P3 Legislation in El Salvador: An Aggressive Reassertion of Neoliberal Economics?

Over the past several weeks, El Salvador has begun to restructure its port and electricity services as the first consequence of the newly enacted Ley de Asocio Público-Privados (Public-Private Partnership Law; P3), which took effect in El Salvador on June 16 after legislative approval on May 23. A history of unsuccessful privatization measures in El Salvador indicates that this economic policy will threaten many Salvadorans while doing little to promote genuinely productive economic activity in the region. In fact, the law is evidently aimed more at opening new markets and increasing profits for large foreign corporations than improving the lives of average Salvadoran citizens. However, P3 not only achieved unanimous approval in the Salvadoran legislature after merely two days of discussion, but did so with the support of President Mauricio Funes of the Farabundo Marti Liberation Front (FMLN). The implementation of this anachronistic neoliberal policy by a president whose party, the FMLN, had previously opposed privatization not only underlines a consistently unproductive relationship between the United States and El Salvador, but also reveals much about the internal tensions of the FMLN party that may have significant implications for the upcoming 2014 Salvadoran presidential elections.

Background

The new P3 measure was drafted as a joint effort between the ruling Funes Administration, Washington, the International Monetary Fund (IMF), and the World Bank (WB) in the name of efficiency and economic development. Although El Salvador is currently the most cost-effective country in Latin America to do business with, according to the U.S. Department of State, inconsistent commercial regulation, violent crime, and an erratic legal system over the past decade have perpetuated stunted foreign direct investment in the nation. [2] P3 was designed to encourage investment by eliminating much of the red tape surrounding privatization. In its original form, the law created a mechanism to auction off 40-year renewable terms of ownership (referred to as ‘concessions’) to private investors, starting with the ports and airports, but eventually opening the country to private investment in all public goods and services. Additionally, the original stipulations offered a reward of 1 percent of concession sales to be paid to losing bidders, set a time limit for all privatization decisions, and transferred all privatization decisions from the Salvadoran legislature to an executive body.

Funes and other FMLN party leaders made several important reforms to the bill before its passage. Article 3, added by FMLN legislators during the reform process, aims to protect water, education, prisons, healthcare, and social security (ISSS) from private ownership. Additional revisions eliminate the time limit for privatization decisions, and the 40-year contracts are no longer renewable. To reduce executive power, the FMLN reformers established a body within the Ministry of Economy called the Public Private Partnership Directorate that is responsible for managing P3 contracts. [3] These reforms were essential in moderating the extreme stipulations of the original bill.

A History of Failure 

In spite of the reforms, P3 has experienced fervent opposition from an array of social organizations. Over 80,000 activists from labor unions, environmental groups, regional organizations, and even the private sector mobilized for the International Workers Day March in San Salvador on May 1. [4] The protesters recognize P3 as the continuation of a historical record of unproductive neoliberal economic initiatives in El Salvador and worry that the next wave of privatization measures will repeat past failures. Indeed, their protests are not unprecedented. In 1992, at the conclusion of El Salvador’s bloody 12-year civil war, the ruling right-wing National Republican Alliance (ARENA) party initiated a series of neoliberal reforms under the auspices of the Bretton Woods organizations that aimed to “modernize” the economy. These measures included adopting the U.S. dollar and forming bilateral trade agreements with the United States. Significantly, El Salvador was the first country to sign on to the Dominican Republic Central American Free Trade Agreement (CAFTA-DR). Privatization was a tool that stood out among these policies. Over the period of 1989-2009, the government sold off assets totaling $5.7 billion USD, but ultimately only received $337 million USD in returns. Meanwhile, according to the Central American University, the corporations that acquired privatized industries “made over $271 billion [USD] in 2007 alone.” [5] Although privatizations occurred over a broad array of industries that included the restructuring of banks and telecommunications, some of the most telling effects have been demonstrated in the electricity, port, and energy sectors.

From 1992 to 1996, the government began to auction off major portions of the electricity sector as the first industry to be privatized. Under private ownership, customers in the lowest consumption group saw an average price increase of 47.2 percent, compared to a 24.3 percent increase for the most frequent users. [6] This disparity signals that the majority of the population, which lies in the lowest consumption group, was severely affected by the increases in electricity rates. Furthermore, users reported a host of issues with their new electricity service. Many users reported issues such as receiving inaccurate charges due to incorrect meter readings, having their service suspended without notice, and experiencing frequent service interruption. [7] According to the Structural Adjustment Participatory Review International Network (SAPRIN), a newspaper survey carried out in 1999 found that 81 percent of users agreed that electricity service after privatization was of a lesser quality than before. [8] Furthermore, a 2009 SAPRIN report noted that:

