In November 2006, the Millennium Challenge Corporation (MCC) and the Government of El Salvador signed a five-year, $461 million compact to reduce poverty by investing in the underdeveloped Northern Zone of the country. The compact invested in education, public services, agricultural production, rural business development, and transportation infrastructure through three projects.
- The Human Development Project promoted increased physical and social infrastructure in the Northern Zone through investments in both education and vital community infrastructure.
- The Connectivity Project helped to physically unify El Salvador’s Northern Zone with the rest of the country by improving road systems, enabling new economic opportunities for rural households, lowering transportation costs, and decreasing travel times to markets.
- The Productive Development Project sought to increase the incomes of Northern Zone residents by providing technical assistance, training, and financial support to alleviate constraints to high-quality production, increased productivity and access to investment capital.
This report provides a summary of the tangible outputs of the compact program, documents changes in compact activities, and provides information on performance against targets in the monitoring plan and on the results of completed independent evaluations. Additional evaluations of compact activities will be completed in 2018 and 2019 and this report will be updated once these evaluations are final.
Country ContextEl Salvador entered into a peace accord in 1992 that ended a decade of civil conflict. Human capital formation lagged and public investment was deferred during the war, contributing to a high incidence of poverty in the country (approximately 66 percent). The Northern Zone fared the worst; its mountainous territory served as a primary staging ground for the conflict, increasing violence and instability in the area and causing an exodus of large numbers of residents. Despite the significant national economic growth that followed the peace accord, progress stagnated and the poverty rate in the Northern Zone climbed significantly higher than the national average.
Overcoming these obstacles and unifying the Northern Zone with the rest of the country became a national priority. A comprehensive development program was needed to enable the region’s people to fully participate in El Salvador’s growth, the benefits of regional integration, and the economic opportunities brought about by free trade agreements. The five-year MCC compact provided a historic opportunity to fulfill these goals and revive El Salvador’s economic development.
MCC and the Government of El Salvador signed the compact in November 2006. It focused on the Northern Zone of the country, a region that includes half of El Salvador’s poorest municipalities and has substantial unrealized potential for sustainable development. The Northern Zone is also an important source of water, energy, biodiversity, and environmental resources for the country and the region.
The compact was implemented by FOMILENIO, an institution established by the Government of El Salvador as a requirement of the compact.[[Under the MCC country ownership model, MCC’s counterparts are responsible for implementing compacts. Partner governments establish entities known as accountable entities (MCAs) to manage compact implementation. In El Salvador, the accountable entity was known as FOMILENIO and was created soon after compact signing.]] The Government of El Salvador and MCC expect over 706,000 people to benefit over 20 years from this investment.
- Original Amount at Compact Signing:
- Amount spent:
November 29, 2006
Entry Into Force:
September 20, 2007
September 20, 2012
Original Compact Project Amount
|Estimated Economic Rate of Return (ERR) over 20 years
|Estimated beneficiaries over 20 years
|Estimated net benefits over 20 years
|At the time of signing
|At the time of signing
|At compact closure
The isolation of El Salvador’s Northern Zone proved to be an impediment to its development, contributing to widespread poverty that affected more than half of the region’s families at the time of compact signing. The Connectivity Project sought to physically link El Salvador’s Northern Zone with the rest of the country, enabling new economic opportunities for rural households, lower transportation costs, and decreased travel times to markets. The project included two activities:
- The Northern Transnational Highway Activity: This activity aimed to provide contiguous and reliable access to communities in the Northern Zone and main transport corridors to enable the Northern Zone to participate more fully in the national and regional economy. It included designing and constructing approximately 50 km of secondary roads, upgrading approximately 160 km of roads to secondary road standards, and rehabilitating approximately 80 km of roads to secondary road standards.
- The Network of Connecting Roads Activity: This activity was designed to connect vast rural areas of the Northern Zone with the Northern Transnational Highway and the existing paved road network by upgrading approximately 240 km of connecting roads to modified tertiary road standards.
The Connectivity Project experienced early difficulties due to delays and quality deficiencies on the feasibility study funded by the Government of El Salvador, environmental impact assessment, and initial designs contract. FOMILENIO employed innovative strategies to recover from these delays (e.g., using a design-build contract modality) and reduced costs far below those estimated in the feasibility study. A significant re-scoping nevertheless became necessary. The Network of Connecting Roads Activity was cancelled in March 2009, and its funding was transferred to the Northern Transnational Highway Activity. The Government of El Salvador then agreed to allocate resources from loans with international banks to build some segments of the connecting roads that were considered a priority (more details on the re-scoping of the project are available in the Compact Changes section below).
