ECUADOR'S COMPLEX MILITARY-INDUSTRIAL DIVESTMENT

C O N F I D E N T I A L QUITO 000245

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E.O. 12958: DECL: 01/29/2017
TAGS: PGOV ECON MARR PINR EIND ETRD SNAR EC
SUBJECT: ECUADOR'S COMPLEX MILITARY-INDUSTRIAL DIVESTMENT

Classified By: Deputy Chief of Mission Jefferson T. Brown for Reasons 1
.4(b) and (d)

CONFIDENTIAL



1. (C) Summary: In a January 22 meeting with DATT and
EconOff, senior managers of HoldingDINE, one of Ecuador's
military-industrial conglomerates, expressed confidence that
they would continue to enjoy freedom of operation even as a
newly ratified law aims to impose strict limitations on the
military's participation in the Ecuadorian economy. As part
of their response to the new law, HoldingDINE's managers are
developing an ambitious new plan that justifies and extends
the military's moneymaking enterprises as essential for
financial maintenance of the armed forces and for developing
frontier projects to prevent expansion of illicit crop
cultivation across the Ecuadorian border. End comment.

ECUADOR'S MILITARY COMPANIES
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2. (C) On January 22, DATT and EconOff met with Colonel
Nelson Echeverria and Colonel (ret.) Eduardo Acosta,
President and Chief Strategist, respectively, of the
Direccion de Industrias del Ejercito (HoldingDINE),to assess
their plans in the wake of this month's ratification of
Ecuadorian law 2007-74, the "Organic Law for National
Defense." Among other provisions, this law states that in
terms of Ecuador's social and economic development, the armed
forces (FFAA) "will be permitted to participate in economic
activities related exclusively to national defense." The law
also states that "the use of FFAA personnel and property in
private sector activities is prohibited."


3. (U) Media exposes began to appear in the Ecuadorian press
as this bill was in debate in the congress. In late
September, Ecuadorian daily El Comercio reported that then
Minister of Defense Jarrin had ordered the liquidation of
nineteen military-owned companies and the divestment of five
more. The same paper reported in early January that the new
Minister of Defense Guadalupe Larriva (who died in a
helicopter crash on January 24) estimated that of the FFAA's
$700 million dollar budget, approximately 18% came from
military enterprises. According to El Comercio, the new
Minister had been advised by some military representatives
that the decision to force the FFAA to divest of its economic
activities "would generate a serious disequilibrium in the
FFAA budget."


4. (C) HoldingDINE is under the Army branch of the FFAA.
Echeverria said that the company contributes approximately
$11 million annually to the Army,s coffers, in addition to
the value of the military goods like ammunition and uniforms
that it transfers directly. He said that compared to the two
other major military companies -- national air carrier TAME,
owned by the Air Force, and marine fuel transporter FLOPEC,
owned by the Navy -- HoldingDINE's total dollar contribution
is much smaller. HoldingDINE is the majority owner or
minority shareholder in eighteen companies operating in
sectors ranging from defense-oriented (steel, munitions,
explosives, military uniforms and boots) to the more
diversified (food production, flower exports, hotels).
Echeverria said that HoldingDINE's market participation in
non-defense sectors was "marginal." Its explosives company
Explocen, for instance, has a 90.75% market-share, and its
munitions company Santa Barbara a 51.29% share, while its
dairy producer Aychapicho has .06% market-share and Proteas,
a flower exporter, has .04%. Echeverria said that
HoldingDINE's profits reached $24 million last year. He said
that HoldingDINE worked with private-sector partners in most
of their enterprises; U.S.-based Austin Powder, for instance,
is a partner in Explocen, and General Motors is the majority
partner in Omnibus BB. HoldingDINE's total portfolio is as
follows:

Companies with HoldingDINE Majority Ownership:
-------------- -

-- Acerias Nacionales del Ecuador (ANDEC); Sector: Steel
production; Ownership: 93.29%; Market Share: 23.3%
-- Explocen; Sector: Explosives production; Ownership: 60%;
Market Share: 90.75%
-- Complejo Industrial HoldingDINE; Uniforms and boots;
Ownership: 100%; Market Share: 1.82%
-- FMSB Santa Barbara; Munitions; Ownership: 100%; Market
Share: 51.29%
-- Aychapacho; Dairy production; Ownership: 100%; Market
Share: 0.06%
-- DINEAgros; Banana production; Ownership: 100%; Market
Share: 0.18%
-- Proteas del Ecuador; Flower production; Ownership: 61.74%;
Market Share: 0.02%
-- Corpsys; Civil engineering / Construction; Ownership:
100%; Market Share: 0.98%
-- DINEComs; HoldingDINE marketing/sales arm; Ownership:
100%; Market Share: n/a
-- Sepriv; Security; Ownership: 100%; Market Share: 0.95%

