced many new varieties that have attracted new consumers, and opened up fresh markets. Ecuadorean flowers are in high demand in Eastern Europe and Russia. Ecuador's urban environments are expanding as new development comes online. THEBUSINESSYEAR 129 132 135 138 Santiago Ribadeneira, CEO of PROINCO Inmobiliaria, on the company’s social responsibility. The construction sector is a critical part of national infrastructure and development plans. Manuel Román Moreno, General Manager of Empresa Pública Cementera del Ecuador, on changing cement production. Real Estate & Construction R E V I E W R E A L E S TAT E Although house prices in Ecuador have been trending upwards in recent years, as it becomes a popular destination for expatriates and retirees, in 2013 and 2014 the market has cooled somewhat, providing good value for money for both buyers and landlords aloke. PLACE IN THE SUN A fter five years of steadily increasing house prices, Ecuador’s property market is now showing signs of slowing, partly due to an oversupply of residential properties that remain unsold, creating a glut on the supply side of the market. Ecuador’s GDP grew at 4.3% in 2013, while inflation rose at a steady 3.1%. Ecuador regularly ranks among the top 10 destinations in the world for expatriates and retirees. The local real estate market has seen house price rises in the past several years, and these rises have mainly been driven by the following factors: 1) the country has witnessed rapid economic growth and maintained relatively low interest rates, both of which have spurred buying; 2) there was a great influx of migrants, many of whom are returning home from living in Spain and the US; and 3) there was an increase in the number of North American and European expatriates and retirees who choose to make their homes in popular major cities, such as Quito and Cuenca. Image: Pronobis Ecuador is extremely popular among expatriates retiring to the country, which has long been a steady supply of buyers in the real estate market. Now, new developments are attracting both locals and foreigners' attention to the sector. Foreign and expatriate migration into Ecuador has been a key factor affecting the housing market in recent years. Ecuador is a popular destination for retirees from North America and Europe, and it ranks highly as a place to retire or as a place to have a second house. More and more non-Ecuadoreans are choosing a less expensive and more pleasant life in the country, and Sergio Torassa, CEO of real estate developer Pronobis, told TBY that: “It has been ranked number one by Forbes and International Living, and in top positions by the Financial Times. According to the UN, some areas of Ecuador have arguably the second best weather in the world, with excellent sunshine hours and attractive sunsets. The government of Ecuador grants real estate visas to foreigners who purchase homes in the country worth at least $25,000. In addition, the country also grants pensioner visas to foreigners with a retirement income of not less than $800 per month. 130 THEBUSINESSYEAR ECUADOR 2014 Yet despite its popularity as a destination, prices are lower in 2013 and 2014. This downward pressure on prices has been caused by a number of factors, primarily a large inventory of unsold properties and a slackening in the rate of Ecuadoreans returning from overseas. Despite these factors, few suggest that a USstyle real estate “bubble” is forming. Access to credit is also a factor for homebuyers, and effects the market differently in different regions. As Ecuador uses the US dollar as its official currency, property prices in Ecuador are quoted in dollars, which creates another appealing factor for buyers from abroad. The US dollar has been the official currency of Ecuador since 2000. Down payment rates of 30% on mortgaged properties and the fact that more than half of all real estate in popular destinations such as Quito and Cuenca carry no mortgages, are the most frequently cited reasons developers and real estate agents are optimistic about the market. Mortgage loans were also down in 2013. In 2010 and 2011, the number of mortgages written by commercial banks increased by 10% and 12% a year. According to government figures provided by the central bank, the effective lending rate for purchasing residential housing remained at 10.64%, which is unchanged on the previous two years. During 2013 and into the first months of 2014, builders and real estate agents say that appreciation is easing slightly. The general industry consensus is that prices will increase 5% to 6% in 2014. Jaime Rumbea Dueñas, Executive Director of the Asociación de Promotores Inmobiliarios de Viviendas del Ecuador, told TBY that the real estate market not only reflects the Ecuadorean economy, but also drives it. “It is of the utmost importance, not only because it is one of the three most dynamic sectors in the economy, but also because it drives urban growth and the urban economy, which nowadays is probably the most important part of the economy, in terms of our country’s growth estimates,” Rumbea Dueñas explained. “We had growth of over 20% three years ago. Our country was growing at a rate of 7%, and now it There are many real estate developments underway all across the country is growing at a rate of 4%, but our sector is still helping to pull the economy up.” According to real estate industry observers, such as The Global Property Guide, Ecuador’s property market is mainly driven by Ecuadoreans, both local homebuyers and those returning from the US and Spain. While foreigners do continue to buy real estate, the trend, especially among English-speakers, is now strongly in favor of renting, and since late 2010, there have been significantly more new renters than buyers. The rental market for foreigners breaks into two categories; the more traditional unfurnished rental with a one-year lease or more short term, and fully furnished rentals, which include all the necessities such as utilities, building fees, internet telephone, and cable TV service. In the traditional market, a good quality 2- or 3-bedroom rental can be found for $300 to $500 per month, while turn-key rentals of three to six month blocks run from $600 to $1,000. Both categories of rental can be had at a fraction of rental costs in North America and Europe. QUITO, CUENCA, & BEYOND Ecuador is a country of great natural beauty and bio-diversity; however, the most active real estate markets are found in the major cities. Quito is widely considered to be one of the world’s most culturally rich cities, and is a UNESCO World Heritage Site. From the colonial Spanish architecture of the historic Old Town, to the modern skyscrapers of the business districts, the city provides all of the modern conveniences of a major global city, alongside a quieter and often simpler pace of life—at affordable prices. In Quito, the average price of apartments and houses was stable in October 2013. According to NuWire Investor, In October 2013, apartments located in Quito were priced around $900-$1,000 per sqm, or $80-$95 per square foot. Houses were priced around $700 to $820 per sqm, or US$65 to $75 per square foot. The average price of new three-bedroom apartments in Quito, with views, ranged from $95,000 to $120,000. ALFONSO JALIL General Manager, Real Estate Division, Grupo Aries What is the importance of the Real Estate Division within Grupo Aries? Lately, there has been a trend for large industries and multinational companies to invest only in strategic assets. They are looking to locals to provide them with non-strategic services, such as warehouses, logistics, and i`×]_m(Ip_lnb_j[mn^_][^_& because of globalization, multinationals in Ecuador are buying more and more local companies. We are specialized in these types of investments. What is the main focus of your business? Iol`i]omcmi`×]_m[h^q[l_houses. But right now, we are \ocf^chai`×]_mj[]_m[h^q[l_houses for these types of companies—big multinational companies and major local companies. Also, we have our traditional type of business, which is apartments and developments. For example, we are building brand new luxury apartments in Quito, and we have a project in Santo Domingo de los Tsachilas on a 48-hectare piece of land. Which part of the real estate business do you see as the main driver of growth for Grupo Aries in the next few years? The real estate business is cyclical. Lately, it has been good business, due to high oil prices and the credit provided by Banco del Instituto Ecuatoriano de Seguridad Social (BIESS). Unfortunately, the government will not be so liquid until 2017 when they will have all their electrical projects ready. Real Estate & Construction Magazine and website articles promoting Cuenca as the world’s top retirement destination are attracting record numbers of North Americans and Europeans to the city. Due to its popularity, prices have risen dramatically in recent years. Compared to the US, house prices are 60% to 75% higher than they were in early 2008, the result of dropping prices in the US and five years of appreciation in Ecuador. In the large home market, a 3,000 to 5,000 square foot houses in Cuenca’s most affluent neighborhoods are priced about $275,000, which significantly higher than the average cost of a US house in the same period. Through the first four months of 2014, property values continued to rise steadily despite the slow economic recovery underway in much of the rest of the world. According to the Cuenca Chamber of Construction, the overall rate of appreciation in Cuenca held constant from 2007 to 2012 at 8% to 12% per year, depending on the type or property and location. Annual appreciation for newer condos was running 10% to 12% and higher. COMMERCIAL REAL ESTATE According to the World Property Journal, Ecuador’s general construction price index fell from 229.54 in August 2008 to 210.79 in May 2009, in the aftermath of the international financial THEBUSINESSYEAR 131 The downward pressure on real estate prices has been caused by a number of factors, primarily a large inventory of unsold properties and fewer Ecuadorian buyers returning from overseas. Despite these factors, few in the industry suggest that a US style real estate bubble is forming. crisis. But since then, construction prices have reached a historical peak of 234.569 in January 2012. Construction prices rose by 6.88% in 2011 (+2.18% in real terms), after 1.95% rise in 2010 (-0.53% in real terms). In Cuenca, the country’s third largest city—and, importantly the economic hub of the southern Sierra region—prices for office and commercial space continue to rise. Cuenca saw an average increase in prices of about 8% to 12% annually in the past five years, which was roughly in keeping with residential prices. In the final analysis, Ecuador offers domestic and foreign buyers good value in 2014, in both the residential and commercial sectors, even within the context of historical rises in the past few years. Real estate is still big business in this Andean nation, and is generally set to remain a stable and sound investment. 132 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW solid FOUNDATIONS TBY talks to Santiago Ribadeneira, CEO of PROINCO Inmobiliaria, on the company’s social responsibility, developing services, and financial services. How did you come by your vocation? My father, Ernestro Ribadeneira, was the founder of the El Recreo neighborhood in Quito, which was purpose-built for the workers of the La Internacional textile factory located in what today is Centro Comercial El Recreo. His idealism and social conscience inspires me to this day, and was the reason that, 25 years ago when I was a Vice-President of a bank, we created Su Cambio por El Cambio (Your Change for Change). This scheme involved the collection of spare change at a network of supermarkets, which was then channeled to the construction of homes for street children. In just three years, 2,000 street children received housing, while we also spread the message of the need for a positive upbringing that would inspire children to grow up as responsible adults. What did you do in that respect? In 1995, pursuing a closely held ambition of mine, I created Banco Solidario, the first Ecuadorean bank with a social mission to provide access to credit for self-employed parents and small businesses excluded from the conventional banking system. I was motivated by helping people escape the trap of debt and fostering the growth of small businesses that wanted to succeed but were excluded from regular means of funding. Biq][h×h[h]c[fch]fomciha_h_l[n_\_h_×nmnb[n improve people’s economic situation? A credit line of $1,000 from the informal sector would accrue $1,500 of interest per year. By relying on us instead, the client would only have to pay $260 in interest. The balance of $1,240 remains in the hands of those who worked hard to generate it. How was Banco Solidario developed? From 1995 to 2006, we issued microcredits worth over $1 billion to 350,000 families and delivered 5,000 social homes with Bono de la Vivienda (the housing bonds program). Furthermore, we paved the way for microfinance in Ecuador. After us came Credife, Procredit, Bancos del Barrio, and many other cooperative banks. Nevertheless, we came to realize that certain ingrained paradigms within the industry had become obsolete and needed to be rethought in the interest of the segment. Who is being excluded from the current system? Anyone not enrolled in the Social Security System is excluded, as the Bank of the Ecuadorean Institute of Social Security (BIESS) does not serve these individuals. Additionally, the unbanked population, representing 60% of the economically active population (EAP), lack instrumental information regarding financial information on matters such as assets or guarantees. They are often self-employed or small business owners who, because they are unbanked, fall prey to unscrupulous lenders; eroding what little savings they may have during times of personal crisis. Biq ][h ×h[h]c[f ch]fomcih \_ g[^_ gil_ ]igprehensive? This requires a systematic effort toward rejecting accepted systems of banking. The organizations that have, thus far, served this segment have become cumbersome, and by extension, obliged to meet higher operational costs prompting many of them to withdraw from this less profitable branch of banking. Many sound lessons can be drawn from experiences abroad. In Asia, microloans are extended by cell phone and e-money has become massive in Kenya, greatly extending financial inclusion. In Venezuela, with the arrival of Chávez, a specialist microfinance bank became the loan originator for banks lacking experience in the microcredit business. The Chávez administration required that 3.5% of their portfolio be reserved for micro-enterprises. The model for the future in terms of financial inclusion must amalgamate existing concepts for the sustainable performance of this financial service. Then what did you do to create a model that brought together these ideas and broke paradigms? We looked for a small financial entity, so that through it we could integrate these concepts and follow our vision of going further than just microfinancing. This meant that small business owners and their families would find in one BIO Santiago Ribadeneira obtained a Master’s in Business Administration at INCAE in Costa Rica, before beginning a distinguished ][l__lch×h[h]_ch?]o[^il and Latin America. Prior to his current position, he was the founder and executive president of Banco Solidario, working there from 1995 to 2006. He had previously served as Vice-President at Produbanco, and oversaw the work of the “Su Cambio por el Cambio” foundation, dedicated to helping children living on the streets. In addition, he held a prominent management position for Banco Popular in Quito until 1984, and has run a number of other companies in the capital city over the past two decades. Real Estate & Construction place everything they need to improve their quality of life: microcredit, emergency credit, supplies for work, supplies for home, health insurance, medical assistance, hospitalization, and even “homes with the own little houses.” ;h^^c^sio×h^cn9 When you follow your dreams and learn to listen to the voice of your heart, your visions materialize. We found that with PROINCO, which was the most well-recognized real estate brand in the country. Hence, with PROINCO already operating, we decided to add YAPA, a word that inspired us because of its meaning “to give more,” and which helped us to renew our philosophy in our new financial inclusion project. For us, giving a little bit more makes us happy. What does PROINCO do? PROINCO is a financial entity specializing in financial inclusion. With just 27 staff, we disburse $12 million in microcredit per month, leveraging the YAPA’s existing commercial network nationwide, as well as in partner institutions and other non-bank outlets. The client portfolio generated is then sold on to financial entities that lack our know-how and experience. To access credit, our unbanked clients can conveniently utilize an existing banking network to pay their YAPA fees. And now that electronic money is gaining ground, we will be issuing credit and receiving payment via cell phones, eliminating the need to even have a bank account. What prospective markets could you expand into going forward? We will offer the world’s first example of a system that generates products that are an alternative to social security for those not covered. This is the culmination of many years of planning based on a vision of inclusion set out by my father. To achieve this, we have formed an alliance with a financial entity from the Popular and Solidarity Economy. How will you achieve this? Clients who are not affiliates of the IESS will invest in a certificate of contribution, becoming a member of the financial entity of the Popular and Solidarity Economy. The profit from this PROINCO q[m`ioh^_^ with the mission of providing financial services to people not serviced by the social security system Chgi\cfc[lc[ provides housing for this underserved segment of the population THEBUSINESSYEAR 133 certificate will create a reserve fund for the retirement of small business owners. Also, being a member of the entity will give rights to health insurance, medical assistance, and hospitalization with microcredit for their business, credit for home and business supplies, and mortgage credit so that they can build what my father used to refer to as a “home in their own little house.” In this manner, we continue his legacy. Does your motivation come from your father’s sense of social justice? PROINCO Inmobiliaria is continuing on the same path. He founded El Recreo, and we have founded Nuevo Sur, which will become the neighborhood boasting the best services and housing in the south of Quito. There is a commercial center planned, as well as a theater, schools, and even a dry port with storage for heavy trucks, sparing merchants the long journey to Quito. All this was designed by considering improvements to the overall quality of life of local families. Meanwhile, a separate project of this type in the parish of Cutuglahua, in Mejía Canton—the new development center of Quito—has received foreign investment. Does PROINCO Inmobiliaria also realize other types of development? Our sole mission is to improve the quality of life of the communities that receive our real estate investments. We are developing the best project on the Ecuadorean coast in Jama, Punta Ballena. By combining the efforts of the public and private sectors, we are improving social conditions in El Matal, in order to transform it into a prime tourist attraction, which is in line with the government’s goal of redeveloping our beaches and towns. It will be known as Mundo Jama, and will prove the point that merely planning a socially worthwhile scheme is the first bold step toward realizing it in reality. Everything you have said could be summarized with the message: giving a little more makes us happy. Would you agree? Yes. This is our philosophy, and I hope God will give us the light and life to continue enjoying it, and that we can achieve all that we have proposed and that we can leave our children with a mission and a task to fulfill. 134 THEBUSINESSYEAR ECUADOR 2014 VOX POPULI RESIDENTIAL A PLACE TO STAY SERGIO TORASSA CEO, Pronobis VERONICA REYES Assistant General Manager, CR Constructora A healthy real estate sector and a balanced housing market can be a key driving force behind a strong economy, something that Ecuador has its sights on. T T he market is evolving along similar lines to Latin American countries, such as Peru, Uruguay, Argentina, or Chile. Until 2009, the industry was quite basic. Since then, the market changed with the public becoming more exigent, more demanding in terms of design, quality, functionality, and the equipment that we fit our buildings out with. Two examples of our answer to that new demand is Ciudad del Río and Karibao. Before Ciudad del Río, people tended to live backward to the river. In this sense, we have followed European trends as it is to live in a river-view property, where they can enjoy the quality of life associated with the peaceful colors of the water and clear skies. Another value-added aspect is the design. We moved upscale to more aesthetically pleasing designs for our clients to enjoy. This is a strong trend that other promoters and developers are now adopting in their own products. Pronobis is proud to be one of the industry leaders, and this is one of the ways we have confirmed our commitment with our clients. he most important challenge for the sector in the coming years is keeping the trend of financing home buying in the country, which has many benefits for the economy. The national government has knowledge that this is a key driver of the economy. Financing is the first challenge, and the second one is finding a social interest home building model. We need to find a model that is sustainable and which allows people, who are not able to get a proper home right now, to be able to do it in the future. Before 2009, if you drew a pie chart of how homes were sold in Ecuador, you would find that most of them were sold at prices above $50,000. It was 2009 when this trend changed or inverted. After 2009, most new homes are bought at prices that are under $50,000. That is a big step in being able to tend to the largest market. JAIME RUMBEA DUEÑAS Executive Director, Asociación de Promotores Inmobiliarios de Viviendas del Ecuador JOSEPH SCHWARZKOPF W hen the company was established, it had a strong focus on large surface and high-quality housing units, because there was a demand for such properties. However, this changed over the years, and so did our strategy. We have always been a flexible firm, and as purchasing power has declined we have started developing smaller projects. The market no longer demanded high-quality finishes. The type of property we first launched to the market 15 years ago is no longer in demand at all in Quito. Some other constructors have tried to develop such schemes, but it was extremely hard for them to sell. We have always analyzed the market evolution and adapted ourselves to the types of properties that respond to saving capacity and purchasing power. In this context, recent economic and social developments in Ecuador have led to a situation in which the middle class has increased, while at the same time, the higher social class has seen its purchasing power reduced over the years. We are talking about a segmented and broad middle class in Ecuador, which is our market niche. General Manager, Uribe & Schwarzkopf W e have seen constant growth of the sector, especially in Quito, confirming its status as the largest market. The main reason for that is the current availability of mortgages, as in the past decade banks have been keen, because of the dollar, to extend longterm mortgages to clients at favorable rates. Formerly, it was not possible to secure a mortgage at a better interest rate than 15%, while today the 10% mark is the norm. A major growth factor in the real estate sector is the social security bank, which has started giving mortgages for 15 to 20 years at better terms in competition with the banks. The mortgage market has duly become interesting for a much wider audience, which fuels the purchase of houses, residences, and offices. As the economy has grown so too has money entering circulation. Companies are now starting up in larger number and we build a large volume of corporate property. Real Estate & Construction THEBUSINESSYEAR The construction sector in Ecuador forms a vital part of the economy, providing the raw materials—literally the cement and steel—for key national infrastructure and development plans. Review CONSTRUCTION IRON & STONE Construction in Ecuador is a sizable industry—cement production alone was estimated at over 6 million tons in 2012-2013—and is represented by numerous public and private companies involved in different operations related to the building, repairing, alteration or maintenance of residential, commercial, and industrial structures. In general, the construction industry in Ecuador is divided broadly into three segments: residential and non-residential buildings; heavy civil engineering projects such as work on bridges, roads, ports, or tunnels; and other more specialized construction-related activities, such as the production of clinker, an essential raw material. To meet the growing needs of the cement industry, Ecuador recently expanded its clinker production capacity at the Holcim Ecuador plant at Guayaquil. By commissioning a new cement mill in 2012, the Swiss multinational Holcim began the second phase of its cement plant modernization in December 2012, thus increasing clinker capacity to a projected 1.4 million tons annually by 2015. This second phase required an investment of nearly $400 million, and the construction of a third kiln at the plant is underway. This will allow Ecuador to sustain its growth in the coming decades, and will balance local clinker production capacity with local cement capacity, in order to eliminate the need to import clinker, and reduce transport costs and risks. In terms of the cement industry in Ecuador, there are four plants and three private com- Like many emerging and developing countries, the building materials and construction sector plays a major part in the growth of the economy, and Ecuador is no different, producing over 6 million tons of concrete in 2012-2013. 