The Connectivity Project achieved its key targets despite the change in scope. More than 222 km of roads, three large bridges, and 20 smaller bridges were rehabilitated or constructed in northern El Salvador to help improve connectivity with the rest of the country. This east-west road stretches from nearly the Guatemalan border in the west to the Honduran border in the east, and the improvements are anticipated to halve travel time from 12 hours to 6 hours.
Human Development Project
Original Compact Project Amount
At the time of compact signing, significant numbers of El Salvador’s poor lacked basic public services required for human development. This problem was particularly acute in the Northern Zone, where an estimated 25 percent of the population (roughly 225,000 people) was not connected to water systems, over 20 percent (nearly 200,000 people) lacked improved sanitation services such as latrines, and 28 percent (over 235,000 individuals) lacked electricity. Poor community infrastructure (e.g., impassable local roads) forced many of the rural poor to forgo opportunities to seek education, health care, or employment. Human development was also hampered by gaps in and constraints to education and training. In 2007, the average Northern Zone student attended school for approximately four years—two years less than their peers in the rest of the country. Less than one in ten children completed high school, and the quality of that education was poor. Many young people chose to emigrate to other countries or major urban centers, where their lack of skills often trapped them in poverty.
The Human Development Project was designed to address these critical issues by increasing the human and physical capital of residents so they could take advantage of employment and business opportunities. The project increased physical and social infrastructure in the Northern Zone through investments in education and vital community infrastructure. The Human Development Project contained two activities:
- Community Development Activity: This activity was designed to increase access to basic public services and infrastructure for the poor in the Northern Zone through three types of investments.
The Water and Sanitation Sub-Activity sought to increase access to water systems and improved sanitation services for thousands of the poorest inhabitants of the Northern Zone in order to reduce the incidence of disease and the time and cost of seeking or purchasing water. This included funding potable water and sanitation systems (e.g., household latrines), capacity building in the communities so the systems would be maintained, and community education to ensure households were aware of appropriate health and sanitation practices.
The Rural Electrification Sub-Activity was designed to extend electricity to at least 97 percent of households in the Northern Zone that were not connected to electricity distribution networks to save beneficiaries money and increase household productivity. The sub-activity included extending 1,500 km of new distribution lines, connecting over 20,000 households to the grid. MCC funding covered 85 percent of the projected investment amount in electrification, with contributions from the Government of El Salvador and executing entities comprising the balance. The sub-activity also installed approximately 950 solar power systems.
The Community Infrastructure Sub-Activity aimed to connect isolated communities and villages in the Northern Zone and address a lack of access to local infrastructure such as market, healthcare, and education facilities. This included the rehabilitation and construction of community infrastructure as well as technical assistance to communities on infrastructure operations and maintenance.
- Education and Training Activity: The Education and Training Activity sought to increase education and skill levels of the poor in the Northern Zone by expanding the quality of and access to vocational and technical education and training. This activity included three sub-activities.
The Technical Assistance Sub-Activity was designed to improve the capacity of institutions and organizations involved in policy, planning, and administration of education and training in the Northern Zone. The compact funded technical assistance to support government institutions by conducting a diagnostic analysis of vocational education and non-formal training programs in the region, identifying measures to ensure sustainability of compact investments in the sector, and supporting the Education and Training Advisory Committee, which was formed by the compact and provided oversight and recommendations on investments.
In addition to investments in technical assistance, the Education and Training Activity also included the Formal Technical Education Sub-Activity aimed at strengthening technical and vocational education institutions in the Northern Zone. This included the construction of the Chalatenango Technical College, a post-secondary institution, and strengthening approximately 20 middle technical schools in key municipalities with links to other activities funded under the compact. This sub-activity also established a competitive scholarship program to reach poor youth in the region.
The Non-Formal Skills Development Sub-Activity worked to complement the Formal Technical Education Sub-Activity by expanding access to non-formal education and training to the poor, women, at-risk youth and others who were unlikely to attend formal programs. This included support to short-term pre-employment training.
