Bending Aid Toward Business

In September of 2010, President Obama unveiled a sweeping vision for global development. At a UN speech, he promised to elevate sustainable development as a pillar of U.S. foreign power, fundamental in fostering national security and U.S. interests at home and overseas. He outlined this vision in a Presidential Policy Directive, recently released through a court-ordered FOIA request, and began piloting its principles among four emerging market economies around the world. These countries, including El Salvador (the only Latin American economy to participate), entered into a “Partnership for Growth” in which U.S. aid agencies and foreign governments aligned objectives to overcome constraints to economic growth.

Apart from prioritizing broad-based economic growth as fundamental to sustainable development, Obama’s policy directive also does a couple of important things. On one hand, it elevates USAID with a seat on the National Security Council, and sets forth a Global Development Council, which has been slow to get up and running. On the other, it outlines how the U.S. pursues policy reforms in developing countries through “the use of conditionality and performance-based mechanisms.” It also pledges to “leverage the private sector” throughout the policy reform process as a willing partner in development.

In El Salvador, we are seeing both conditionality and this private sector inclusion play out through the “Partnership for Growth.” So far, private sector interests may be trumping the public good, and rule of law.

Back in May of 2013, El Salvador’s legislature approved a new, Public-Private Partnership Law, or PPP law. The vote was completely unanimous, with one legislator reporting a voice vote after showing up late to the roll call, for fear of being labeled as against the measure. For the first time, El Salvador laid the groundwork for a partnership with the private sector, no small feat when considering El Salvador’s history within our lifetime. However, select members of the private sector weren’t satisfied with the PPP law, and the U.S. began to push for further reform.

As part of Obama’s Partnership for Growth, a Council for Economic Growth was instituted including individuals from the Funes administration, and seven prominent members of El Salvador’s private sector. Together with the Salvadoran Foundation for Economic and Social Development (FUSADES), the Council proposed a series of changes to the current PPP law. These included allowing the government to concession off the water sector to be managed in private hands, increasing the amount of public funds set aside to promote PPPs, outlining a public registry for PPPs, and clarifying the national and international arbitration processes. These reforms also proposed to limit the National Assembly’s approval of concessions, and empowered a relatively new executive agency, PROESA, to make most of these decisions.

In response, the U.S. Embassy vocalized its support for the private sector reform agenda. In tandem, the Millennium Challenge Corporation (MCC) put the approval process for $277 million in aid money on hold, setting a unique precedent. Never before had the MCC’s Board of Directors approved an aid package, and then stalled on its signing and ratification. Surprisingly, a look at the structure of the $277 million aid package, and El Salvador’s legal landscape shows that no new laws are needed to execute the 5-year project, known as FOMILENIO II. Part of this package, or compact, also includes technical advice toward appropriate PPPs for El Salvador’s international airport and wind farm in Metapán, each of which could be financed under the current funding ceiling for PPPs. So, it makes little sense for the U.S. to push specific reforms beyond what is required of its immediate foreign aid agenda.

Regardless, the U.S. embassy and MCC continue to push a narrow reform agenda on PPP, and other domestic Salvadoran policies, including money laundering and agricultural seed acquisition—the latter reportedly in conflict with Chapter 9 of the Central American Free Trade Agreement (CAFTA).

In the context of PPP reforms, the U.S. is clearly backing the private sector at the expense of a sustainable public sector, and rule of law.

The current PPP law obliges the Salvadoran state, through its different Ministries, to seek out opportunities for private sector engagement. These PPPs, once designed, would then be funded in part by the state which sets aside a public fund as a percentage of El Salvador’s gross domestic product. It is unclear per the current law, backed by the United States, whether or not the Salvadoran government would fund these long-term concessions by accruing more public debt. Article 67 of the current PPP law leaves the door open for loan financing of private sector engagement. Reforms backed by the United States also go a step further by increasing the size and breadth of that fund, essentially opening up the Salvadoran government and its people to more risk associated with propping up private sector engagement.

U.S.-backed reforms also seek to limit public debate about these PPPs. Though Article 120 of El Salvador’s constitution explicitly states that only the Legislative Assembly can approve long-term economic concessions to the private sector. Instead, reformers and the United States would rather empower an existing agency, PROESA, to assess, design, value, and approve the viability of PPPs. El Salvador has already seen what back-door dealings with the private sector can do to their economy, the perfect case being a deal put forth between the previous Flores administration, and the Italian company ENEL. Unknown to the public or the National Assembly, this deal has been valued at a staggering $2.1 billion dollars to date, and found unconstitutional by the Salvadoran Constitutional Court in 2012.

Proponents for reform, including members of the Council for Economic Growth, argue that empowering a centralized agency to promote PPP policy is better for business and the investment climate. In actuality, a review of current PPP facilities does not support this claim. In a survey conducted by the Overseas Development Institute in 2013, of eight developed and developing countries with a centralized PPP facility like PROESA, only the United Kingdom possessed a PPP unit with as much power. Even in the Philippines, coincidently another “Partnership for Growth” country, its version of PROESA is only empowered to provide technical assistance, not set policy or approve key aspects of PPPs without clear oversight. Along with the basic parameters of the social, environmental and economic feasibility of these PPP deals, the Salvadoran public must be aware of their benefits, and pitfalls. Bottom-line: if a PPP’s Rate of Return on investment for the private sector is higher than El Salvador’s government bond rate, a PPP would make little sense.

At the time this blog was being written, El Salvador’s national assembly was discussing a law to establish PROESA, introduced by the ARENA caucus of the Treasury Commission. This current law, if approved as is, would empower PROESA to establish an internal executive council to approve the basis for PPPs, including how they are designed to meet private sector candidates, and concessions are overseen. No mention is made of linkages to the National Legislative Assembly, nor public transparency mechanisms within PROESA. (UPDATE: The National Assembly approved the PROESA law 74-0, with little discussion in April 9th’s plenary session.)

Enabling debt financing for new private sector concessions, limited public debate and questionable transparency processes. All of this presents serious rule-of-law complications, and all of it is currently being supported by the U.S. government and its aid mission.

Next Steps

El Salvador has just been through a nail-biter of an election cycle, which highlighted a stark political divide in the country. Nevertheless, each presidential candidate voiced their unconditional support for the private sector, and its engagement as a partner in the country’s development. Publicly, there was little daylight between Salvador Sanchez Cerén of the FMLN and Norman Qujano of ARENA on the issue. The debate about PPPs as a tool for economic growth, and even whether or not the private sector should or shouldn’t be engaged in El Salvador’s development agenda, is over. What remains now is whether or not the private sector and the government of El Salvador, as mutual partners, are put on equal footing.

As was the call made on the floor of the U.S. Senate last September, the United States and its agencies like the MCC need to support policy reforms that enable rule-of-law in El Salvador to empower the public sector, not sideline it to expedite narrow private interests. This includes proper legislative oversight over an agency like PROESA, limiting its power as a technical assistance branch of PPPs, and being cautious in opening the flood gates to PPPs through increased funding, and increased risk exposure for a burgeoning public sector. Local, municipal governance structures also need to be prioritized. Alongside national Ministries, local governments should be empowered to, if they so choose, propose and oversee their own PPPs for the good of their distinct local constituencies.

In the Bay of Jiquilisco, Usulután, as well as in La Paz and San Vicente, civil society is forging a coalition with local governments to manage sustainable, inclusive coastal development. The United States and FOMILENIO II should enable these efforts, each already supported by the Salvadoran government through its “Territorios de Progreso” program and National Coastal Zone strategy. This will be especially important with new and unprecedented tourism development being planned for the region´s important coastal areas like the Bay of Jiquilisco.