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The Quito airport project is back on track, but may be too little, too late, some experts warn.

Inter-American Dialogue

The new Quito, Ecuador international airport project is back on track after a legal dispute triggered an 18 month renegotiation process among investors, lenders and the government connected to $660 million in financing. Quito's mayor signed final contracts, ending the dispute and allowing the deal to close on Feb. 4. The new facility, which was two-thirds complete when the financing problems arose, is part of Ecuador's strategy to expand its global trade profile. What was behind the delay, and will the project now proceed smoothly? Does Ecuador have the right plans in place to beat out other countries in the region vying for a share of expanding international commerce?

Jonathan C. Hamilton, partner at White & Case LLP in Washington: The $660 million Quito airport project involves the construction of an entirely new international airport at a new site. It depends on equity investments by multinationals from Canada, Brazil and the United States, debt by multilateral lenders and the collection of airport tariffs. In July 2009, the Constitutional Court ruled that the airport tariffs were state property. The circumstances interrupted construction and the subsequent negotiations involved, among other things, efforts to bridge the new legal regime in Ecuador with the project and its financing requirements. The 18 month process culminated in a strategic alliance agreement with myriad ancillary contracts and investment protection agreements and the resolution of certain disputes. President Correa, the mayor of Quito and other key leaders participated in a ceremony celebrating the agreement last year and the deal subsequently closed on Feb. 4, 2011. Construction of the new airport has resumed, bringing at least 2,500 jobs for contractors, subcontractors and skilled workers. The result holds important ramifications for foreign investment in Ecuador and bilateral relations between Ecuador and each of Canada, Brazil and the United States. The project has a positive impact on Ecuador's local and national economy and development.

Ramiro Crespo, president of Analytica Securities in Quito: Quito's Mariscal Sucre International Airport has long been considered dangerous and too small. A new airport 18 kilometers to the northeast was to solve the problem. However, political and legal disputes over the 2002 contract stalled financing of the project under President Rafael Correa, who called its terms 'robbery,' and whose estimated costs have ballooned from $430 million to the present more than $650 million. Following 18 months of renegotiations, a deal between the municipality and the Quiport consortium signed last month will apparently secure financing to complete the project. Multilateral lenders have promised to fund access roads, which sadly won't be ready by April 2012, the latest date for the airport's completion. Controversial technical issues remain to be resolved, particularly dangers of the new approach route. It is very unfortunate that these weren't tackled before the renegotiations to ensure the new airport won't end up a white elephant. The controversy over Quito's new airport is symptomatic of the weakness Ecuador's political leadership has shown in providing the physical and legal infrastructure to defend and expand its export markets. Significant highway construction has taken place under Correa, funded by high oil prices. The expansion of the Latacunga airport, nearing completion after several delays, is a welcome boost for exporters in the Central Andes. Corruption allegations tied to infrastructure contracts however have been severe. Lost opportunities include the repudiation of Ecuador's participation in ICSID and numerous bilateral trade agreements as well as the refusal to sign free trade agreements with the United States and European Union. Ecuadorean companies are therefore still sidelined, forced to watch as Latin American competitors encroach on their most important markets.

Fabián Andrade, municipal attorney general for the city of Quito: Based on the 2008 Constitution, Ecuador's Constitutional Court ruled that resources derived from the various airport services in the city of Quito were taxes (fees) and therefore are a public resource belonging to Quito. Similarly, the comptroller general made several comments on legal, technical and economic issues relating to the construction of the new Quito International Airport. With this background, the city, the Metropolitan Airport Services Company, Quiport, developers, investors and representatives of the main lenders began negotiations with the objective of continuing the project, correcting earlier shortcomings. Agreements on economic aspects were implemented in February 2010, recognizing that the city would have the right to receive part of the economic benefits of the project in proportion to its contributions, that is, 26 percent of such benefits (approximately $900 million during the grant period.) As of that date, involved parties began the work of implementing the agreements, adjusting them to the existing legislation and correcting imperfections of previous contracts. The formal process ended Feb. 4, 2011. The new airport will improve Quito's competitiveness in the region and will create a significant number of jobs, both directly and indirectly. It also is helping to generate a development center that integrates a duty-free zone, an area of special arrangement for productive initiatives, improvement of the road network and new public and private investments, which include hotel infrastructure as well as industrial and commercial logistics.

Alberto M. Ramos, managing director and co-head of Latin America economics at Goldman Sachs in New York: Ecuador faces significant challenges going forward given the heterodox nature of the policies in place, relatively investment unfriendly policy mix and uncertain regulatory framework. The end-2008 politically motivated selective default on external debt based on the findings of a government appointed audit commission that argued the debt was 'illegal and illegitimate' impacted market sentiment, closed government access to international capital markets and added a significant risk premium on Ecuadorean assets. This significantly limited the fiscal financing options. Advances over the independence of the central bank and the use of part of the central bank reserves to expand domestic credit are also a concern, particularly in the context of a dollarized economy. Ecuador's recent economic performance has been clearly subpar and the economy is not integrated into global financial markets. Within the hemisphere, Ecuador faces strong competition from larger regional economies that offer attractive business opportunities, easier access and a conventional disciplined policy mix where the rules of the game are perceived as more stable than what has been the recent experience in Ecuador.

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


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