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Diplomacy in Action

2012 Investment Climate Statement - El Salvador


2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report
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Overview of Foreign Investment Climate

The Government of El Salvador views foreign investment as necessary for economic growth and development and has taken steps in recent years to improve the investment climate. According to the Economic Commission for Latin America and the Caribbean (CEPAL), foreign direct investment (FDI) in Central America in 2010 increased in every country except El Salvador where it fell 79 percent. The downward trend appeared to recover slightly in the last quarter of 2010 (-0.2 percent) and Central Bank statistics reflect a positive trend for the first three quarters of 2011, with an average increase of 6.7 percent. Despite being named the most cost-effective country in Central America in which to do business, inefficient and inconsistent commercial regulation, increasing violent crime, and concerns over a sometimes ineffective and erratic legal system are mitigating factors in El Salvador's efforts to encourage investment and merit additional monitoring. The free trade agreement among Central American countries, the Dominican Republic, and the United States (CAFTA-DR) includes an investment chapter and other provisions that have strengthened investment dispute resolution for member state companies with interests in El Salvador.

In 2011, El Salvador and the United States signed the Partnership for Growth (PFG) Joint Country Action Plan. PFG is a dynamic new model of cooperation which leverages complimentary commitments and actions by partner governments to improve productivity. PFG activities will foster a more favorable environment for business, improve infrastructure, invest in human capital, and encourage investment. Moreover, PFG allows for complimentary cooperation with other donors, the private sector, civil society, and other interested parties from the partner countries and beyond.

Companies from many countries, including the United States, Panama, Mexico, Spain, Canada, Costa Rica, Guatemala, Germany, and Italy, have invested in El Salvador. In 2010, the Central Bank estimated that foreigners invested $528.6 million in El Salvador in sectors such as finance, industry, retail, services, electricity, communication, and textiles. The government has a medium-term objective to become a logistics/shipping hub for Central America, and construction of a deep-water port in the Gulf of Fonseca was completed in early 2009. The government began operating the port in June 2010. So far, the port has seen limited use. A new law for concession of the port was approved in September 2011.

The principal statutes governing foreign investment in El Salvador are the Investment Law, Export Reactivation Law, Free Trade Zones Law, and International Services Law. Other statutes establishing the basic legal framework for investment include the Monetary Integration Law, Banking Law, Insurance Companies Law, Securities Market Law, intellectual property laws, special legislation governing privatizations and credit cards, Competition Law, and Tourism Law. Additional information on each of these laws is available throughout this chapter. A new Public-Private Partnership law is expected to be presented to the National Assembly in 2012.

The 1999 Investment Law grants equal treatment to foreign and domestic investors. With the exception of small businesses (10 or fewer employees and sales of less than $68,571/year), foreign investors may freely establish businesses in El Salvador. Investors who begin operations with 10 or fewer employees must present plans to increase employment to the National Investment Office (ONI) at the Ministry of Economy. The Investment Law created ONI as a one-stop shop to facilitate the registration of new investments in the country, a process that by World Bank estimates takes 17 days. Some U.S. investors have commented, however, that the permitting processes at the municipal level lack transparency and are inconsistent throughout the country. Several U.S. investors have commented on problems obtaining permits from the Ministry of Environment within the required time stipulated by Salvadoran law. The law establishes procedures to resolve disputes between foreign investors and the government and eases residence requirements for foreign investors who make significant investments. It also provides that underground resources (minerals) belong to the state, which may grant concessions for their extraction.

The government's trade, investment and exports promotion agency is the National Investments and Exports Promotion Agency (PROESA). PROESA organizes investment promotion tours overseas and provides information and facilitation services in El Salvador; identifies niche markets for Salvadoran exports, especially nontraditional goods; and provides trade capacity building to new exporters. PROESA also promotes investment schemes between the public and the private sector, including Public-Private Partnerships.

The government launched a privatization process in 1990 starting with the banking system. Privatization has played an important role in attracting foreign investment, especially in electricity generation and distribution, telecommunications, and pension funds.

The Salvadoran electricity sector is divided into generation, transmission, and distribution subsectors. The electricity generation market includes: CEL, the state-owned energy company; one U.S. company that bought three thermal generation plants from CEL in 1999; an Indian-Israeli consortium that recently bought a thermal power plant from a British company; La Geo, a public-private Italian joint venture geothermal power generation company; one U.S. company owns and operates a new renewable-energy, methane gas collection system at the Nejapa landfill site; and other minor generators. The state-owned ETESAL provides transmission services. Investors from the United States, Chile, and Venezuela bought controlling shares in four electricity distribution companies when the government privatized the sector in 1998. However, one U.S. company now provides 80% of all distribution services for the country. The Transaction Unit (UT), owned by market participants, operates the wholesale energy market. Four companies (including two U.S.-owned) are in the process of bidding on new long-term electricity contracts that will generate up to US $1 billion in foreign direct investment. In 2011, CEL (through its subsidiary Inversiones Energeticas - INE) took the unusual step of appealing to a European civil court the adjudication of an international arbitration case related to a dispute with its Italian partner in the La Geo joint venture.