135 136 THEBUSINESSYEAR ECUADOR 2014 CEMENT panies catering to the needs of over 15 million citizens. In 2007, during his first term, President Correa started to work directly on issues related to the integrated social development of the country, and a specific emphasis was put on projects related to infrastructure, roads, and other transport links. To achieve these goals, the country needed to be able to produce significant quantities of cement. With this problem, until 2012, the government attempted to increase production and to act in the market in order to supply enough cement for the economy’s needs. Ecuador currently has a number of large-scale megaprojects in the works, and this is driving up demand for concrete, steel, and other construction materials. According to its own figures, the government is investing over $2 billion in future highway projects all across the country, which will link up a number of currently underserved areas while expanding existing roadways. Recent past investments in the highway system have totaled over $8 billion. The government has also planned or begun building 14 hydroelectric plants to be constructed in the next few years, with an overall investment amount over $7 billion. Two further projects that are relevant to the construction sector include the highly publicized Pacific Refinery, with a future allotted investment amount of over $13 billion, and the Pacific Shipyard, with a future investment amount of over $180 million. There are two main private cement producers in Ecuador, which are also the two biggest producers in the world. One is Holcim, a Swiss multinational, and the other is Lafarge, a major concern from France. These two companies taken together have more or less an 80% market share. The state is also heavily involved in cement production. Manuel Román Moreno, General Manager of the Empresa Pública Cementera del Ecuador (a publically owned cement producer), describes the state role in cement and clinker production in this way: “The government has two companies. One of them is Cemento Chimborazo, and the other is Industrias Guapan. Previously, they were owned by different parts of the government, but we have now merged them together into the Empresa Publica Cementera del Ecuador (EPCE). This was because Cemento Chimborazo had a 5% market share and Guapan had a 7% market share; therefore, we decided to bring them together to make the company stronger.” He went on to say, “we performed this merger in November 2013, and right now we are looking to make this company stronger with an investment of around $230 million to put in a brand new clinker line.” The Ecuadorean unit of the Holcim has announced that its Guayaquil plant expansion will help supply the country’s domestic cement needs, and moreover the investment will generate about 2,500 direct and indirect jobs in the country during the construction phase, which should be fully completed by early 2015. The first phase of the expansion began in early 2010, with an investment of $120 million, and by completion of the project, Holcim Ecuador’s cement capacity will grow to over 5.4 million tons per year. The German company Loesche is also involved in the Guayaquil plant, having delivered in late 2013 a new LM 56.4 type vertical roller mill for cement raw material grinding. The mill has a capacity of 386 tons per hour. The mill motor capacity will be 4,000 kW. It will complement an existing Loesche roller mill that has been operating at the same plant since 2010. Lafarge, the other major private cement producer, has announced the sale of its cement operations in Ecuador for a value of $553 million to Union Andina de Cementos (UNACEM) of Peru. Union Andina de Cementos (UNACEM), formerly Cementos Lima, is also engaged in the production of cement in Ecuador. Real Estate & Construction STEEL Ecuador is South America’s seventh-ranked steel producer, and has three steel companies: the 250,000 tons per year Acerias del Ecuador (Adelca), the 135,000 tons per year Acerias Nacionales del Ecuador (Andec), and Novacero which produces around 250,000 tons per year. Ecuadorean steelmakers Adelca, Andec and Novacero currently have a combined crude steel capacity of almost 700,000 tons per year. Ecuador’s $1.1 billion annual steel industry imports about 800,000 tons each year to meet its average demand of about 1.2 million tons a year; most of this steel is used to provide infrastructure for the oil industry. In 2013, the Ecuadorean government began promoting the construction of a $1.4 billion steel mill to meet future domestic and export demand, as it has increased import tariffs on rebar and a number of other steel products, in a bid to protect its domestic industry from more competitively priced material from overseas. The steel mill, which would have capacity of 1.5 million tons per year, would take 15 years to build in two stages, Ecuador’s national investment agency Preinversión said in a report posted on its website. Annual steel demand is slated to rise to 2 million tons by 2025, according to Preinversión figures. The Indian government is also eyeing opportunities to invest in manufacturing industries in Ecuador, including the steel sector, and negotiations were under way for Indian investment in 2014. Crude steel output in Ecuador reached 323,000 tons by 2H2014, down by 4% compared with the corresponding period last THEBUSINESSYEAR 137 Since 2007, successive administrations of the Correa government have worked directly on issues related to the integrated infrastructural development of the country. To achieve these goals, nb_]iohnlsh__^_^ni\_[\f_nijli^o]_mcahc×][hnko[hncnc_mi` cement and steel. year. Between January and August of 2013, Ecuadorean apparent steel consumption came to 995,000 tons, according to the latest figures from Latin American steel group Alacero. Increases in 2015 are expected, mainly due to rising demand from both the construction and infrastructure sectors. This growth in demand has contributed to lifting local consumption of steel products such as beams and bars. One shortcoming that has been noted is that despite the healthy steel demand conditions in Ecuador, domestic mills continue to rely on raw material imports such as ferrous scrap. Imports of ferrous scrap come mostly from neighboring countries in Latin America, but also from further afield in Asia. In the final analysis, the construction sector in Ecuador, driven by a number of major planned mega projects and a need for residential housing, is vibrant and in good health. Current investments and improvements are only deepening this trend. 138 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW cementing THE FUTURE TBY talks to Manuel Román Moreno, General Manager of Empresa Pública Cementera del Ecuador, on changing cement production levels, restructuring, and proposed PPP investment in domestic clinker production. Qb[n cm nb_ mcahc×][h]_ i` nb_ restructuring within the public cement sector? What is the importance of having a national cement company? The cement business is a monopolistic business by nature. This is typically because there are very few producers for a lot of consumers. In Ecuador, we have four plants and three companies for 15 million consumers. Locally, there was a lack of cement from 20 years ago up until 2012. In 2007, the government started to improve things, such as infrastructure, roads, health, and education. To achieve these goals, we needed cement as one of the main building materials, and up until 2012 the government asked us to increase production because the private producers could not supply the market. In most countries, except Ecuador and Paraguay, the entire market belongs to the private sector. In this case, we have two main private producers, which are also the two biggest producers in the world. One is Holcim, which is Swiss, and the other is Lafarge, from France. Now, these two companies have merged and have more or less an 80% market share. We made many investments, especially in recent years, and increased our production three fold. We needed a public cement company, but now the supply has met the market demand and we can leave this business to private producers. The government has two companies. One of them is Cemento Chimborazo, and the other is Industrias Guapan. Previously, they were owned by different parts of the government, but we have now merged them together into the Unión Cementera Nacional UCEM Compañía de Economia Mixta, where 95% of shares belong to Empresa Publica Cementera del Ecuador (EPCE). This was because Cemento Chimborazo had a 5% market share and Guapan had a 7% market share; therefore, we decided to bring them together to make the company stronger. We performed this merger in November 2013, and right now we are looking to make this company stronger with an investment of around $230 million to put in a brand new clinker line. Clinker is one of the steps in making cement. The cement is produced from limestone and clay. From limestone and clay, we produce clinker, and with clinker and the addition of gypsum we produce cement. Therefore, we need a kiln and a lot of equipment, such as a crusher. Right now, the country imports a lot of clinker, close to 1 million tons per year; however, the government is working to reduce imports, which is why we need to increase domestic clinker production. To do that we have to invest huge amounts of money, and the government has decided to transfer the responsibility to the private sector. Would you say the cement industry can play an important role in the transformation of the productive matrix? Definitely, because it is a strong industry. The cement industry is a nice one because we start with geological materials, with mine quarries, and limestone, and then we have to transform this material, meaning we need the mechanical-electrical industry. We also have to transform materials with heat, making it a chemical industry. Then, we have to sell the product, meaning it is a market industry. We also need electronics and software. The cement industry uses combustible fuels, meaning we have to move away from the use of fossil fuel or oil to other products. In Europe, for example, they can substitute 50% of these combustibles, such as coal, oil, and gas, by using waste, such as plastics and tires. In Ecuador, the use of such fuels is now zero, meaning we can use the cement industry to initiate this change. The cement industry could be, in a few years, the friend of humanity because we can utilize all of the waste, instead of burning it. We can reach two goals simultaneously by helping the environment while using this material to produce cement. EPCE was created to manage Cemento Chimborazo and Industrias Guapan, Ecuador’s two national cement companies now merged into UCEM CEM BIO Manuel Román Moreno graduated as an industrial engineer from the Institut Supérieur Industriel de Hainaut of Université du Travail in Belgium. He has more than 25 years of experience in the cement industry in the private and public sector. Before being appointed General Manager of Empresa Pública Cementera del Ecuador, he was a technical advisor to the Board and Directorate of Cemento Chimborazo. In the public sector he has also served as advisor to the Minister Raul Sagasti for the development and implementation of the national cement strategy. Previously, he had been General Manager in Fabricación de Alimentos Finos, Cementos ^_fJ[]c×]i&[h^MF?AN?H Andino. THEBUSINESSYEAR 142 143 144 Executives from two key sectors of Ecuador’s economy, on the possibilities for exporters. Ensuring a sustainable future for the tuna industry is a key objective for both operators and regulators. Jelisava Cuka Auad, General Manager of Marbelize, on innovation and the export market. 139 Agriculture REVIEW Improved demand for Ecuador’s key agricultural commodities, such as bananas and cocoa, have helped boost the country’s export performance. FARMERS’ DELIGHT W hile the agricultural sector in Ecuador contributed a relatively modest 5.9% to GDP in 2013, the sector represented 27.8% of the country’s employment. In 2014, the agriculture sector experienced overall export growth, with strong growth among some of its most prominent crops. The country’s primary agricultural products include bananas, coffee, cocoa, rice, potatoes, cassava, plantains, sugarcane, beef, pork, poultry, fish, and shrimp. Recently, floriculture goods, such as roses and carnations, tomatoes, strawberries, melons, and asparagus, have also increased in export prominence. The expansion of agricultural sector goods is in line with the government’s diversification and improved trade balance priorities. In 2014, Ecuador continued to enact new regulations intended to support its agriculture sector and uphold price controls to insulate farmers from global competition. Additional reforms aim to clamp down on informal and spot market activity. For example, in February 2014, banana plantation registration restrictions came into effect in an effort to thwart fraud. Ecuador has realized the need to balance market activity with environmental considerations in order to promote sustainable growth. The government intervened in its tuna fishing market twice during 2014 to impose trade bans and allow wild populations to rebound. Food labeling regulation was another policy area that was updated over the past year. State law now requires more detailed information concerning fat, sugar, and salt content. Foods containing known carcinogens are to be labeled as well. ON THE BEND Agriculture has long been the backbone of Ecuador's economy. However, now it is attempting to add more value to its crops through advanced processes. The past year has been eventful in regard to Ecuador’s sales of bananas, the country’s most iconic commodity crop. At the end of 2013, banana farmers faced the prospects of sector stagnation due to rising production costs. However, increas- 140 THEBUSINESSYEAR ECUADOR 2014 ing global demand has enabled Ecuador to increase its banana exports in several key markets during 2014. Algeria, the UK, Turkey, and the Netherlands all upped their 1Q2014 imports in YoY terms for the same period. In the first five months of the year, exports to China boomed by 540.77% as China’s domestic production figures dropped off. In September, China imported 300,000 boxes of Ecuadorean bananas per week, and that number is set to increase even further. The Western regime of sanctions against Russia has also presented Ecuador with significant export opportunities. In July 2014, over 4 million boxes of bananas were shipped to Russia, compared to 3 million in 2013. That same month, Ecuador and the EU concluded years of negotiations by signing a Free Trade Agreement (FTA) that guarantees Ecuador’s $630 million in annual banana exports to members of the economic bloc. The surge in global demand in 2014 was mirrored by an uptick in prices. In August, box prices for bananas Free On Board (FOB) rose as high as $14.50. In 2013, average prices for boxes FOB ranged between $8.50 and $9.50. The government has also been working to further regulate the banana market by imposing price controls, reducing spot market activity, and reforming plantation registration to combat fraud. WARM BREW Cocoa beans, another of Ecuador’s key cash crops, has experienced dramatic growth in production as well. Despite battling an outbreak of Witches’ Broom fungal disease in 2013, the cocoa-bean harvest increased 13%. This raised cocoa output to 220,000 tons and made Ecuador Latin America’s largest cocoa producer, with a over 399,467 planted hectares. Eager to cash in on rising chocolate prices, the government embarked on farmer education initiatives and increased the rate of planting. As a result, the country is expected to increase its cocoa exports by 10% in 2014. In 2013, Ecuador’s departure from the Adean Trade Promotion and Drug Eradication Act (ATPDEA), which ended US/Ecuadorean preferential trade tariffs, brought into question cocoa export capacities. Regardless of the speculation however, the country’s cocoa sector future looks bright. Today, Ecuador is on track to become the world’s fourth largest cocoa supplier in 2015, and could surge should West African exports come under threat. Rice exports are set to increase even more throughout the 2014-2015 period. While rice-crop diversification is expected to boost milled rice cultivation from 767,000 tons to 787,000 tons, a 3% increase in production, exports are forecast to grow 16%. Rice is among the crops targeted by the government’s price controls, which are promoted through the Andean Price Band System (APBS). According to APBS standards, the minimum price per ton is set at $575, while the maximum price per ton is $691. Additionally, the APBS levies a 68% duty on rice imports, although Andean Community members are exempt from the charge. Corn production, which leads Ecuador’s crop farming in total cropped area, is another agricultural subsector that has received government assistance in recent years. The Maize Production Support Program, initiated in 2012, provides farmers with quality seed, technical assistance, and minimum price guarantees in order to promote the country’s self-sufficiency in this core crop. With the backing of the support program, maize production has been on the rise. At the end of 2013, Ecuador produced a record 1.1 million metric tons of corn. In 2014, the growth rate fell by 4.09%, but production managed to remain well above the million-ton mark. The majority of corn consumption in Ecuador is driven by demand for animal feed, while a relatively small portion is consumed per individual. Meanwhile, Ecuador’s sugar farmers have been increasing their stocks in an effort to insulate themselves from the impacts of currency value volatility. Overall, however, sugarcane has continued to develop as a staple crop for Ecuador’s agricultural sector. FAS Quito predicts that Ecuador will produce 615,000 metric tons of sugar for the 2014/2015 marketing year. This would represent a 6.5% increase from the 2013/2014 marketing year. JUAN XAVIER CORDOVEZ Executive Vice-‐President, EXPALSA How have EXPALSA and Ecuador’s shrimp industry grown together over the past 30 years? Expalsa started when shrimp aquaculture was born in Ecuador. Prior to that, the bulk of EXPALSA’s exports comprised wild-caught shrimp. We started out packing a mixture of wildcaught and aquaculture shrimp. <onqcnbchnb_×lmn×p_s_[lm&q_ began focusing on aquaculture, which has driven Ecuador’s growing shrimp exports. EXPALSA is involved in the genetic improvement of aquaculture shrimp, the production of the shrimp larvae, production of shrimp feed, and the raising of the shrimps themselves. We are also a market leader in packing and export. What have been some of the challenges in opening up new markets? Today, we are present in Europe, the US, Canada, South America, Asia, and the Middle East. EXPALSA’s strategy has been to develop new markets without overextending our capabilities. If we concentrate on a single market, we risk our future operations. We take each market into consideration and try to maintain 30% of our exports in Asia, 30% in America, and 30% in Europe. Is it a challenge to add value in the food sector? We were able to add value by differentiating our packaging. We ^_p_fijj[]e[achanb[nl_Ø_]nm our customer’s demands, such as single person servings for European consumers. Agriculture STAY SLICK As Ecuador looks to diversify its economy, a number of other commodity crops are tracking high growth figures too. Among these goods is palm oil, which is quickly becoming one of the country’s primary agricultural engines. In 2014, palm oil production is forecast to climb by as much as 25,000 tons, from 495,000 to 520,000 tons, while exports may trend upward from 213,000 tons to 225,000 tons. In 2013, Ecuador exported 55% of its produced palm oil, generating $300 million in revenues. “In Ecuador, the volume of oil available for export is increasing annually, as the industry is growing at a rate of 7% per year. We forecast the industry doubling again over the next 10 years,” Francisco Naranjo, Executive Director of the National Association of Palm Oil Cultivators, told TBY in an exclusive interview. Palm oil plantations now total 280,000 hectares, which is an even larger area than the 240,000 hectares of Ecuador’s banana THEBUSINESSYEAR 141 Cocoa beans, another of Ecuador’s key cash crops, has experienced dramatic growth in production as well. Despite battling an outbreak of Witches’ Broom fungal disease in 2013, the cocoa-bean harvest increased 13%. plantations. Overall, 87% of these plantations are smallholdings, where 6,000 of Ecuador’s 7,000 palm oil farmers operate on areas of 50 acres or less. The development of the sector is, therefore, limited by the access of farmers to resources and technical know-how. Despite these constraints, palm oil has accounted for 15% of agricultural GDP and supported 170,000 jobs, both directly and indirectly, since the end of 2013. 