Report No. 35951-GY Guyana Investment Climate Assessment (In Two Volumes) Volume I: Main Findings and Policy Recommendations June 21, 2007 Finance, Private Sector and Infrastructure Latin America and the Caribbean Region (LCSFR) Document of the World Bank CURRENCY EQUIVALENTS (Exchange rate effective as of 03/31/2006) National Currency is the Guyanese dollar (GY$) US$1.00 = GY$199.75 FISCAL YEAR January 1 ­ December 31 MAIN ABBREVIATIONS AND ACRONYMS BBC British Broadcasting Corporation CARICOM Caribbean Community CDB Caribbean Development Bank CEM Country Economic Memorandum CHA Caribbean Hotel Association CIDA Canadian International Development Agency CPAR Country Procurement Assessment Report CPI Corruption Perception Index CSME Caribbean Single Market and Economy DDL Demerara Distillers Ltd. DFID UK Department for International Development DSL Digital Subscriber Lines EU European Union FDI Foreign Direct Investment FIAS Foreign Investment Advisory Services FTA Free Trade Agreement GATS General Agreement on Trade and Services GDP Gross Domestic Product GNBS Guyana National Bureau of Standards GNI Gross National Income GO-INVEST Guyana Investment Promotion Agency GPL Guyana Power and Light GT&T Guyana Telephone and Telegraph GUYSUCO Guyana Sugar Corporation GWI Guyana Water Inc. HACCP Hazard Analysis Critical Control Point IAAC Inter-American Accreditation Cooperation ICAO International Civil Aviation Organization ICRG International Country Risk Guide ICS Investment Climate Survey ICT Information and Communication Technologies IDA International Development Association IDB Inter-American Development Bank IEC International Electro-technical Commission IFS International Financial Statistics ILAC International Laboratory Accreditation Cooperation IMF International Monetary Fund INATUR Instituto Nacional de Turismo de Venezuela IPA Investment Promotion Agency ISO International Organization for Standardization ISPs Internet Service Providers IPPs Independent Power Producers ITU International Telecommunications Union MBM Multi-Buoy Mooring MSTQ Metrology, Standards, Technology and Quality NAFTA North American Free Trade Agreement NBFIs Non-Bank Financial Institutions NDS National Development Strategy OECD Organization for Economic Cooperation and Development OECS Organization of Eastern Caribbean States PAHO Pan-American Health Organization PPP Purchasing Power Parity PUC Public Utilities Commission R&D Research and Development SMEs Small and Medium Enterprises TEU Twenty-foot Equivalent Units THAG Tourism and Hospitality Association of Guyana TFP Total Factor Productivity TVET Technical and Vocational Education and Training UNDP United Nations Development Program UNICEF United Nations Children's Fund USAID US Agency for International Development VAT Value-added Tax WBI World Bank Institute WDI World Development Indicators WDR World Development Report WEF World Economic Forum WHO World Health Organization WTO World Trade Organization Vice President: Pamela Cox Country Director: Caroline Anstey Sector Leader: Charles Feinstein Sector Manager: Susan Goldmark Task Manager: Stefka Slavova ii TABLE OF CONTENTS ACKNOWLEDGMENTS........................................................................................................... vi EXECUTIVE SUMMARY ......................................................................................................... ix 1. THE GUYANA INVESTMENT CLIMATE SURVEY.......................................................1 2. GOVERNANCE AND INSECURITY...................................................................................6 BUSINESS-GOVERNMENT RELATIONS........................................................................................6 RECOMMENDATIONS ON BUSINESS-GOVERNMENT RELATIONS...............................................12 CONTRACT ENFORCEMENT AND THE JUDICIARY......................................................................13 RECOMMENDATIONS OF CONTRACT ENFORCEMENT AND THE JUDICIARY ...............................17 CRIME AND VIOLENCE.............................................................................................................18 RECOMMENDATIONS ON CRIME AND VIOLENCE......................................................................21 3. INFRASTRUCTURE ............................................................................................................23 ELECTRICITY ...........................................................................................................................23 RECOMMENDATIONS ON ELECTRICITY ....................................................................................27 TELECOMMUNICATIONS...........................................................................................................28 RECOMMENDATIONS ON TELECOMMUNICATIONS....................................................................32 TRANSPORT AND LOGISTICS....................................................................................................34 RECOMMENDATIONS ON TRANSPORT AND LOGISTICS .............................................................42 WATER ....................................................................................................................................43 4. SKILLS, MIGRATION, TECHNOLOGY AND QUALITY ............................................47 RECOMMENDATIONS ON SKILLS, MIGRATION, QUALITY AND TECHNOLOGY...........................56 5. FINANCE ...............................................................................................................................58 ACCESS TO CREDIT..................................................................................................................58 COST OF CREDIT......................................................................................................................62 COSTS AND ACCESS TO FINANCIAL SERVICES: THE PERSPECTIVE OF THE FIRMS ....................63 ACCESS TO FINANCIAL SERVICES: A KEY PROBLEM FOR FIRMS WITH GROWTH POTENT........66 POLICY RECOMMENDATIONS ON FINANCE...............................................................................71 6. POTENTIAL FOR ECO-TOURISM GROWTH ..............................................................73 RECOMMENDATIONS ON POTENTIAL FOR ECO-TOURISM GROWTH..........................................75 REFERENCES.............................................................................................................................77 APPENDIX...................................................................................................................................82 iii LIST OF TABLES Table 1 - Guyana's Investment Climate at a Glance....................................................................................................vii Table 2 - Guyana's Performance in International Investment Climate Rankings.......................................................viii Table 3 - A Summary of Main Findings and Recommendations................................................................................xvi Table 2.1 - Inspected Firms and Frequency and Duration of Inspections.................................................................... 11 Table 2.2 - Business Association Membership and Dispute Resolution...................................................................... 