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2013 Investment Climate Statement - El Salvador


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013
Report
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Openness to, and Restrictions Upon, Foreign Investment

El Salvador is open to and encourages foreign investment and is currently taking steps to improve the nation’s investment climate. Foreign direct investment (FDI) in El Salvador was forecasted to reach approximately $258 million in 2012 (according to the Economic Commission for Latin America and the Caribbean – ECLAC), a 41 percent decline from $441 million in 2011. Meanwhile, El Salvador’s regional neighbors have experienced increasing levels of FDI inflows, attracting on average more than $1.0 billion per country in 2012.

Inconsistent and burdensome commercial regulation, a sometimes ineffective judicial system, and widespread violent crime encumber El Salvador’s investment climate. CAFTA-DR, the free trade agreement among Central American countries, the Dominican Republic, and the United States, 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 initiated the Partnership for Growth (PFG), a new cooperative development model that aligns complimentary commitments by both partner governments. November 2012 marked the first year of PFG implementation, and the Partnership has taken steps to foster a more favorable environment for business and investment, and improve human capital and infrastructure. For more information on PFG, access the link on the Embassy’s website at http://sansalvador.usembassy.gov/.

In October 2012, the El Salvadoran government presented to the National Assembly a package of legislation to promote investment and facilitate commerce, including a new Contract Stability Law and Electronic Signature Law, and updates to the existing Free Trade Zone Law and International Services Law. If approved in the Assembly, the Contract Stability Law would provide greater investor assurances across a variety of sectors on issues surrounding taxes, customs and immigration, and repatriation of earnings. Proposed updates to the Free Trade Zone Law would extend many of the current law’s investment incentives while establishing additional investment and employment criteria to comply with World Trade Organization (WTO) commitments. Updates to the International Services Law would expand the scope of the service industries covered under the current legislation.

A new Public-Private Partnership Law has been pending approval in the National Assembly since January 2012. The government is actively supporting its approval and has stated publicly throughout 2012 that the country’s future development, particularly in infrastructure, depends on public-private partnerships.

The existing 1999 Investment Law grants equal treatment to foreign and domestic investors. With the exception of small businesses (ten 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 ten or fewer employees must present plans to increase employment to the National Investment Office (ONI) of the Ministry of Economy. The Investment Law also provides that underground resources (minerals) belong to the state. The state may grant concessions for their extraction, but there have been no new permits for mineral extraction in recent years. Per the constitution, foreigners are forbidden from acquiring rural property unless it is used for industrial purposes.

Additional current statues governing foreign investment in El Salvador include the Export Reactivation Law, Free Trade Zone Law, and the 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 the Tourism Law.

FDI into El Salvador originates from across the globe, including the United States, Panama, Mexico, Spain, Canada, Costa Rica, Guatemala, Germany, and Italy, and targets a variety of sectors of the economy.

Energy: El Salvador is currently seeking to expand its electricity generation capacity by attracting investment to support 350 megawatts worth of long-term power purchase agreements. The auction is expected to bring in up to $1 billion and conclude with a contract awarded by the end of 2013. A lack of recent investment to build additional capacity over the last several years has driven electricity prices up.

Media and Telecommunications: Privatization and foreign investment have helped to modernize Salvadoran media and 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. There has been extensive growth in the cellular phone industry. In 2012, Mexican-owned America Movil attempted to purchase one of the five major service providers, but abandoned its bid after the Salvadoran anti-trust authority required it give up some of its existing spectrum. Additionally, El Salvador is making preliminary plans to switch to digital television.

Aeronautics: In December 2012, El Salvador hosted an international aeronautics forum to promote itself as a cluster for aeronautics and transportation logistics in the region. El Salvador is already a hub for Avianca-Taca, a major Central American airline, and home to Aeroman, a commercial aircraft maintenance, repair and overhaul facility. The government is also developing plans to modernize and expand El Salvador’s international airport.

Textiles and Apparel: El Salvador’s free trade zones host many international textile and apparel firms, including Fruit of the Loom and Hanesbrands. A revision to the free trade zone regime in El Salvador, currently under consideration in the Legislative Assembly, is expected to support continued investment in the sector.

