VZCZCXYZ0032
OO RUEHWEB

DE RUEHSN #1185/01 1662213
ZNR UUUAA ZZH
O 152213Z JUN 07
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6701
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAWJA/DEPT OF JUSTICE WASHINGTON DC

UNCLAS SAN SALVADOR 001185 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN EPET ENRG EAGR EINV ES
SUBJECT: SACA COMPLETES THREE YEARS AND SIDESTEPS FMLN AGAIN 
 
REF: A. 06 SAN SALVADOR 2351 
     ¶B. SAN SALVADOR 131 
     ¶C. SAN SALVADOR 453 
     ¶D. SAN SALVADOR 738 
 
¶1. (U) Summary.  In a June 1 speech to the nation delivered 
at the Legislative Assembly, President Saca marked his third 
anniversary of his presidency.  With his trademark stirring 
oratory he lauded his Administration,s achievements, 
challenged the leftist-opposition party FMLN, and set out an 
ambitious agenda for the future.  Among the numerous 
economic-related proposals he proposed (septel will discuss 
political aspects related to the speech), Saca said the most 
important was the creation of another trust fund to finance 
some $350 million for education and security programs. 
Similar to last year, when he established a trust fund to 
legacy fund pension fund costs (reftel A), the "Education, 
Social Peace and Citizen Security Fund" is being proposed 
because the FMLN refuses to support taking on any additional 
debt for government programs.  As it did with the pension 
trust fund, the FMLN claims the proposed establishment of 
this trust fund is unconstitutional, because a supermajority 
of the Legislature is needed for the government to take on 
additional debt. 
 
¶2. (SBU) Saca also proposed to make the National Registry 
Center and Road Maintenance Fund agency (FOVIAL) autonomous 
government agencies, to allow them to sell bonds 
independently to raise revenue.  On the energy front, he 
proposed reforms to the hydrocarbon law and a new law 
providing fiscal incentives for renewable energy projects, as 
well as reforms to the competition law to increase the amount 
of fines that can be imposed for non-competitive practices in 
the sector.  Saca proposed a new law that provides incentives 
for the service sector and trade zone law, designed to 
address WTO concerns regarding the current free trade zone 
regime, which must be discontinued by the end of 2008.  The 
Administration will also introduce a new investment fund law. 
 While significant progress has been made, the polarization 
between the two major parties will stymie any sustained 
progress in the future.  End Summary. 
 
Impressive Achievements 
----------------------- 
 
¶3. (SBU) Tooting his own horn as much as touting his party,s 
(ARENA) ability to deliver on social and economic programs 
(particularly important in the run up the March 2009 
elections) President Saca addressed the nation at the 
Legislative Assembly on June 1.  Since taking office in June 
2004, economic growth has increased from 1.5% in 2004 to 4.2% 
in 2006 (the highest growth rate in a decade).  The Central 
Bank forecasts an even higher GDP growth rate of 4.5% in 
¶2007. The fiscal reform performed since 2004 has impressively 
increased tax collection.  There are 22,000 new value added 
tax (VAT) taxpayers and 113,000 new income tax contributors. 
Tax revenues increased by over 15% in 2005 and by a similar 
percentage again in 2006. (Comment.  Though, at about 13.9% 
of GDP, fiscal revenue in El Salvador is still much lower 
than the Latin American average of 20%. End comment.) 
 
¶4. (U) Saca said that 76,000 formal sector jobs were added to 
the Social Security Institute (ISSS) rolls during the first 3 
years of his presidency.  In that same period, 96 new foreign 
companies were established in the country, directly 
generating 18,000 jobs.  These companies, in sectors such as 
industrial assembly, tourism, aircraft maintenance, call 
centers and other services invested over one billion dollars 
in El Salvador.  Annual exports, with the exception of the 
maquila sector (See reftels B and C for additional trade 
information) have significantly increased due to successful 
government support programs and the CAFTA-DR which entered 
into force for El Salvador and the United States on March 1, 
¶2006.  Saca added that the agricultural sector grew by 17% 
since he took office, with 7.1% growth just in 2006. 
President Saca attributed the growth in agriculture in part 
to his Administration,s improved seeds and fertilizer 
distribution program, which he said benefited 160,000 small 
producers. 
 