142 THEBUSINESSYEAR ECUADOR 2014 B2B GROWERS TBY talks to two executives on the importance of growers for Ecuador’s economy and the possibilities for exporters. oil & flowers FRANCISCO NARANJO Executive Director, National Association of Palm Oil Cultivators (ANCUPA) ALEJANDRO MARTINEZ Executive President, EXPOFLORES What is the importance of your sector for Ecuador's economy? Palm oil is derived from the Mesocap, or the reddish pulp of the fruit FRANCISCO NARANJO The palm oil industry is one of Ecuador’s new agricultural segments. In the past, bananas, cocoa, and coffee production boomed, and now, some 50 years on, the palm industry has seen an incredible increase of palm oil tree plantations. Often people associate Ecuador with bananas, but actually the palm oil industry today is the larger of the two. We have 280,000 hectares of palm oil, versus 240,000 hectares of bananas. In 2013, we produced over 500,000 tons of palm oil, with 45% consumed locally and 55% exported generating around $300 million for the Ecuadorean economy, rendering it one of key agricultural export products. It also represents about 5% of agricultural GDP and about 0.5% of Ecuador’s total GDP. In terms of labor, the sector employs about 50,000 people directly and a further 100,000 indirectly in related sectors, whereby around 150,000 people work in the palm industry. One important aspect is that in Ecuador, almost 87% of palm growers are small producers. ALEJANDRO MARTINEZ The flower industry in Ecuador began around 35 years ago. It is still the main crop in the highlands and at 98% is almost entirely dedicated to export. There is no other crop beside broccoli that is such a large employer, with approximately 120,000 people. Therefore, it is an important business both in terms of employment and for certain local economies. The flower business has also helped to develop other tangential sectors such as airfreight, for example. The market here is different from in Colombia, which has large fields with a narrow range of flowers. Here we have small farms of an average of about 7.12 hectares per estate, with a diversity of varieties that on average numbers over 50 species. The Ecuadorean industry has focused on breeding roses with larger buds and stems, and high production with reduced costs, and fewer people working per hectare. Do you think that Ecuador has the potential to become a more substantial palm oil exporter competing with the better-known palm oil exporting nations of Asia? FN No. Malaysia and Indonesia represent about 85% of the global output of palm oil. Ecuador is the prime exporter in the region, ahead of Colombia, but we consume our oil domestically, with a marginal surplus for export. In Ecuador, the volume of oil available for export is increasing annually, as the industry is growing at a rate of 7% per year. We forecast the industry doubling again over the next 10 years. Local consumption of palm oil is stable, as our population grows by around 2% per year. Meanwhile, we are working with the government to launch a biodiesel program, and in fact President Correa has already signed a presidential decree aimed at reaching a nationwide bio diesel consumption level of 5%. This would account for 500,000 tons of palm oil per year, creating a new local market for our oil. Ecuador has negotiated a trade agreement with the EU, but it seems the agreement with the US has been placed on hold for a while. How do these markets compare in importance for the Øilc]ofnol_m_]nil9 AM Ecuador does not focus on one market, typically preferring the diversified route. About 38% of production goes to the US, with 25% to Russia, and 25% to Europe. The remainder goes to 108 other destinations. About 10% of long-stem roses are destined for Russia. The medium stems go to Europe, and the short stems go to the US. We are working with a couple of supermarkets in the US to introduce mixed bouquets. Agriculture THEBUSINESSYEAR 143 TUNA FOCUS PROFIT TO NET Ensuring a sustainable future for the tuna industry is among the objectives for both operators and regulators. WITH ITS 2,358 kilometers of coastline on THE EUROPEAN MARKET the Pacific Ocean, Ecuador is well placed to take its share in the lucrative tuna fishing industry given that 70% of the world’s commercial tuna catch between 1950 and 2002 came from the Pacific Ocean, according to statistics from the UN’s Food and Agriculture Organization, Globefish Research Program. In fact, according to official statistics reported on The Fish Site, of the approximately 595,248 tons of tuna caught in the eastern tropical Pacific Ocean in 2011, Ecuador had the largest catch followed by Mexico, with Panama, Venezuela, and Colombia lagging some way behind. And the international demand for tuna is not slowing down in any significant way, particularly with the continued popularity of sushi worldwide and the general trend toward fish products as a healthy alternative to meat. In Japan, a country that consumes approximately 80% of the world’s Bluefin tuna catch, a Pacific Bluefin was sold for a record sum of $1.78 million at a 2013 Tokyo auction. The major downside to this tuna boom, highlighted in a study released by fisheries scientists from the International Scientific Committee to Study the Tuna and Tuna-Like Species of the North Pacific Ocean in 2013, is that the Pacific Bluefin population is now 96% lower than at its un-fished level. Ecuador is taking this issue seriously. Victoria Serrano, General Manger of Seafman, one of the major tuna processing companies based in Manta, Ecuador, told TBY, “The Chamber of Tuna Industries has developed a code of conduct... The Ecuadorean tuna industry has been respectful of the environment and complied with all regulations. We should advertise this fact globally.” And indeed in line with this policy of ecological responsibility, the government has imposed two tuna fishing bans for 2014. The first ran from July 29, 2014 for a period of approximately two months, and a second capture ban will come into force on November 18 and run through until January 2015. Ecuador’s Undersecretariat of Fisheries Resources outlining the way the bans operate said “…53 ships of the 99 that make up the tuna fleet, will benefit from this first closure… Meanwhile, the remaining 46 will stop… work in the second ban,” according to Tunaseiners. The European market is of growing importance for Ecuador’s tuna industry. Negotiations have just finished on a new free trade agreement (FTA) between the EU and Ecuador, although according to Agritrade the commercial terms agreed will not enter into force until 2H2016. Europe accounts for 70% of Seafman’s sales and the Ecuadorean tuna processing company expects its production capacity to increase by 10% as a result of the new FTA. Similarly, Marbelize, Ecuador’s fourth largest exporter of tuna, sends 98% of its products overseas, and its biggest export market is Europe according to General Manager, Jelisava Cuka Auad. Within that European market, there has also been significant growth in German imports of canned Ecuadorean tuna, up 53% in 2013 compared to the previous year. Ecuador is now Germany’s largest supplier of canned tuna out of the 25 countries it imports from, and the second largest exporter of tuna loin to Germany after Vietnam. Marbelize’s Jelisava Cuka Auad commented to TBY that, “Asia is our main competitor. To compete with them is a big challenge. Their prices are low.” Things are set to get tougher too with Asian exporters, such as the Philippines, lobbying hard for reduced EU taxes on their tuna products. If Ecuador cannot negotiate favorable interim tariff terms with the EU in the lead up to their FTA entering into effect in 2016, the country may find their imports become less competitive compared to Asia in the short term. LOCAL CONSUMPTION Local consumption of Ecuadorean tuna is surprisingly low, at approximately six to seven kilograms per capita consumption annually, compared to the Latin American average of 15 to 16 kilograms, according to the Undersecretariat of Fisheries Resources. In the case of Marbelize, domestic sales make up less than 2% of the company’s overall sales. Clearly there is more work to be done by the government to encourage local consumption for the sake of both the industry and the nation’s health, and to balance out the tuna industry’s current dependence on export markets for future growth. VICTORIA SERRANO General Manager, Seafman What does the free trade agreement (FTA) with the EU mean for Seafman, and for Ecuador’s tuna industry? The FTA means that the tuna industry is alive and well. For Seafman, it means that we can continue to grow, and we are currently constructing new facilities to accommodate our expansion. We also expect our production capacity to increase by 10% as a result of the new trade agreement. Europe accounts for 70% of Seafman’s sales, even though we do not have our own brand there. How has Seafman changed since you became General Manager? Qb_hC×lmnmn[ln_^&q_q_l_ processing around 130 tons per day, but today we are up to 150 and going to 160 tons per day. The original Seafman plant was built in 1966, and fortunately there has been a readiness to invest in new infrastructure, which has clearly enhanced our performance. What is the strategy for competing with Thailand? Tuna is an economy of scale business. It is necessary to enter markets with your workhorse, which in our case is the half pound canned tuna in oil or water. This is where we run into intense competition and some disadvantages, since Thai wages and transportation costs are lower. Ecuador is a small country and simply does not have the same trade volume. 144 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW TBY talks to Jelisava Cuka Auad, General Manager of Marbelize, on contributing to the local economy, innovative new tuna products, and export markets. a favorite TUNA Would you say that Marbelize has played an important role in the economic development of Manabí province? Yes, certainly. We are the biggest exporter on the catering side of tuna pouch bags in Ecuador. The tuna pouch bags are our main business. In 2001, we started bringing the latest technology into the plants. We contribute notably to the economy by directly hiring 1,125 people from Manta, and working with 3,000 indirect workers, and many vessels. In 2008, we also started a company for the mechanical and electronic parts of our operations. What distinguishes Marbelize in Ecuador’s tuna sector? BIO Jelisava Cuka Auad studied Business Administration at the Lausanne Business School in Switzerland, where she earned a Master’s in Business Administration. She also speaks English, French, and Italian. Since 2000 she has been General Manager of Marbelize SA, a position that has led her to receive multiple awards, including for “Best entrepreneur” in 2005, “Merit Company” in 2006 and 2007, and “Administrative Merit” in 2013. Marbelize is the fourth largest exporter of tuna in Ecuador. We are also the first to develop new kinds of products. We are innovative; we invest in research to develop new products and create new trends. We were the first company to have tuna in a glass container in Ecuador. Afterwards, the competition followed, and now you have a mixture of seafood in glass jars. We introduced that in 2004, and also export glass jars now. There are two big companies with more than 50 years of experience in the market that focus on cans. To compete against them is impossible, and so we pursue other targets and alternative products. We are going to change the way peo- ple eat tuna, for example by flavoring it, and packaging it in glass jars, and we also have Cazuela Manabita (Manabí Casserole). We are developing other products such as tuna nuggets, hamburgers, and meatballs. We also have green olives filled with tuna and then fried. That is a new market in frozen products. You can find these products in the supermarket, but we also deal directly with cafeterias in schools. We work with 900 different brands from all over the world. It is not just my own brand. In the German market, we have a client that wants our tuna meatballs with a different sauce. They are willing to pay for it because they are confident of its quality. We also sell glass jars to Australia. We even make a special product for cruise ships. What portion of your sales is domestic? It is not even 2%. We are increasing it considerably, but we don’t have the volume here in Ecuador. Most people in Ecuador prefer canned tuna, but that is a small part of our business. We are going with the niche products on one side. Meanwhile, I am developing products for the military, and caterers that supply meals to government schools. G[l\_fct_ introduced higher-quality glass jar tuna to the Ecuadorean market 32i` Marbelize’s business is for export Given the importance of exports, how closely do you work with the Ministry of Foreign Trade to open new markets for Ecuador? I visited Russia with the President, and also to Chile and Dubai. We work a lot with the government in this area. We have to decrease duties, because with 40% in some countries, 50%, or even 80% in others, exports are hindered. Today, we are developing a strong market here and in South America. Although we don’t sell to Venezuela, we do sell a lot to Brazil and Chile. Argentina is opening up again. Asia is starting to work a lot with South America, and that creates export difficulties. However, as soon as people sample our quality, they stay with us. THEBUSINESSYEAR 145 148 153 156 Héctor Enríquez C., General Manager of Laboratorios LIFE, on catering to public and private sector demands. Ambitious educational reforms are promoting world-‐class research and academic value. Sergio Flores Macías, Rector of Escuela Politécnica del Litoral (ESPOL), on promoting advanced research in universities. Health & Education R E V I E W H E A LT H A 439.5% increase in overall healthcare spending under Correa shows that his administration means business when it comes to national health. IT’S BUSINESS TIME I n 1992, the conservative DuránBallén regime created the National Commission on Modernization, which enthusiastically embraced the Washington consensus and championed privatization, to the detriment of Ecuador’s public health system. Under the subsequent presidents Bucarám and Alarcón, health policy floundered, and the Ministry of Health (MSP) budget was reduced to an absolute minimum: from 4.6% of GDP in 1996 to 2.8% in 1997. In 1998, the right to healthcare was written into the new constitution, and later in 2002, the Organic Law of the National Health System established the national health system as the central axis of healthcare reform. Due to private sector lobbying, structural adjustment programs, and poor coordination, however, the ameliorative impact of Ecuador’s healthcare reform was largely thwarted, and unequal access and low coverage rates defined the 1990s and early 2000s. In 2007, President Image: Hospital de los Valles Healthcare standards are on the rise in Ecuador. Now, the government is looking at ways to expand the reach of these services to rural areas. Correa inherited this broken health system, made its reform a central part of his policy, and enshrined free, high quality, public healthcare for all citizens in the 2008 Constitution. The implementation of healthcare as a fundamental right has had a profound effect on the health of Ecuador’s citizens and in 2014; Ecuador is now the world’s 20th most efficient healthcare system according to Bloomberg. In addition, the health sector provided 40 million treatments, whereas only 16 million were delivered in 2006. This increase stems from a massive increase in infrastructure spending on 14 hospitals and 956 health centers by 2017, greater flexibility of consulting hours, and increased coordinating and efficiency. The Correa administration has taken steps to improve the preventative health capabilities of Ecuador as well, in large part through massive investment in facilities and public utilities that will deter the spread of pestilence and pathogens. Potable water is now available in over 91% 146 THEBUSINESSYEAR ECUADOR 2014 of all urban areas, up from 82% only six years ago. In rural areas, availability is now 57.9%. And while Correa claims to be implementing 21st century socialism, the statistics for potable water skew downward amongst the lowest 20% of Ecuadoreans, where only 58.3% have access to potable water (versus the top 20%, where the number is 99%). According to the Ministry of Public Health, access to working sewage is even more limited, again by income. Only 29.6% of the bottom quintile has access to sewage (versus 96% for the top fifth). A similar disparity plays out between urban and rural residents in Ecuador, where 77% of urban dwellers have access to sewage, while for their rural counterparts, the number is only 23.7%. Of course, operating costs for public infrastructure rise as population decreases, and more public amenities are coming on line every day in rural areas. ON THE MONEY The 2013 healthcare budget reflects a similar commitment to creating healthy lifestyles. The largest component was infrastructure and equipment maintenance, which was allocated 65% of spending. In second place, human resources spending was allocated 18% of the budget, followed by medical products and pharmaceutical costs at 8%, and basic services, consulting, communications, and property costs, at 9% in total. Ecuador’s remarkably low pharmaceutical expenditure is in large part due to the country’s implementation of compulsory licenses for pharmaceutical manufacturing. The right of countries to issue compulsory licenses is enshrined in the World Trade Orga- nization’s TRIPS Agreement of 1995, as well as in a unanimous Doha Declaration of 2001 on intellectual property and public health. One compulsory license, issued in 2010 for Lopinavir/Ritonavir a critical HIV/AIDS treatment, immediately lowered costs by 27%. Unlike China, which has used similar legal strategies to produce and export copycat pharmaceuticals, President Correa has stated that medicine is a human right, which cannot be patented. Healthcare spending has more than doubled under Correa. A comparison of the overall health budgets and investment between 2008 and 2013 shows that in addition to rising from $879 million to $2.43 billion, $398 million in 2013 went towards facilities and buildings. In other words, very few hospitals were built in the years leading up to the 2008 constitutional reform. Overall health spending by category reflects the same trends. In 2008, investment in human resources was only $5.5 million; however, by 2013 this number was up to $113.98 million, as the number of medical professionals was ramped up in line with commitments to improved healthcare. Similarly, pharmaceutical investment rose from $51.59 million in 2008, to $131.79 million in 2012. Bucking this trend, installation, maintenance, and repairs was the highest in 2008, at $6.9 million, reflecting the immediacy of the response to the reforms. Overall spending and investments in pharmaceuticals rose from $133.2 million in 2008 to $277.1 million in 2013. While these numbers represent improvements during the Correa administration, comparisons with 2000 are even more striking. In the year 2000, nation- ANA DOLORES ROMÁN General Manager, Pfizer J×t_lcmjl_m_hnch[fgimn_p_ls]iohnlschnb_ qilf^(Qb[ncmnb_mcahc×][h]_i`nb_?]o[^ilean market? J×t_ll[hemhog\_l`iolch?]o[^ilÎmjb[lg[]_otical market, and has been present in Ecuador for nearly 60 years. With more than 100 products in the market, we are active in virtually all therapeutic segments. We employ 140 colleagues across our three jb[lg[]_onc][fi`×]_mh[ncihqc^_(J×t_l?]o[^il will continue to strengthen its portfolio, as it is an important market for the company in Latin America. Does strengthening your portfolio mean broadening into other healthcare areas that are not currently your strengths in Ecuador? At this time, we are focused on strengthening our portfolio in existing areas, rather than expanding it into different ones. We have an important presence in many therapeutic areas, such as cardiovascular, nervous system, and oncology. This year we will have launched four new medicines in diverse segments, including pain, oncology, and rheumatoid arthritis. We have had the opportunity to launch dif- ferent molecules that are well known worldwide, as well as others that have been recently launched in markets such as the US. We want to maintain and strengthen our portfolio in Ecuador, with the end goal being to have as many products domestically as we do worldwide. How has Ecuador’s approach to compulsory licensing affected the way you do business here? This is a very important issue. Threats of compulsory licenses create uncertainty in the business environment. We believe that unwarranted or routine compulsory licensing of patents undermines innovation incentives, and could result in fewer new medicines being developed. The protection of intellectual property is vital to the progress of medicine; it is the driving force behind pharmaceutical companies continuing to research and develop medicines that treat incurable diseases and other unmet medical needs. As such, we believe that the unwarranted compulsory licensing of a patented medicine is counterproductive to innovation in the health sector and jeopardizes the future welfare of patients. Health & Education Ministy of Health Total Budget 2008 -2013 (In Millions) 2013 2012 2011 2010 2009 2008 Source: Ecuador MSP al health spending was only $101 million. From 2000 through 2006, overall health spending was $2.07 billion, whereas from 2007 through 2013, this number was $9.12 billion, which equals a 439.5% increase in overall spending under President Correa. Likewise, the per capita health budget in 2001 was only $15, whereas by 2013 this number had risen to $117. PEOPLE POWER 0 500 1000 1500 2000 2500 Per Capita Health Spending (in USD) 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Source: Ecuador Ministry of Finance 0 20 40 60 80 100 120 As of early 2014, there were approximately 140 hospitals in the Public Health Network, 22 new hospitals under construction, and 24 more being remodeled. Plans also include 950 health centers nationwide, with a standard of two beds per 1,000 residents. Many more health professionals are in the pipeline as well. Minister of Health, Carina Vance, has announced that almost 600,000 scholarships were created, while a further 17,000 health professionals received raises. These numbers are reflected in overall human resource spending which reached $1.13 billion in 2013. By March 2013, the MSP reported that almost 300 health professionals had returned to the country under the plan Ecuador Saludable, Vuelvo Por Ti (Healthy Ecuador, I Come Back For You). This program attracts Ecuadorean and foreign health professionals from abroad with higher salaries and other benefits. Until 2011, Ecuadorian health professionals earned a salary of between $855 and $1,590 per month. The implementation of new public policies and initiatives offers physicians in Ecuador improved living conditions and salaries between $2,034 and $2,641, plus all legal benefits, meaning that total compensation can reach $3,900. There is also a remuneration increase for nurses, whose earnings can increase from $986 to $2,034, in addition to other benefits. THEBUSINESSYEAR 147 Pharmaceutical investment rose from $51.59 million in 2008, to $131.79 million in 2012. TRIMMING THE FAT In late 2011, Ecuador raised its taxes on tobacco products to $0.08 per cigarette unit, making them the foremost taxers of tobacco. This move raised the prices of cigarettes by approximately 80% and raised the tax share of tobacco sales to 77.4%, up from 64% in 2010. Despite the high taxes, Ecuadoreans are still some of the top boozers in Latin America, only consuming less than Argentina and Guyana. The state has stepped up its efforts to curb this thirst in recent years. A new tax package in 2011 increased the ICE ad valorem rate on spirits from 40% to 75%, and added a specific tax of $6.20 for every liter-equivalent of alcohol, which was phased in by 2014. And while these steps have flooded the country with cheap bootlegged alternatives, the state is pressing ahead and this time, fast food chains are squarely in President Correa’s sights. According to Ecuador’s Health Ministry, 30% of school age children, 20% of teenagers, and 30% of adults suffer from obesity, and Correa argues that these costs must be shifted to the responsible parties, namely international fast food chains. While this law has yet to make its way through congress, the legislative attention paid to unhealthy vices and improving services is evidence that Ecuador means business when it comes to national health. 