Productive Development Project
Original Compact Project Amount
Approximately 40 percent of the population in the Northern Zone was engaged in low-productivity activities at the start of the compact, including the production of traditional crops such as maize, beans, and forage. Limited technical and business knowledge and limited access to financial resources slowed regional economic growth. Only two percent of loans in El Salvador had been extended to inhabitants of the Northern Zone, of which only four percent were extended to the agriculture sector.
The Productive Development Project sought to increase the incomes of Northern Zone residents by providing technical assistance, training, and financial support to alleviate constraints to high-quality production, increased productivity and access to investment capital. The project intended to help the region jump-start investment, particularly in activities that would benefit the poor and disadvantaged (with a special focus on women and youth). Banking institutions in the Northern Zone were also strengthened by the project, which included three activities:
- The Financial Services Activity: The Financial Services Activity sought to increase lending, access to credit, and other financial services to improve the risk profile of micro-, small- and medium-sized producers and rural entrepreneurs in the Northern Zone. The activity supported two guarantee programs – one, called Progara Norte, that facilitated access to credit for farmers and reduced credit risk for the participating financial institutions, and another, called SGR, that provided bank or commercial loan guarantees for micro-, small- and medium-sized enterprises. Another component of the activity funded a crop insurance program, which was terminated during a mid-term review due to lack of uptake. Finally, the Financial Services Activity provided technical assistance to banks and other financial institutions in the Northern Zone to expand rural finance and improve credit analysis, introduce new technologies into service delivery, and develop specialized products that increase beneficiary access to financial services such as leasing, savings, and specialized agricultural credit products.
- The Investment Support Activity: The goal of the Investment Support Activity was to make investment capital available to poor individuals and organizations that benefit poor inhabitants of the Northern Zone, who, due to insufficient collateral and lack of liquid assets, were not able to finance their investments. This activity supported the administration and funding of an investment support program, called FIDENORTE, providing investment capital for the development of competitively selected business proposals.
- The Production and Business Services Activity: This activity aimed to help poor farmers, organizations and micro-, small-, and medium-sized enterprises that benefit poor inhabitants of the Northern Zone successfully transition to higher-profit activities. This transition was expected to generate new investment, expand markets and sales, and create new jobs to support sustainable economic growth and poverty reduction. It provided technical assistance to poor farmers to shift to high-value agricultural production and forestry strategies, and provided pre-investment studies and technical assistance to develop and implement business plans for Northern Zone residents. There were three sub-activities: investment planning, assistance to small farm enterprises, and business development services.Through the Investment Planning Sub-Activity, assessments of high-return investments, primarily in the agriculture, tourism and handicraft sectors, were completed and used to guide business plan development and technical assistance. The Assistance to Small Farm Enterprises Sub-Activity included delivery of on-farm technical assistance and small in-kind grants to farmers with the objective of shifting poor farmers to higher-value crops and animal products. The Business Development Services Sub-Activity undertook outreach and technical assistance and training to support the development of efficient, sustainable commercial activities in agribusiness, tourism, handicrafts, and other niche markets. Assistance was also provided to other enterprises to develop valuable market linkages and networks.
MCC and FOMILENIO modified the design of the Production and Business Services Activity during the compact. Phase I of assistance focused on technical assistance with productive activities—particularly milk production in the dairy chain, vegetable production in the horticulture chain, and wood- and clay-based handicraft production in the handicraft chain. After the mid-term review of the compact, the activity was modified in response to lessons learned during Phase I—namely, that increased and more diversified production was not sufficient to guarantee higher sales and income among participating producers. As such, Phase II of assistance featured more explicit marketing and business development components, including the establishment of two new producer-owned enterprises in the horticulture and dairy chains, and the strengthening of three pre-existing producer-owned enterprises in the handicraft and dairy chains.
At the end of the compact, the Productive Development Project assisted approximately 17,500 producers through the provision of training, seeds, equipment, and technical assistance. The project also supported work to improve almost 23,500 hectares of land on which producers planted short-season vegetables and fruits and improved pasture lands. The Investment Support Activity provided 30 loans to small- and medium-sized businesses in the Northern Zone to develop new investments or expand existing investments in the agriculture, tourism and handicraft value chains. These loans totaled $4.6 million, about 20 percent of which went to women-owned businesses.