As the sale of the State companies was based on the argument of supposed inefficiency in the public administration of electricity distribution services, one would expect better quality, coverage and price of this service under private administration. However, the evaluation of the impact of this reform does not show any significant improvement in any of these three aspects. [9]

Following these events, El Salvador’s ports and airports were privatized in 2001. According to Dollars and Sense, nearly 1,000 workers were laid off at the Acajutla port alone following a series of privatizations. [10] When security, cleaning, and cargo services at El Salvador International Airport were outsourced to private companies that year, average wages in these sectors decreased from $552 USD per month to $240 USD per month. [11] Recognizing that private budgets were being bolstered at their expense, over 200,000 doctors, nurses, and ISSS workers successfully mobilized in a massive protest against a 2002 ARENA proposal to privatize healthcare. Similarly, communities and unions joined together to halt a 2007 attempt to privatize water.

Perhaps the most revealing example of the disappointments of Public Private Partnerships has come to light recently, when the Salvadoran government saw the consequences of an early privatization. During the 1990s, the ARENA government opened the national geothermal energy company, LaGeo, to private international bidders. The Italian energy company Enel Green Power won the contract to enter a partnership with the state. This year, Enel sought majority ownership of LaGeo but the government refused to relinquish additional shares. In response, Enel filed suit for breach of contract in the International Arbitration Tribunal of the International Chamber of Commerce. The tribunal ruled in Enel’s favor such that the company was able to dramatically increase its stake in LaGeo, resulting in unprecedented potential state revenue flowing into private hands. Ignoring the result of this situation, the P3 legislation may once more subject El Salvador to what Funes himself described as “the biggest swindle that has occurred in the country.” [12]

Voices of Protest

Some of the most vocal protesters have been workers unions, students, and leaders from the Bajo Lempa region, who are concerned that this legislation will open the door for rampant labor abuse, restrictions on the availability of higher education, and environmental destruction. Human Rights Watch released a 2003 report describing widespread labor abuse in El Salvador. In addition to describing activities aimed at discouraging unions, the report pointed out that:

Employers also routinely violate local labor laws by delaying salary payments, denying workers mandatory paid vacations and year-end bonuses, and failing to pay overtime. In some cases, employers also deduct social security dues from workers’ salaries without paying them to the government, thereby preventing workers from accessing free public health services. [13]

The report went on to identify four specific companies with particularly abysmal human rights records. Significantly, the Rio Lempa Hydroelectric Company and the El Salvador International Airport, both of which have already begun restructuring under the new legislation, were included in this group.

The students of El Salvador’s only public university, the University of El Salvador, have been similarly vocal in their opposition to P3. Although the reforms added by FMLN legislators theoretically protect higher education from privatization, students, in the words of Alan Marroquin, a member of the Community in Solidarity with the People of El Salvador, “suspect that internal directors are moving forward the privatization issue” by using loopholes in the language of the law to slowly privatize the public university. [14] Private involvement will significantly raise tuition costs for students, negating the emphasis President Funes has placed on education during his term. For this reason, students at the University of El Salvador organized a rally on July 30 to protest privatization in higher education.

Moreover, turning El Salvador’s public industries into less closely regulated private hands may allow for significant environmental risks. In May, Mesa Nacional Frente a la Minería (Salvadoran National Roundtable Against Metallic Mining) released a letter expressing concern that P3 will encourage government-sponsored foreign metal mining projects in El Salvador, expanding an industry that has already received attention for a particularly unaccountable record. The Mesa statement, released the day after P3’s passage, asserts that:

Vulnerability to disasters, along with environmental degradation, massive budgetary and institutional weaknesses in addressing climate change, forced migration, social exclusion and violence are the result of not keeping the voracious markets under control. [15]

Likewise, representatives from the Bajo Lempa region fear that P3 will encourage mega-development for tourism in their area, including the creation of golf courses and resorts, which will disrupt their agricultural economy and peaceful way of life. They are troubled by the damage that profit-driven foreign investment in the region might inflict on coastal ecosystems and their populations, especially given the vulnerability of beaches, mangrove forests, and nature reserves. [16] Their statement, released on May 23, perhaps most succinctly echoes the collective protest against P3:

Neoliberal measures implemented in El Salvador have failed in every way. Privatization, dollarization and CAFTA-DR were supposed to create jobs and economic growth, but it never happened. Instead poverty, violence, environmental degradation and corruption increased significantly during the 4 ARENA governments that oversaw the implementation of these neoliberal policies. We deeply regret that our country continues to embrace the neoliberal agenda dictated by the World Bank, International Monetary Fund and the United States government, the principal “advisors” and promoters of the Public-Private Partnerships Law. [17]

Foreign Pressures

As evident in the Bajo Lempa statement, Salvadoran social organizations are not oblivious to the foreign roots of this policy. Washington’s promotion of P3 has been blunt and unrelenting. The United States and the IMF have used financial conditionality to promote the interests of large multinational corporations, directing their influence in El Salvador through two specific U.S. programs: the Partnership for Growth (PFG) and the Millennium Challenge Corporation (MCC).