148 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW the right PRESCRIPTION means that more pharmaceutical products are needed for patients, and the volume has significantly increased accordingly. We thoroughly understand the government’s requirements and, accordingly, know precisely what investment and technology is required to meet those needs. Close to 27% of our business is in the public sector. TBY talks to Héctor Enríquez C., General Manager of Laboratorios LIFE, on catering to public and private sector demands and maximizing company performance. What growth has Laboratorios LIFE experienced over 2013? Last year was an important one because, in addition to the private sector, we have become a key Ecuadorean supplier of products to the public market. Over the past seven years, the government has invested in improving national health conditions. That How do your strategies differ when approaching the private and public sectors? They are completely different strategies. In the private market we have the products, we know the doctors and hospitals, and we understand the requirements of specific therapeutic areas and develop our strategies accordingly to supply that market. In the public sector, what is important is to cover the basic needs of the majority of the population through the National Basic Product List, needs that differ entirely from those of the private sector. The most important customers in the public sector are the Ecuadorian Social Insurance System, the Ministry of Health, the Armed Forces, and so on. What notable investments have you committed to? What are your main goals for the next couple of years? This year, for example, we have invested close to $10 million, and are set to have completed several projects by the end of September 2014. The three most important projects, which make up the majority of that amount, include one new complete line of injectable lyophilized products. The area where we manufacture injectable products has been completely redesigned and rebuilt. We are also expanding the manufacturing capacity of large volume parenteral. Those are the main investments on the technical side. Another important investment is new Enterprise Resource Planning software (ERP). This new system performs the planning and management of the entire company. In addition to that, we are going to implement a new Customer Relationship Management (CRM) and Business Intelligence System, so we will not only be upgrading our internal capacity to manage the business, but also boosting all other systems to better understand the market and its requirements. This will also help us to analyze what strategies we need to implement to remain competitive and increase our market share. We are interested in certain therapeutic areas. Ecuador has an increasing need for specialized products in the cardiology, biotechnology, and oncology areas. We develop formulations of our products here in Ecuador. That means we need not only information of what the active principles are that we need for a product, but also on what the right formulation is in order to make it equivalent to original foreign products. BIO As General manager of Laboratorios LIFE Héctor Enríquez C. oversees a business with annual sales exceeding $50 million, and a staff count of 408, predominantly engaged in human and animal health products, and consumer products. He has fostered close relations with key industry leaders, opinion formers, distributors, and both key private and public sector accounts. He is a graduate of the Chemical Engineering School at the National Polytechnic University, Quito, Ecuador. Health & Education THEBUSINESSYEAR 149 INTERVIEW healthy BUSINESS TBY talks to Diego Ruiz, Executive President of Novartis Ecuador, on its portfolio of products, growth in the public sector pharmaceutical business, and exporting hurdles. Qb[ncmnb_mcahc×][h]_i`?]o[dor for Novartis? Ecuador is an interesting market for Novartis. Latin American markets have factors that are different in comparison to the US and European markets. In Ecuador, there are 16 million people and we provide them with the most innovative treatments. Novartis puts a lot of effort into having the same portfolio in Ecuador a in Europe and the US. Besides pharmaceuticals, Novartis Ecuador has over-the-counter (OTC), generics, animal health, Alcon, and ophthalmology. What would you say is driving growth in the Ecuadorean market? For Novartis, it is different in each business line. Through the primary care business, we pursue detailed promotional activities to reach key opinion leaders and primary care physicians to promote our solutions for hypertension, metabolism, respiratory, pain, and central-nervous system issues. We have a great opportunity in the primary care business since it has been, and will continue to be, the main driver of our growth. We work with physicians and many important distributors in the country. For Novartis, it is really important to continue developing specialty businesses. We have held many launches here, and all of these products have scientific agents behind them. IN NUMBERS Novartis Private sector clients 75% What is the split of your business between the public and private sectors? The private market continues to be very important, consisting of almost 75% of our operations. The public market is increasing day-by-day and is reaching 25%. More than 60% or 70% of the Ecuadorean population has some type of healthcare coverage, while 30% of people are below the poverty line. We are trying to grow in both segments of the business. The public business should be a higher percentage than it is today. The public sector may be proportionally bigger in other countries, but both markets are very important for us. Do you see the potential for Ecuador to become a major exporter of pharmaceuticals? The government will need to put more effort into changing the productive matrix. In order to do this, Ecuador should guarantee investments both locally and externally. For example, IP protection must be improved. We talk about compulsory licenses, but in terms of the cost of maintaining patents, Ecuador is one of the highest in the world. Additionally, the time it takes to approve a patent in Ecuador is considerable. In the past five or six years we have only had a couple of examples, so we need long-term, clear rules. The government could provide clearer signals to the pharmaceutical business in this area. Right now it is difficult, as we have seen with the EU agreement. Possibly the most critical issue that postponed the agreement has been IP regulations. We may need to qualify the longterm strategy from the government authorities to try to become more attractive as a market. What kind of challenges does Ecuador present for the pharmaceutical industry? Ecuador has challenges similar to those you may find in any other growing and emerging markets. In the Latin American and Asian markets, because we have weak IP protection, there are low levels of reimbursement. The government offers limited budgets, and many local pharmaceutical companies produce copies and brand generics that hurt the market more so than in European or US markets. Should IP be a concern in issues of public health? We really want to have a dialogue with the government and Minister of Health on this matter with a long-term perspective. We have been working to establish a link to the patient so that treatment costs are part of this dialogue. The patient is at the center of our decisions. Ecuador deserves innovative treatments just like other countries. We are not adapting our portfolio for this situation; on the contrary, we are working hard to establish a strong portfolio here. BIO Diego Ruiz has an MBA from Universidad Austral IAE, Argentina, and is a ]_lnc×_^Jo\fc];]]iohn[hn having graduated from the Universidad de Buenos Aires (UBA). Since April 2013 he has been the Executive President of Novartis Ecuador. Prior to that he was Novartis Pharma Argentina’s Commercial and Marketing Head from 2008 to 2013, and the company’s CCFO from 2006 to 2008. Other positions he has held include Manager and Senior Manager for Arthur Andersen in Buenos Aires during the period of 1993 to 2003. 150 THEBUSINESSYEAR ECUADOR 2014 FORUM HEALTH INSURANCE the place TO HEAL A dynamic healthcare environment requires new approaches to insurance, which is being offered up in spades. PABLO ALBUJA General Manager, Humana SANTIAGO TARRÉ INTRIAGO General Manager, Best Doctors I n the past 15 years, since the moment Humana became part of the Grupo Conclina C.A., we have learned a lot and moved from being a company in the insurance sector to what we are today; an enterprise that operates in the health sector. We have implemented a successful strategy to provide high-quality health services to our clients and we now want to ensure that this relationship grows and becomes a true partnership. This means a new approach to the company’s strategy, which is our main goal for the future. Also, we want to be an active part of the process to build a high-quality health system in the country through a network of clinics and hospitals. Being part of the most important health benefits group in the country, Conclina, to which Hospital Metropolitano also belongs, we know the importance of having strategic alliances with the best medical providers. Our aim is that our members receive timely medical services and are attended to with quality equipment and infrastructure. LEOPOLDO BÁEZ AYORA Managing Director, Bupa Ecuador I E cuador is one of our more important markets right now. Best Doctors started its Latin American operations here in Ecuador. The country has a dynamic economy. We do our third highest volume of business in Ecuador, just behind Mexico and Venezuela. If we account for sales per capita, Ecuador is our most valuable market. During our six years of operations in Ecuador, we have experienced remarkable growth. Best Doctors is a Global company. Best Doctors has enjoyed a 30% average growth rate over the years. Even though we started operations in Ecuador six years ago, we only started commercializing our products a year and a half later. We are set to reach $20 million in sales, and we have experienced growth rates of 40% every year. These numbers have earned us the reputation as one of the leading companies in the country. The insurance culture is still in its first stages of development, and Ecuadoreans are just starting to realize the importance of insurance products. Right now, only around 15% of Ecuador’s population has private health insurance. This figure is low, but it shows opportunities for growth in the Ecuadorean insurance market. nsurance is certainly a growing market that is becoming more sophisticated. In general, that means that there are more products. Another indicator we are seeing is market consolidation. There are too many companies for the size of the market. Companies are merging, and international companies are buying local entities and consolidating them. This pattern is set to continue over the next few years, which is positive both for the industry, and the customer. Larger, consolidated companies are able to bring better products and services to the market. About seven or eight years ago, Bupa decided to continue its growth story in Latin America. It acquired several companies working in the insurance sector, and one of them, Amedex, had offices here in Ecuador. Latin America, and Ecuador in particular, fit Bupa’s profile, as a developing market. We have invested in growing our business in this market, and strategically, the company has a long-term commitment. Bupa has a very aggressive growth plan, and we want to quadruple the size of the company within five years. That is a challenging, but achievable goal, and our corporate business is a key component in our efforts to achieve this. Health & Education THEBUSINESSYEAR 151 INTERVIEW public private PANACEA TBY talks to Guillermo Menéndez, General Manager of Grunenthal Ecuatoriana, on growth plans for Latin America, the flexibility created by having your own manufacturing plant, and the role pharmaceutical companies should play in supporting public health. Qb[n cm nb_ afi\[f mcahc×][h]_ of Ecuador to Grunenthal? Ecuador holds a special position for Grunenthal. Not only from a production perspective, since one of the five plants that Grunenthal has in is the world is located here, but also due to the fact that Grunenthal Ecuador was the first subsidiary opened in Latin America. Last year we celebrated 40 years of operations in the country. This was of great significance for the group. Currently we are involved in an ambitious project to grow within the Latin American region. Ecuador, being one of the largest subsidiaries of the group, occupies an important role within that project. We provide pharmaceuticals from Ecuador to all the countries in which we operate, from Mexico to Chile. The Ecuador plant produces for all of Latin America. Would you say that having a plant here distinguishes Grunenthal from the other pharmaceutical companies in the country? Definitely, because I believe that it allows us the flexibility to produce. We also generate work. The plant allows our group to introduce new products with more flexibility and a reduction in the time to market, compared to other companies in the country. How does the pharmaceutical sector here compare to that of Panama? They are different situations. Panama has limited local manufacturing, as opposed to Ecuador where we have multiple manufacturers. That is the reason why the government is insisting on raising the quality of the products. Government policies are different in each country, too. What is your view of the role that pharmaceutical companies can and should play in supporting public health? BIO Guillermo Menéndez was born in 1973. He studied Operation and Production Management at University of Texas and holds an Executive Marketing Program from INSEAD. He joined the company as Commercial Manager in 2004 and become General Manager of Grünenthal CAM in 2009 until he assumed the position of General Manager of Grünenthal Ecuadorian in January 2014. Previously, from 1999 to 2004, he worked for Bayer Group as Product Manager and New Business Development and Marketing Project Manager. As companies dedicated to research, it is important that we make new technology available to the population and that we educate people in the use of that technology. It is also important that we continue working to reduce the time it takes for these products to reach the market so that they can make a difference in people’s lives as soon as possible. That is where we can best contribute; international companies have the best up-to-date practices related to drug safety and compliance, which regulate these internal practices and could be shared with local companies, thus improving the quality of their practices. We are talking about health and business. This is a very fine line, which must be widened so we can be more compliant. The industry has been negatively labeled at times, so I think it is important for our industry to work within these guidelines in order to protect the population. What is Grunenthal’s vision for the sector? Grunenthal’s vision is to be focused on the patient. We want to be the player that is close to the physicians and making available new technologies, as well as transferring information regarding the treatment of pathologies. Grunenthal mainly focuses on the treatment of pain and women’s Grunenthal is the only multinational pharmaceutical company with manufacturing facilities in Ecuador health pathologies. We strive to become stronger partners for physicians, institutions, and patients in those areas. Grunenthal recently acquired the Chilean pharmaceutical company Laboratorios Andrómaco. What is the importance of that acquisition for Grunenthal's regional operations? This acquisition will help to improve the availability of new products that we can promote and bring to patients. It is also an opportunity to grow not only in a business sense, but also to grow with our collaborators. We are bringing new ideas, and this is important for the company. Another objective is to make sure it continues to be a great place to work. This is related to having the capacity to attract and retain talent. You have to have people who are proud of being part of the Grunenthal group. Of course, we also want to consolidate our position as a main partner of our physicians and clients. 152 THEBUSINESSYEAR ECUADOR 2014 B2B HOSPITALS FRANCISCO CEPEDA General Manager, Hospital de los Valles What do you see as your role in Ecuador’s healthcare system for the longer term? FRANCISCO CEPEDA Our vision at Hospital de los Valles is to be a teaching hospital with centers of reference for a few different specialties like pediatric care, intensive care, and cancer care. In two years, we hope to inaugurate the cancer center in alliance with a foreign partner specializing in cancer treatment. Our vision over the next 10 years is to develop two or three other centers of reference in combination with the teaching hospital. We hope to achieve international accreditations of quality and safety for patients, which is why our partnership with Johns Hopkins is important. Achieving all of this will take patience and hard work. ELIO WONG LAMA Through the Hospital Universatario, a university medical facility, we offer specialized training to our physicians. It is large, with about 500 doctors, and we offer opportunities to study abroad for a year or two and then return. Our vision is to expand our operations in other cities on the coast, for example to establish facilities in Manta or Machala, and to integrate these new centers with the one in Guayaquil. We aim to concentrate on certain specific areas such as heart disease with a new catheterization lab, im- ELIO WONG LAMA Manager, Grupo Hospitalario Kennedy aging coming from a new MRI, heart and others transplant surgery, clinical medicine, urology, and four new operating rooms, among others. We have been focusing our efforts on five or six fields that are not catered for in other places. What can Ecuador do to develop a medical tourism industry? FC I think it is difficult for Ecuador to compete in medical tourism because we are so far behind countries such as Mexico, Costa Rica, Panama, or Colombia. In Ecuador, the focus is on internal medical tourism. Other provinces do not have the same quality of hospitals as we do. Right now, many people feel they should travel abroad to have good treatment. First, we need to focus on showing people that they can get quality treatment here in Ecuador. Then, we can look abroad for patients. EWL The Ministry of Health has adopted the correct strategy to deal with the industry. It is gradually standardizing and classifying all the medical facilities in the country. It is important to bring these clinics and health centers up to a certain standard of quality in order to remain attractive for health tourists. Most of the private facilities are sufficiently qualified with physicians, well trained in their specialties. house of HEALERS While Ecuador is behind some of its neighbors in regard to medical procedures and possible medical tourists, it is making great strides in the right direction to catch up. Your aim is to become the “Johns Hopkins of Ecuador.” What challenges do you face in doing that? One of the features of your new expansion project is a hotel for relatives of patients. What is the motivation for including that? FC To be a teaching hospital, it is important to have good physicians who like teaching and can earn a good salary by both teaching and practicing medicine. This is not a model that exists in Ecuador. We are creating it. Our medical director traveled to Johns Hopkins in April 2014 to learn about this model so that we can apply it here. In many places, such as the US, the focus is on the hospital. People go to Johns Hopkins or to the Mayo Clinic because of the reputation of the hospital. They know the hospital is good, and, therefore, they believe it will have high-quality physicians. In Ecuador, however, the focus is on the physician. You often have a well-known physician that works at two or three hospitals. We need to change this, because it is the hospital that implements the procedures and protocols to ensure safety and quality levels. It is hard to change this way of thinking in Ecuador, but it is our challenge. EWL Approximately 10% of our patients come from outside the city, mostly from the coastal region. Sometimes treatments for these people and also for older people require more time. Many people mistakenly think that when you are in the hospital for more days, the hospitals make more money. In fact, when a patient stays in the hospital for one or two weeks, we are losing our resources. In response to this, we have developed the concept of running a hostel where patients can pay to have medium-length stays of a few weeks. In this way, they will have shelter, and will be near the hospital so can visit their doctor once or twice a day, and can get seen to by their nurse. In Alborada, we are building two new facilities, one has offices for physicians, and one rooms that can be rented by the hospital, or used for long-term patient stays. Health & Education THEBUSINESSYEAR 153 Ambitious educational reforms are promoting world-class research in Ecuador, where the government now guarantees the academic value of diplomas. Review E D U C AT I O N BACK TO SCHOOL When President Correa complained that Ecuador “probably has the worst universities” in South America, his derision stemmed from a widespread collapse of academic excellence in Ecuador’s universities. A former economics professor himself, President Correa and his administration have been ruthless in their pursuit of “garage universities,” that the President accuses of cheating students and functioning as degree mills. Starting with the new constitution, ratified in 2008, and then later with the Organic Law on Higher Education, which passed in 2010, legal reforms were implemented to bring educational institutions in line with international standards and the country’s development goals. Many of Ecuador's best universities are in urban areas These two legal undertakings overhauled university funding, administration, accreditation, staffing professor qualifications, and made public universities free of charge for students who met heightened criteria. At the same time, the reforms barred under-qualified students from degree programs. The 2010 reforms ensure that by 2017, 70% of professors have Doctoral degrees and that all new teachers have at least a Master’s degree. In addition, promotions were made contingent on holding a PhD. Educators in