Privatization and foreign investment have modernized Salvadoran telecommunications. The only remaining restrictions for foreign investors are on free reception television and AM/FM radio broadcasting, where foreign ownership cannot exceed 49 percent of equity. America Movil, the Mexican telecommunications giant, now owns 94 percent of what was Compania de Telecomunicaciones de El Salvador (CTE), the state-owned telecommunications firm privatized in 1998. A U.S. long-distance telephone service provider had complained that regulators and Salvadoran courts were unable to prevent CTE from violating interconnection agreements and offering discriminatory interconnection rates. However, the U.S. company later settled its claim with CTE's parent company. Separately, the government is preparing new telecommunications regulations to implement cost-based interconnection as required by CAFTA-DR. The government created five privatized pension funds in 1998 with the participation of Citibank, Spanish banks Banco Bilbao Vizcaya and Argentaria, and two local investors. After considerable consolidation in the sector, two funds remain, owned by Banco Cuscatlan and Banco Agricola. However, during 2007, Citigroup acquired Banco Cuscatlan and Bancolombia acquired Banco Agricola. In January, 2011Banco Agricola sold pension fund AFP Crecer to Proteccion SA of Colombia.

One of El Salvador&s primary challenges is the high level of violent crime. According to 2010 World Bank data, losses from theft, robbery, vandalism or arson represent 1.6 percent of company sales in El Salvador, the 4th highest rate in Latin America and the 25th highest in the world. A study sponsored by the United Nations (UN) published on October 2011 ranks El Salvador as the 2nd most violent country in the world - more than Iraq and Venezuela – with a violent deaths rate of 62 homicides per 100,000 habitants. Despite anti-crime initiatives launched by successive governments, violence and crime levels have continued to rise. Street gangs, made up of unemployed youth, account for the majority of violence. Under increasing pressure to respond to public concerns over violent crime, the government announced in June 2011 the implementation of a series of new measures to fight crime; an increase in the number of soldiers deployed to serve alongside the national civil police force from 4,000 to 5,000; the creation of the Law of Proscription of Gangs that was approved by the Legislative Assembly in September 2011; and, in December 2011, the Ministry of Security announced the creation of the Anti-Gangs Elite Division within the National Civil Police (PNC).


Index

Year

Measure

Index Ranking

TI Corruption Index

2010

3.6

73

Heritage Economic Freedom

2011

68.8

39

World Bank Doing Business

2011

N/A

112

MCC Govnt Effectiveness

2011

0.47

55.9809

MCC Rule of Law

2011

-0.40

22.7478

MCC Control of Corruption

2011

0.26

51.1962

MCC Fiscal Policy

2011

-4.23

N/A

MCC Trade Policy

2011

85.0

N/A

MCC Regulatory Quality

2011

0.91

N/A

MCC Business Start Up

2011

0.948

N/A

MCC Land Rights Access

2011

0.725

N/A

MCC Natural Resource Protc.

2011

8.11

N/A

Conversion and Transfer Policies

There are no restrictions on transferring funds associated with investment out of the country. Foreign businesses can freely remit or reinvest profits, repatriate capital, and bring in capital for additional investment. The 1999 Investment Law also allows unrestricted remittance of royalties and fees from the use of foreign patents, trademarks, technical assistance, and other services.

The Monetary Integration Law dollarized El Salvador in 2001, and the U.S. dollar now freely circulates and can be used in all transactions. One objective of dollarization was to make El Salvador more attractive to foreign investors. U.S. dollars account for nearly all currency in circulation. Salvadoran banks, in accordance with the law, must keep all accounts in dollars. Dollarization is supported by family remittances--almost all from the United States--that were $3.2 billion in 2011. On average in 2011, the Central Reserve Bank reported international reserves of $3 billion.

Expropriation and Compensation

El Salvador's 1983 constitution allows the government to expropriate private property for reasons of public utility or social interest, and indemnification can take place either before or after the fact. There are no recent cases of expropriation. In 1980, a rural/agricultural land reform established that no single natural or legal person could own more than 245 hectares (605 acres) of land, and the government expropriated the land of some large landholders. While banks were nationalized in 1980, beginning in 1990 they were returned to private ownership. A 2003 amendment to the 1996 Electricity Law contains a provision that, while not authorizing expropriation, requires energy generating companies to obtain government approval before removing fixed capital from the country. According to the government, this provision is intended to prevent energy supply disruptions.

In April 2009, the U.S. subsidiary of a Canadian mining company filed an international arbitration proceeding against the Government of El Salvador alleging various violations of the obligations in Chapter Ten of the CAFTA-DR. The Claimant alleges that the Government of El Salvador wrongfully refused to grant environmental permits for its mineral exploration and exploitation projects. This case is currently before the International Center for Settlement of Investment Disputes (ICSID). On August 2, 2010, the ICSID issued a ruling on preliminary objections filed by the Government of El Salvador. The tribunal overruled the objections of the Government of El Salvador and will allow the Claimant to proceed to the next stage in the case. In July 2009, two different North American mining companies filed a joint notice of arbitration against the Government of El Salvador alleging similar breaches of Chapter Ten of the CAFTA-DR agreement. These investors contend that the Government of El Salvador’s wrongful revocation of environmental permits effectively terminated their existing environmental concessions.

