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¶1. Per reftel, following is Embassy San Salvador’s submission for
the 2009 Investment Climate Statement.

Openness to Foreign Investment
——————————

¶2. The Government of El Salvador views foreign investment as crucial
for economic growth and development and has taken numerous steps in
recent years to improve the investment climate. However, inefficient
and inconsistent commercial law enforcement is a weak spot in El
Salvador’s otherwise positive record for encouraging investment. The
free trade agreement among Central American countries, the Dominican
Republic, and the United States (CAFTA-DR) includes an investment
chapter and other chapters that promise to strengthen investment
dispute resolution in El Salvador.
¶3. In 2007, the Ministry of Economy estimated that foreigners
invested $1.1 billion in El Salvador in sectors such as finance,
retail, hotels, and beverages. The government has announced 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 97% complete in 2008. Disputes over what percent of the
port should remain under government ownership, however, have delayed
the port concession. Salvadoran Central Reserve Bank statistics show
the foreign investment stock has steadily increased, reaching $6.3
billion by June 2008, up from $1.97 billion in 2000. Companies from
many countries–including the United States, Panama, Mexico, Spain,
Canada, Costa Rica, Guatemala, Germany, and Italy–have invested in
El Salvador.
¶4. The principal statutes governing foreign investment in El
Salvador are the Investment Law, Export Reactivation Law, Free Trade
Zones Law, and 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, Competition Law, and Tourism Law. Additional
information on each of these laws is available throughout this
chapter.
¶5. 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 the World Bank estimates takes 17 days.
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 exploitation.
¶6. The government’s trade and investment promotion agencies are
organized under the Investment and Exports Promotion National
Commission (CONADEI), headed by the Vice President. The National
Investment Promotion Agency (PROESA) organizes investment promotion
tours overseas and provides information and facilitation services in
El Salvador. The National Agency for Export Promotion (EXPORTA)
focuses on identifying niche markets for Salvadoran exports,
especially nontraditional goods, and provides trade capacity
building to new exporters.
¶7. The government launched its 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.
¶8. 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. investor 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 private-public Italian
joint venture geothermal power generation company; 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, two U.S. and
British companies now provide all distribution services for the
country. The Transaction Unit (UT), owned by market participants,
operates the wholesale energy market. Two U.S.-owned companies have
delayed construction of new generation facilities, which may lead to
problems with energy supply.
¶9. 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

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owns 94 percent of what was 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. On June 12, the National Assembly passed a law to
establish a four-cent-per-minute tax on incoming international phone
calls terminated in El Salvador (though some provisions may exempt
phone calls from Central America),. U.S. phone companies are
contesting this tax alleging it violates local law and several
international commitments, including CAFTA-DR.
¶10. 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.

Conversion and Transfer Policies
——————————–

¶11. 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.
¶12. 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. El Salvador has long had a
freely convertible currency and since 1994 the colon traded at 8.75
per dollar. The Monetary Integration law fixed the colon at that
rate. While prices are sometimes listed in both currencies, the
colon is not used. 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 $3.7
billion in 2007, up from $3.3 billion the year before. As of the end
of 2008, the Central Reserve Bank reported international reserves of
$2.2 billion.

Expropriation and Compensation
——————————

¶13. 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 of the law is intended
to prevent energy supply disruptions. In December 2008, the U.S.
subsidiary of a Canadian mining company filed a notice of intent to
file a CAFTA-DR complaint under the indirect expropriation
provision. The parties will have 90 days to resolve the matter
before more formal dispute resolution proceedings will commence.

Dispute Settlement
——————

¶14. While foreign investors can seek redress of commercial disputes
with Salvadoran companies through El Salvador’s courts, investors
have found that seeking resolution of 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 should enter into force on January 1, 2010. 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.
¶15. El Salvador’s commercial law is based on the Commercial Code and

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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.
¶16. 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.
¶17. The first case of commercial arbitration in El Salvador involved
a U.S.-owned firm and the para-statal 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.