¶5. (U) His Administration also increased social spending by 
16% in 2006.  With programs such as Red Solidaria the 
Administration has addressed those in extreme poverty through 
infrastructure projects in the 32 poorest municipalities in 
the country, reaching some 24,000 families. His FOSALUD 
health project established 105 health clinics, many open 24 
hours everyday of the year.  Saca said the GOES provided 
subsidized electricity to 60% of electricity users, helped 
750,000 families with potable water subsidies and GOES 
subsidies reduce the cost of propane gas from $11 to $4.15 
for a 25 pound tank.  He specifically mentioned the 
assistance being provided by the USG through the $461 
Millennium Challenge Corporation (MCC) compact agreed to last 
year and Japanese assistance, especially regarding the port 
in La Union.  He proudly noted that El Salvador has a stable 
dollarized monetary system, as well as the best road network, 
telecommunications system and aircraft connections in the 
region. 
 
Sidestepping the FMLN 
--------------------- 
 
¶6. (U) President Saca described as his most important new 
initiative his proposal to create a trust fund (fideicomiso) 
for &Education, Social Peace and Citizen Security.8  Under 
the proposed law that will establish the fideicomiso, 
investors could buy bonds named &fiduciary certificates for 
education and citizen security8 (or CEFES) to raise up to 
$350 million.  The funds would finance education (up to $200 
million) and public security (up to $150 million) programs. 
The GOES would put in $10 million as seed money for the fund. 
 Anyone would be able to buy the bonds, as they will be 
available in denominations as low as $10 with a 5 year 
maturity date and would pay about 6% in annual interest. 
 
¶7. (U) Saca resorted to the fideicomiso for the same reason 
he used one to fund legacy pension fund costs last year 
(reftel A).  He couldn,t get the constitutionally required 
supermajority (56 of 84 votes) approval in the Legislative 
Assembly to secure international loans to cover those 
expenses.  As it did with proposed financing of the pension 
costs, the leftist opposition FMLN (with 32 votes) has 
refused to approve several international loans from the 
Inter-American Development Bank (IDB) and the World Bank for 
education, security, rural roads, Red Solidaria and other 
development programs.  Saca,s legal advisor Luis Mario 
Rodriguez claims the law establishing the fideicomiso is 
legal because it creates an autonomous legal entity that is 
assuming the debt, which will not be backed by the 
government.  However, the proposed law does permit the issuer 
of the bonds, the Multisectoral Investment Bank (BMI), to 
purchase insurance to guarantee payment of the bonds. 
 
¶8. (U) The FMLN has already challenged the constitutionality 
of the fideicomiso created to cover the legacy pension fund 
costs.  FMLN Legislator Salvador Arias claims the current 
proposal violates Article 148 of the Salvadoran Constitution. 
 He said, if the law passed, the FMLN would file legal 
challenges to the law.  In addition, the FMLN said it would 
start an international campaign to discourage purchase of the 
CEFES.  A smaller political party, Cambio Democratico (CD or 
Democratic Change), has also criticized the proposal and on 
June 13 said there was a 1999 Supreme Court case that 
supported their argument that the fideicomiso was 
unconstitutional.  Two former Supreme Court Magistrates also 
claim the proposed law is unconstitutional. (Comment.  In our 
preliminary review of the 1999 case, we found one factual 
difference that could distinguish the two cases, which could 
lead to a different legal conclusion about the 
constitutionality of the latest proposal. End comment.) 
 
¶9. (U) Respected economist Luis Membreno told Econ Counselor 
and later repeated it in his weekly column in the leading 
newspaper &La Prensa Grafica8 that by creating this 
fideicomiso to bypass the supermajority requirement, Saca was 
opening a "Pandora,s box."  Membreno agrees that the FMLN 
has been obsructionist, that El Salvador needs the types of 
ivestments the international loans would have been sed for, 
and that El Salvador could viably assum the international 
debt.  He believes though tha the Saca Administration is 
being short-sighted y creating the fideicomisos to bypass 
the legislature.  Membreno notes that the Saca Administration 
will not be in power forever and a subsequent govrnment, 
whether ARENA or the FMLN, might similary try to bypass the 
legislature.  He added that a subsequent government might 
also choose to not honor the CEFES, since they would not be 
backed by the GOES. 
 