Dispute Settlement

While foreign investors can seek redress of commercial disputes with Salvadoran companies through El Salvador's courts, investors have found that seeking resolution to problems through the slow-moving domestic legal system can be costly and unproductive. The course of some cases has shown that the legal system is subject to manipulation by private interests, and final rulings are sometimes not enforced. Where possible, arbitration clauses, preferably with a foreign venue, should be included in commercial contracts as a means to resolve business disputes. Investors should make sure that all contracts are carefully drafted and that the relationships with local firms are specifically defined. Some U.S. firms have been embroiled in major legal disputes in recent years, in cases where they asserted that a contract with a Salvadoran firm either had formally ended or never existed, but Salvadoran courts have ruled that the contract remained in force. On October 22, 2008, the Legislative Assembly passed a new criminal procedures code, which entered into force on January 1, 2011. The new code is designed to facilitate trials and streamline the appeals process. The new code also improves the way in which evidence is handled.

El Salvador's commercial law is based on the Commercial Code and the Code for Mercantile Processes. There is a mercantile court system for resolving commercial disputes, although there have been complaints about its slow processes and erratic rulings, particularly at the Supreme Court level. The Commercial Code, Code of Mercantile Processes, and Banking Law contain sections that deal with bankruptcy. There is no separate bankruptcy law or bankruptcy court. On June 12, 2008, the Legislative Assembly passed several reforms to the Commercial Code and the Commerce Registry Law. The reforms are aimed to facilitate trade and investment through a reduction of the steps and requirements needed to register, develop, and close a business. The reforms include lower capital requirements to open a business and fewer requirements to increase the capital of the business or to dissolve a business. With the reforms, all documents and payments can be submitted electronically to the Commerce Registry.

Article 15 of the 1999 Investment Law states that disputes between foreign investors and the government will be submitted for arbitration to the International Center for Settlement of Investment Disputes (ICSID), a World Bank affiliated organization. In 2002, the government approved a law to allow private sector organizations to establish arbitration centers for the resolution of commercial disputes, including those involving foreign investors. Under CAFTA-DR, investor rights are protected by an effective, impartial procedure for dispute settlement that is fully transparent, as described in chapter 20 of the agreement. Submissions to dispute panels and panel hearings are open to the public, and interested parties have the opportunity to submit their views.

The first case of commercial arbitration in El Salvador involved a U.S.-owned firm and the parastatal water company. The arbitration panel ruled in favor of the U.S-owned firm, but a legal challenge by the water company relating to the bidding process led the Supreme Court to suspend the proceedings in August 2004. In late 2006, the Supreme Court issued its final resolution against the U.S-owned firm, determining that the contract was illegal. No further arbitration cases have been heard in El Salvador because potential clients lack confidence that the courts will respect arbitral decisions. In October 2009, El Salvador modified its arbitration law to allow a party to an arbitration dispute the ability to appeal a ruling to the Salvadoran courts. By subordinating central aspects of the arbitral process to the judiciary, the fundamental efficacy of arbitration as an alternative method of resolving disputes has been diluted.

Performance Requirements and Incentives

El Salvador's Investment Law does not require investors to export specific amounts, transfer technology, incorporate set levels of local content, or fulfill other performance criteria. Foreign investors and domestic firms are eligible for the same incentives. Exports of goods and services are levied zero value added tax.

The 1998 Free Trade Zones Law is designed to attract investment in a wide range of activities, although at present more than 90 percent of the businesses in export processing zones are clothing assembly plants. The Government of El Salvador recognizes the law violates its WTO obligations and is working to revise the incentives it offers to investors in the free trade zones by June 2015. As of early 2012, the Government of El Salvador had finished drafting an updated free trade zone law which will be presented soon to the Legislative Assembly. A Salvadoran partner is not needed to operate in a free zone, and some textile operations are completely foreign-owned.

The 1998 law established rules for export processing zones (free zones) and bonded areas. The free zones are outside the nation's customs jurisdiction while the bonded areas are within its jurisdiction but subject to special treatment. Local and foreign companies can establish themselves in a free zone to produce goods or services for export or to provide services linked to international trade. The regulations for the bonded areas are similar.

Firms located in the free zones and the bonded areas enjoy the following benefits:

· Exemption from all duties and taxes on imports of raw materials and the machinery and equipment needed to produce for export.

· Exemptions from taxes for fuels and lubricants used for producing exports if these are not domestically produced;

· Exemption from income tax, municipal taxes on company assets and property; and

· Exemption from taxes on real estate transfers that are related to export activity.

Companies in the free zones are also allowed to sell goods or services in the Salvadoran market if they pay applicable taxes for the proportion sold locally. Additional rules apply to textile and apparel products.

Under the 1990 Export Reactivation Law, firms were able to apply for tax rebates ("drawbacks") of 6 percent of the FOB value of manufactured or processed exports shipped outside the Central American Common Market area. This benefit was eliminated in February 2011. However, the Government of El Salvador approved new regulations to support producers, which were approved in January 2011. The proposed regulations include a new form of “drawback,” approved by the World Trade Organization (WTO), which consists of a refund of custom duties paid on imported inputs and intermediate goods exclusively used in the production of goods exported outside of the Central American region. The new regulations also include the creation of a Business Production Promotion Committee with the participation of the private and public sector to work on policies to strengthen the export sector, and the creation of an Export and Import Center. The Export and Import Center will replace the current system, wherein export procedures are handled by the Central Bank and import procedures are handled by the Ministry of Finance.

