Friday, March 10, 2017

Millennium Challenge funds in El Salvador

In September 2014, the US approved a $277 million aid program to El Salvador through the Millennium Challenge Corporation.  The program is referred to as FOMILLENIO II.    Two and a half years later, how is that money being used?

According to the FOMILLENIO II website, "The aim of the program is to improve the investment climate in El Salvador for economic growth and poverty reduction."   The program has a total budget of $365.2 million, of which $277 million is an investment made by the US government through the Millennium Challenge Corporation and $88.2 million comes from the Salvadoran Government.

The components of the program include:

Logistical infrastructure.    This includes improvement of the southern coastal highway from the airport to the city of Zacatecoluca as well as improvements at the border crossing to Honduras at El Amatillo in eastern El Salvador.

Human Capital.    This project has a $100.2 million fund available over five years, with a stated goal "to improve education quality and align it with the skills required by the labor market in order to increase the productivity of El Salvador’s workforce."  The Human Capital project includes both assistance to the Ministry of Education and investments in improving 344 schools and vocational education.

Investment Climate.    This section of the program includes (a) regulatory reform and (b) the El Salvador Investment Challenge, a  $75 million fund to provide public investment during the 5 year term of FOMILENIO II.   Essentially, businesses are competing to propose projects which will include parallel investment from the fund in public goods or services to make the project feasible and to generate other public benefits.

The FOMILENIO II website describes the investment challenge as intended to:
(i) Leverage private investment projects within the internationally- traded goods and services sector, by providing certain public and quasi-public goods and services which are essential for their profitability and
(ii) Provide goods and services such as road infrastructure, electric energy, sanitation, and workforce training, among others, which will not only contribute to the competitiveness of the investing private sector, but will also generate social benefits for third parties, especially the communities around each project’s neighboring areas. 
So, for example, a business might commit to investing $1 million to build a factory which will employ 500 people, but can only do so if there is an improvement in the water system of a community.   The improvement to the water system might be something funded  by the $75 million available for parallel investments in the investment challenge.

As of last month, none of the proposed projects yet had a commitment from the Fund to proceed forward.

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In El Salvador and elsewhere I have heard different comments about the FOMILENIO II program.  A common refrain is that the program is designed to facilitate mega-tourist-resort projects along the Paciifc coast.    I don't see anything in this program which currently points towards that end.

I have also heard a belief that FOMILENIO II is a program that is focused exclusively on the coastal area.    While there are aspects of the program which are focused in that way, others are not.   There are 344 schools in the coastal area which will be benefited.   The 26 kilometer stretch of highway improvement is in the coastal region from the airport to Zacatecoluca.   But the investment challenge projects can be anywhere in the country, and programs of technical assistance to the government are intended to help the country as a whole.

Others will automatically reject these projects because they are sponsored by the US (AKA the "evil empire" or the "Great Satan"), or because the US puts strings on how the money is spent (in a country with a significant problem with corruption).

To be sure, this is a program based on the proposition that aiding business development is an effective means of poverty reduction.  That is a debatable proposition.   Nor is this a program focused on micro-businesses.   Instead the program has a preference for developing businesses which can produce goods and services for the export sector.  

The export focus can be seen in the funds going to improve the Honduras border crossing.  The El Salvador Investment Challenge calls for proposers "willing to invest in a new project or expand an existing one belonging to the internationally- traded goods and services sector, meaning, good or services which may be internationally traded."   Yet a good argument can be made that El Salvador might be better suited to developing business models which help it reduce its dependence on imported goods and which focus on domestic markets.
 
Civil society groups need to seek input and participation in the process for the ongoing implementation of these projects.   They must insist that promises from FOMILENIO II about attention to environmental concerns, labor rights, gender equity and citizen participation are fulfilled. They should seek mechanisms to enforce promises made by business which receive the investment challenge funds and to be able to do so well after the program comes to an end in 2020.

With the Trump administration in office, this may be the last batch of foreign aid that El Salvador sees from the US for a long time.




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