Ecuador were quick to criticize the reforms, but ultimately some schools were shuttered, and the reforms went ahead. The ensuing years have tested the viability of the reforms and overall, Ecuador’s Image: ESPOL 154 THEBUSINESSYEAR ECUADOR 2014 NEW SCHOOLS quality of education is now far better than in years past. According to teleSUR, enrollment in public schools has experienced a 16% increase over the past year, 36% of whom are transfers from private institutions. In addition, 12% of the national budget is allocated towards education-related projects, totaling $1.3 billion annually, and including plans to construct 200 new schools by the end of 2014. These developments are part of the “Good Living” development plan instigated by President Correa, which aims to overhaul education and bring high school graduation rates up to 80% by 2017. MORE ON REFORMS Under President Correa, education reforms went beyond removing barriers. The establishment of a university accreditation process through Consejo de Evaluacion Acreditacion y Aseguramemiento de la Calidad de la Educacion Superior (CEAASES) has raised quality standards at universities. One of the responsibilities of the CEAASES is to vet students entering universities. Students are now required to sit an entrance exam created by the National Secretariat of Higher Education, Science, Technology, and Innovation (SENESCYT) that measures basic learning skills and suggests a career path. This organization has also increased scholarships available to students. At the same time, university salaries were raised and interest rates on student loans reduced to 4.6% from a previous 12%. During a speech made in 2014, President Correa boasted that the country was investing $308 million in either revamping or building dozens of technical institutes that are strategically positioned to benefit the productive sector. Correa also pointed out that four new world-class and tuition-free universities were being built in the country, one of which, the National University of Education, will be dedicated to training educators. Meanwhile, the Ministry of Education (which does not include higher education) manages 12% of the total state budget, making it the largest budget in the Ecuadorean government. The second university, which opened its doors in early 2014, is the University of Arts (UARTES), the establishment of which is expected to increase artistic research, creation, production, diffusion, and the maximization of the country’s talents in arts and culture. The first degrees being offered by the school are in film, audiovisual arts, and inter-cultural literary arts. Upon completion of the school, which is still under construction, more degrees will be offered. The new arts university will have an investment of around $200 million and an initial enrollment of only 200 students. However by 2026, at full capacity, the school expects enrollment of 2,000 students. The third new university, Ikiam, is dedicated to the study of natural resources and biodiversity. The university lies in the center of a 920-square-kilometer nature reserve, which makes the facility part of a massive environmental laboratory. Also in 2014, the University of Yachay, called the city of knowledge, was opened. The new university will combine industry, research, and academics and go on to play a crucial role in the new productive matrix. While terms such as “the Silicon Valley of South America” are bandied around to describe the project, these titles have currency. With over $1 billion in total investments, the project aims to draw the worlds brightest minds and companies to Ecuador, with President Correa calling it, “the most important project for the country in the last hundred years.” THE PROMETEO PROJECT The Prometeo program, which funds researchers from around the world in Ecuadorean universities, is evidence that the country’s universities are expanding into the international arena. Researchers that are awarded funding must have established academic credentials, such as publications and experience in select research projects in specific fields. By SONIA ROCA Chancellor, Universidad Del Pacífico What motivated you to found Ohcp_lmc^[^>_fJ[]×]i9 We began in 1994 as a business m]biif&[h^i`×]c[ffs\_][g_[ university in 1997. From the outset, our role has been to leverage the spirit of entrepreneurship as a model for education. At that time we were pioneers in Ecuador, replicating the Harvard Business School model. And today, over 60% of our graduates have established their own businesses, which has generated tangible opportunities for the country at large. How would you characterize the ability of Ecuador’s educational system to instill entrepreneurship? We see ourselves as sowing the seeds of entrepreneurship, but it seems to me that Ecuador lacks the right model to ensure adequate long-term positive results. I would hope to see an academic model adopted widely by other universities that fosters business initiatives, as this is what emerging markets are most in need of. Foreign investment is important, but it should not be allowed to compensate for inadequate indigenous human capital. In that case, what shortfall in the educational system is precluding such a model? We need to think internationally, such that graduates develop an awareness of their potential in the wider global marketplace. This view has underpinned our model since we opened our doors. We b[p_qile_^ni_mn[\fcmb×lg links with universities in Europe, Asia, and the Americas. Health & Education late 2013, 357 scientists and researchers from around the world had moved to Ecuador to participate in the program, which hopes to attract 5,000 scientists by 2017. The Prometeo project is structured to create a knowledge-based social economy in the following areas: sciences of production and innovation, natural resources, life sciences, educational sciences, pure sciences, and art and culture. With such ambitious goals, Ecuador is now competing with established global research leaders. However, the country offers 11 public research institutions in various fields, the chance to research in one of the most biologically diverse countries in the world, a multicultural state with 15 indigenous nationalities, and the political will to support the academic ambitions of its researchers. Ecuador’s international activities are not limited to the ivory tower; in mid-2013, plans were announced to hire 5,500 teachers from Spain to bolster the country’s linguistic capabilities, while taking advantage of Spain’s high unemployment rates. Teachers from Spain are being offered monthly salaries of The 2010 reforms ensure that by 2017, 70% of professors will have Doctoral degrees and that all new teachers have a Master’s degree. up to $5,000, which is far above the median income of less than $500 per month, according to the World Bank’s 2013 data. And while the program has predictably raised the ire of local teachers who are challenging the unusually high pay rates, the presence of qualified Spanish teachers is expected to raise overall standards and the competitiveness of Ecuador’s schools. While it is too soon to tell how Ecuador will fare in what is becoming an increasingly competitive global educational market, reforms made over the past decade have already made it a regional heavyweight, and as more schools are opened, Ecuador’s educational offerings will only increase. THEBUSINESSYEAR 155 156 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW TBY talks to Sergio Flores Macías, President of Escuela Politécnica del Litoral (ESPOL), on promoting advanced research, working with the private sector, and becoming an internationally recognized institution. an INSTITUTIONAL edge How have ESPOL graduates contributed to development in Ecuador? BIO Sergio Flores Macías received his BS in electrical engineering from Lafayette College, and a MS in Electrical Engineering from Stanford. Later he earned his MBA from the Escuela Superior Politécnica del Litoral. Among the many academic positions that Macías has held at ESPOL leading up to his current position, he worked as Director of the Department of Electrical Engineering, Director of the Center for Computer Services, Provost, President, and Dean of the Faculty of Electrical and Computer Engineering. He has also held the positions of Executive President of the State Corporation for Telecommunications (EMETEL), President of the Board, for Ecuador Telecom, and Founding Member of the Foundation for Science and Technology (FUNDACYT), to name just a few. ESPOL was founded 56 years ago. During this time, one of our main goals has been to offer high-quality undergraduate education. I would argue that our undergraduates become the best-qualified professionals in Ecuador. Being a technical university, our primary contribution is to the industrial sector, the private sector—engineering areas such as electrical, mechanical, civil, petroleum, and, computer science, geology, and marine biology, among others. We work in applied research to generate knowledge for developing the agricultural sector. Our marine research lab CENAIM developed most of the techniques used to prevent white spot disease. We are also working on biotechnology for bananas growers to organically combat certain agricultural diseases. Our curriculum is designed to develop leaders and entrepreneurs, rather than only engineers. What role do you see for technical education in Ecuador in the efforts to transform the productive matrix? This transformation requires well-trained people. For example, the Refineria del Pacífico project requires 2,000 engineers skilled in petrochemicals, automatic control, electricity, mechanics, chemistry, and so on. The country lacks these human resources, and the university’s role is to ESPOL works with Sony, which sponsors a lab where ESPOL students develop new video games bridge this gap, which is difficult because training in any of these fields requires at least five years. The other option is to retrain professionals from other areas, for example training a mechanical engineer for the petrochemical sector. To transform the productive matrix we need well-qualified researchers in order to generate knowledge for innovation. Research plus development leads to innovation and to changes in the productive system, and research and development should be done at universities and through innovation by the private sector. Do you see relationships with the private sector as a bigger part of how the university will respond to future national requirements? In the oil and gas sector, most companies are state-owned enterprises—PetroEcuador and PetroAmazonas, for example. These entities are destined to have an important role in the productive matrix and need well-trained people. You either bring these people in from abroad or you train them here, and this is where ESPOL plays an important role. What is the importance of international links for ESPOL? This is essential in both undergraduate and graduate education. We are the only university in Ecuador with international accreditation: two engineering programs accredited by ABET and our business school accredited by AACSB. We are going to start two PhD programs. A key component of these will be a six-month stint abroad at a research lab. We encourage our professors to author papers with professors from other universities and to write research proposals. Our professors work with colleagues from America and Europe on different research projects. What is your vision for ESPOL and its relationship with the government, the productive matrix, and private sector? Until 10 years ago all universities in this country, including ESPOL, were teaching oriented, where the main goal was undergraduate education. We are today going from an educational to a research-oriented institution. This means that while we formerly hired professors for teaching positions, today we hire professors for research and teaching. We are now incentivizing professors to publish in international, high-impact publications. We also encourage people to seek research funding. Our key point is that all effort must ultimately be aligned with the productive matrix. ESPOL is developing an Innovation Zone for Ecuadorian Littoral (Zona de Innovación del Litoral Ecuatoriano [ZILE]) as a mechanism to work on applied research and development for innovation; because the coastal area needs a technical, economic, and social development engine. Health & Education THEBUSINESSYEAR 157 INTERVIEW upping the GRADE TBY talks to Dr. José Barbosa Corbacho, Rector-Chancellor of Universidad Técnica Particular de Loja (UTPL), on pioneering distance learning, local economic development, and raising academic standards to international levels. What role does Universidad Técnica Particular de Loja (UTPL) play in Ecuador’s education system? The main role has been to democratize teaching through distance education. Our university has been a pioneer in distance education in Latin America for more than 30 years. We began providing distance education in 1976 with the aim of training teachers, as in those days many of them did not hold a university degree or a higher qualification. How has UTPL’s focus on distance education transformed the education system in Ecuador? Actually the UTPL boasts more than 26,000 students, many of whom have studied through its distance education program. Our focus has been on providing education for people who live in rural areas, for instance, where it is difficult to access higher education facilities. This has meant that many Ecuadoreans have been able to obtain a degree while doing their business incubators and business start-ups for the southern region of Ecuador. Are there more challenges for entrepreneurs in Ecuador who are not based in or near Quito and Guayaquil? normal job. As a result, this has enabled many students to progress in their professional careers. We have also contributed to improving the lives of a vast number of Ecuadorean migrants, especially those who moved abroad for economic reasons. Many of these migrants have been able to complete their studies with us via our distance education courses. This has changed the way many employers view Ecuadorean migrants abroad. We have also received international recognition from international accrediting bodies for our work in this area. How has UTPL contributed to local development in Loja? Since it was originally founded, UTPL has played an important role in developing the local economy. An essential part of the university’s mission is to provide outreach to society. In this regard, we have a number of university-led projects that aim to develop the local economy. Essentially, the aim is to provide work experience for our students who take undergraduate programs in related fields such as business administration, hospitality management, and so on. In this sense, we have made a significant impact on local development. It is largely thanks to these initiatives that Loja now has hotels and restaurants of an international standard. There is also UTPL’s Technology Valley, which serves as a hub for There are certainly more challenges for local entrepreneurs, and those challenges are more complicated. One of the major challenges is the lack of formality within the local economy. In Zamora province, for example, a significant proportion of the economy is focused on artisanal or small-scale mining. In the most recent census, it was calculated that there were 91,000 inhabitants in that particular province. Interestingly, the number of people actually registered with the tax authorities as having formal jobs was only 159, and they all came from the public sector. Notwithstanding, there are major mining companies now moving into this field, all seeking a stake in the market. As a university, we are working hard on providing training for both professionals and workers in this field so that they can become more actively involved in the decision making process. Would you say there has been a change in the international perception of higher education in Ecuador? Yes, because the Ecuadorean government is making a major effort to transform our higher education system, specifically through the use of scholarships that promote international mobility programs for students and professors. Unfortunately, there are some key aspects that still require improvement. Arguably Ecuador has had limited opportunities for doctoral level studies compared with other counties in the region, which has made it much harder for the younger generation of professors to obtain their PhDs here in Ecuador, and to have those doctorates recognized internationally. IN NUMBERS Universidad Técnica Particular de Loja Has provided higher education training to more than 44,000 Professionals BIO José Barbosa Corbacho was born in 1952. He earned a Doctorate PhD Cum Laude in Philosophy and Teaching from Universidad Autónoma de Madrid and has been Doctor Honoris Causa from Universidad Católica Los Ángeles Chimbote in Peru since 2012. He has been Director, Deputy Director, and frequent contributor of various literary publications and is co-author of Ética Para Todos. He has fostered, organized, and participated in numerous congresses and conferences. From 2012 to 2014 he was Regional Councilor of the Inter-American University Organization (OUI). Before becoming the Rector in 2010, he was Vice-Chancellor of Universidad Técnica Particular de Loja from 2003. José Barbosa is also member of the board of Directors of ISTEC, the Iberoamerican Science and Technology Education Consortium. 158 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW make the CONNECTION TBY talks to Fabián Carrasco Castro, Rector of Universidad de Cuenca, on promoting more research in higher education, forging connections with overseas institutions, and the university’s symbiotic relationship with the city. Universidad de Cuenca is over 145 years old. How has the instinoncihÎmmcahc×][h]_`il?]o[^il changed over that time? The University of Cuenca is the second oldest in the country after the Universidad Central del Ecuador. It has had a clear impact on both the city and the country at large. Many Ecuadorean politicians have previously served as professors at the university, or were educated here, and in that context our institution has a long and well-established tradition. The new higher educational law will present a challenge for us, having been created to transform the universities’ teaching institutions more into centers of research. Indeed research is one of the activities that our universities have yet to fully embrace. What are the challenges involved in effecting this transition? The main problem is the need for skilled individuals who are keen to conduct research. The teachers are not prepared to undertake research as they lack experience in this area. At present, we have many students who are set to obtain their PhDs overseas—in the US, Spain, Belgium, or Germany—so it is simply a matter of time before they return having developed this expertise themselves. The current government wants to implement these changes rapidly, but this cannot be done to order. We agree on the need to advance ourselves to become a more comprehensive university. We have to teach, but also have to conduct research. For that we need to prepare people, as well as install infrastructure such as laboratories. This is the easier part of the equation that simply requires financial outlay. The challenge lies in adequately training human capital. How would you characterize the University’s relationship with the city of Cuenca? We say that the city belongs to the university and the university to the city. This is the only public university in the area, and I consider its contribution important for personal development. We have agreements with all municipalities, and numerous mayors of the city belong to the university. The city’s mayor was a professor at the university, so there is a close relationship with the government, and also with the people. We have given assistance to small towns to help them obtain water, for instance, and are running such studies at this university. What role do inter-university connections play in building research capacity? What is your medium-term vision for the university? We need to develop a research network beyond the national network of research in the principal universities of the country. However, we also need connections with other countries because Ecuador is a relatively small nation. We have connections with Belgium, Germany, Spain, the US, and other countries, where we are trying to link our own institutions with the best universities we can find. It will remain a quality university that helps to solve the problems faced by the country, that educates the people of this region, and that cooperates to help develop the city and its surrounding region. We will try to take good care of the country’s natural environment. We are heavily active in this area and our students know that it is important to have this clear objective. I see the future of this in research. Universidad de Cuenca is the secondoldest university in Ecuador BIO Fabián Carrasco Castro was born in Cuenca, Ecuador and attended the University of Cuenca after completing high school in the US. He majored in Civil Engineering and has a Master’s degree in the same ×_f^`lignb_Ohcp_lmcnsi` Colorado, Boulder, US. He has taught at the Faculty of Engineering (University of Cuenca) since 1981 and worked as the Director of the Civil Engineering School from 1989 to 1991. He has been a member of the Directive Council of the Faculty of Engineering and was Dean of the same faculty until 2000. From 2000 until 2011 he was the Vice-President of the University of Cuenca and since then he has been the President of the same institution. Health & Education THEBUSINESSYEAR 159 RESEARCH VOX POPULI A CUNNING PLAN Ecuador’s universities are increasingly using their research departments to make an international name for themselves, while also driving their respective fields forward. CARLOS LARREÁTEGUI W ith the creation of Universidad de San Francisco de Quito (USFQ), the educational sector became competitive for the first time. Before then, it was a public system with no competition. Competition makes you develop, and ultimately makes your university better. Since we have started, the whole education system has been transformed, not only on a university level but also from K to 12. We are the only university in Latin America to offer a full Liberal Arts curriculum in the tradition of the UK and the US. Just by our example alone, we have changed the Rector, Universidad de las Américas (UDLA) attitudes of students and professors, improved the quality of teaching, and emphasized the necessity of research. We are not research-oriented and do not receive state funding, although in spite of that we are the top research university in Ecuador. We have the largest number of PhDs of any institution in Ecuador by far. SANTIAGO GANGOTENA, RECTOR Universidad de San Francisco de Quito (USFQ) U niversidad de las Américas (UDLA) has a strong, but limited, research program. It is strong in the sense of focus, but limited in the sense of scope. Universities do not receive any funds from the government, but we have to work with the government. We will not develop a good research project as a whole if we do not collaborate. We do not receive funds from the government, and we devote most of our resources to helping our health science schools. UDLA probably has the best-developed research center in Ecuador, especially for study areas such as cancer. We have noticed that different indigenous communities in Ecuador have diverse problems of a genetic nature. As a result, we are conducting genetics studies and we have a center that is focused on diabetes. There is a traditional food from Ecuador called chocho. We are finding that certain types of chochos that we develop can fight diabetes. This is fantastic because it is natural, cheap, and people like it. We have been conducting experiments for the past three years and will shortly publish the final study. Again, the concept is: do your research in topics of significance to the country, and not just of academic orientation. 