The International Services Law, approved in 2007, establishes service parks and centers with incentives similar to those received by El Salvador's free trade zones. Service park developers will be exempted from income tax for 15 years, municipal taxes for 10 years, and real estate transfer taxes. Service park administrators will be exempted from income tax for 15 years and from municipal taxes for 10 years. Firms located in the service parks/service centers receive the following permanent benefits:

· Tariff exemption for the import of capital goods, machinery, equipment, tools, supplies, accessories, furniture and other goods needed for the development of the service activities (goods and services such as food and beverages, tobacco products, alcoholic beverages, rental fees, home equipment and furniture, cleaning articles, luxury goods, transportation vehicles, and hotel services are not exempted from taxation);

· Exemption from income tax and municipal taxes on company assets. The tax exemptions remain in place as long as the service operations are functioning.

Service firms operating under the existing Free Zones law are also covered. However, if the services are provided to the Salvadoran market, they cannot receive the benefits of the Services Law.

The following services are covered by the Services Law:

· International Distribution

· Logistical International Operations

· Call Centers

· Information Technology

· Research and Development

· Marine Vessels Repair and Maintenance

· Aircraft Repair and Maintenance

· Entrepreneurial Processes (i.e., business process outsourcing)

· Hospital-Medical Services

· International Financial Services

Beneficiaries must invest at least $150,000 during the first year of operations, including working capital and fixed assets, must hire no fewer than 10 permanent workers, and must have at least a one-year contract. For hospital/medical services, the minimum investment in fixed assets must be $10 million if they are to provide surgical services or a minimum of $3 million if they do not provide surgical services. Hospital or medical services must be located outside of major metropolitan areas. The service must also be provided only to patients that are insured.

In 2005, the government approved a tourism law to spur investment in the sector. The law establishes fiscal incentives for those who invest a minimum of $50,000 in tourism-related projects in El Salvador. Incentives include an income tax break of 100 percent for 10 years and no duties on imports of capital and other goods, subject to limitations. The investor also benefits from a five-year exemption from land acquisition taxes as well as a 50 percent cut in municipal taxes over that period. To take advantage of these incentives, the enterprise must contribute five percent of profits during the exemption period to a government-administered Tourism Promotion Fund.

Those who plan to live and work in El Salvador for an extended period will need to obtain temporary residency, which may be renewed periodically. Under Article 11 of the Investment Law, foreigners with investments equal to or more than 4,000 minimum monthly wages ($768,400) have the right to receive Investor's Residence, permitting them to work and stay in the country. Such residency can be requested within 30 days after the investment has been registered. The residency permit covers the investor and his family and is issued for one year, subject to extension on a yearly basis.

Most companies employ a local lawyer to manage the process of obtaining residency. The American Chamber of Commerce in El Salvador can also help its members with the process. Labor law requires that 90 percent of the labor force at plants and in clerical jobs be Salvadoran. There are fewer restrictions on the professional and technical jobs that can be held by foreigners.

U.S. companies have complained of variable customs valuations and inconsistent enforcement of both customs regulations and CAFTA-DR preferential treatment for goods coming from CAFTA-DR countries aside from the United States. A fast-track system for shipments via express courier companies has not been fully implemented. Additionally, foreign companies are having issues registering pharmaceutical products due to the Government of El Salvador’s requirement that the Certificate of Pharmaceutical Products (CPP) be issued by the distributing country rather than the producing or packaging countries; these are the countries that the FDA requires the CPP to be issued from.

Right to Private Ownership and Establishment

There are restrictions on land ownership. No single natural or legal person--Salvadoran or foreign--can own more than 245 hectares (605 acres). Rural lands cannot be acquired by foreigners from countries where Salvadorans do not enjoy the same right. Foreign citizens and private companies can freely establish businesses in El Salvador. The only exception for this is in some cases involving small business. A 2001 fishing law allows foreigners to engage in commercial fishing anywhere in Salvadoran waters providing they obtain a license from CENDEPESCA, a government entity.

Protection of Property Rights

Private property, both movable and real estate, is recognized and protected in El Salvador. Companies that plan to buy land or other real estate are advised to conduct a thorough search of the property's title prior to purchase.

In 2005, El Salvador revised several laws to comply with CAFTA-DR's provisions on intellectual property rights (IPR). The Intellectual Property Promotion and Protection Law (1993, revised in 2005), Law of Trademarks and Other Distinctive Signs (2002, revised in 2005), and Penal Code establish the legal framework to protect IPR. Investors must register trademarks, patents, copyrights, and other forms of intellectual property at the National Registry Center's Intellectual Property Office to protect their investments. Reforms passed in 2005 extended the copyright term from 50 to 70 years. In 2008, the government enacted test data exclusivity regulations for pharmaceuticals and agrochemicals, which will be protected for 5 and 10 years respectively, and ratified an international agreement extending protection to satellite signals. Although El Salvador has implementing regulations in place to be in accordance with Article 15.10 of CAFTA-DR (Decree No. 65 Regulation for Test Data Protection) the Salvadoran Council of Public Health (CSSP), the agency in charge of registering pharmaceuticals is not enforcing this decree and is therefore not granting patent linkage and test data protection for pharmaceutical products.

