Ecuador | Transparency Snapshot

Since the inauguration of President Rafael Correa in January 2007, Ecuador has undergone momentous political change. During his first year in office, President Correa continued campaigning to reform existing political institutions through a new constitution. First, he succeeded in getting approval to organize a referendum on electing a Constitutional Assembly from a Congress dominated by the opposition. Then, in November 2007, the newly elected Assembly, where Correa's party has a majority, voted to put Congress into indefinite recess. In addition to drafting a new Constitution, the Assembly became the new legislative power. Finally, in late September, 2008, a new constitution was approved with a two-thirds majority. Although the new charter provides more powers to the executive and creates a "citizens' council" to oversee other branches of power, its effect on previously existing transparency legislation remains to be seen.

In prior governments, confrontation between the executive and legislative branches bred intense political instability. Despite these tensions, Ecuador was able to establish a sound legal framework for transparency based on the Transparency and Access to Public Information Law (LOTAIP, by its Spanish acronym). However, a public perception of poor transparency persists, reflected by low ratings in international indices, such as the International Budget Project and the World Governance Indicators.

Ecuador is the fifth largest oil producer in South America, with an estimated output of 512,000 barrels per day in 2007. According to the Oil and Gas Journal, the nation holds the third-largest proven oil reserves in South America, totaling 4.5 billion barrels in January 2008. Ecuador is heavily dependent on oil revenue, which accounted for a quarter of the government's total fiscal revenue and half of its total export earnings in the period of 2000-2005, according to IMF data.

Although industrial scale mining has been non-existent in Ecuador, in 2007 a company called Aurelian Ecuador identified one of the biggest gold and silver deposits in the world. According to Ecuadorian newspaper reports,1 the deposit contains 58.9 million tons at a grading of 7.23 g/t gold, and 11.8 g/t silver. The size of the deposit earned the Thayer Lindsley International Discovery Award from the Prospectors & Developers Association of Canada.2 However, development in the mining sector has been halted by a decree of the Constitutional Assembly, which froze all activities until a new mining law is enacted. There is mounting tension among different groups that favor and oppose large scale mining, and as the new legislature convenes in the first quarter of 2009, the mining law is expected to be a priority.

Revenue Transparency

Ecuador's oil industry emerged during the 1970s. In 1985, Ecuador held its first international bidding process, resulting in the award of block 15 to the Occidental Petroleum Corporation. During the 1990s, as part of a regional trend, Ecuador further liberalized the sector when it introduced production sharing agreements with private companies.

After completing construction of a new oil pipeline in 2003, private companies increased their output to bring total production above 500,000 barrels per day. Concurrently, the production rate of Petroecuador, the national oil company, began to decline. By 2004, private operators were producing over 50% of the total output. However, disagreements over taxes and contractual terms led to the government takeover of Occidental Petroleum assets in 2006, marking a turn towards a greater state control over the industry.

As President, Rafael Correa made social expenditure a priority. In 2006, Ecuador's budget allocated $1 billion (USD) to education and $400 million to health care; the GDP was about $35 billion and fuel subsidies were estimated at $2 billion. The need to fulfill promises to expand social programs has forced the government to look for ways to increase fiscal income. In September 2007, President Correa announced a dramatic increase in the oil windfall profits tax, raising the rate to 99% of the differential between the realized price and the price established by contract (adjusted for inflation)—an increase of 49% from the 50% rate established the year before. At the same time, Correa's government announced a change in contracts governing oil production, from existing production sharing agreements to service contracts, under which companies are reimbursed for their costs and receive a fee, but production is owned by the state.

The main source of Ecuador's oil revenue comes from oil exports, comprised of Petroecuador's own production and royalties. In addition, private companies must pay a windfall tax, income tax, and are obligated to give a share of profits to employees. All proceeds from crude exports are deposited in an account at the Central Bank of Ecuador (CBE). The CBE then distributes oil revenue according to predetermined percentages to the Ministry of Economy and Finance, to several funds established by law, and other beneficiaries.

Actual payments made by private companies, however, depend on the terms of their individual contracts, and seem to be complicated by unclear rules. For example, the implementation of the windfall profits tax increase was unclear and ultimately subject to negotiation. A further lack of clarity is found in the exemption of companies from paying a VAT tax. The opacity of rules determining the implementation of the VAT tax and its exemptions led to the conflict with Occidental Petroleum in 2006.