160 THEBUSINESSYEAR ECUADOR 2014 Image: Universidad de Especialidades Espiritu Santo (UEES) A t the moment we are transitioning toward the new law and academic framework stipulated by the regulator. This framework has yet to be proven, but we will do our best to make it work, even if we do not completely agree with it, such as the requirement to hold a PhD to become a dean, vice-president, or president of a university. Time alone will reveal the wisdom of the new legal framework. We want to feature on the global map, and even in the international rankings. As for the next 20 years, after updating new skills and curricula, we are driven to develop the health-related component of Universidad de Especialidades Espiritu Santo (UEES): the school of medicine and related areas, such as in- JAIME CALDERÓN SEGOVIA Rector, Escuela Politécnica Nacional (EPN) tensive care technology, and neurosurgery. We plan to build a university hospital within the next five years. We have already approached four of the top-10 hospitals to leverage their experience and advice in what will be a greatly ambitious project. All of our efforts will be geared at establishing an agreement with one of the experienced international institutions. CARLOS ORTEGA MALDONADO Chancellor, Universidad de Especialidades Espiritu Santo (UEES) F or over 45 years Escuela Politécnica Nacional (EPN) has espoused a system to balance secondary education with the training of professionals, having offset certain deficiencies in the disciplines of physics, mathematics, and chemistry. Once students are enrolled at EPN, our staff expose them to both pure and applied scientific research. Teachers at EPN know that they have to teach, research, and work to fulfill our social responsibilities. Research must be linked to teaching, because knowledge is dynamic, and academic staff must have published 20 to 30 articles in indexed journals. Arguably, what Ecuadorean universities are missing is patentable innovation. If it is a center for engineering and sciences it should be possible to patent one’s work. THEBUSINESSYEAR 161 164 165 166 Roque Sevilla, Chairman of Metropolitan Touring, on preserving Ecuador’s biodiversity. Gino Luzi, General Manager of Grand Hotel Guayaquil, on Guayaquil’s attraction as a center for MICE tourism. The Tren Crucero has been revived, and is breathing new life into railroad and sightseeing tourism. Tourism REVIEW Over the past few decades, Ecuador’s tourism sector has been slowly growing in reputation and attractions, and today has become one of the most stable and envied on the continent. ENVIABLE POSITION T oday, tourism is big business in Ecuador, but this was not always the case. Back in the 1980s, the government paid little attention to the tourism industry, leaving much of the country’s ancient ruins and colonial towns underdeveloped and unprotected. This, however, is not the case at present, with the government investing large sums of money to develop sites and tourist attractions, and the sector contributing ever larger amounts to the country’s GDP. The direct contribution of travel and tourism to GDP in Ecuador was $1.66 billion (1.9% of GDP) in 2013, which is expected to rise by 3.4% in 2014 to $1.71 billion, and then again rise by 4.5% per annum between 2014 and 2024 to $2.65 billion (2% of GDP) according to annual research carried out by the World Travel and Tourism Council (WTTC). The total contribution of travel and tourism to GDP in 2013 was $4.7 billion (5.3% of GDP). This figure is expected to Image: Metropolitan Touring The tourism sector in Ecuador is expanding yearly; government policy aimed at attracting visitors to the Andean nation is focused on highlighting the country's rich cultural and natural offerings. rise by 4.1% in 2014 to $4.89 billion. The sector is then expected to continue rising by 4.5% per annum between 2014 and 2024 to $7.57 billion (5.8% of GDP). Tourism also attracted a considerable amount of investment over 2013, when $801 million was pumped into the sector, which equated to 3.5% of the total investment in the country. This figure is estimated to rise by 4.1% over 2014, and then again by 4.4% until 2024 when it will reach $1.29 billion, or 3.8% of the total. Employment in the sector is also set to rise. In 2013, both indirect and direct employment totaled 337,500 jobs, or 4.8% of total employment. The WTTC expects that this will rise by 2.3% in 2014 to 345,000 and again by 2.9% per annum until 2024 when it will employ 461,000 people (5.3% of total employment). In line with these growth figures, visitor numbers have also been growing, with a 14% rise between January 1, 2014 and August 25, 2014 to push the number just over the 1 million mark. Ecuador is most ECUADOR 2014 162 THEBUSINESSYEAR Travel & Tourism Investment (2014 Percentage Growth) Source: WTTC Rank Country 143 Guatamala 2,4 140 Venezuela 2,4 132 Chile 2,7 111 Ecuador 4,1 110 Argentina 4,1 88 78 5 Peru Colombia 5,5 WORLD 5,7 AMERICAS 5,8 6,5 63 Mexico 51 Costa Rica 1 Brazil 7,5 21,8 Travel & Tourism Direct Contribution to GDP (2014-2024 Percentage Growth PA est.) Source: WTTC Rank Country 134 Argentina 3,5 127 Guatamale 3,6 124 Brazil 3,6 AMERICAS 115 Colombia 111 Chile 103 Venezuela WORLD 87 Ecuador 78 Mexico 61 Costa Rica 26 Peru 3,7 3,8 3,9 4,1 4,2 4,5 4,6 5 6,1 Travel & Tourism Total Contribution to Employment (2014-2024 Percentage Growth PA est.) Source: WTTC HARD WORK Rank Country 117 Chile 102 Brazil 87 76 1.9 2.1 AMERICAS 2.2 Mexico 2.3 54 Ecuador 52 1.7 Colombia WORLD Venezuela 2.4 2.9 3 50 Guatamala 3.1 47 3.2 Argentina 43 Costa Rica 3.3 38 3.4 Peru popular with Colombians, with 251,124 tourists making the trip, followed by the US with 184,540, and then Peru with 112,801 according to the Ministry of Tourism. It also expects that by the end of the year more than 1.5 million tourists will have arrived in Ecuador. This will be an approximately 10% increase on 2013, when 1.36 million people visited the country. Of those that arrived in 2013, 70% came via air while 29% came by bus, bringing with them $1.25 billion in foreign exchange according to the Ministry of Tourism. The government has been working hard over the past couple of decades to boost the tourism sector and get it to where it is today. One of the recent advertising campaigns that has been running is the All You Need is Ecuador promotion. The advertisement depicts the half submerged head of a caiman, with its back representing the Amazon and the Andes and its nose the Pacific Coast and the Galápagos Islands. The advertisement won at the CGI Awards in Photokina, which is held every two years in Cologne, Germany. The judges of the awards stated the image was “incomparable and one of the best that has been selected in the awards trajectory.” The advertisement was able to communicate Ecuador as an enviable country with four different ecospheres in a biodiverse, compact, and unique world. The All You Need is Ecuador campaign has been unprecedented in tourism advertisements as it has been able to reach over 455 million people worldwide since its launch in 2014. It is campaigns such as these, as well as many in the past, that have been pushing Ecuador’s image onto the international stage. Further evidence of this can be demonstrated by the fact it successfully held a PGA Tour event in September 2014, which was attended by 150 participants from 24 countries. The event was won by 22 year-old Taylor McCumber. The President of the Club Quito Tennis and Golf Club, Santiago Arias, specifically thanked the All You Need is Ecuador campaign in being instrumental in attracting the Tour to Ecuador. The government has been experiencing a degree of success in its tourism industry recently; however, it has no plans to rest on its laurels and has laid out a set of objectives and targets it wishes to reach. In September 2014, the Minister of Tourism, Sandra Naranjo, at- Tourism Total Contribution to GDP (USD Millions) Source: WTTC 5,000 4,000 3,000 2,000 1,000 0 2008 2009 2010 2011 2012 2013 2014E GDP Contribution 2013 (USD Millions) Employment 2013 (Thousands) Source: WTTC Source: WTTC 931 1.658 74 119 2.112 144 Direct Indirect Induced tended the Second Small Hotels Inter-American Network Encounter, which was held in Quito. She emphasized the need for cooperation to help strengthen three main areas: security enforcement, the quality of destinations and tourism products, and the improvement of connectivity and promotions. During her speech, she also announced the implementation of a new grading system for hotels to improve the quality of services offered. Hotels will be ranked with quality seals of platinum, gold, silver, and bronze. These will be given to hotels that specifically stand out in their field and will allow tourists to easily distinguish between high- and low-quality services. It is expected that the level of services will improve as hotels compete to get the highest seal of approval. The Ministry will also be launching a new electronic system to digitize the lodging books of hotels, allowing the information to be handled in a more orderly way. Hotels will register online and the service should streamline the registering of guests in hotels, lodges, and hostels. The Ministry has also announced an investment of $270 million in security services for tourism. The money will go to 15 police stations that operate in 23 provinces and should cover almost 100% of tourism activities. THEBUSINESSYEAR 163 164 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW TBY talks to Roque Sevilla, Chairman of Metropolitan Touring, on the frustrations of the Yasuni-ITT Initiative, preserving Ecuador’s biodiversity, and thinking beyond the Galapágos Islands to mainland tourism opportunities. responsible response How would you characterize the level of success Ecuador has had in protecting its biodiversity? I would like to put your question in context: Ecuador has the highest biodiversity per square kilometer in the world. More than 20% of Ecuador’s territory has been declared a protected area. The Galápagos National Park is a world example of good environmental management. But some hot spots of biodiversity are in great danger because of oil and copper extraction. An example is the Yasuni National Park, the most biodiverse place in the Western hemisphere. who collected 750,000 signatures demanding that a public consultation should be held asking the people whether oil should be exploited in the national park. The authorities bent the law to avoid public consultation. How important is the environment for Metropolitan Touring? As the former head of the Yasuni-ITT Initiative, how do sio`__f[\ionnb_×h[fion]ig_ of the project? I feel disappointed both with the international community and with the Ecuadorean government. The idea was to avoid oil exploitation in the Yasuni National Park, keeping 20% of Ecuador's oil reserves under the soil forever and asking the world community to contribute to half the value of that oil. Ecuador committed to invest those resources in conservation, reforestation, renewable energy production, and support for the poorest communities. After 18 months as head of the Yasuni Initiative, I managed to receive the support of six European countries with a commitment to contribute during 13 years a total amount of $1.76 billion. Unfortunately, large countries such as the US and China showed no interest. When the negotiation was ripe, the Ecuadorean government proposed conditions on the donors that were not attractive, and the project fell apart. Having said that, I must say that I feel proud of the Ecuadoreans BIO Roque Sevilla is an Ecuadorean businessman, ecologist, and former politician. He leads a corporation that has investments in insurance, health, tourism, and renewable energy. Sevilla has been Mayor of Quito, a Member of Parliament, and was the Chairman of the Yasuni Initiative. He was also the Founder and Chairman of an Ecuadorean environmental NGO, ViceChairman of the Charles Darwin Foundation for the Galápagos, and a Member of the Board of WWF International and WWF in the US. Sevilla is an Economist and holds a Master’s degree in Public Administration from Harvard University. We live from this incredible environment. We give the highest level of support to any kind of regulation that is established in the places where we work. Where such regulations do not exist, we promote them ourselves. A good example of that is what we do in Mashpi and in the Galápagos. Our hotel in the Galápagos has received the Travel Award for the third year in a row, as the green lodge of South America. In Mashpi, we are investing not only in the protection of the forest, but also in research. We are developing a project to reintroduce a species of monkey that had disappeared in that area. There were only 250 of them in Ecuador previously. We have constructed a 3.6 MW photovoltaic plant in the same area. Up until now, Ecuador’s tourism sector has focused on the Galápagos. Do you see the future of tourism developing in Ecuador as tourism on the mainland? Ecuador has great potential. We must be careful to avoid the type of large-scale, cheap tourism that does not bring progress into the country. I would prefer a tourism portfolio of small facilities where the people, not the large com- Metropolitan Touring has been one of the leading marketers for tours of the Galápagos internationally panies, are the owners. That is consistent with the philosophy of the government, with which I agree. Ecuador has the characteristics of small ecosystems and ecodestinations that are completely different from each other. This means that each town’s people can develop small facilities, such as hotels or tourist services that can be managed by them. The good thing in tourism is that you need a relatively low amount of capital and training to offer good service. For example, in Mashpi, almost 70% of our employees in our 22-room lodge come from the region. They are learning English, and becoming firstclass guides for watching the 450 species of birds. In just a year and a half, they have become experts in tourism, while before they were farmers. That is the value of tourism if you do it in the right way. I hope that the model of tourism we develop in Ecuador will use these small niches wisely, where you will feel the difference between one place and another. Tourism THEBUSINESSYEAR 165 INTERVIEW location,location, LOCATION TBY talks to Gino Luzi, General Manager of Grand Hotel Guayaquil, on the value of having a great location, renovating the Grand, and Guayaquil’s attraction as a center for MICE tourism in Ecuador. What distinguishes the Grand Hotel Guayaquil within the tourism sector? BIO Gino Luzi was born in Switzerland in 1941. He graduated in Hotel Administration from École Hôtelière de Lausanne and b_cmØo_hnchA_lg[h& French, English, Italian, and Spanish. In the course of his professional career he has held different positions in numerous hotels in Switzerland, Spain, Peru, Panama, Honduras, El Salvador, and Ecuador. He is President of the Guayas “AHOTEGU” Hotel Association and a Member of the Board of Directors of the Chamber of Tourism. He has received a host of prizes and distinctions from various institutions as well as the Ministry of Tourism, the Ministry of Labor and Human Resources, and the Ministry of Education and Culture. The Grand Hotel Guayaquil features 182 fully-equipped and renovated rooms, a 24hour café, a first class restaurant, a bar with live music, as well as the Terraza Racquet Club with two squash courts, a fully-equipped gym, sauna, steam bath, and massage service. The hotel also has a beautiful panoramic swimming pool with a waterfall, located in a tropical environment. The location, in the middle of the regenerated downtown section of the city, is basically in the tourist center of Guayaquil; we share a whole city block with the Cathedral, and are one block away from the park where hundreds of iguanas are admired by locals and visitors daily. Another asset is that our hotel is only four blocks away from the Malecon 2000, a beautiful and safe site for local and international tourism, for promenading along the river, with 1.5 miles of trees and flowers, and a good number of shops and cafés. Grand Hotel Guayaquil has been open for 37 years Guayaquil has a growing MICE tourism sector have a good volume of weekend family packages, sport events, and tourism groups, mainly from France, Germany, Switzerland, Spain, and the US. We are the best choice for organized tourism packages for groups and a good number of individuals in transit to the Galápagos Islands. As Guayaquil is the country’s most active port we are obliged to mention the corporate business, which means a great number of business people and visitors to conventions, congresses, and fairs. Qb[ncmnb_g[chjli×f_i`siol guests? What occupancy levels have you seen in 2013, and does seasonality present a challenge? We have a variety of guests, as ours is a full service hotel and one of the three largest in the city; we welcome corporate guests and local and foreign business people, as well as national and international tourists. As the hotel is located in the tourist heart of the city, we Occupancy has maintained its level of approximately 65% a year since 2012. Being a city hotel, we do not really have a seasonal shift, but we do have lower occupancy in the first four or five months of the year, and our best five months run from July through November. The hotel is currently undergoing renovations. How will these enhance it? This renovation is our fifth since opening in the mid1970s, but there is a crucial difference this time. In contrast to previous renovations this one is comprehensive, externally and internally, with a total investment of over $3 million. Being in a highly competitive environment, we have decided to proceed with the facade, dividing it into 14 sections, and four floors, remodeling half-floor by halffloor, and all the rooms. What has made the hotel so successful over the past 37 years? Our 37 years in this market are not a coincidence. The constant training of our staff, our genuine orientation towards the comfort of our guests and clients, and remaining the best and most innovative, in terms of decor, service and technology initiatives; this has been helpful in terms of providing the best possible services to our guests. What does Guayaquil have on offer to attract MICE tourism? Guayaquil is located at sea level, with an international airport that operates 365 days a year. The city features a good number of deluxe hotels belonging to known chains, plus new openings announced for the next five years. With a population of 2.2 million, Guayaquil is the economic capital of Ecuador and the preferred venue for important national and international events. There is a new convention and visitor bureau, which will be charged with promoting the city to the country and the wider world. The city boasts a convention center with a capacity of 3,000 seats, and the principal hotels also have large convention facilities. Guayaquil has been selected to host the International Aviculture Congress 2015, and the Orchid World Congress 2017, each with between 1,500 and 3,000 participants. ECUADOR 2014 166 THEBUSINESSYEAR FOCUS TREN CRUCERO 0 km 34 km 87 km QUITO 2777 mts MACHACHI 3089 mts TAMBILLO 2779 mts LASSO 2995 mts GUAYTACAMA 2882 mts LATACUNGA 2760 mts SALCEDO 2636 mts CEVALLOS 2882 mts AMBATO 2570 mts URBINA 3609 mts MOCHA 3187 mts RIOBAMBA 2764 mts CAJABAMBA 3212 mts COLTA 3296 mts MANCHENO 3202 mts GUAMOTE 3057 mts PALMIRA 3239 mts TIXAN 2787 mts ALAUSí 2347 mts SIBAMBE 1836 mts CHANCHÁN 1482 mts HUIGRA 1255 mts NARANJAPATA 555 mts VENTURA 397 mts BUCAY 294 mts SAN RAFAEL 161 mts NARANJITO 31 mts MILAGRO 12 mts YAGUACHI 5 mts GUAYAQUIL/DURÁN 4 mts Source: Ecuador Destiny EL BOLICHE 3547 mts The Tren Crucero’s Route & Altitude Station Stop 100 km 122 km 143 km 166 km 212 km 275 km 301 km 352 km 352 km 423 km 440 km GAINING TRACTION The Tren Crucero has been revived after many years of neglect. Now, the line is revitalizing many once forgotten villages. By the end of the 19th Century, Ecuador had over 1,000 kilometers of railway track; however, due to a lack of investment, harsh environment, and particularly strong weather in 1982 and 1990 by 2008 there was only about 10% of the original track that remained in operation. But since then, the government has been on a quest to reinstate this once iconic railway running through some of the most unique and mesmerizing landscapes around. Over $280 million has been spent renovating the old track and locomotives, with the 453-kilometer Tren Crucero, or Cruise Train, high on the list. Connecting Quito in the Andes and Guayaquil on the Pacific, the narrow piece of track is becoming something of an icon and major tourist attraction for people wanting a relaxing journey through rural Ecuador. Construction of the line originally began in 1897 and was not finished until 1908. The original locomotives have been restored, the oldest of which is nearly 100 years old, and coupled with new luxury carriages built in Madrid. The idea behind the restoration is an attempt to boost economic activity in places tourists would otherwise be unlikely to visit on the route, places such as Casiguana, which was abandoned when the train stopped passing by. It is hoped that by connecting these severed links, numerous villages along the route will once again become economically sustainable. “The communities on the train lines are the ones in charge of managing them, so we will increase their level of participation, generating job opportunities with as many as 5,200 direct employment positions and around 16,000 indirect ones, as well as providing economic alternatives to these communities,” Eduardo Carrera, General Manager of Ferrocarriles del Ecuador, explained to TBY. HIGHLIGHTS With Quito being 2,800 meters above sea level, passengers are treated to some of the most exhilarating and astonishingly beautiful views. One of the most thrilling sections is what is called the Devil’s Nose. Through a series of mind-bogglingly tight switchbacks, the train manages to descend 2,945 meters in only 56 kilometers, making for a hair raising and exciting section of the journey. The Devil’s Nose took four years to build between 1904 and 1908 and cost the lives of over 4,000 workers. Now, the section is much safer and a highlight for many tourists. Another highpoint of the journey is the Avenue of Volcanoes. At over 3,609 meters high, it is one of the highest points of the journey and passes by 10 volcanoes. In Urbina, a new visitors center has been built, which it is hoped will increase economic activity. The journey takes four days to complete, and passengers spend three nights sleeping in local hotels as the train only travels in daylight. In 2015, the price for an adult will cost $1,393, which will include all the hotels and the ticket. Ferrocarriles del Ecuador has been promoting the line heavily with tourists, and has spent $10 million on advertising in the US and the EU. Tourism THEBUSINESSYEAR 167 INTERVIEW In many countries, the rail sector is considered industrial. However, in Ecuador, it is seen as touristic. Why is that? Ecuador used to have a railway network of around 1,000 kilometers built at the end of the 19th century, operating until the