Banking: Financial and banking services in El Salvador are provided by a range of institutions. Ten private sector banks (non-state owned) account for 87 percent of the industry’s loan portfolio, two state-owned banks hold six percent, and seven cooperatives and savings and loans hold the remaining seven percent.

The chart below does not include the Salvadoran cooperative and savings and loans:

Ranking (based on outstanding loans)

Banking Institution

Ownership

1

Banco Agrícola, S.A.

Private, Colombian

2

Scotiabank El Salvador, S.A.

Private, Canadian

3

Banco Davivienda Salvadoreño, S. A.

Private, Colombian

4

Banco Citibank de El Salvador, S.A.

Private, United States

5

Banco de América Central, S.A.

Private, Colombian

6

Banco Promérica, S.A.

Private, Salvadoran

7

Banco Hipotecario de El Salvador, S.A.

State-owned, Salvadoran

8

Banco G&T Continental El Salvador, S.A.

Private, Guatemalan

9

Banco Procredit, S.A.

Private, Salvadoran

10

Banco de Fomento Agropecuario

State-owned, Salvadoran

11

Banco Industrial El Salvador, S.A.

Private, Salvadoran

12

Banco Azteca El Salvador, S.A.

Private, Mexican

Services: The call center industry has experienced strong growth in El Salvador over the last several years. The industry employs 13,000 Salvadorans; 1,750 jobs were created during 2012. Currently, five of the country’s top 25 employers are call centers. The government is also actively promoting other service sectors such as software design and animation, architectural design, and medical tourism.

Selected Indicators from reputable third party sources:

(MCC refers to the Millennium Challenge Corporation)

Measure

Year

Ranking / Score

WEF Global Competitiveness

2012

101 out of 144

Transparency Int’l Corruption Index

2012

83 out of 174

Heritage Foundation’s Economic Freedom index

2013

53 out of 177

World Bank’s Doing Business Report

2012

113 out of 185

MCC Government Effectiveness

2013

78%

MCC Rule of Law

2013

28%

MCC Control of Corruption

2013

81%

MCC Fiscal Policy

2013

33%

MCC Trade Policy

2013

69%

MCC Regulatory Quality

2013

97%

MCC Business Start-Up

2013

25%

MCC Land Rights and Access

2013

50%

MCC Natural Resource Protection

2013

25%

MCC Access to Credit

2013

78%

MCC Inflation

2013

76%

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 allows unrestricted remittance of royalties and fees from the use of foreign patents, trademarks, technical assistance, and other services. Tax reforms introduced in 2011, however, levy a five percent tax on national or foreign shareholders’ profits. Moreover, shareholders domiciled in a state, country or territory with low or no taxes or that is considered a tax haven, will instead be subject to a tax of twenty-five percent.

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.

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 Pacific Rim, a Canadian mining company, filed an international arbitration proceeding against the El Salvadoran government alleging various violations of the obligations in Chapter Ten of the CAFTA-DR. Pacific Rim alleges that the El Salvadoran government wrongfully refused to grant environmental permits for its mineral exploitation projects after it had spent $75 million in exploration costs. In June 2012, the CAFTA-DR claims were dismissed because the International Center for Settlement of Investment Disputes (ICSID) tribunal determined the U.S. subsidiary lacked substantial business activities in the United States to qualify as a party under CAFTA-DR. The tribunal found, however, that it did have jurisdiction to proceed on an evaluation of the merits of the Canadian corporation’s claims under Salvadoran investment law. The case is ongoing.

Dispute Settlement

While foreign investors can seek redress of commercial disputes through El Salvadoran 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. Local investment and commercial dispute resolution proceedings in El Salvador routinely last many years.

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. In 2008, the Legislative Assembly passed several reforms to the Commercial Code and the Commerce Registry Law. The reforms were 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.

In 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. Investors have complained that the modification dilutes the fundamental efficacy of arbitration as an alternative method of resolving disputes.

Performance Requirements and Incentives

El Salvador's Investment Law does not require investors to meet export targets, transfer technology, incorporate a specific percentage 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 the vast majority of the businesses in export processing zones are clothing assembly plants. The El Salvadoran government recognizes the law violates its WTO obligations and in October of 2012 presented an updated free trade zone law to the Legislative Assembly. It remains pending. A Salvadoran partner is not needed to operate in a free trade 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 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;
  • Exemption 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 six percent of the FOB value of manufactured or processed exports shipped outside the Central American Common Market area. This benefit was eliminated in 2011. However, later that same year the El Salvador government approved new regulations to support producers. The 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. Since 2011, all import and export procedures are handled by the Export and Import Center. More information about the procedures can be found at: https://www.centrex.gob.sv/scx_html/quienes_somos.html.