Regarding the quality of information available concerning fiscal revenue, Ecuador has abided by international standards for macroeconomic statistics. For instance, the IMF Report on the Observance of Standards and Codes (ROSC) for data dissemination and quality found that, at the time of the study in 2003, Ecuador was "in observance of specifications on coverage, periodicity, timeliness, and dissemination of advanced release calendars for data subject to the Special Data Dissemination Standard." However, the ROSC adds that room for improvement remains, citing a need for greater detail on government finance statistics, in order to support "comprehensive macroeconomic analysis and timely monitoring of short-term conditions."3

However, a widespread perception of low transparency in Ecuador's public sector remains a problem that undermines trust in public institutions. The Open Budget Index gives the country a score of "minimal" transparency for the central government budget and finances.4 Ecuador also scores low on Transparency International's Corruption Perception Index, ranking 138th out of 163 countries,5 while the World Bank governance indicators show insufficient controls on corruption.6

Many participants in the hydrocarbon sector already publish information with varying degrees of transparency. Petroecuador releases its contracts, financial statements and budgets, along with the results of audits by the National Hydrocarbon Directorate, the technical arm of Ministry of Mines and Petroleum, which is in charge of controlling the activities of petroleum companies.

The Ministry of Economy and Finance's website, posts oil revenues, prices and related fiscal information, as well as financial statements for state-owned enterprises and local governments and data on the distribution of oil revenues. The site is the best example of a centralized repository for sector information from Ecuador. The Ministry of Mines and Petroleum also publishes extractives sector statistics online, including monthly updates on oil exploration, production and transportation, associated natural gas production, contracts and audit results. Private oil companies operating in Ecuador have varying standards on the reporting of information disaggregated by country.

A group of civil society organizations led by Grupo FARO signed an agreement with the Ministry of Mines and Petroleum to increase the transparency of the extractive industries in July 2008.7 This coalition is formed by a variety of CSOs working on transparency, public policy and the environment, and aims to promote the disclosure of financial, social and environmental information as well as long term transparency policies. At the moment, the coalition is in conversations with government officials to find possible avenues of collaboration.

 

Expenditure Transparency

On the expenditure side, there are approximately 11 different methods of distributing oil export revenues, depending on the type of contract, company, field and crude oil density (23° API is the benchmark). In addition, 20% of this oil revenue is managed outside the federal budget, and there are multiple funds that receive pre-allocated income. In general, there is a lack of clarity about earmarked resources, cost estimates, and the amounts of subsidies included as part of the national oil company balance sheet.

The complexity of fiscal terms, contract options and other variables all hamper transparency in oil revenue collection. Furthermore, oil revenue is pre-allocated to beneficiaries that manage resources outside Ecuador's central budget. All these factors hinder a clear understanding of revenue flows from production activities to the actual income received by the treasury.

Until December 2007, division of revenue was determined according to the operator (either Petroecuador or a private company), the type of contract (production sharing, production service, marginal fields, strategic alliance), and even the field (for example, the former Occidental operation in block 15 is now operated by Petroecuador under a special regime). This arrangement has rendered the budged opaque and inflexible. Although a new law passed in December, 2007 has eliminated many earmarked expenditures, it is unclear how this will be reflected in the 2009 budget. The issue will be discussed during mid-2009, after new general elections in February.

Contract Transparency

The three primary contracts in place until 2007 were production sharing, service provider and marginal fields agreements. Information on these contract types abounds and Petroecuador published all of its contracts currently in force on its website. However, information on Strategic and Operating Alliances was not made public, and the process of entering into one of these alliances—as well as the agency responsible for negotiating and defining strategies and objectives—remains opaque.

Currently, Ecuador is in the middle of renegotiating all of its existing contracts, and the objective of the government is to change production sharing contracts into service agreements. The new Constitution establishes that non-renewable resources are owned by the state and are strategic sectors for the country. Although authorities have declared that priority will therefore be given to state-owned companies forging partnerships with Petroecuador, the possibility of arrangements with private companies remains open. However, it remains to be seen whether strategic agreements will be published in the same way that private contracts have been disclosed to the public.

Freedom of Information

The Constitution of 1998 guaranteed freedom of information rights. The public's right to information access was further bolstered by the Organic Law on Transparency and Access to Public Information (LOTAIP), adopted in May 2004. The LOTAIP has been the foundation for disclosure of information about the hydrocarbon sector, notably effecting the publication of production sharing contracts and service contracts by the national oil company. According to Grupo FARO,8 the Ministry of Mines and Petroleum complies with 50% of the requirements in the law, while Petroecuador complies with 58% of it (see table below). Additionally, all taxes incurred by companies are disclosed on the Internal Revenue Service webpage, although paid taxes are omitted from this disclosed.

Monitoring Compliance with LOTAIP disclosure requirements
(May 2008)

InstitutionCompliance (%)
Ministry of Mines & Petroleum49.5
Petroecuador57.8
Petrocomercial16.7
Petroindustrial38.5

 

Oil and Other Options for Development

 

The Ecuadorian Government has launched an initiative to keep 20% of the country's proven reserves untouched. This reserve is located in the Yasuní National Park, one of the largest bio-diverse locations in the world. The initiative has a limited time-frame to discover a compensatory alternative revenue source for the government. Though it has been unsuccessful so far, a new approach has been proposed concerning participation in the Emission Trade Scheme (ETS) with a new type of emission reduction certificate.