Companies with HoldingDINE Minority Participation:
-------------- --------------

-- Alfamedical; Medical insurance; Ownership: 0.47%; Market
Share: 0.92%
-- Amazonas HOT (JW Marriott Hotel); Hospitality; Ownership:
44.68%; Market Share: 3.37%
-- Inmobiliaria Amazonas; Property; Ownership: 50%; Market
Share: 9.55%
-- Banco General Ruminahui; Banking; Ownership: 12.85%;
Market Share: 2.39%
-- Maresa; Automotive; Ownership: 0.57%; Market Share: 14.38%
-- Novacero-Aceropaxi; Steel processing; Ownership: 2.08%;
Market Share: 10.74%
-- Omnibus BB; Automotive; Ownership: 34.1%; Market Share:
82.15%
-- Soccasa; Shrimp farming; Ownership: 42.2%; Market Share:
0.86%


5. (C) In spite of the media fervor, Echeverria insisted that
HoldingDINE will not be forced to divest under the new law,
but that it "will have to work under a new regulatory
framework." According to Echeverria, HoldingDINE is
constantly engaging in divestment and restructuring. He said
that the Ecuadorian constitution permits "self-management" of
military-related enterprises, and more importantly that the
Ecuadorian government "does not have the resources to fund"
the FFAA, especially as military budgets are being cut to
fund more social spending.

"TOO MUCH TRANSPARENCY"
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6. (C) EconOff asked what was behind the recent political
impetus for restructuring. Echeverria said that "certain
interests" wanted the military out of the private sector not
because they were significant competitors in most sectors,
nor because they exercise any unfair market advantages that
their military status might afford. Indeed, Echeverria said
that in operating according to market rules, they "behave
better" than their private sector competitors. Echeverria
says that divestment is being pushed on them because their
operations were 'too transparent". Echeverria said that
because HoldingDINE's finances are publicly available,
including its tax payments, people were starting to use its
results as referents for the sectors in which they operate.
According to Echeverria, HoldingDINE's larger private sector
competitors fear that in the current atmosphere of
"transparentization", people will look at military companies'
revenues, tax payments and market share and begin to
extrapolate what private industry is failing to pay to the
state.


7. (C) Echeverria also described HoldingDINE's work in border
development projects as becoming a victim of its own success.
He described HoldingDINE as contributing more to border
development than any other governmental, non-governmental or
private organization, and said that HoldingDINE insisted on
accountability and success measurement. This posed a danger,
he said, to the dozens of organizations working on
development projects and "skimming" money from the financing
they receive.

MORE, NOT LESS
-- -- -- -- --


8. (C) As a response to calls for divestment, HoldingDINE is
proposing a strategy to justify and increase its involvement
in Ecuador's economic and social development. This plan,
largely devised by Col. Acosta, is called the Program for
Support of the Frontier (APODEFRON). APODEFRON is
HoldingDINE's answer to the challenge of preventing the
spread of illicit crop cultivation across the Ecuadorian
border. Post DAO will present details of the initiative in
septel, but Acosta's general point was that Ecuador's current
geographical position as an island of relative calm amid the
world's largest cocaine producers demands that the military
be more, not less, involved in business and economic
development. He (rightly) observed that the military has an
"image of credibility" among the Ecuadorian public, and that
only the FFAA has the resources and track-record to develop
Ecuador's vulnerable frontiers. HoldingDINE, through its
various moneymaking enterprises, was and should continue to
be a vital player in this effort.


COMMENT
-- -- --


9. (C) Echeverria and Acosta presented HoldingDINE as the
only clean player in Ecuador's notoriously corrupt private
sector. Their explanation that they are being pushed out
because their transparency makes "business as usual" more
difficult for their competitors is clearly not the whole
story, but it is just counter-intuitive enough to ring at
least partially true in Ecuador's labyrinthine economic
society. We will continue to speak with other relevant
parties, such as HoldingDINE's automotive partner General
Motors, to hear alternate perspectives.


10. (C) Reforms set in motion by former Defense Minister
Oswaldo Jarrin, which propose limited divestment, reflect
changes we believe are necessary to build a stronger, more
efficient military. However, critics of the measure claim
that divestment will strain the GOE's ability to fund its
military. While likely true in the short-term, the
Ecuadorian military has a top-heavy structure that is more
ceremonial than operational. It currently spends an
estimated 70% of its budget on salaries and the remaining 30%
on operations, leaving inadequate resources for procurement,
operations, maintenance and training. Lack of adequate
funding for fuel and vehicle and aircraft replacement and
repair has limited the military's capacity to meet Ecuador's
modern security needs. Post has supported efforts by the
military to professionalize and, where appropriate, will
encourage efforts to modernize and restructure.


11. (C) Post suspects that it will be difficult for the new
civilian Minister of Defense (yet to be named) to force the
issue, as HoldngDINE's business operations not only relieve
the MOD of having to compete against Correa's ambitious
social and economic plans, but also provide many
opportunities for gainful employment for retired military
officers and their relatives and a lucrative post-retirement
safety net. Forced divestment pursued by the government
would threaten these interests and disrupt the current
comfortable status quo. Given the military's pivotal role in
the last three irregular changes in government and Correa's
looming battle with the Ecuadorian Congress over the
constituent assembly, Correa may be forced to move to a back
burner any sweeping reforms that might alienate current
military leadership and the influential cabal of retired
officers. He will probably need their support in the coming
months and years and he will be intent on building bridges to
the military, not burning them. End comment.
JEWELL