Leftover loot: despite an expensive and bloated bureaucracy, Ecuador is looking to spend money on telecoms and power.

Public spending is on the rise in Ecuador, which is good news for the country's 300,000 civil servants. Their paychecks will collectively hit US$2.44 billion in 2006, which comes to 28% of the $8.56 billion budget for this year. Nevertheless, there are still business opportunities with the government once those salaries are paid. And, despite delayed reimbursements, political uncertainty and changes to the rules of the game--on top of a shaky judicial framework--companies are knocking on the government's door just the same.

Wireless telephony has been one of the economy's hottest business sectors over the last few years. According to Ecuador's telecommunications ministry, in September 2005 alone the country's three mobile operators, Ameica Movil, Movistar and Alegro, were serving 5.3 million clients, 68.6% more than they had at the same time a year earlier. Compared to the country's client base of 350,000 wireless users in 2000, the sector has grown 1,414%, making Ecuador a market with 42 people out of every 100 dialing away on a cell phone.

For wireless carriers, the public sector has proven to be an especially loyal customer. "The government is a very important client, especially for us, the only operator in all 22 provinces," says Daniel Bernal, director of Porta Celular, a subsidiary of Mexican wireless giant America Movil, which claims a two-thirds market share. Many public-sector operations at work on highways, bridges and other infrastructure tend to buy lots of cell phones, Bernal says.

The government spends $27 million a year paying phone bills, according to Jose Pileggi, ex-president of the National Telecommunications Counsel, an industry association. On top of that, the government doles out $12 million a year on handsets as well as setting up new accounts for 10,000 managers, who rack up monthly bills that average $100. The remaining $15 million is spent on phone calls made from fixed lines to wireless phones. Yet there is room to grow. The government's phone bills account for just 2.7% of the $1 billion Ecuadoran wireless market. "This puts the government's capacity to grow in the telecommunications sector into perspective," Pileggi says.

America Movil is not the only global giant fighting for business in the niche. Movistar, the Latin American wireless unit controlled by Spain's Telefonica Moviles, scooped up 1.6 million Ecuadoran clients when it bought BellSouth's Ecuadoran assets for $833 million in October 2004. Today, it is the second-largest operator here after America Movil. In a distant third place, state-run Alegro serves 200,000 users.

Electricity is another opportunity. The biggest supplier of electricity to the Ecuadoran public sector now is Machala Power, a subsidiary of U.S. power company Noble Energy. Since October 2001, when the company signed a 31-year contract to sell power to government entities, the company has invested $400 million in electricity generation equipment that burns natural gas pumped from the Gulf of Guayaquil, according to Machala Power Manager John Tomich.

While demand for power is real, the money to pay for it sometimes isn't. Machala Power is still awaiting $30 million for power it has sold to 18 state-owned electricity distributors since 2003. "Since then, we've been waiting for the goodwill of each government, yet good intentions and promises have yet to become realities," says Tomich. The company at press time was considering settling the matter via international arbitration.

Ecuador is abundant with the natural resources and human capital needed to pump in foreign investment, yet it really needs a stronger legal safety net if it wants investments to stay, Tomich says. An iffy legal system has prompted Machala Power to hold off on a plan to invest $150 million to raise the country's generation capacity by 180 megawatts, he says.

Nevertheless, the private sector should continue to see the Ecuadoran government as a business partner, according to Economy Minister Magdalena Barreiro. Oil revenues are flowing into the country's coffers and, in 2006, that money will fund spending on health, education and welfare programs as well as develop infrastructure. The government will spend $1.85 billion in those areas this year, 22% more than in 2005, Barreira says. However, such a figure is somewhat weak when compared with the $2.86 billion the government will spend in 2006 just paying down public debt.

Yet even banks can cash in. Fernando Pozo, president of the country's private-banking association, says $700 million in social security will be paid to some 1.9 million Ecuadorans, which will boost economic activity in the country. "The financial sector is diversifying its medium and long-term saving options, providing additional benefits to clients, including free health insurance, school loans and housing loans, all with the aim of turning a consumer culture into one of savings and investments," Pozo says. On top of that, at least half of the 25 banks operating in Ecuador have adopted business models to handle payments to civil servants.

Still, a fundamentally flawed economy could prevent the government from becoming a top-notch business partner soon. Public-sector employees are 2.3% of the population, yet their salaries consume 100% of the country's value-added tax and 60% of income tax, two of the country's main sources of revenue, says Jaime Carrera, a U.N. economist in Ecuador who tracks public spending. "This means that we're paying taxes to finance the bureaucracy, whose salaries go up every year in lieu of investment," Carrera says.

Domestic demand has been growing at a fast pace over the last few years, especially in 2000, the year Ecuador adopted the U.S. dollar as its official currency, says Blasco Penaherrera, head of Quito's Chamber of Commerce. Once the current government's economic recovery program wins support from the International Monetary Fund, aid from multilateral lending institutions will flow during 2006 and fears of economic crises and default will subside, says Patricio Baus, general manager for Ecuador Risk Watch, a credit-ratings agency.

One of the government's chief reforms bound for Congressional approval will ask for even more investments in the electricity sector, which currently is unable to meet demand that rises 10% a year. Blackouts are common in Ecuador

Worthy partner. Oil production is key to kick-starting the economy here, and the current administration hopes the private sector sees opportunities. Nevertheless, Ecuador has spent decades trying to make Petroecuador, the state-owned oil company, efficient enough to be a worthy partner to global oil companies. Inefficient management and frequent labor disputes have plagued the company for years, resulting in decreased oil output, says Dario Lamanna, head of Ecuadoran operations for Petrobras, Brazil's state-run oil company. Even private companies are having a tough time getting crude out of the ground due to government inefficiency. The Economy Ministry expects private-sector oil production to drop by 9% in 2006 to 75.5 million barrels.

Government figures show that in 1993, Petroecuador produced 320,000 barrels of oil a day, much more than the 200,000 it pumps out of the ground today. According to Lamanna, private oil companies accounted for the lion's share of the country's total oil production at 520,000 barrels a day. Nevertheless, Petroecuador manages 74% of the country's most productive oil fields.