The Attorney General's office and the National Civilian Police enforce these rights by conducting raids against distributors and manufacturers of pirated CDs, cassettes, clothes, and computer software. The 2005 reforms authorize the seizure, forfeiture, and destruction of counterfeit and pirated goods and the equipment used to produce them. They also allow authorities to initiate these raids ex-officio, and piracy is now punishable by jail sentences of two to six years. However, using the criminal and mercantile courts to seek redress of a violation of intellectual property is often a slow and frustrating process. In 2008, the local Blockbuster Video franchise shut down, citing piracy concerns.

Judiciary and regulatory enforcement continue to be the weakest pillars of intellectual property protection in El Salvador. A significant intellectual property rights case continues to drag on through the Salvadoran court system, concerning a contractual dispute involving trademark and copyright infringement by an ex-franchisee of a major U.S. corporation. In October 2011, the Salvadoran Supreme Court affirmed a previous award of $24 million to the ex-franchisee. Legal representatives of the U.S. corporation are further appealing the case, however, while the plaintiff demands immediate satisfaction of the judgment.

El Salvador is a signatory of the Bern Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, the Geneva Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication, the World Intellectual Property Organization (WIPO) Copyright Treaty, the WIPO Performance and Phonograms Treaty, and the Rome Convention for the Protection of Performers, Phonogram Producers, and Broadcasting Organizations.

Transparency of Regulatory System

The laws and regulations of El Salvador are relatively transparent and generally foster competition. However, the government does control the price of some goods and services, including electricity, liquid propane gas, and fares on public transport. The government also directly subsidizes water services and sets the distribution-service tariff.

Bureaucratic procedures have improved in recent years and are relatively streamlined for foreign investors. Regulatory agencies, however, are often understaffed and inexperienced, especially when dealing with complex issues. New foreign investors should review the regulatory environment carefully.

The Superintendent of Electricity and Telecommunications (SIGET), a regulatory agency modeled after a public utilities commission, regulates electricity and telecommunications. SIGET oversees electricity rates, telecommunications, and distribution of electromagnetic frequencies.

In 2003, the government amended the 1996 Electricity Law with the intention of reducing volatility in the wholesale market and thereby stabilizing retail electricity prices. The new reforms to the law allowed SIGET to develop a cost-based pricing model for the electricity sector, which they introduced to the marketplace on August 1, 2011. The new system requires the adoption of additional long-term contracts and should alleviate various market distortions. The GOES subsidizes consumers using up to 200 kWh monthly (recently lowered from 300 kWh). Electricity distributors credit the subsidy on consumers’ bills and then seek reimbursement from the GOES. Starting in September 2011, a cash flow shortage forced the GOES to pay distributors with IOUs. The companies must sell these IOUs for cash at a discount and recuperate any losses in the electricity rate structure, further increasing energy prices. The electricity subsidy costs the GOES upwards of $100 million annually. Energy sector companies have warned that ever-changing subsidies have eroded the financial stability of the power sector and discouraged needed investment in new generation capacity.

The 2004 Competition Law defines a series of anticompetitive practices such as collusion to fix prices, limit production, or rig bids. Vertical arrangements, tying (conditioning the sale of one product on the sale of another), and exclusive dealing are also outlawed. Certain abuses of dominant market position are also prohibited, for example, creating barriers to entry by other firms, predatory pricing to drive out competitors, price discrimination and similar actions when intended to limit competition are illegal. The law created an autonomous Superintendent of Competition responsible for enforcing the law, which took effect in January 2006.

The Superintendent of Competition's decisions against the gasoline and energy companies resulted in four lawsuits filed against the Government of El Salvador in 2007. Electricity distributors appealed the Superintendent's finding that they blocked two companies from entering the power distribution business. Two international oil companies appealed the Superintendent's ruling that they abused their dominant position and engaged in anti-competitive practices. The companies have questioned the determination that they had a dominant position in the Salvadoran market due to their parent companies' joint ownership of a refinery. They also argue that the alleged uncompetitive practice, zone pricing, is actually pro-competitive and beneficial to consumers. The Supreme Court suspended the decision made by the Superintendent of Competition. However it did not suspend the fines; the oil companies were therefore obligated to pay $1.7 million in fines in October 2010.

Efficient Capital Markets and Portfolio Investment

The Superintendent of the Financial System supervises banks and non-bank financial intermediaries. Interest rates are determined by market forces and have decreased significantly since dollarization was implemented. Foreign investors may obtain credit in the local financial market under the same conditions as local investors. Accounting systems are generally consistent with international norms.

December 2004 fiscal reforms require that applicants for credit at Salvadoran financial institutions prove they are current in their tax obligations with the Salvadoran Government. New credit card regulations were approved in November 2009 and have entered into force. Further reforms to regulate credit card interest rates were approved in September 2011 but were vetoed by President Funes in October 2011. A proposed Usury Law intended to regulate banking and non-banking institutions that provide credit, including the informal sector, is under consideration by the Legislative Assembly.