U.S. financial involvement in El Salvador has been channeled through the work of development programs created by President Barack Obama and former President George W. Bush. P3 was created as a derivative of the PFG program, a bilateral development program established by President Obama and extended to El Salvador after Obama’s 2011 visit to the country. The program seeks to create an environment that is friendly to U.S. business and has identified security issues and a lack of tradable goods as the primary barriers to this goal. Through PFG, El Salvador receives development funding when it implements policies that promote the interests of foreign corporations. Similarly, the MCC, a USAID project created by the Bush Administration, focuses on infrastructure, education, and business development, and has complemented PFG funding in El Salvador. Between 2007 and 2012, the MCC invested $463 million USD in a new highway spanning the northern border of the country. The next round of funding has been allocated towards developing the Pacific coast of El Salvador. [18]

Initially, encouragement from these programs was not enough to quell the concerns of protestors, and the Funes administration was reluctant to bring privatization initiatives to the legislature. Thus, early in 2013, the IMF urged President Funes to organize a national dialogue to address the issue of public debt and heavily recommended privatizing public goods and services as a solution. When there was no indication of P3 legislation moving forward in a timely manner, the U.S. ambassador to El Salvador, Mari Carmen Aponte, responded to fierce local opposition from social organizations by publicly threatening to withhold the pending second round of MCC funding unless P3 was passed. [19]

Party Perspectives

To many, the passage of P3 legislation is less an indication of Funes’s policy direction than of the persistently invasive influence of U.S. interests on El Salvador. Not only do FMLN leaders and Funes himself operate under hegemonic pressure, but they do so in the context of a formerly contentious relationship. During the civil war, the U.S.-backed Salvadoran security forces fought against the FMLN, which at the time was a coalition of guerilla organizations and local radical groups. Throughout post-war election periods, U.S. officials consistently questioned FMLN legitimacy and commitment to democracy, asserting that U.S.-Salvadoran relations would be jeopardized were the FMLN to win the presidency. In this context, the decision by the FMLN leadership to adopt a heavily reformed version of P3 can be seen, at least in part, as a political move to appease the United States while allowing for minimal concessions by amending the legislation before its final passage.

However, for the FMLN, there may be a political price to pay for its support of P3, given the party’s historic departure from neoliberal economic development strategies and support for the public service sector. The FMLN opposed each effort to privatize during the years of the ARENA presidency and were successful in defeating proposed privatizations in 2002 and 2007, both under ARENA-led governments. In their opposition statement, the leaders of the Bajo Lempa region stated, “it infuriates us that the party that once led a fierce opposition to the neoliberal agenda is now endorsing this type of law.” [20]

In a phone interview, a former Salvadoran judge in the exterior described this duplicity as unsurprising. He cited P3 as just one example of the many disappointments of the Funes administration. “I don’t believe Funes is different from the former leaders,” he said, referring to the right-wing ARENA party that maintained a 20-year hold on the executive branch until 2009. He pointed out that “while it is true [Funes] has invested in social programs” in the areas of education, health care, tax reform, and nutrition through his “el cambio” program, he also has neglected to touch other issues that his center, center-left, and left support base expected of him. [21] Importantly, none of the former ARENA presidents have been prosecuted for corruption, nor have the individuals who participated in gross human rights abuses during the civil war. Despite a ruling by the Inter-American Human Rights Court in October 2012 demanding that the Funes Administration conduct an investigation into the 1991 El Mozote Massacre, the administration has failed to do so, a frustration for the many Salvadorans who voted for Funes with the hope that an FMLN-backed president would mark the end of gross impunity in the country. [22] To an increasing number of Salvadorans, the maintenance of an amicable relationship with the United States is not a sufficient reason for failing to adhere to party norms and pursue long-overdue policies.