Performance Requirements and Incentives
—————————————

¶18. 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 export
incentives. Exports of goods and services are levied zero value
added tax.
¶19. 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 maquila
clothing assembly plants. A Salvadoran partner is not needed to
operate in a free zone, and some maquila operations are completely
foreign-owned.
¶20. The 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 very
similar.
¶21. 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.
¶22. 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.
¶23. Under the 1990 Export Reactivation Law, firms may apply for tax
rebates of 6 percent of the FOB value of manufactured or processed
exports shipped outside the Central American Common Market area.
These firms need not be located in the free zones or be exporting
100 percent of their output. Exports of coffee, sugar, and cotton
can qualify for this rebate if they have undergone a transformation
that adds at least 30 percent to their original value. Firms that
qualify for these tax rebates are also eligible for duty exemptions
for imported raw materials and intermediate goods used in the
assembly of the products to be exported. El Salvador extended the
period to eliminate this WTO-inconsistent measure until the end of
2009.
¶24. The International Services Law, approved in 2007, establishes

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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.
¶25. 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.
¶26. Service firms operating under the existing Free Zones law are
also covered. However, if the services are provided to the national
market, they cannot receive the benefits of the Services Law.
¶27. 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
¶28. Beneficiaries must invest at least $150,000 during the first
year of operations, including working capital and fixed assets, must
hire no fewer than ten 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.
¶29. 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 $50,000.00 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.
¶30. 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.
¶31. 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.
¶32. U.S. companies have complained of inconsistent enforcement of
customs regulations and variable customs valuations. A fast-track
system for shipments via express courier companies has not been
fully implemented.

Right to Private Ownership and Establishment
——————————————–

¶33. 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
—————————–

¶34. Private property, both movable and real estate, is recognized
and protected in El Salvador. Companies that plan to buy land or

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other real estate are advised to conduct a thorough search of the
property’s title prior to purchase.
¶35. 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.
¶36. The Attorney General’s office and the National Civilian Police
enforce these rights by conducting raids against distributors and
manufactures 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-oficio, 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.
¶37. There has been no progress in a significant intellectual
property and related contractual dispute involving trademark and
copyright infringement by an ex-franchisee. In December 2005, an
appeals court ignored important evidence to rule in favor of the
ex-franchisee on a contractual issue, ordering the U.S. company to
pay $24 million in losses and damages. The U.S. company has appealed
the decision to the Supreme Court. Judiciary and regulatory
enforcement continue to be the weakest pillars of intellectual
property protection in El Salvador.
¶38. 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
———————————

¶39. The laws and regulations of El Salvador are relatively
transparent and generally foster competition. 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.
¶40. 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. SIGET’s processes and procedures have
been criticized by private electricity companies as arbitrary and
populist.
¶41. 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 law allows
the regulator, SIGET, to develop a cost-based pricing model for the
electricity sector to replace the existing competition-based system.
The new system would allow the adoption of long-term contracts and
may alleviate current market distorting regulations and intervention
by the regulator, SIGET, and politicized management of hydro
resources by the state-owned hydropower generator CEL. The United
States has raised concern that uncertainty regarding the impact of
re-regulation and the regulator’s seemingly arbitrary
decision-making processes are deterrents to U.S. electric energy
investments in El Salvador. The government’s decision to freeze
electricity rates and increase subsidies through mid-2009 has
increased the likelihood that regulatory reforms will be delayed.
Energy sector companies have warned that the rising subsidies are
eroding the financial stability of the power sector and discouraging
needed investment in new generation capacity. Electricity companies
are pressing the government to reduce the subsidies and schedule
more frequent payments. Two U.S. manufacturers have complained that
the state-owned geothermal plant was not honoring the electricity
rates stated in their supply contracts. One of these cases has been
resolved.
¶42. In December 2007, distribution companies requested an injunction
from the Supreme Court to block SIGET from applying the new rates
which they say will reduce their revenues by 30% and damage the
energy sector. They argue that SIGET violated their due process

SAN SALVAD 00000047 006.2 OF 009

rights and committed multiple technical and legal errors to
underestimate their assets and costs during the rate review process.
The companies reached a settlement with the government in March
2008 to limit the rate cuts, but not before ratings agencies
downgraded the credit rating of both distribution companies citing
increased risk of political interference in the regulatory process.
¶43. 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
illegal, 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 will be illegal.
The law created an autonomous Superintendent of Competition
responsible for enforcing the law, which took effect in January
2006.
¶44. 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 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.