El Salvador's banks are among the largest in Central America and owned by foreign financial institutions. The banking system is sound and in general well managed and supervised. The banking system's total assets as of October 2011 were $12.6 billion.

Under the 1999 Banking Law and amendments made in 2002, foreign banks are afforded national treatment and can offer the same services as Salvadoran banks. They can open branches and buy or invest in Salvadoran financial institutions. The law strengthened supervisory authorities and provided more transparent and secure operations for customers and banks. The law also established an FDIC-like autonomous institution to insure deposits, increased the minimum capital reserve requirement for banks to 100 million colones ($11.4 million), and sharply limited bank lending to shareholders and directors.

The Non-Bank Financial Intermediaries Law regulates the organization, operation, and activities of financial institutions such as cooperative savings associations, nongovernmental organizations, and other microfinance institutions. The Money Laundering Law requires financial institutions to report suspicious transactions to the Attorney General and the Superintendency of the Financial System.

The 1996 Insurance Companies Law regulates the operation of local insurance firms and accords national treatment to foreign insurance firms. Foreign firms, including U.S., Colombian, Canadian, and Spanish companies, have invested in Salvadoran insurers. A new law mandating vehicle owners to carry third-party insurance will enter into force in June 2012.

The 1994 Securities Market Law established the present form for the Salvadoran securities exchange, which opened in 1992, and has played an important role in the privatization of state enterprises and facilitating foreign portfolio investment. Stocks, government and private bonds, and other financial instruments are traded on the exchange, which is regulated by the Superintendency of Securities. In 2007, the Legislative Assembly approved a securitization law but it has not yet been widely used. Foreigners may buy stocks, bonds, and other instruments sold on the exchange and may have their own securities listed, once approved by the Superintendent. Companies interested in listing must first register with the National Registry Center's Registry of Commerce. From 2008 – 2011, the exchange averaged daily volumes of about $8.9 million. Government-regulated private pension funds, Salvadoran insurance companies, and local banks are the largest buyers on the Salvadoran securities exchange.

Competition from State-Owned Enterprises

El Salvador has successfully liberalized many sectors where the government previously exerted monopoly control, effectively limiting most forms of direct competition from state-owned enterprises. Power generation in the country is dominated by the state-owned Rio Lempa Executive Hydroelectric Commission (CEL), though distribution was privatized in 1999. CEL manages and operates El Salvador’s hydroelectric and (with a private sector partner) geothermal plants, which account for approximately 65 percent of the total energy produced. Alba Petroleos, a joint-venture between a consortium of Farabundo Marti National Liberation Front (FMLN) mayors and a subsidiary of Venezuela's state-owned oil company PDVSA, operates 40 service stations across the country. Under Alba Petroleos’ arrangements, a percentage of the profit goes back to the mayors' municipalities to fund social projects.

Corporate Social Responsibility

The private sector in El Salvador has embraced the concept of corporate social responsibility (CSR) in recent years, led by several prominent U.S. companies. A local foundation was created in the year 2000 to promote corporate social responsibility practices, entrepreneurial values, and philanthropic initiatives; it is also a member of international institutions such as Forum Empresa (an Alliance of CSR institutions in the Western Hemisphere), AccountAbility (UK), and the InterAmerican CSR Network. Businesses have created CSR programs in the workplace that provide education and training, transportation, lunch programs, and childcare. In addition, CSR programs have provided assistance to surrounding communities in the areas of health, education, senior housing and HIV/AIDS awareness.

Political Violence

El Salvador's 12-year civil war ended in 1992 with a peace agreement. The former guerrilla organization, the FMLN, became a political party and has participated in elections since 1994. Mauricio Funes, the FMLN candidate, won the Presidential election in March 2009, marking the first peaceful transfer of power to another party since the end of the civil war. There has been no political violence aimed at foreign investors, their businesses, or their property.

Corruption

Soliciting, offering, or accepting a bribe is a criminal act in El Salvador. The Attorney General has a special office, the Anticorruption and Complex Crimes Unit, which handles cases involving corruption by public officials and administrators. The Constitution also established the Court of Accounts that is charged with investigating public officials and entities and, when necessary, passing such cases to the Attorney General for prosecution. In 2005, the government issued a code of ethics for the executive-branch employees, including administrative enforcement mechanisms, and it established an Ethics Tribunal in 2006. El Salvador ratified the Inter-American Convention Against Corruption in 1998.

Corruption remains a problem. El Salvador went down in Transparency International's Corruption Perceptions Index from 73rd out of 178 countries in 2010 to 80th of 182 countries in 2011. The Legislative Assembly approved a Law on Transparency on March 30, 2011 in an effort to combat corruption and increase government accountability. The Law entered into force on May 8, 2011 but will not be fully implemented until May 2012 when all supporting regulations had been approved. There have been some recent corruption scandals: one involved a member of the Legislative Assembly and another involved senior officials of the Salvadoran water authority, including its former president. There have also been credible complaints of judicial corruption, while another ongoing corruption scandal involves municipal governments and waste disposal contracting. There is an active, free press that reports on corruption.