More Bold Initiatives 
--------------------- 
 
¶10. (U) In addition to the fideicomiso for education and 
security programs, President Saca announced eight other legal 
initiatives.  He proposed new laws to reform the National 
Registry Center (Centro Nacional de Registro, CNR) and the 
Road Maintenance Fund agency (Fondo de Mantenimiento Vial or 
FOVIAL) so both institutions can directly negotiate their 
financing without the need of the Assembly,s approval. The 
CNR would then be able to negotiate $60 million for the 
Chambita Medidor Phase II project, which would develop the 
second phase of the national land registry plan.  Funding of 
that initiative was one of the issues that the MCC negotiated 
with the GOES last year in order to finalize the compact. 
Originally, the GOES would have received a World Bank loan to 
finance the project.  However, the FMLN rejected the loan, 
claiming that some of the funds in the first phase had been 
misspent.  With the reforms, FOVIAL would also be able to 
negotiate $59.2 million to perform a second phase of a 
sustainable rural roads program, which originally was to be 
financed by the IDB.  Under Saca,s new proposal FOVIAL,s 
road maintenance program would also be expanded from its 
current rural road focus to include urban roads (currently 
the responsibility of municipal governments). 
 
¶11. (U) Saca said there would be no electricity price 
increases in the second half of 2007, "despite the high 
prices of petroleum."  He announced the presentation of a 
proposed law to provide fiscal incentives for renewable 
energy generation.  Another proposal would increase fines 
that petroleum derivate providers must pay for 
anti-competitive practices.  Currently, the fines range from 
about $5,000 to $10,000.  Under the reform proposal the fines 
could be as high as 1 to 1.5% of annual sales.  In the case 
of Esso, that could be as much as $6 million.  According to 
El Salvador Esso Representative Jose Alfaro, Minister of 
Economy de Gavidia said the fines were increased as a result 
of problems they had with a local propane gas supplier. 
Tropigas has been charged with and fined thousands of dollars 
for allegedly consistently providing less than the 25 pounds 
of propane gas in each tank, though it had been charging 
customers for the full 25 pounds. 
 
¶12. (U) The Administration proposed new incentives to 
encourage investment in the services sector as well as 
reforms to the Free Trade Zone law that he believes will be 
WTO compliant.  President Saca also proposed to establish an 
autonomous institution dedicated to the well-being of 
teachers to take care of them and their families, health 
needs.  The GOES will provide $10 million in seed capital for 
the initiative. Saca said he would expand the FOSALUD program 
to add mobile clinics, continue with hospital modernizations, 
expand an important and busy road to the Port of La Libertad 
from two to four lanes, plus other projects. 
 
Comment 
------- 
 
¶13. (SBU) The Saca Administration has delivered on many of 
its social and economic programs.  However, with the high 
rate of violent crime, significant levels of poverty, 
continued migration and low education levels there is much 
work left to be done, and an ARENA win in the 2009 elections 
is by no means assured.  A radical change in government could 
lead to a radical change in economic and social policies (see 
reftel D).  Hamstrung by the FMLN from securing international 
financing, the Administration has been forced to seek more 
expensive alternatives, such as fideicomisos and private 
guarantees, to continue its economic and social agenda.  It 
is unlikely that the Supreme Court, with the majority of its 
members sympathetic to ARENA and the right, would soon 
declare the fideicomisos unconstitutional.  Still, the 
uncertainty generated by claims of unconstitutionality will 
at a minimum make those bonds more costly for the GOES and 
potentially scare away investors.   While most of the new 
proposals should be positive for the country, there seems to 
be no end in sight to the polarization between the two major 
parties.  That divide will continue to hold the country back 
from making more significant, sustained progress in the 
future. 
Glazer