mid-20th century, and eventually becoming obsolete. The network had been built according to the prevailing geographic and economic conditions of the time, meaning that it did not comply with today’s regulations regarding slopes and curvature. Today, Ecuador’s railway network is much more functional, and works through a modern system of tunnels and bridges. The railway has been reintroduced by the current government, and we have taken important steps over the past few years such as the recovery of the touristic train, a rehabilitated line of nearly 500 kilometers in length. Moreover, the government aims to revive railway transportation so as to contribute to the transformation of the production matrix, which is not exclusively industrial. We have sought international expertise on these projects as part of broader infrastructural commitments. How does the Ministry work to bring railway expertise back to the country? We have sought international advice from countries like Spain, where Renfe handles over 15,000 kilometers of railway. We have also prioritized the development of the rail lines we have built, so we know how they work. All in all, we prioritize the development of an Ecuadorean knowledge base, and we have also sent staff to some European countries. I think it is important to have international partnerships for infrastructure construction projects. Today, we have as many as five private Ecuadorean companies laying railway lines and five others engaged in other aspects of railway infrastructure and logistics. These companies also take part in other railway proj- on TRACK TBY talks to Jorge Eduardo Carrera, General Manager of Ferrocarriles del Ecuador on modernizing Ecuador’s rail network, increasing numbers of local and international tourists, and the positive social impact rail can have on rural communities. The government is investing $350 million in the regeneration of the rail network ects in neighboring countries like Peru and Colombia. What is the impact of the more than $350 million in investment plan implemented by the Ministry to local communities? The Ministry started operating railway tracks in 2008, and back then we had just 16,000 tourists a year. In 2013 the figure reached 150,000 tourists. This growth has been possible due to several projects implemented by the Ministry; for example, the excursion train, which is a one-day journey through several regions of our country. We also implemented the so-called Tren Crucero, where tourists can spend some nights on a scenic journey. We have also implemented subsidy plans for certain communities in the country, such as for scholars and the disabled. Today, 75% of our railway tourists are locals, demonstrating the importance of this means of transport for our people. Our main goal in the near future is to boost the Tren Crucero, where 60% of the passengers are foreigners, and increase the overall number of visitors using the Ecuadorean railway network. We have already spent $10 million on promotional campaigns in the US and Europe. These tourism activities bring development and economic alternatives to many rural communities in our country. Our main priorities in this regard are: 1) to bring economic dynamism to the communities through which the train travels, 2) to restore the cultural heritage associated with railways, 3) to operate one of the most beautiful railway lines in the world. We also have plans to supplement the above-mentioned activities with other initiatives such as the Museum of the Train, the Coffee Train, and many more. The communities on the train lines are the ones in charge of managing them, so we will increase their level of participation, generating job opportunities with as many as 5,200 direct employment positions and around 16,000 indirect ones, and providing economic alternatives to these communities. The Tren Crucero we talked about has been nominated for the World Travel Awards. Why should it win? This touristic product was launched in mid-2013 and by the end of the year we were awarded the prize of Best Touristic Product Outside Europe. This in itself is one of the main reasons why we are a real competitor for the World Travel Award; the award is based around the educational and economic impact of the project, the social responsibility aspects of the initiative, and its touristic potential. BIO Jorge Eduardo Carrera Sánchez was born in Quito. He obtained Bachelor's and Master's degrees in Management for Local Endogenous Development from the Universidad Politécnica Salesiana. He then continued his studies at Universidad General Sarmiento in Argentina and Universidad de Salamanca obtaining a graduate degree in Social Economics and a Master’s in Entrepreneurship and Innovation. In his professional career he has held several positions, such as Institutional Advisor at Fundación Patronato Municipal San José, Country Coordinator in Fundación Logros, Technical Advisor of Cooperación Técnica Alemana (GTZ), Project Co-Director for Agencia Española de Cooperación para el Desarrollo (AECID), Executive Director of Agencia de Desarrollo Provincial de Manabí, and Secretary of the Ecuadorean Committee for Territorial Economic Development (CEDET). He has been General Director of Ferrocarriles del Ecuador for six years. ECUADOR 2014 168 THEBUSINESSYEAR P H O T O ES SAY D E S T I N A T I O N JUAN FERNANDO PAREDES ROLDÁN Executive Director, Municipal Tourism Foundation for Cuenca Tourism in Cuenca has grown \s-*ip_lnb_j[mn×p_ years. What have been the drivers of this success? In 1999, Cuenca became a World Heritage Site, which caused tourism to take off. The city boasts such a range of attractions. A recent World Bank molp_sc^_hnc×_^=o_h][[mih_ of the safest and most accessible cities in South America. For a city of its size, Cuenca is in a perfect position, and that attracts visitors. Colonial style buildings are typical of the downtown and historic districts CUENCA ANDEAN DREAMS Cuenca offers visitors a host of activities guaranteed to keep even the most restless traveller entertained. Located in the province of Azuay in the Andes of Ecuador, the city of Cuenca, or Santa Ana de los Cuatro Rios de Cuenca, has long been a safe haven as well as an attraction for travellers. The first inhabitants of the region date back to 8000 BC; however, it wasn’t really until the Pre-Colombian times that the city began to take shape. It was the Cañari that first established a settlement, which they called Guapondeleg in 500 AD. In around 1000 AD, the Incas conquered the Cañari and changed the name of the city to Tomebamba. The Incas began to replace the original architecture with that of their own and the city quickly became known as the “second Cusco,” as well as the regional capital. It was from the Cañari that the Incans learnt many new astrological and agricultural skills, which the Cañari had mastered. The Incan commander Tupac Yupanqui ordered the construction of a grand city, which was to be called Pumapungo or “Door of the Puma.” By What are the challenges in developing Cuenca’s tourism sector? We are working hard to encourage both local and international tourists to take advantage of our city. Cuenca’s half a million l_mc^_hnm[fl_[^s\_h_×n`lig the clean air and rivers. The World Bank study was of great \_h_×n`ilom&[h^q_[l_^icha our utmost to eradicate the l_g[chcha^_×]c_h]c_m( You mentioned an investment in Cuenca by the Sheraton hotel chain. What role do you see for international investment in Cuenca‘s tourism sector? The Sheraton investment ^_gihmnl[n_mnbcmmcahc×][hn ]b[chÎm]ih×^_h]_ch=o_h][ as a viable market. Now it is important that we move forward on an international airport. Ecuador has a solid legal framework for investment, and our international exposure is increasing. Tourism THEBUSINESSYEAR 169 Cuenca offers a distinct blend of traditional and modern architecture The 3rd largest city in Ecuador, Cuenca is a World Heritage Site that offers a wide variety of highlights and experiences for visitors, locals, and expatriates alike; it is a truly unique destination. the time the Spanish arrived on the continent, Tomebamba had been destroyed by its inhabitants and had been abandoned; however, its reputation had spread across the continent as the legendary city of golden temples and other such wonders, so much so that many believed, including many of the Spanish conquistadors, that it could have been the fabled city of El Dorado. When the Spanish finally found Tomebamba, they renamed it Cuenca and began permanent settlement in 1557. Today, the rich history provides tourists with many activities and places to visit, such as colonial cathedrals, monasteries, churches, and museums. Being located in the Andes, it also means there are numerous small Andean villages within a short driving distance, Incan ruins, rivers, streams, nature walks, and El Cajas, an expansive national park that is between 3,500 and 4,200 meters above sea level and contains the Lacs en Miroir (Mirrored Lakes). THEBUSINESSYEAR 171 174 175 178 Founder and CEO of Moore Stephens on providing wide ranging strategic business consultancy services. A Partner and General Manager at Moore Stephens talks about what makes Ecuador an appealing business environment. A list of hotels and helpful hints for first time visitors to Ecuador to make the experience convenient and memorable. Executive Guide REVIEW LEGAL THE THICK OF IT E cuador is seeking an efficient and effective set of laws and regulations to drive the economy and encourage foreign investment in the country. LEGAL-POLITICAL SYSTEM BIO Xavier Rosales is a partner at Corral Rosales Carmigniani Perez, a major law ×lgch?]o[^il&l_mofncha from the merger of Corral Lim[f_m&[f[q×lg\[m_^ in Quito, and Carmigniani J_l_t&[f[q×lg\[m_^ch Guayaquil. He has broad experience in foreign investment in Ecuador, mergers and acquisitions, competincih&×h[h]chaij_l[ncihm& banking and insurance. He has been ranked as a leading corporate and M&A lawyer in Ecuador by different reputable publications including Chambers, LatinLawyer, and IFLR1000. Ecuador is a democratic republic the constitution of which was enacted in 2008. It recognizes the classic division of powers: a legislative branch, an executive branch, and a judicial branch. The president is elected for a period of four years, with the possibility of immediate reelection. The National Assembly consists of 137 representatives, also elected for terms of four years. The judges of the National Court of Justice are appointed for a period of nine years, and one-third of them are reappointed every three years. There is a Constitutional Court, which is responsible for interpreting the rules of the Constitution and reviewing the acts of the state, including judgments of courts and tribunals that may violate constitutional rules. FOREIGN INVESTMENT The rules and regulations applicable to foreign investment currently in force in Ecuador include the following: %FDJTJPOTBOEFOBDUFEJO.BSDI and issued by the Commission of the Andean Community (Colombia, Ecuador, Peru, and Bolivia). $PEFPO1SPEVDUJPO5SBEFBOE*OWFTUNFOUT and its regulations. 3FHVMBUJPO EBUFE .BSDI BT amended and issued by the Central Bank of Ecuador, which regulates the registration of foreign investment. -BXPO$PNQBOJFT As a general principle, the Constitution of Ecuador provides foreign nationals with the same rights as Ecuadoreans. Decision 291 ensures that foreign investors have the same rights and obligations as local counterparts, with the exceptions provided for in the law of each member country. Foreign investors do not require prior authorization to invest in Ecuador, whether to invest in the capital of a company or as a financial investment through the stock exchange. Foreigners are only required to register their investment with the central bank, mostly for statistical purposes. Foreign investors may freely remit to their country of origin—or to any other country— the profits deriving from their investment, as well as any proceeds obtained from the sale thereof. No authorization from any organization is required. Both foreign individuals and entities may acquire real property in Ecuador. Generally, all sectors of the economy are open to foreign investment without limitation. There are only certain specific restrictions for foreign investment in areas relating to strategic sectors (namely oil, power, potable water), national defense, and security. VEHICLES FOR INVESTMENT The vehicles usually used for local or foreign investment are corporations (SA), limited liability companies (SRL), and branches of foreign companies, all mainly regulated by the Law on Companies. Below is a comparative list of the main characteristics and requirements of each type of entity. 172 THEBUSINESSYEAR ECUADOR 2014 FEATURES CORPORATION SRL BRANCH Minimum number of shareholders Two shareholders are required for the incorporation and maintenance of a corporation. Similar to a corporation. Not applicable Maximum number of shareholders No maximum number of shareholders. A maximum of 15 members; otherwise, it needs to be transformed into another type of company or dissolved. Not applicable Shareholders’ liability Up to the amount of their capital contributions, except in case of bad faith or willful misconduct. Similar to a corporation. Not applicable Foreign entities that participate as shareholders of a corporation must appoint an attorney in fact resident in Ecuador. Similar to a corporation. Not applicable The identity of the shareholders of the foreign entity participating as shareholder of a corporation needs to be disclosed up the chain of ownership until the ben_×]c[fiqh_l&qbicm[hch^cpc^o[fil[h_hncnsfcmn_^ch a stock exchange. Similar to a corporation. Capital is divided into register shares. Ordinary and preferred shares may be issued. Preferred shares have no voting rights, but may grant special rights in relation to dividend payments and in case of liquidation of the corporation. Capital is divided into quotes of a single class. Bearer shares are not allowed. Capital is divided into quotes of a single class. Shares may be freely transferred. Any statutory or contractual limitation to the transfer of shares shall be rendered null and void. Shares may only be transferred with the unanimous consent of all the members. Shares are transferred by means of an assignment notice executed by the assignor. The assignment shall \_ _r_]on_^ ch nb_ mb[l_ ]_lnc×][n_ il ch [ ^i]og_hn attached thereto and recorded in the Register of Shareholders. The assignment shall be executed in the form of a public deed, duly registered with the Commercial Registry and further recorded in the Register of Members. Shares are subject to attachment by seizure of the mb[l_]_lnc×][n_m[h^l_]il^chanb_[nn[]bg_hnchnb_ register of shareholders. No attachment of quotas is permitted. Shares may be pledged. Quotas may not be pledged. Minimum subscribed capital $800 Mj_]c×] gchcgog [giohnm g[s \_ l_kocl_^ `il ]ihducting certain activities. $400 Mj_]c×] gchcgog [giohnm g[s \_ l_kocl_^ `il ]ihducting certain activities. $2,000 Mj_]c×] gchcgog [giohnm g[s \_ l_kocl_^ `il ]ihducting certain activities. Minimum paid-in capital At the time of incorporation at least 25% of the subscribed capital must be paid in. The remaining balance must be contributed in a maximum two-year period. At the time of incorporation, at least 50% of the subscribed capital must be paid in. The remaining balance must be contributed in maximum one-year period. 100% the allocated capital must be paid in at the time of establishing the branch. Preemptive right Absolute right. The shareholders shall always have a preemptive right to participate in a capital increase, pro rata to their current participation in the paid-in capital of the company. Right may be waived. Relative right. It needs to be determined in the by-laws of the company or resolved accordingly by the shareholders’ meeting. Not applicable. Highest corporative body Shareholders’ meeting Shareholders’ meeting The corresponding body pursuant to the law and the \s'f[qmi`nb_b_[^i`×]_( Shareholders’ meeting venue The shareholders’ meeting must take place at the legal domicile of the company, except for universal shareholders’ meetings with the participation of all the shareholders that may take place anywhere within the territory of Ecuador. It is not possible to hold shareholders’ meetings outside of Ecuador. Similar to a corporation. Not applicable. Meeting quorum ;nf_[mn/*i`nb_j[c^'ch][jcn[fch[×lmn][ff(Ch[ second call, the shareholders’ meeting may take place with the number of shareholders present. Certain exceptions apply. The quorum may be reinforced in the company’s bylaws. Similar to a corporation. Not applicable. Resolution quorum Simple majority of the paid-in capital participating at the meeting, except for those exceptions determined by law. Similar to a corporation. The unanimous vote of all the shareholders is required for: (i) transforming into another type of company; and, (ii) authorizing the transfer of shares and admitting new partners. Not applicable. Statutory auditor Mandatory Optional Not applicable. Stock market Public subscription of shares through the stock market is permitted. Convertible bonds may also be issued. Not possible Not applicable. Management and legal representation A board of directors is not mandatory. The by-laws shall provide for a legal representative and an alternate legal representative. The legal representative shall reside in Ecuador or at least carry a resident visa. Similar to a corporation. Must designate a general attorney in fact with full powers, domiciled in Ecuador. Capital reduction Allowed Not allowed when it involves a refund to the shareholders of capital contributions made, with the exception of the exclusion of a shareholder. Not applicable. Legal reserve Obligation to create a legal reserve with at least 10% nb_h_ns_[lfsjli×nm&ohncfnb_l_m_lp_l_[]b_m/*nb_ subscribed capital. Obligation to create a legal reserve with at least 5% the h_ns_[lfsjli×nm&ohncfnb_l_m_lp_l_[]b_m,*i`nb_ subscribed capital. Not applicable. Name To be authorized by the Superintendence of Companies Similar to a corporation. &DUULHV WKH VDPH QDPH DV WKH KHDG RIûFH 1R DOWHUnate name allowed. Time to incorporate / establish Approximately 30 days Similar to a corporation. Similar to a corporation. Disclosure of shareholders’ information Capital structure Transfer of shares Attachment of shares Not applicable. Not applicable. Not applicable. Executive Guide MERGERS & ACQUISITIONS In Ecuador, it is possible to merge two or more companies when one or more (of those taken over) are taken over by another company, or if the merging companies disappear in order to create a new company. In all cases, the company that takes over or the new company succeeds the rights, and obligations of those taken over. A company can also purchase all, or the majority of the shares of another company that does not disappear but becomes the property of the buyer. It is also possible to purchase all the assets and liabilities, or most of them, in what is known as a “business purchase” (purchase of a going concern). In this case, the buyer does not acquire all of the seller’s obligations, but only those specifically designated. This alternative is beneficial when there are any doubts concerning hidden or contingent liabilities of the seller. The purchase can also involve the assets exclusively, or any part thereof. THEBUSINESSYEAR 173 In all cases, the company that takes over or the new company succeeds the rights, and obligations of those taken over. Ecuadorean law does not contemplate unsolicited (hostile) transactions, and, therefore, there are no tactics of defense to oppose or block a takeover. Ecuador enacted, for the first time, a Law on Competition in October 2011. Under the Law on Competition any business combination that meets the following criteria is subject to prior approval by the competition authority: (i) when the combined volume of business in Ecuador within the prior fiscal year is higher than the threshold determined by the competition authority (known as the Regulatory Board), which is currently $68 million except in case of insurance and banking transactions, or (ii) when, as a result of the combination of entities involved in the same type of business, 30% or more of the relevant market is obtained or increased. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. TBY would like to thank Corral Rosales Carmigniani Pérez for compiling this analysis. Adding-value to our clients &RUUDO5RVDOHV&DUPLJQLDQL3HUH]LVDPDMRUODZϧUPLQ(FXDGRU UHVXOWLQJIURPWKHPHUJHUEHWZHHQ&RUUDO5RVDOHVDODZ ϧUPEDVHGLQ4XLWRDQG&DUPLJQLDQL3HUH]DODZϧUPEDVHGLQ *XD\DTXLOZLWKDYLVLRQRILQWHJULW\FRPPLWPHQWDQGTXDOLW\ 2XUJURZWKKDVEHHQWKHUHVXOWRIRXUFRPPLWPHQWWRWLPHO\ KLJKTXDOLW\DQGFRVWHϱHFWLYHFOLHQWVHUYLFH&5&3KDVD WHDPRISURIHVVLRQDOVEDVHGDWLWVRϫ FHVLQ*XD\DTXLODQG4XLWR ZLWKGLϱHUHQWWDOHQWVDQGDELOLWLHVWRGHVLJQWDLORUDQG LPSOHPHQWFUHDWLYHOHJDOVROXWLRQVIRURXUFOLHQWV2XUGHYRWLRQ WRRXUFOLHQWVKDVHDUQHGXVFRQVLVWHQWO\KLJKUDQNLQJVDQG UHFRJQLWLRQIURPQXPHURXVUHSXWDEOHSXEOLFDWLRQV 5REOHV(\$Y$PD]RQDV(GLI3URLQFR&DOLVWRSLVRT:F:48,72(FXDGRU $YGH2FWXEUH(GLI/D3UHYLVRUD2IT:F:*8$<$48,/(FXDGRU QUITO · GUAYAQUIL www.crcp.ec 174 THEBUSINESSYEAR ECUADOR 2014 INTERVIEW sage ADVICE Moore Stephens has a wide international presence. What is nb_ mcahc×][h]_ i` ?]o[^il `il the group as an international ]ihmofn[h]s×lg9 Moore Stephens was founded in London in 1906, and now it has a presence in over 105 countries worldwide, one of which is Ecuador. Ecuador is one of our most important markets in the Latin American region. We started not as an auditing firm but as a consulting firm, and, thus, we had numerous multinational clients that required services in other countries. Ecuador has been an important reference to other firms in the region and worldwide. TBY talks to Mauricio Durango Pérez, Founder and CEO of Moore Stephens, on providing wide ranging strategic business consultancy services, the value of creative personalized advice, and new entrants to the Ecuadorian market. but also how to help them take advantage of those reforms to be more competitive. What would you say, then, is your value proposition in Ecuador? What is the main focus of your practice in Ecuador today? We used to work on huge legal studies with partners from Deloitte, Arthur Anderson, PwC, and so on. But we did not want to be just a law firm or an audit firm. We preferred to become a more strategic consulting firm that provides a comprehensive service. In that regard, we use all of this knowledge as a tool to provide strategic business consulting without dividing into practice areas. Many of your clients switch to you from one of the big four conmofncha×lgm(Qbscmnb[n9 Many companies or clients we work with have normally worked with the big four. But, in Ecuador, they choose to work with us because we create value for them. We provide a difference in our services. We offer considerable personalization, and offer important creative and strategic products that meet customer needs. We are always working within the concept of a factory. We do not produce cars, but we do produce ideas. Ecuador has extensively reformed its constitution and laws. It is not only a matter of understanding the new legal requirements and obligations the companies have to meet, BIO Mauricio Durango Pérez is an Attorney, a Doctor in Jurisprudence, and a member of the Quito Bar Association, who graduated `lignb_Jihnc×][f=[nbifc] University of Ecuador. He is the founding Partner and General Manager of Moore Mn_jb_hmJli×f_=ihmoftants. He was formerly a legal advisor to two of ?]o[^ilÎmf[la_mn×h[h]c[f groups, and manager of Arthur Andersen & Co.’s legal and tax division. Dr. Durango received a Diploma in American and International Law from the Center for American and International Law in Dallas, US. Among other activities, he is currently Director and Chairman of the Board of the Ecuadorian American Chamber of Commerce and Director of the Quito Securities Exchange, as well as being Chairman of the Board of the Managing Council of the Colegio Americano de Quito Foundation. We want to be the iPod of consulting. We want to make a difference and I think we are doing that because we have the trust of multinational and national clients. All of the products we create are designed with a focus on creating value or trying to go one step ahead. We want to create products that perceive what the needs and obligations are, and help clients understand their legal requirements. Has a presence in 105 countries worldwide Focuses on providing integrated strategic consulting services What kind of services could an international company looking to enter the Ecuadorean market expect to receive from Moore Stephens? At the beginning, we will send along all the information about doing business so a firm has an overview of legislation in Ecuador. We can then work on the legal establishment of the company or branch, and will advise on the better options. We can also help with the accounting of the company, or even with its representation if the client so wishes. We can help with tax matters and financial issues if a firm needs capital or loans for projects. We can also assist with hiring personnel and headhunting, as well as strategic issues specific to the business you want to implement. What are the major challenges you see for foreign investors coming into Ecuador? We have had a lot of reforms, and we have to be aware that Ecuador's is a revolutionary government with a “21st Century socialism” oriented mindset. We also have to understand what its goals are. All of the laws it is issuing have an eye on instituting its overall goals, so it is important that companies understand the new regulations. They have to improve their processes in accordance with those regulations, and they have to see the opportunities that are available. Executive Guide THEBUSINESSYEAR 175 DOING BUSINESS GUIDE REVIEW STREAMLINED FOR SUCCESS Mauricio Durango Pérez, Partner and General Manager at Moore Stephens on what makes Ecuador an appealing business environment. According to the economic policies of the government of President Correa, Ecuador has been improving its business environment in order to achieve more foreign and national investments. Indeed, over the past four years Ecuador has changed several key laws, with which the government is improving the production process and decreasing paperwork to start economic activities through a company. The General Code for Production and Investment was issued to regulate production processes, in the stages of production, distribution, exchange, trade, consumption, management of externalities, and productive investments oriented toward living well. This recent regulation sets several tax benefits for new investments especially in those economic activities considered strategic sectors, such as food production, biotechnology, and petrochemicals among others. DOING BUSINESS IN ECUADOR There are several corporate legal arrangements through which to carry out economic operations in Ecuador, be it through local companies, branches and subsidiaries of foreign companies, or holding companies, for example. In Ecuador, it is usual to constitute two kinds of commercial company, corporations and limited-liability companies, since they limit their partners’ liability to the amounts they have put into them. The corporate norms are set forth in Ecuador by the Civil Code, the Commercial Code, and the Law on Companies, the last having recently been reformed in May, 2014. When the capital of any of these companies comes from foreign investors, they are called subsidiaries, and must register with the Central Bank of Ecuador, according to the type of investment they make (local, direct foreign, sub-regional, or neutral). In the event that an Ecuadorean company has shareholders or partners that are foreign companies, it must inform the Superintendence of Companies who the shareholders or partners of those foreign companies are. It must also disclose to the Ecuadorean Internal Revenue Service the names of those who appear as shareholders down to the level at which actual individuals are identified. Both regulations are trying to clarify people who are behind the companies in order to prevent tax evasion, crime of money laundering and the trafficing of influence in negotiations with the State. For a company constituted abroad to be able to habitually engage in its activities in Ecuador, it must have a permanent representative in Ecuador with full powers to carry out all actions and legal matters that must be done and have effect in the Nation’s territory, and especially to be able to reply to lawsuits and meet contractual obligations. However, if the activities of a foreign company in Ecuador entail the implementation of public works, public service provision, or extraction of Ecuador's natural resources, it must establish domicile in Ecuador before signing the corresponding contract. It is important to mention that Ecuadorean Law is friendly to new investments; this explains why just two months ago it was issued a new regulation that eliminates several inefficient procedures in incorporating companies. TAX SYSTEM The Ecuadorean tax structure comprises taxes, fees, and contributions. Taxes can be national, provincial and municipal. The main taxes are outlined below: National Income tax (IR) This tax is levied over the total income obtained by Ecuadorean or foreign corporate bodies, individuals and undivided estates. Ecuadorean and foreign companies are treated the same. Overall income is understood as all income the taxpayer has received. The taxable base income for this tax is the total taxable income minus the costs and expenses that, according to Ecuadorean norms, are deductible. Some activities are exempt from income tax in order to promote investment (as it was mentioned before concerning the Production Code), for social reasons, and for other reasons exonerating taxpayers from paying taxes. According to prevailing legal norms, there is income considered exempt from income tax, such as dividends distributed to shareholders and partners who are individuals or corporate bodies domiciled abroad (but not in a “fiscal paradise”), or Ecuadorean corporate bodies, and income obtained under international agreements, among others. Income tax for Individuals Individuals and single-owner businesses pay income tax proportionally to their income, at a rate varying according to the income received, from 5% to up to a maximum of 35%. Expenses that individuals may deduct for income tax purposes include “personal expenses”, which cover: health, education, clothing, and food, and which are deductible up to an overall maximum of 50% of total taxable income, as long as this does not exceed the equivalent of 1.3 times the basic un-taxed base amount for income tax for individuals ($10,410.00 as of 2014). Corporate Income tax. There is a single tax rate 176 THEBUSINESSYEAR ECUADOR 2014 WORK-RELATED STANDARDS Under Ecuadorean legislation, labor contracts may be either written or verbal. That is, even if there is no instrument or contract, the labor relationship can be proven. However, the law provides for certain cases in which a written contract is mandatory. Additionally, there are several modalities of work, and the most important are: @cr_^'ncg_ilch^_×hcn_ duration: Ecuadorean legislation establishes a minimum one-year ^ol[ncih`il[ff×r_^'ncg_il ch^_×hcn_'^ol[ncih]ihnl[]nm that do not specify some other duration. Nlc[f]ihnl[]nm4Chnb_ above contracts, when mcah_^`ilnb_×lmnncg_& a trial period can be stipulated, lasting no longer than ninety days. After that time, it will automatically be understood to remain in effect for the time remaining to complete one year. A worker’s remuneration cannot be lower than the Ohc×_^<[mc]Q[a_&qbc]b has been at $340.00 since 2014. for companies of 22% on a taxable amount calculated through the process called “tax reconciliation.” The Tax Administration grants a discount of ten percentage points in the 12% tax rate for companies that decide to reinvest their Available Profits, providing that this reinvested amount is used to purchase new machinery or equipment, as well as to purchase goods related to research and technology to improve productivity, diversify production, and increase employment, among other cases. As a requirement to take advantage of this tax benefit, the company must formalize the reinvestment (by Capital Increase) in the Mercantile Register by the following year. National Value-‐added tax (VAT) VAT is an indirect tax levied on consumption whenever a taxpayer takes an action or signs a contract for the purpose of transferring or importing physical chattel goods, transferring copyright or horizontal property, at all stages of the selling; and provision of services (local and imported). Rates for VAT are 12% or 0%. This tax can be transferred by one taxpayer to another, because the intention is for the tax burden to be paid by the end consumer, if producing goods and services subject to the 12% tax rate. Otherwise, a proportional part of this tax credit can be used. National Tax on Foreign Currency Payments (ISD) The tax on outgoing foreign currency is levied on all monetary transactions that are done abroad, with or without the intervention of the institutions comprising the financial system. The taxable action for this tax is the transfer or movement of foreign currency abroad as cash, or by drawing checks, transfers, sending, withdrawing or paying in any way. The tax rate on Outgoing Foreign Exchange is 5%. Additionally to the above taxable actions, it will be legally presumed that there has been outgoing foreign currency in the following cases: In all payments made abroad by Ecuadorean or foreign individuals, or corporate entities domiciled or resident in Ecuador. In the case of exports of goods or services generated in Ecuador, and realized by individuals or corporate entities domiciled in Ecuador, who engage in economic activities of exportation, when the foreign exchange to pay for those exports does not enter Ecuador within 180 days time. Tax on Extra Income This tax is levied on extra income obtained by companies that have signed contracts with the national government for exploration and extraction of non-renewable resources. The taxable base amount is the total extra income, that 'is, the difference between the selling price and the base price established in the contract, multiplied by the number of units sold at that price. This tax rate is 70%. Tax on special consumption This tax is levied on cigarettes, alcoholic beverages, soft drinks, perfumes and toilette waters, video games, firearms, sports weapons and ammunition, motor vehicles and hybrid, or electric vehicles, paid television services, dues, shares or subscriptions to social clubs, whether from Ecuador or imported. The taxable base amount is the sales price to the public suggested by the manufacturer or importer, minus the VAT and the ICE (as long as this amount is not lower than the result of adding 25% to the presumptive minimum marketing margin to the ex-factory or ex-customs price, as the case may be) or on the basis of the reference prices established by a Resolution annually by the Director-General of the Ecuadorean Internal Revenue Service. Tax on holding assets abroad The monthly tax on funds available and investments held abroad by private entities regulated by the Superintendence of Banks and Insurance and the Intendancies of the Securities Market in the Superintendence of Companies is based on holding any certificate for funds available in entities domiciled outside Ecuadorean territory, whether directly or through affiliated subsidiaries or offices of the taxpayer abroad; and investments abroad by entities regulated by the National Securities Council. Taxpayers must pay the equivalent of 0.25% monthly of the average monthly balance of funds available in foreign entities and investments issued by entities domiciled outside national territory. When the funds are received or the investments held or made through subsidiaries located in fiscal paradises or preferential fiscal systems or through affiliates or offices abroad of the taxpayer, the applicable rate will be 0.35% monthly of the taxable base income. REGULATION OF TRANSFER PRICES AND FULL COMPETITION In 2005, Ecuador incorporated OECD guidelines in its legislation on regulating transfer prices, to regulate those transactions completed by related companies when the sales are at or below cost. This regulates prices so they will not be lower than those current on foreign markets at the time of the sale; whereas for imports it will make sure they are not higher than international prices. The norms state that related parties are when an individual or company, with domicile in Ecuador or abroad, participates directly or indirectly in the management, administration, control, or stock of the other company; or when a third party (an individual or company, with domicile in Ecuador or abroad) participates directly or indirectly in the management, administration, control, or stock of these companies. The norms oblige certain taxpayers to present studies and information on their transactions with related parties to the Tax Administration, along with their income tax declaration. Executive Guide AUDITING AND ACCOUNTING Accounting must be kept using the double-entry system, in the Spanish language and in US dollars, taking into consideration generally accepted accounting principles. For corporate bodies subject to control and oversight by the Superintendencies of Companies or of Banks and Insurance, their accounting must be kept according to International Financial Reporting Standards (IFRS) adopted for preparing financial statements as of January 1 2009. INTERNATIONAL RELATIONSHIPS FOR INVESTMENTS Ecuador has signed bilateral treaties on investment with the following countries: Germany, Argentina, Bolivia, Bulgaria, Canada, Chile, China, Costa Rica, Denmark, El Salvador, Spain, the US, Finland, France, Honduras, Nicaragua, Paraguay, Peru, the Netherlands, the UK, Sweden, Switzerland, Dominican Republic, and Venezuela. Those international treaties try to provide legal security for foreign investors and guarantee economic conditions in the future. Furthermore, Ecuador has treaties to avoid dual taxation for income tax in international transactions. Ecuador has signed those international agreements with: Belgium, Canada, Chile, France, Italy, Rumania, Switzerland, Spain, Germany, Brazil, Mexico, South Korea, and Uruguay; China’s agreement is in the final stage of approval. Additionally Ecuador has signed Decision 578: a system with which to avoid dual taxation and prevent tax evasion among the countries of the Andean Community. This Treaty uses the overriding principle of taxation in the source country instead of the residence principle. A treaty with Argentina (applicable only for air transport) has also been signed. To verify payments abroad for agreements on dual taxation for transactions done in a given fiscal year, totaling more than one basic tax-free amount for income tax for individuals ($10,410.00 for 2014) requires certification by Independent auditors. A certificate of fiscal residence, issued by the relevant authority of the other country, with a translation into Spanish, if necessary, and authenticated by the respective Ecuadorean Consul, is also required. In recent years, Ecuadorian government has been negotiating several international agreements to avoid double taxation, which demonstrates the intention to stimulate foreign investment. Indeed, the government is looking to achieve other international agreements, especially with countries in which direct providers of the state are residents, and therefore, it would be possible to secure better conditions and decrease the tax burden for companies with international operations in the future. THEBUSINESSYEAR 177 The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. TBY would like to thank Moore Stephens for compiling this analysis. 178 THEBUSINESSYEAR ECUADOR 2014 Where to Stay QUITO 01 Hotel La Colina Suites La Colina N26-119 y Avenida Orellana T +593 2 223 4678 www.lacolinasuites.com Rooms 22 Suites of 64sqm Guest Services )UHH:Lû0LQL*\P Sauna & Jacuzzi, Coffee Station, Covered Parking, Airport transfer, Business Center, Laundry Dining Restaurant with modern dishes in a relaxed ambiance 02 Mercure Alameda Quito Ramón Roca E4-122 y Av. Amazonas T +593 254 5847 www.accorhotels.com 05 Swissotel Quito 12 de Octubre 1820 Ave. & Luis Cordero T +593 2 256 7600 www.swissotel.com 5 4 1 Rooms 277 rooms and suites Guest Services 24-hour room service, 20 meeting rooms, spa, indoor and outdoor swimming SRROûWQHVVFHQWHUVTXDVK racquet, and tennis courts, steam bath and jacuzzi, Swiss business center, concierge Dining Le Gourmet, Trattoria La Pergola, Tanoshii, Café Quito, Bar Le Point, Oro Pollo/Oro Pizza, Gourmet Deli. 2 3 6 Rooms 147 rooms and 41 “Privilege rooms” Guest Services Gym, business center, parking, early check in, late check out Dining Gourmet national dishes, Japanese cuisine, barbeque Fridays. 03 Hotel Le Parc Republica de el Salvador No. 34349 e Irlanda T +593 9 964 7914 www.leparc.com.ec Rooms 30 suites Guest Services Executive services, transfer in-out, business center, unlimited ZLUHOHVVLQWHUQHWDFFHVVûWQHVV area, spa, 24-hour room service Dining Neu Bistro Restaurant, and Skybar. Casa Gangotena Bolívar Oe6 #41 y Cuenca. Quito T +593 2 240 0800 www.casagangotena.com 04 Rooms 31 rooms Guest Services Conservatory, garden, wood-paneled library, terrace Dining Casa Gangotena offers national dishes. GUAYAQUIL 11 06 Grand Hotel Boyace entre Clemente Ballen y 10 de Augusto T + 593 4 232 9690 www.grandhotelguayaquil.com Rooms 182 spacious guestrooms Guest Services Pool, meeting URRPVEXVLQHVVFHQWHUûWQHVV center, Wi-Fi Access, room service, incoming shuttle service Dining A choice of three options including the 24-hour coffee shop La Pepa de Oro, the 1822 Restaurant, which serves traditional food in décor reminiscent of Simon Bolívar, and the Turtle Bar for drinks. Executive Guide 07 JW Marriott Quito Avenida Orellana 1172 & Avenida Amazonos T +593 2 297 2000 www.jwmarroittquito.com Rooms 241 guest rooms, 16 suites, including junior and Presidential suites. Guest Services Business lounge, :L)LDFFHVVûWQHVVFHQWHUZLWK gym, spa, 24-hour room service, swimming pool, 32 meeting rooms spread over 12,917 sq feet with seating capacity for up to 1,000. Dining Bistro Latino, La Hacienda Steakhouse, The Exchange Lobby Bar & Sushi Bar, Café Gourmet, 'RQ3RUûULR0H[LFDQ 13 08 Hilton Colon Guayaquil Av. Francisco de Orellana Mz 111 T +593 4 268 9000 www.guayaquilhilton.com Rooms 294 rooms and suites Guest Services Airport shuttle, business center, wireless internet access, outdoor pool, health club, spa, extensive meeting, conference, and convention facilities with capacity for 1,800 guests Dining six restaurants and three bars. 8 THEBUSINESSYEAR 179 12 09 Sonesta Hotel Guayaquil Joaquin Orrantia Av. and 1st Northwest (La Gran Manzana) T +593 4 259 5900 www.sonesta.com Rooms 112 guest rooms, including 56 single rooms and 56 double rooms Guest Services ûWQHVVFHQWHUVSDSRROLQWHUQHW access, 2,700 square feet of meeting space for corporate or social events, business center, 24-hour room service, 24hour concierge service Dining The VIEW restaurant offers international cuisine. 10 HM International Alberto Borges 1er Pasaje T +593 4 228 0806 www.hmhotel.ec Rooms HM International Hotel offers modern rooms with the Atlantis and Greece rooms equipped with modern odor removal systems, ideal for coffee breaks Guest Services LCD TV, deposit box, ecological air conditioner, free wireless internet, fridge, noise insulating windows, energy-saving lighting, tempered water systems, modern saloons of 40 sqm. Corporate meetings Executive suites CUENCA 11 Hotel Oro Verde Av. Ordóñez Lazo S/N T +593 7 409 0000 www.oroverdehotels.com Rooms 77 deluxe rooms including three suites Guest Services Laundry, transfers to/from airport on request, private parking, secretarial services, personal computers, and audiovisual equipment, meeting rooms with a capacity for four to 12 people Dining Oro Café, La Cabaña Suiza, and Gourmet Deli. 12 Hotel Victoria Calle Larga 6-93 y Presidente Antonio Borrero T +593 7 282 7401 www.hotelvictoriaecuador.com Rooms 23 rooms, including 9 standard or matrimonial rooms, 10 double rooms, 2 triple rooms, and 2 suites Guest Services Business center, transfer in-out, reading areas, private parking, room service, laundry service, WiFi Dining El Jardín Restaurant. MANTA Gourmet restaurant 13 Hotel Boutique Maria Isabel Barrio El Murciélago Calle 24 #103 y av. Mz2 T +593 5 262 5013 www.hotelboutiquemariaisabel.com Rooms 16 unique rooms Guest Services Wi-Fi, private parking, 24-hour security, cafe bar, meeting room with 3D TV and satellite. Dining Bar and dining hall. 180 THEBUSINESSYEAR ECUADOR 2014 When in ECUADOR Helpful Hints Useful Numbers EMERGENCY SERVICES Some survival tips that will help get you through the first few days in the country FIRE 102 EMERGENCY 911 POLICE 101 MINISTRIES THE PRESIDENCY www.presidencia.gob.ec MINISTRY OF FOREIGN TRADE www.comercioexterior.gob.ec MINISTRY OF FINANCE qqq(×h[ht[m(ai\(_] MINISTRY OF CULTURE & HERITAGE www.culturaypatrimonio.gob.ec MINISTRY ECONOMIC & SOCIAL INCLUSION When planning meetings in Quito, be sure to leave time in case you get stuck in the city's infamous WUDIûF Most exeuctives in Ecuador split their time between two cities and ZLOOü\EDFNDQGIRUWKIRUPHHWLQJV 0DNHVXUHWRFRQûUPZKLFKFLW\ your meeting is in to avoid a mixup They say that in Ecuador there is a soup for every day of the year. Locro de Papas is one of the more popular soups, made with potatoes and cheese. www.inclusion.gob.ec MINISTRY OF EDUCATION www.educacion.gob.ec MINISTER OF ELECTRICITY & RENEWABLE ENERGY www.energia.gob.ec MINISTRY OF ENVIRONMENT www.ambiente.gob.ec MINISTRY OF FOREIGN AFFAIRS www.cancilleria.gob.ec MINISTRY OF HOUSING & URBAN DEVELOPMENT www.habitatyvivienda.gob.ec MINISTRY INDUSTRIES & PRODUCTIVITY www.industrias.gob.ec MINISTRY OF INTERIOR www.ministeriointerior.gob.ec In the mountains most people take holidays in July and August, while on the coast, most people take holidays in February and March. Taxi drivers may not always want to use the meter, meaning that a bit of bargaining may be in order. Receipts are a rarity. Ecuador uses US-style 110 V A/B class plugs. Bring a surge protector for sensitive equipment. MINISTRY OF LABOR www.relacioneslaborales.gob.ec MINISTRY OF NON-RENEWABLE NATURAL RESOURCES www.recursosnaturales.gob.ec MINISTRY OF TELECOMMUNICATIONS & INFORMATION www.telecomunicaciones.gob.ec MINISTRY OF TOURISM www.turismo.gob.ec MINISTRY OF TRANSPORT & PUBLIC WORKS www.obraspublicas.gob.ec OFFICIAL ORGANIZATIONS CENTRAL BANK OF ECUADOR qqq(\]_(×h(_] It’s not necessary to have a YDFFLQHFHUWLûFDWLRQZKHQYLVLWLQJ Ecuador; however, if you visit the Amazon, make sure to be vaccinated for tropical diseases. The average temperature on the FRDVWLVRIÕ&7KHZDUPDQG rainy season runs from November to May, while the dry season is from June to December. One single kiss on the cheek between men and women or two women is accepted when people are introduced, even at a business level. NATIONAL INSTITUTE OF STATISTICS www.ecuadorencifras.gob.ec QUITO INTERNATIONAL AIRPORT www.aeropuertoquito.aero Energy for Development MATRIZ CUENCA, ECUADOR PBX +593 (07) 3700 100 Panamericana Norte KM 7 ½ , sector Capulispamba www.celec.gob.ec