Efficient Capital Markets and Portfolio Investment
—————— ——————————-

¶45. The Superintendent of the Financial System supervises banks and
nonbank 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.
¶46. 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 2008 were $12.8 billion.
¶47. 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 a bank to 100 million
colones ($11.4 million), and sharply limited bank lending to
shareholders and directors.
¶48. 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.
¶49. 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.
¶50. 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. The exchange has averaged daily
volumes of about $30 million. Government regulated private pension
funds, Salvadoran insurance companies, and local banks are the
largest buyers on the Salvadoran securities exchange.

Political Violence
——————

¶51. 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. There
has been no political violence aimed at foreign investors, their

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businesses, or their property. However, general levels of crime,
including gang activity and extortion, are high and a major concern
to the business community.

Corruption
———-

¶52. 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.
¶53. While improvements have been made, corruption remains a problem.
When it occurs, corruption is usually at lower governmental levels.
However, 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 about
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
————————– ——————————

¶54. 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.
¶55. El Salvador also negotiated trade agreements with Colombia and
Taiwan and is negotiating a trade agreement with Canada; these
agreements will contain investment provisions. El Salvador, with the
other Central American countries, is also negotiating an Association
Agreement with the European Union that will include the
establishment of a Free Trade Area. 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.

OPIC and Other Investment Insurance Programs
——————————————–

¶56. OPIC insures against currency inconvertibility, expropriation,
and civil strife and can also provide corporate project financing
and special financing oriented to small business. The Overseas
Private Investment Corporation (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
—–

¶57. El Salvador has a labor force of approximately 1.72 million.
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.
¶58. 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

SAN SALVAD 00000047 008.2 OF 009

standards, but is not enforced consistently by government
authorities. The International Labor Organization’s Committee on
Freedom of Association has expressed concern in a number of cases
about the government’s failure to apply the protections of workers
rights to organize and bargain collectively, as required by
International Labor Organization conventions.

Foreign Trade Zones/Free Trade Zones
————————————-

¶59. As of December 2007, there were 13 free zones operating in the
country. Maquila textile operations constitute the businesses of 12
of the free zones. These firms, mostly owned by Salvadoran, U.S.,
Taiwanese, and Korean investors, employ approximately 58,000 people.
The section on Performance Requirements and Incentives outlines the
benefits available to investors in these zones.

Foreign Direct Investment Statistics
————————————

¶60. Accumulated Foreign Investment by Country of Origin (Millions of
Dollars)
Country 2004 2005 2006 2007
——- —- —- —- —-
United States 1,026.7 1,358.9 1,371.8 1,870.9
Panama 102.5 144.5 212.3 1,053.5
Mexico 614.7 647.8 655.0 714.4
Virgin Islands 56.2 356.2 355.9 356.6
Spain 195.0 195.2 195.3 205.4
Canada 56.0 130.3 145.3 153.6
Costa Rica 68.8 67.4 70.1 104.2
Guatemala 60.1 70.4 93.4 93.6
Germany 84.9 89.4 92.2 93.6
Bahamas 67.8 68.6 74.9 75.2
Italy 26.6 26.6 74.0 74.0
Taiwan 57.3 58.6 58.3 58.3
Singapore 32.5 36.5 37.3 45.0
Netherlands 39.1 55.0 56.3 42.0
Nicaragua 20.4 21.3 27.8 35.5
Korea, South 23.5 26.0 22.0 30.0
Honduras 21.0 21.6 21.8 22.0
Japan 14.2 14.2 14.0 18.7
Switzerland 15.6 16.8 16.8 16.8
Aruba 15.0 15.0 15.0 15.0
Brazil 0.0 0.0 4.3 13.7
Bermuda 11.8 12.3 13.3 13.3
England 7.4 8.2 9.7 12.7
France 5.8 5.8 6.0 4.5
Israel 2.3 1.0 1.5 2.5
Peru 22.3 22.3 22.3 1.8
Chile 0.7 0.3 24.8 0.8
Ecuador 9.0 9.0 9.0 0.0
Venezuela 309.5 0.0 0.0 0.0
Other 29.6 29.6 34.4 52.2
Total: 2,996.1 3,508.1 3,735.0
5,182.5Source: Central Reserve Bank of El Salvador.