The 2014 Presidential Elections

The experience of party alienation, increasingly pervasive in Funes’s Salvadoran voter base, may have significant implications for the impending presidential elections. Frustration with party leadership increased when many party members felt, in March 2012, that the selection of FMLN political candidates was neither transparent nor representative of party wishes. In an April 2012 article for the Council on Hemispheric Affairs, titled, “The 2014 Presidential Elections in El Salvador: The Debate on the Salvadoran Left,” COHA Senior Research Fellow Dr. Frederick B. Mills addressed this phenomenon, asserting that “a growing alienation of some of the party’s base threatens to derail the progressive FMLN project.” [23]

However, current Vice President and 2014 FMLN Presidential Candidate Salvador Sánchez Cerén appears to stand with the party base in publicly opposing the programs developed by the PFG. In early May, he asserted that “with respect to Partnership for Growth, we want to say that the project that has been presented to the Legislative Assembly, we as the FMLN do not back it.” [24] Moreover, Cerén has expressed his intent to reject U.S. and Chilean influence and to seek relations with the Bolivarian Alliance for the Americas (ALBA) bloc if elected. [25] Cerén is evidently aware of the significance of party disagreement over P3; in his May 1 speech, he urged constituents not to abandon the party. To be sure, this piece of legislation will not persuade FMLN supporters against the party in the 2014 elections, but is likely to contribute to the diminishing participation of dissatisfied voters, a dangerous prospect for the FMLN if the presidential race is as close as polls indicate. [26]

Conclusion

 1. “El Gobierno Prepara Primeros Asocios Public Privados,” Contrapunto, May 28, 2013, http://www.contrapunto.com.sv/coyuntura/el-gobierno-prepara-primeros-asocios-publico-privados.

2. “2012 Investment Climate Statement: El Salvador,” U.S. Department of State: Diplomacy in Action, June 2012, http://www.state.gov/e/eb/rls/othr/ics/2012/191143.htm.

3. “Increased US Pressure Pushes Through P3 Law in Legislative Assembly,” Committee in Solidarity with the People of El Salvador, May 21, 2013, http://www.cispes.org/blog/increased-us-pressure-pushes-through-p3-law-in-legislative-assembly/.

4. “P3 Law Passes Amidst Protest from Social Movement,” Committee in Solidarity with the People of El Salvador, May 27, 2013, http://www.cispes.org/blog/p3-law-passes-amidst-protest-from-social-movement/.

5. Elaine Freedman, “Public-Private Partnerships: Another Disguise for Privatization,” Revista Envío, http://www.envio.org.ni/articulo/4542.

6. “Privatization of Electricity Distribution in El Salvador: A Summary Report,” Saprin El Salvador, http://www.saprin.org/elsalvador/elsalvador.htm.

7. Ibid.

8. Ibid.

9. Ibid.

10. “Changing Seasons in El Salvador’s Battle Against Privatization,” Labor Notes, March 2003, http://www.democracyuprising.com/2003/03/changing-seasons-in-el-salvadors-battle-against-privatization/.

11. Hilary Goodfriend, “P3 Push in El Salvador,” Dollars and Sense, March 2013, http://www.dollarsandsense.org/archives/2013/0313goodfriend.html.

12. “El Salvador Investigates Public Private Energy Contract Amidst Debate for New State Concessions Law,” http://www.cispes.org/blog/el-salvador-investigates-public-private-energy-contract-amidst-debate-for-new-state-concessions-law/.

13. “Deliberate Indifference: El Salvador’s Failure to Protect Workers Rights,” Human Rights Watch, December 13, 2003, http://voiceselsalvador.wordpress.com/.

14. Alan Marroquin, E-mail Interview, July 30, 2013.

15. “The Salvadoran Round Table Against Mining Releases a Statement Against the P3 Law,” Voices on from El Salvador, May 24, 2013.

16. “Bajo Lempa Rejects the Public-Private Partnership Law,” Voices from El Salvador, May 29, 2013, http://voiceselsalvador.wordpress.com/.

17. Ibid.

18. “El Salvador Compact,” Millenium Challenge Corporation, http://www.mcc.gov/pages/countries/program/el-salvador-compact.

19. “US Embassy and Arena Go On Offensive As Salvadoran Legislature Studies Public-Private Partnership,” Committee in Solidarity with the People of El Salvador, January, 22, 2013. 

20. “Bajo Lempa.”

21. Daniel Joya, Phone Interview, June 22, 2013.

22. Ibid.

23. Mills, Frederick B. “The 2014 Presidential Elections in El Salvador, The Debate on the Salvadoran Left,” Council on Hemispheric Affairs, April 18, 2013.

24. “Momentum Against the MCC and Other U.S. Policies May be Building,” Voices on the Border, May 3, 2013, http://voiceselsalvador.wordpress.com/?s=ceren&submit=Search.

25. Ibid.

26. “Latest Presidential Polls out of El Salvador,” Voices on the Border, May 28, 2013, http://voiceselsalvador.wordpress.com/.

27. Ronn Pineo. “The Free Market Experiment in Latin America: Assesing Past Policies and the Search for a Pathway Forward,” April 17, 2013. https://coha.org/the-free-market-experiment-in-latin-america-assessing-past-policies-and-the-search-for-a-pathway-forward-part-three-the-last-of-three-parts/.