Ecuador

Ecuador - Power and Communications Sectors Modernization and Rural Services Project (PROMEC) (Vol.1), 2001/06/01, PID9237, Project Information Document

The Project would support the efforts of the Government to further advance reforms and enhance private enterprise participation in the three sectors, with the aim to improve service quality and access, through (i) strengthening public institutions and establishing arms-length regulation, to ensure the functioning of liberalized markets and protect consumers and investors; (ii) promoting private investment and operations, thus reducing the Government's exposure to financial risks; (iii) increasing fiscal revenues from the sectors; and (iv) mitigating social-environmental impacts especially from hydrocarbons operations.

Letter of Intent, Memorandum of Economic Policies, and Technical Memorandum of Understanding, April 4, 2000

To help secure the needed fiscal adjustment, the increase in public sector wages in 2000 will be limited to 20 percent in January 2000 for selected groups, 10 percent across-the-board in April, and 20 percent each in July and October to certain groups. As a result, the wage bill of the NFPS is projected to decline by 1.1 percentage points of GDP in 2000 to 6.2 percent of GDP.

The approval of the Ley Fundamental para la Transformación Económica del Ecuador paves the way for reforms aimed at boosting productivity, raising potential output, and strengthening the regulatory framework for sectors to be privatized. The labor market would be made more flexible, and unemployment reduced, by permitting employment on temporary contracts. In the oil sector, the law would allow private companies to build and operate pipelines, and facilitate the construction of a new oil pipeline planned to start this year, which is expected to facilitate an increase oil exports from about 90 million barrels a year at present to 190 million barrels a year in 2002. Investment for the pipeline is estimated to be about US$600 million and would be financed mainly through foreign direct investment. In the electricity sector, the law would permit the privatization of the six state electricity generation companies and 18 electricity distribution companies; the government already has retained the services of an international investment bank and the IFC to advise on these privatizations. In the telecommunications sector, the law will facilitate the privatization of the two state companies with majority private sector participation. Net revenue from the privatization program during 2000 is tentatively estimated at US$300 million. Ecuador's constitution provides for the proceeds from privatization to be managed by the social solidarity fund and invested in high quality assets; the investment income is to be used to increase social expenditures.

Concessions to the private sector for the provision of other services currently supplied by the state will be expanded. The municipal government of Guayaquil will invite bids for the supply of sewage and water services by July 2000; bids have been invited for the operation of the seaports of Guayaquil and Esmeraldas; and bids will be invited for the state oil refineries during 2000.

There is substantial scope for reducing public sector employment in the medium term. In September 1998 the government introduced a program aimed at reducing central govern-ment employment by 26,000 during 1998-2002; the net reduction in employment to date has been about 8,500 which has been achieved mainly by voluntary separations. To accelerate the program, the government is seeking assistance from multilateral organizations to finance severance payments, retraining programs, and assistance with the creation of small businesses for employees that leave the public sector.

The government is undertaking a comprehensive pension reform, and is committed to allowing private sector participation in the provision of pensions as soon as the health of the financial system has been restored. Legislation has been sent to congress to reform the pay-as-you-go state pension system, and establish an unemployment insurance scheme. The government will ensure that the reforms are consistent with strengthening the public finances in the near and medium term. Steps also are being taken to ensure that the cross subsidies between the old age and health insurance schemes of the social security institute are more transparent, and the accounting of both insurance schemes is being separated.

Letter of Intent, Supplement to the Memorandum of Economic Policies, and Supplement to the Technical Memorandum of Understanding, August 10, 2000

In the Ley para la Promoción de la Inversión y la Participación Ciudadana the government intends to further advance the structural reform process begun in the Ley de Transformación Económica approved by the congress last March. The new law will expand the scope of private sector activity, permitting the privatization of public utilities, the state airline TAME, roads, seaports and airports, postal services, and the extraction of nonrenewable natural resources. The regulatory frameworks for the petroleum, mining, electricity, and telecommunications sectors also are to be reformed in order to facilitate privatization and/or joint ventures. Measures also are included to further increase labor market flexibility, including longer probation periods for workers, use of part-time labor, and greater functional mobility for workers within firms.

The combined fiscal deficit target (in U.S. dollar terms) of the program remains unchanged. However, the composition between the targets for the nonfinancial public sector (NFPS) and the quasi-fiscal balance of the central bank have been revised slightly to take account of a negotiated reduction in the interest rate (from 12 percent to 6 percent) on most of the central bank's portfolio of government bonds (resulting in lower interest payments and a smaller deficit of the NFPS, and a corresponding reduction in the quasi-fiscal surplus of the central bank). In relation to GDP, the targeted fiscal adjustment in 2000 is now larger because nominal GDP for 2000 has been revised upwards mainly to reflect the higher inflation and consequent different real exchange rate path. The combined fiscal deficit would decline from 7.2 percent of GDP in 1999 to 2.7 percent of (revised) GDP in 2000, consistent with a reduction in the NFPS deficit over the period from 6 percent of GDP to 2.8 percent (Box 2). In spite of the increases granted in May, public sector wages would still fall sharply in real terms this year, and by 0.9 percentage points of GDP (to 6.3 percent) from 1999.

Letter of Intent, Memorandum of Economic Policies, and Technical Memorandum of Understanding, May 14, 2001

In December 2000, a 30-year concession for the supply of water and sewage services to the city of Guayaquil (the largest city in Ecuador) was awarded to a foreign company; the company is to invest US$520 million over the next five years to improve the infrastructure for such services.
The privatization of the six state electricity generation companies and 18 electricity distribution companies is envisaged by end-2001 (in March 2001 the government launched "road-shows" to Europe and the United States in support of the privatization).

The ruling by the constitutional tribunal last December that many elements of the Ley Trole II were unconstitutional has delayed the development of joint ventures in the petroleum sector and the privatization of the state airline (TAME). However, the authorities are examining the possibility of overcoming the objections of the tribunal through changes in the legal structure of the joint ventures and of the state airline and expect to be able to proceed with these activities later in 2001.