Bilateral Investment Agreements and Free Trade Agreements

The United States - Central America – Dominican Republic Free Trade Agreement (CAFTA-DR) entered into force for the United States and El Salvador on March 1, 2006. For Honduras and Nicaragua it entered into force on April 1, 2006, for Guatemala on July 1, 2006, for the Dominican Republic on March 1, 2007, and for Costa Rica on January 1, 2009. CAFTA-DR's investment chapter provides protection to most categories of investment, including enterprises, debt, concessions, contract, and intellectual property. U.S. investors enjoy, in almost all circumstances, the right to establish, acquire, and operate investments in El Salvador on an equal footing with local investors. Among the rights afforded to U.S. investors are due process protection and the right to receive a fair market value for property in the event of an expropriation. Investor rights are protected under CAFTA-DR by an effective, impartial procedure for dispute settlement that is fully transparent and open to the public. On January 1, 2010, a new alcohol tax entered into force in El Salvador. U.S. industry has voiced concerns that the new tax discriminates against imported alcohol, in violation of El Salvador’s CAFTA-DR and WTO obligations. The Government of El Salvador has not officially confirmed its position on whether the CAFTA-DR is a multilateral agreement versus a bilateral agreement with the United States. In addition, U.S. firms have raised concerns that El Salvador may not be adhering to its CAFTA-DR obligations regarding import treatment of goods from free trade zones in other Central American countries which appear to meet CAFTA-DR rules of origin requirements.

El Salvador also signed free trade agreements with Mexico, Dominican Republic, Chile, Panama, Colombia, and Taiwan. All of them have entered into force with the exemption of the FTA with Colombia which is expected to enter soon into force. El Salvador is also negotiating trade agreements with Canada and Peru; these agreements will contain investment provisions. El Salvador, with the other Central American countries, signed an Association Agreement with the European Union that includes the establishment of a Free Trade Area. The legal text of the agreement is still under revision by the European Union. When the review is complete, it is expected to be ratified by the Legislative Assembly and enter into force in 2012. The five Central American Common Market countries, which include El Salvador, have an investment treaty among themselves. In addition, the free trade agreements that El Salvador has with Mexico, Chile, and Panama include investment provisions. In September 2011, the GOES signed a Partial Scope Agreement (PSA) with Cuba.

OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) insures against currency inconvertibility, expropriation, and civil strife and can provide corporate project financing and special financing oriented to small business. OPIC has a bilateral agreement with El Salvador that requires the Government of El Salvador to approve all insurance applications. A new agreement is being negotiated that will eliminate this requirement. In 2006, OPIC signed an agreement with the National Investment Promotion Agency of El Salvador (PROESA) to improve outreach to U.S. small business investors in El Salvador. Because El Salvador uses the U.S. dollar, full inconvertibility insurance may be unnecessary, but investors do insure against inability to transfer funds. El Salvador is a member of the Multilateral Investment Guarantee Agency (MIGA).

Labor

El Salvador has a labor force of approximately 2.6 million in 2010. Salvadoran labor is perceived as hard working and receptive to training and advanced study. The general educational level is low, and the skilled labor pool is shallow, which may pose problems for investors needing skilled, educated labor. According to many large employers, there is a lack of middle management-level talent, which sometimes results in foreigners being brought in to perform such tasks. Employers do not report labor-related difficulties in incorporating technology into their workplaces.

The Constitution guarantees the right of employees in the private sector to organize into associations and unions. Employers are free to hire union or non-union labor. Closed shops are illegal. Labor law is generally in accordance with internationally recognized standards, but is not enforced consistently by government authorities. In 2011, several businesses have expressed concerns about the government's application of labor laws, alleging a disregard of established legal procedures.

Foreign Trade Zones/Free Trade Zones

As of January 2012, there were 13 free zones operating in the country, 12 of which are occupied exclusively by maquila textile operations. These firms, mostly owned by Salvadoran, U.S., Taiwanese, and Korean investors, employ approximately 71,500 people. The section on Performance Requirements and Incentives outlines the benefits available to investors in these zones.

Foreign Direct Investment Statistics

Accumulated Foreign Investment by Country of Origin (Millions of Dollars)

 

 

2009

2010

1 United States

2,448.70

2,553.00

2 Panama

2,028.4

2,113.50

3 Mexico

821.3

775.5

4 Virgin Islands

498.5

504.3

5 Luxembourg

256.7

248.4

6 Spain

285.7

242.7

7 Canada

213.2

214.6

8 Guatemala

151.9

212.9

9 Bahamas

175.3

171.4

10 Holland

149.5

151.3

11 Italy

113.1

114

12 Germany

94.1

99.8

13 Singapore

90.1

88.7

14 Costa Rica

68.7

63.9

15 Colombia

37.6

41.8

16 Taiwan

36.3

36.2

17 Bermudas

37.7

30.6

18 Japan

30.3

30.3

19 Peru

5.8

25.6

20 France

22

24.5

21 South Korea

18.4

18.3

22 Cayman Islands

56.5

15.8

23 Switzerland

13.5

14.2

24 New Zeeland

11.2

12.4

25 Belgian

7.8

10.6

26 Brazil

10.2

9.8

27 Honduras

13.7

8.8

28 Sweden

0.4

8.4

29 Cambodia

2.9

3.8

30 Check Republic

0.1

2.5

31 Chile

2.1

2.4

32 Nicaragua

-13.3

-13.3

33 Other countries

-6.3

-18.2

34 Totals

7,682.00

7,818.40

Source: Central Reserve Bank of El Salvador

Annual Foreign Investment Flows in Selected Sectors (Millions of Dollars)