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 ten years, and real estate transfer taxes. Service park administrators will be exempted from income tax for 15 years and from municipal taxes for ten 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 Trade Zone Law are also covered. However, if the services are provided to the Salvadoran market, they cannot receive the benefits of the International Services Law.

The following services are covered under the International 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, and international financial services

The proposed updates to the International Services Law, submitted to the Legislative Assembly for approval in October of 2012, would expand the service sectors covered by the law. If approved in the Assembly, the updated Law would cover: container repair and maintenance, technological equipment repair, elderly and convalescent care, telemedicine, and cinematography postproduction services.

To qualify for benefits, businesses 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 medical service must also be provided only to patients with insurance.

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 a ten-year income tax exemption and no duties on imports of capital and other goods, subject to some limitations. The investor also benefits from a five-year exemption from land acquisition taxes and a 50 percent break in municipal taxes. 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 regulations require that 90 percent of the labor force at plants and in clerical jobs be Salvadoran. There are fewer nationality restrictions for professional and technical jobs.

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. While advances have been made to implement a fast-track system for shipments via express courier companies, it has not been fully implemented. The clearance procedures for samples which arrive via express shipments is still an ongoing issue.

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.

In March 2012, El Salvador passed a new Medicines Law to regulate the production, sale, and distribution of pharmaceuticals. The law created the National Directorate of Medicines to oversee implementation, including drafting new regulations and establishing price controls for the sale of pharmaceuticals. The new regulations were published by the Directorate in December of 2012.

The Attorney General's office and the National Civilian Police enforce trademark and intellectual 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 McDonald’s. In October 2011, the Salvadoran Supreme Court upheld a previous award of $24 million to the ex-franchisee. McDonald’s continued appeals. In October 2012, the Supreme Court again decided in favor of the ex-franchiser and McDonald’s paid an award, though further legal issues remain.

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 the 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, gasoline, fares on public transport, and medicines. 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 and encouraging new investment. 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 in 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. The electricity subsidy costs the GOES upwards of $150 million annually. Energy sector companies have warned that ever-changing subsidies and the GOES inability to pay the subsidies in a timely manner 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, and 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. The Superintendent of Competition's decisions, particularly against gasoline and energy companies, have resulted in a series of lawsuits filed against the El Salvadoran government.

Efficient Capital Markets and Portfolio Investment

The Superintendent of the Financial System supervises individual and consolidated activities of banks and non-bank financial intermediaries, financial conglomerates, stock market participants, insurance companies, and pension fund administrators. 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.

On December 6 2012, the National Assembly approved a new Usury Law to regulate interest rates on credit cards and loans provided by banking institutions, commercial establishments, stores, credit card issuers, pawnshops, cooperatives, credit unions, and private lenders. Per the legislation, the maximum interest rate for credit cards and loans would be 1.5 and 1.6 times the simple average effective rate established by the Central Bank, respectively. President Funes, however, returned the legislation to the Assembly requesting 1.8 times the effective rate for both credit cards and loans. A final version of the Law must be approved again by the Assembly in order for the Law to enter into force.

El Salvador's banks are among the largest in Central America and many are owned by foreign financial institutions. The banking system is sound and generally well-managed and supervised. The banking system's total assets as of November 2012 totaled $13.2 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. 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 minimum capital reserve requirements, 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 Superintendent 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.

The 1994 Securities Market Law established the present framework for the Salvadoran securities exchange, which opened in 1992. The Salvadoran securities exchange has played an important role in past years in the privatization of state enterprises and more recently in securitizations and facilitating foreign portfolio investment. Stocks, government and private bonds, and other financial instruments are traded on the exchange, which is regulated by the Superintendent of the Financial System.

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.

Between 2009 and 2012, the exchange averaged daily trading volumes of about $8.4 million. Government-regulated private pension funds, Salvadoran insurance companies, and local banks are the largest buyers on the Salvadoran securities exchange.

