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Ecuador: Negative Outlook

How will the Odebrecht expulsion affect foreign and private investment in Ecuador? Four experts share their insights.

Inter-American Dialogue 

Ecuador's President Rafael Correa expelled Brazilian construction firm Odebrecht last month, blaming it for faulty construction of the San Francisco hydroelectric dam. [And last week, the government rejected an offer from Odebercht to solve the dispute]. Will the Odebrecht expulsion stifle private sector interest in upcoming energy projects in Ecuador? What were the factors driving Correa's decision against Odebrecht? Does the move put a chill in Brazil-Ecuador relations, and how should Brazil react?

Leonardo E. Stanley, Visiting Researcher at the Center for the Study of State and Society (CEDES) in Argentina: The conflict between the Ecuadorean government and Odebrecht centers on the San Francisco hydroelectric project, inaugurated mid-2007. By the beginning of this year a series of structural faults were detected, which necessitated various repair works. As a result, the Ecuadorean government fined Odebrecht, at the same time revoking the company's contract. The conflict has continued to grow over the past few days, appearing on the agenda of the meeting between Correa and Lula in Manaus [on September 30]. ... This is not the first problem that Correa has faced with foreign investors, and it won't be the last. But neither is it the first conflict involving Brazilian investors in the region. Up to the present, the disputes have ended up being settled in the political-diplomatic sphere. This is the method that Brazil has preferred to maintain; it declined to participate in a dispute resolution system where private companies can sue sovereign states directly. This won't be the last conflict [of this type] for Brazil, since foreign direct investment of Brazilian origin is becoming every day more prominent. As such, we will see the Brazilian government intervening frequently between investors and 'friendly governments,' something that could end up hurting its geopolitical interests in the region. This type of situation could lead Brazil to rethink its strategy regarding the currently prevailing bilateral system.

Gustavo Romero, Partner at Romero Arteta Ponce Abogados in Quito: I think this decision represents bad news for foreign investment in Ecuador, not only because it meant a unilateral termination by the Ecuadorean government of some contracts duly signed with Odebrecht, but also because it seems to be a decision taken for political purposes rather than technical criteria. Even Brazilian President Lula has said that he would like to talk with President Correa about this issue in the wake of [the September 28] referendum in Ecuador. I also believe that this issue could influence foreign investors around the world before making an investment in Ecuador, not only because the government has proceeded to terminate unilaterally the contract for the construction of the San Francisco hydroelectric dam, but also because it ended other important projects that were being constructed by Odebrecht in different parts of this country such as the Carrizal-Chone and Baba Multiproposito projects among others, with investments of millions of dollars. It is also important to mention that all termination decrees issued by President Correa against Odebrecht involved the confiscation of goods and the militarization of installations. Therefore, it is highly possible that Odebrecht is now preparing the respective international claims against Ecuador for confiscation and expropriation, or any kind of such measures if no agreement is promptly reached. Taking this into account, it is clear that these political decisions only create a confused environment for foreign investment in Ecuador without clear rules and juridical security. Who would want to invest in a country with this juridical environment? We hope that after President Correa's visit with Lula, the Ecuadorean government can demonstrate clear signals that its intention is to encourage foreign investment in Ecuador—which is very important for our development—and not create a climate of uncertainty, which could lead us to an economic crisis without precedents in our country, especially if oil prices keep decreasing and the government continues to increase public expenses, putting at risk the US dollar as our currency.

Jose Valera, Partner at King & Spalding LLP: It appears that the construction contract was ambiguous and did not clearly provide for an allocation of risks upon the occurrence of certain events. Serious cracks appeared in one of the turbines barely a year after the commencement of commercial operations of the plant. The government alleges faulty construction and Odebrecht alleges force majeure. Negotiations broke down over a compensation and repairs arrangement that the government was demanding. Then President Correa sent the military to take over the plant, seized the property of Odebrecht, and expelled Odebrecht from the country. Regardless of the merits in the contract dispute, the actions taken by the government are worrisome. Normally you would expect that a dispute of this nature is resolved in accordance with the dispute resolution provisions in the contract. But that was not the course of action that the government took. Instead, the president assumed the role of judge and jury and promptly decided that Ecuador was right and Odebrecht was wrong, and that Odebrecht needed to be punished immediately by also losing other unrelated contracts and property in the country. Even if one wants to explain these actions as part of the president's politicking leading up to the September 28 constitutional referendum, the facts demonstrate a total disregard for due process and an alarming lack of legal security. I would anticipate that the Odebrecht expulsion will indeed further stifle private sector interest in upcoming energy projects in Ecuador.

Jeremy Martin, Director of the Energy Program at Institute of the Americas: Ecuador's investment climate had been significantly stifled long before the aggressive move by the Correa government against Odebrecht. While the Odebrecht story hews nicely to the conventional wisdom of a resource nationalist government, the country's investment outlook had declined before Correa took office—the infamous case against ChevronTexaco and the Oxy eviction both occurred during previous governments—but Rafael Correa has done nothing to improve matters. The recent actions, coupled with the broad-ranging presidential powers the new Constitution will afford, will increase skepticism on the part of potential investors. In particular, the language in the new Constitution pertaining to the oil industry has left many analysts wary. Additionally, several US business groups wrote to US congressional leaders last week urging Congress not to renew Ecuador's trade preferences through the Andean Trade Promotion and Drug Eradication Act (ATPDEA) when it expires at the end of the year. For international observers, the move against a Brazilian firm—some Odebrecht executives sought refuge at the Brazilian embassy in Quito—adds an interesting intra-regional wrinkle to the pattern of Latin American resource nationalism. Bolivia's dealings with Petrobras and Venezuela's nationalization of Cemex are other recent examples that prove a Latin American address no longer provides the protection of rhetorical solidarity. Finally, investor confidence will be further shaken if, as some now charge, the complaints against Odebrecht are a smokescreen protecting the interests and corruption efforts of other companies.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.



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