U.S. Embassy and foreign aid agency condition assistance on questionable reforms that could worsen rule-of-law issues in El Salvador. Click here for more articles on our advocacy work.

Last Wednesday afternoon, representatives in El Salvador’s national assembly were scheduled to convene an ad-hoc legislative commission to discuss specific reforms to El Salvador’s Public-Private Partnership law, or PPP law.  Proposed by members of the conservative ARENA party, these reforms seek to consolidate the decision-making process regarding how the government concessions public property to business interests.  ARENA’s reforms would also limit the National Legislative Assembly from the approval process, and open up parts of the water and sanitation sector to business interests.

Prodded by the U.S. Embassy and the Millennium Challenge Corporation, a U.S. government agency, El Salvador’s debate over these reforms is too important to be rammed through by external actors.  In a country where a concerted sector of private business has, for decades, exerted overwhelming influence over public policy–enabling corruption and limiting democratic rule of law–the reforms being proposed by ARENA shouldn’t be taken lightly.   What’s at stake is whether or not outside interests, including the United States, continue to engender bad behavior, and what this means for the long-term potential in El Salvador for sustainable, inclusive economic growth.

Earlier this month, President Funes became very outspoken about a previously unspoken truth: without specific economic reforms, the U.S. government would not provide El Salvador with $277 million in aid money through the Millennium Challenge Corporation (MCC).  This was re-enforced by the U.S. Ambassador, Mari Carmen Aponte, who stated bluntly that without changes to El Salvador’s current PPP law, this $277 aid package would not be signed, nor allowed to be ratified by the National Assembly.[1]  This latest rhetoric displayed a sharp shift from her message just several months prior, in which she had congratulated the National Assembly in the passage of the PPP law, and stated that it was a decent step in the right direction.

It’s not exactly a secret that the U.S. seeks to spur economic growth in El Salvador through a set of policy reforms guided by Washington.  The Partnership for Growth and the “MCC Effect” are very clear and open about this agenda.  What is puzzling, however, is just what sort of changes Ambassador Aponte is alluding to, and what these changes mean for El Salvador and its already significant challenges to rule-of-law.

Last June, EcoViva learned that powerful Salvadoran business interests sitting on President Funes’ Council for Economic Growth were unhappy with the current PPP law, passed by overwhelming bi-partisan support with not a single vote in opposition.  Their concerns, first expressed publically at an event held at the Council of the Americas in Washington, included what they interpreted as limitations on which public goods and services should be eligible for PPPs, including water and higher education.  They also expressed their alarm that El Salvador’s National Assembly would continue to exert influence over aspects of these PPPs.

Meanwhile, the MCC has also expressed the need to help El Salvador manage a public grant facility to spur private sector investment through the Salvadoran agency PROESA.  This includes public-private projects related to tourism, public land acquisition, agriculture, and water management.  Though details of individual projects are not currently public, EcoViva and its partners understand that a large percentage of the funding slated for these public-private deals is being positioned toward private investments in water treatment and sanitation.

True to form, the PPP law reforms being proposed by members of the ARENA caucus include language that enables water treatment and sanitation, and continues to exclude “the distribution of potable water” from PPPs.  This reflects broad public sentiment in El Salvador against the privatization of water, and is also likely a reflection of pressures felt by the ARENA party during a nail-biter of an election cycle.

The ARENA proposal also seeks to dissolve the PPP policy and oversight arm established in the original law, the DAPP.  Instead, ARENA seeks to empower an existing agency, PROESA, which currently oversees the MCC’s public-private grant facility, “Apuesto para InversionES.”  PROESA was created by executive decree in 2011, under the watchful eye of the U.S. Partnership for Growth initiative.  It was never designed to operate as the sole proponent of PPPs in El Salvador.  PROESA’s job is to promote El Salvador as a place to do business, and as a producer of goods and services to be purchased in other countries—nothing more.

PROESA is not structured to be accountable to the National Assembly, nor to the Salvadoran people.  If the United States is backing ARENA’s agenda on PROESA, and not just water sector reforms, then it may be tacitly enabling greater corruption through less transparency and weakened oversight.  And, currently, clear oversight and rule of law seems to be a real problem for El Salvador’s previous public officials, their business partners, and even the MCC itself.

Twenty-one former government officials and Salvadoran businessmen are currently charged with embezzlement and falsifying documents stemming from a 2002 public-private partnership, awarding takeover of the state owned geothermal company, CEL, to Italian energy company Enel Green Power.  In authorizing the contracting process to a private foreign company, the former CEL executives illegally bypassed the powers of the Legislative Assembly, the only state entity with the authority to award such concessions.  The Attorney General charges that government functionaries manipulated the proceeding to ensure the Italian company Enel won the concession to be the private partner of CEL.  The contracting process should have been regulated by Entity of Institutional Acquisitions and Contracts to enforce the Law of Acquisitions and Contracts of the Public Administration (LACAP).  However, the bidding process required by the LACAP was not followed in what is now being called covert privatization of El Salvador’s geothermal resources.  The case is one of the largest corruption investigations in Salvadoran history, with the Attorney General estimating the losses for the country of El Salvador in the billions of dollars.

Coincidently, the MCC itself is being probed by the U.S. Congress and the foreign policy press[2] on its policies regarding corruption in emerging market economies.  As signaled by Senator Patrick Leahy in September with the example of El Salvador, the MCC may be providing aid to countries that exhibit challenging “rule-of-law” circumstances.  For Senator Leahy, this also includes environmental and development compliance measures, highlighted by EcoViva, the Mangrove Association, and a coalition of local actors working to improve governance along sensitive coastal areas like the Bay of Jiquilisco.

When oversight and public participation in PPPs is sacrificed to accommodate business interests, the immediate question becomes: which business interests in particular are being accommodated?  It goes without saying that if transparency becomes less straight-forward, not only does society lose, but so too does the broader business community.  How, for example, could one tourism developer be able to compete with another if the state’s cost benefit analysis and feasibility study for a project is kept under wraps?  What signal are we sending to the business class if only those who made it to the front of the line for a public-private grant, those who had an insider track, are the ones eligible to engage the public sector?

For local communities and civil society, being confronted by even more barriers to participation and input limits buy-in to these projects.  It also hinders the long-term sustainability required for real, measurable economic growth.  If El Salvador and the U.S. want to strengthen the Salvadoran economy, they will need to rely on the kind of inclusive, participatory governance that only an engaged and informed civil society can foster.  Clear, accessible “rules of the road” benefit everyone, and a shared vision for development can raise all boats.

This past September, the MCC Board of Directors approved El Salvador’s second compact.  The congressional comment period in Washington came and went.  Nevertheless, the MCC and U.S. government seems to be conditioning aid on a set of economic reforms that appear contrary to the democratic system, contrary to transparent, rule-of-law required to oversee complex public-private concessions, and contrary to sustainable, inclusive economic growth.