In 2007, the Legislative Assembly approved a securitization law. There have been a number of transactions for around $10 to 50 million under the securitization law and there are at least two firms authorized to underwrite securitizations.

Competition from State-Owned Enterprises (SOEs)

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. While energy distribution was privatized in 1999, the GOES maintains significant energy production facilities; state-owned Rio Lempa Executive Hydroelectric Commission (CEL) is a significant producer of hydro-electric and geothermal energy. La Geo is a joint venture between CEL and Enel, a private Italian firm, which has exclusive geothermal rights. New investment in La Geo has been stunted by lengthy legal cases between the El Salvadoran government and Enel, which have generally all ruled in favor of Enel. In 2012, the Salvadoran Supreme Court ruled the geothermal concession to La Geo was unconstitutional, creating further uncertainty; the matter has not yet been resolved.

Alba Petroleos, a joint-venture between a consortium of the left-leaning Farabundo Marti National Liberation Front (FMLN) party 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. Alba Petroleos has built and is planning to operate a 75 MW oil-fired electricity plant in the first quarter of 2013. In February 2012, Alba Petroleos launched ALBA Foods El Salvador to promote the development and growth of the domestic agriculture sector. Focusing on basic crops (beans, rice, corn, and sorghum); ALBA Foods also provides technical support and credit to small and medium producers. ALBA Petroleos is also planning to launch ALBA Medicines to produce, distribute and sell low cost medicines. Critics have alleged that the financial records of the ALBA businesses are non-transparent and the firm is indebted to the point of insolvency to its Venezuelan parent company.

Corporate Social Responsibility

The private sector in El Salvador, including several prominent U.S. companies, has embraced the concept of corporate social responsibility (CSR). There are a number of local foundations that promote CSR practices, entrepreneurial values, and philanthropic initiatives. El Salvador 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 areas such as 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

U.S. individuals and firms operating or investing in El Salvador should take the time to become familiar with the relevant anticorruption laws in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel. U.S. companies operating in El Salvador continue to be subject to the U.S. Foreign Corrupt Practices Act.

Corruption can be a challenge to investment in El Salvador. El Salvador ranks 83 out of 174 countries in Transparency International's Corruption Perceptions 2012 Index. El Salvador has laws, regulations and penalties to combat corruption, but their effectiveness is inconsistent. 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.

The Legislative Assembly approved a new Transparency Law in 2011 in an effort to combat corruption and increase government accountability. The law’s intended effectiveness has been partially delayed pending the appointment of commissioners to the Access to Public Information Institute, the newly-created entity responsible for ensuring the law’s implementation.

There have been some recent corruption scandals at the federal, legislative, and municipal levels. There have also been credible complaints of judicial corruption. El Salvador has an active, free press that reports on corruption.

El Salvador is not a signatory to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. El Salvador is a signatory to the UN Anticorruption Convention and the Organization of American States’ (OAS’s) Inter-American Convention Against Corruption.

Bilateral Investment Agreements

CAFTA-DR, the free trade agreement among Central American countries, the Dominican Republic, and the United States entered into force for the United States and El Salvador on March 1, 2006. CAFTA-DR's investment chapter provides protection to most categories of investment, including enterprises, debt, concessions, contract, and intellectual property. Under the agreement, 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.

In 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 El Salvadoran government 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 has free trade agreements with Mexico, Dominican Republic, Chile, Panama, Colombia, and Taiwan. All have entered into force with the exception of the FTA with Colombia which is expected to enter soon into force. El Salvador, jointly with Costa Rica, Guatemala, Honduras, Nicaragua, and Panama, signed an Association Agreement with the European Union that includes the establishment of a Free Trade Area. The agreement includes provision for Central American countries and Panama to get access to a wider range of EU development aid. The agreement was ratified on December 11, 2012 by the European Parliament. Ratification by the Salvadoran Legislative Assembly is pending but it is expected to take place soon and the agreement to enter into force in 2013. The five Central American Common Market countries, which include El Salvador, have an investment treaty among themselves.

The free trade agreements that El Salvador has with Mexico, Chile, and Panama include investment provisions. El Salvador is also negotiating trade agreements with Canada, Peru, and Belize that will contain investment provisions. The El Salvadoran government signed a Partial Scope Agreement (PSA) with Cuba in 2011 and is negotiating another with Ecuador.