Sector

2009

2010

Industry

2.7

2.7

Retail

43.5

44.3

Services

1,762.3

1,701.0

Construction

1,029.2

1,090.2

Communications

19.2

21.1

Electricity

610.4

662.7

Agriculture and Fishing

11.3

21.8

Mining

1,279.4

1,249.1

Financial

2,756.7

2,796.2

Maquila

167.2

229.2

Total:

7,682.0

7,818.4

Source: Central Reserve Bank of El Salvador

Foreign Direct Investment as a Percentage of GDP (Millions of Dollars)

 

2009

2010

GDP

21,100.50

21,214.70

FDI stock

7,682.00

7,818.40

FDI flows

n/a

136.40

FDI stock as a percentage of GDP

36.41%

36.85%

FDI flows as a percentage of GDP

n/a

0.64%

Source: Central Reserve Bank of El Salvador

Partial List of Major Foreign Investors

AES Corporation (USA) -- Electricity distribution
Chartis (USA) -- Insurance
Alba Petroleos (Venezuela) -- Gas stations and refinery
Avery Dennison (USA) -- Labels for clothing
Bancolombia (Colombia) -- Banking
Bayer de El Salvador (German) -- Pharmaceutical processing plant, fertilizer plant
Decameron International (Colombia) -- Tourism/hotels
DELSUR (Colombia) -- Electricity distribution
HSBC (U.K.) -- Banking
Citigroup (USA) -- Banking
Scotiabank (Canada) -- Banking
Digicel (Caribbean) -- Cellular telephone service
Duke Energy (USA) -- Thermal electricity generation plants
Elf (France) -- Propane gas
Cenergica (Israel) -- Owner/operator of the Nejapa power/generating plant
EMEL S.A. (Chilean/USA) -- Electricity distribution
Esso Standard Oil (USA) -- Gas stations/small refinery at Acajutla
America Movil (Mexico) -- Fixed and wireless telephone, retail
Fruit of the Loom (USA) -- Apparel assembly
Grupo Calvo (Spain) -- Tuna fishing/processing
Hanes Brand (USA) -- Apparel assembly
Holcim (Swiss) -- Cement
Intelfon (Panama/El Salvador) -- Telecommunications
International Paper (USA) -- Packaging
Lacoste (France) -- Textiles/apparel
Kimberly Clark de C.A. (USA) -- Distribution facility
Maseca (Mexico) -- Corn Milling
Max (Guatemala) -- Appliance retailing
Petenatti (Brazil) -- Textiles PriceSmart (USA) -- Member discount store and supermarket
SABMiller (South Africa) -- Beer, sodas, and other beverages
Sara Lee Knit Products (USA) -- Apparel assembly
Sears (U.S. franchise acquired by a Mexican)
Unopetrol El Salvador (Honduras.) -- Oil refinery (with Esso); Service stations/grocery marts throughout the country.
Stream (USA) -- Customer service/sales call center
Sykes (USA) -- Customer service/sales call center
Telefonica de Espana (Spain) -- Cellular telephones
TIGO (USA/Luxembourg) -- Cellular telephones, Cable television, telephone and Internet
Texaco Caribbean (USA) -- Fuel storage and lubricant blending plant in Acajutla, and service station/grocery markets.
Unifi (USA) --Yarn
Unisola-Unilever (UK) -- Food products
WalMart (United States) -- Supermarkets

 

Web Resources

Foreign Direct Investment Statistics, Central Bank: http://www.bcr.gob.sv/
Investment Promotion Agency, PROESA: http://www.proesa.com.sv/
Country Investment Climate and Economic Outlook, Think Tank NGO, FUSADES: http://www.fusades.com.sv/i_index.html
Investment Office, Ministry of Economy: http://www.minec.gob.sv/oni/index.php
Economic Commission for Latin America and the Caribbean (CEPAL): http://www.eclac.cl
fDiintelligence: http://www.fDiintelligence.com
Regulatory Agencies: http://www.ssf.gob.sv/
Investment Financing: http://www.opic.gov/
Mediation Center, Chamber of Commerce – El Salvador: http://www.mediacionyarbitraje.com.sv/
Intellectual Property Rights, Office of Registration: http://www.cnr.gob.sv/
Trade Agreements, Ministry of Economy: http://www.minec.gob.sv/
CAFTA, Ministry of Economy: http://www.cafta.gob.sv/
Trade Agreements, Organization of American States: http://www.sice.oas.org/trades.asp#MCCA/
http://www.sice.oas.org/ctyindex/ESVpg.asp#AT/
Labor regulations, Ministry of Labor: http://www.mtps.gob.sv
Regional Labor Information: http://www.laboral.sieca.org.gt/



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