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

Sector 2004 2005 2006 2007
—— —- —- —- —-

Industry 40.8 316.6 16.7 21.4
Retail 39.1 26.7 51.3 41.0
Services -0.1 14.4 11.9 40.1
Construction 0.0 0.0 0.0 -0.1
Communications 334.7 47.8 0.1 66.7
Electricity -48.0 0.0 47.4 0.0
Agriculture and
griculture and
Fishing 21.8 -1.5 0.6 1.9
Mining 0.0 1.5 28.0 8.3
Financial -13.0 102.3 71.5 1,167.5
Maquila 31.4 4.2 -0.4 100.6
Total: 406.9 512.0 226.9 1,447.5

Source: Central Reserve Bank of El Salvador.

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

2004 2005 2006 2007
—- —- —- —-

GDP 15,798.3 17,070.2 18,653.6 20,372.6
FDI stock 2,996.1 3,508.1 3,735.0 5,182.5
FDI flows 406.9 512.0 226.9 1,447.5
FDI stock as
a percentage
of GDP 19.0 20.6 20.0 25.4
FDI flows as
a percentage

SAN SALVAD 00000047 009.2 OF 009

of GDP 2.6 3.0 1.2 7.1

Source: Central Reserve Bank of El Salvador.
¶63. Partial List of Major Foreign Investors
AES Corporation (USA) — Electricity distribution
AIG (USA) — Insurance
AMNET (USA)- Cable television, telephone and Internet
Avery Dennison (USA) — Labels for clothing
Bayer de El Salvador (German) — Pharmaceutical processing plant,
fertilizer plant
Decameron International (Colombia) – Tourism/hotels
DELSUR (USA)-Electricity distribution
Citigroup (USA) – Banking
Scotiabank (Canada) – Banking
Digicel (Caribbean) — Cellular telephone service
Dell Computer (USA) — Customer service/sales call center
Duke Energy (USA) — Thermal electricity generation plants
Elf (France) — Propane gas
Globaleq (USA) — 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
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
Shell El Salvador (Netherlands/U.K.) — Oil refinery (with Esso);
Service stations/grocery marts throughout the country.
Telefonica de Espana (Spain) — Cellular telephones
Telemovil (USA/Luxembourg) — Cellular telephones
Texaco Caribbean (USA) — Fuel storage and lubricant blending plant
in Acajutla, and service station/grocery markets.
Unisola-Unilever (UK) — Food products
WalMart (United States) — Supermarkets
¶63. Web Resources
Foreign Direct Investment Statistics, Central Bank:
http://
www.bcr.gob.sv/estadisticas/series_estadistic as.html
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.html
Capital Market Regulatory Agencies: http://www.superval.gob.sv/ and
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/proi.asp?n=0
Trade Agreements, Ministry of Economy:
http://www.minec.gob.sv/default.asp?id=31&mnu =31/
CAFTA, Ministry of Economy:
http://www.minec.gob.sv/default.asp?id=70&mnu =70/
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/
Infrastructure Map (Ports, Airports, Highways, Customs and Free
Trade Zones): http://www.proesa.com.sv/map.asp
Monetary Integration:
http://www.bcr.gob.sv/ingles/integracion/ley. html