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 to small business. OPIC has a bilateral agreement with El Salvador that requires the El Salvadoran government to approve all insurance applications. A new agreement is being negotiated that will eliminate this requirement. In 2006, OPIC signed an agreement with the El Salvador’s National Investment and Exports Promotion Agency (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

In 2012, El Salvador had a labor force of approximately 2.6 million. Salvadoran labor is perceived as hard working and receptive to training and advanced study. That said, 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 the necessity to transplant additional managers from abroad. 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 expressed concerns about the government's application of labor laws, alleging a disregard of established legal procedures.

Foreign Trade Zones/Free Ports

As of December 2012, there were 16 free trade zones operating in El Salvador. They are comprised of more than 200 companies operating in areas such as textiles, clothing, distribution centers, call centers, business process outsourcing, agribusiness, agriculture, electronics, and metallurgy. Owned primarily by Salvadoran, U.S., Taiwanese, and Korean investors, the firms employ approximately 71,500 people. The section above 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)

Country

2010

2011

United States

2,552.6

2,695.4

Panama

2,247.2

2,289.7

Mexico

775.5

822.8

Virgin Islands

493.7

508.7

Luxembourg

95.4

75.5

Spain

242.7

250.8

Canada

214.6

197.6

Guatemala

225.7

248.6

Bahamas

141.7

137.2

Holland

151.3

162.2

Italy

114.0

144.1

Germany

99.8

100.8

Singapore

88.7

92.6

Costa Rica

63.3

133.3

Colombia

41.8

35.1

Taiwan

33.8

15.2

Bermudas

7.9

29.1

Japan

31.5

36.0

Peru

13.6

11.5

France

24.5

25.4

South Korea

18.3

13.6

Cayman Islands

15.8

34.8

Switzerland

14.2

31.3

New Zeeland

12.4

12.4

Belgian

10.6

14.0

Brazil

9.8

12.4

Honduras

8.8

8.8

Sweden

4.7

7.3

Cambodia

3.8

3.8

Czech Republic

2.5

1.7

Chile

2.4

2.6

Nicaragua

(13.3)

(12.5)

Other countries

(18.2)

30.7

Total

7,731.0

8,172.2

Source: Central Reserve Bank of El Salvador

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

Sector

2010

2011

Agricultural

0

0

Mining

0.8

-0.6

Manufacturing Industry

12.9

260.2

Energy

61

50.7

Construction

1.9

0.5

Wholesale and Retail

31.3

92.6

Transportation and Storage

10.5

14.4

Information and Communications

-187.7

49.3

Financial and Insurance Activities

45.3

-30.7

Other Sectors

59.4

4.8

Total

35.4

441.2

Source: Central Reserve Bank of El Salvador

Foreign Direct Investment Stock, Flows and Percentage of GDP (Millions of Dollars)

 

2010

2011

GDP

21,427.9

23,054.1

FDI stock

7,731.0

8,172.2

FDI flows

35.4

441.2

FDI stock as a percentage of GDP

36.1%

35.4%

FDI flows as a percentage of GDP

0.2%

1.9%

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 station, refinery, electricity generation
  • Avery Dennison (USA) – Labeling and packaging
  • Bancolombia (Colombia) -- Banking
  • Bayer de El Salvador (German) -- Pharmaceutical processing, fertilizers
  • Decameron International (Colombia) -- Tourism/hotels
  • DELSUR (Colombia) -- Electricity distribution
  • Banco Davivienda -- formerly HSBC (Colombia) -- 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
  • Trafigura PUMA Energy(Netherlands) -- 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) – Paper production and 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 firm) -- Retail
  • Unopetrol El Salvador (Honduras) -- Oil refinery; Service stations/grocery markets
  • Stream (USA) -- Customer service/sales call center
  • Sykes (USA) -- Customer service/sales call center
  • Telefonica de Espana (Spain) -- Cellular telephone service
  • TIGO (USA/Luxembourg) -- Cellular telephone service, cable television, landline, and internet
  • Texaco Caribbean (USA) -- Fuel storage and lubricant blending, and service station/grocery markets
  • Unifi (USA) --Yarn
  • Unisola-Unilever (UK) -- Consumer products
  • WalMart (United States) -- Supermarkets

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