14 Table 2.3 - Proportion of Firms with Overdue Payments That Have Filed Court Cases, by Size............................... 15 Table 3.1 - Local and Long Distance Prices in 2003 (US$)......................................................................................... 32 Table 3.2 - Classification of Guyana's Road Network, 2005....................................................................................... 35 Table 3.3 - Sea as Primary Means of Transport by Company Size and Location........................................................ 38 Table 3.4: Average Stevedoring Charges for Georgetown relative to Competitor Ports............................................. 39 Table 5.1 - Private Sector Credit as Percent of GDP: An International Comparison (2004)....................................... 60 Table 5.2 - Interest Rate Spreads, international comparison........................................................................................ 62 Table 5.3 - Cost of Finance and Access to Finance: the Perceptions of Guyanese Firms ........................................... 66 Table 5.4 - Even Exporters and Large Firms in Have Trouble Getting US Dollar Loans........................................... 66 Table A.1 - Main Findings and Recommendations...................................................................................................... 82 LIST OF FIGURES Figure 1.1 - Sample Composition by Sector................................................................................................................... 1 Figure 1.2 - Ranking of Constraints to Doing Business: Percentage of Guyanese Manufacturing Firms who Rate Each Area as a Major or Very Severe Obstacle (0 ­ no obstacle, 4 ­ very severe obstacle) .................. 3 Figure 1.3 - Ranking of Constraints to Doing Business: Percentage of Guyanese Hotels who Rate Each Area as a Major or Very Severe Obstacle (0 ­ no obstacle, 4 ­ very severe obstacle).................................... 4 Figure 1.4 - Percentage of Firm Sales Lost Due to Quantifiable Constraints in the Areas of Infrastructure and Governance................................................................................................................................................ 4 Figure 2.1 - Percentage of Senior Management Time Spent on Regulations in Guyana,.............................................. 7 Figure 2.2 - Corporate Tax Exemptions in Guyana, by Type of Firm ........................................................................... 9 Figure 2.3 - Importance of Competition, Import Tax Exemptions and Income Tax Holidays for Reduction of Firms' Costs and Development of New Products........................................................................................ 9 Figure 2.4 - Eligibility and Use of Input Tax Exemptions and Tax Holidays by Guyanese Hotels ............................ 10 Figure 2.5 ­ Reported Bribes to Obtain Government Contracts, percent of contract value ........................................ 11 Figure 2.6 - Court Users Distrust the Judiciary Much More than Non-Users.............................................................. 13 Figure 2.7 - A Comparison of Court Duration Data for Guyana.................................................................................. 15 Figure 2.8 - Percentage of Firms which Think that Bribes to Judicial Officials Are Common................................... 16 Figure 2.9 - Incidence of Theft, Robbery, Vandalism or Arson, percent of ICS respondents who have experienced a case of theft, robbery, vandalism or arson .............................................................................. 19 Figure 2.10 - Losses due to Crime and Firms' Costs to Prevent Crime, by Firm Size ................................................ 20 Figure 2.11 - Share of Firms Which Spend Some Amount on Security, percent of ICS respondents......................... 20 Figure 3.1 - Average Number of Power Outages in Latin American Countries .......................................................... 23 Figure 3.2 - Losses from Power Interruptions in Guyana, percent of total annual sales.............................................. 24 Figure 3.3 - Self-Supply of Electricity in Guyana........................................................................................................ 24 Figure 3.4 - Transmission and Distribution Losses: An International Comparison..................................................... 25 Figure 3.5 - Installed Generation Capacity Per Capita, MW per 1,000 of population................................................. 26 Figure 3.6 - Electricity Intensity (KWh per capita)...................................................................................................... 26 Figure 3.7 - Average Waiting Time for Telephone Line Installation (Number of Days) ............................................ 29 Figure 3.8 - Firm Email and Internet Use, by Country................................................................................................. 30 Figure 3.9 - Internet Use by Firms in Guyana.............................................................................................................. 30 Figure 3.10 - Mobile and Fixed Penetration Rates in Guyana ..................................................................................... 31 Figure 3.11 - Cellular Teledensity and GDP per Capita in 2003 ................................................................................. 31 Figure 3.12 - Main Mode of Transportation of Firms' Products and Inputs, by Type of Firm ................................... 34 Figure 3.13 - Average Losses Due to Damage and Theft during Shipment of Goods, by Type of Firm and Type of Shipment ........................................................................................................................................... 36 iv Figure 3.14 - Average Losses Due to Damage and Theft during Shipment of Goods, by Industry and Type of Shipment .................................................................................................................................................... 36 Figure 3.15 - Reported Incidence of Informal Payments at Customs, by Firm Size.................................................... 41 Figure 3.16: Use of Different Sources of Water for Production, percent of manufacturing firms .............................. 43 Figure 3.17: Provision of Water from Public Sources, by Country ............................................................................. 44 Figure 3.18: Costs of Water Interruptions: percent of annual sales across firms that experienced water interruptions, by Country ............................................................................................................................... 45 Figure 3.19: Average Number of Days to Obtain a Water Connection, by Country ................................................... 46 Figure 4.1 - Distribution of the Population by Educational Attainment, Guyana, 1990 and 2002.............................. 47 Figure 4.2 - Proportion of Population with Secondary or Tertiary Education, by Country......................................... 47 Figure 4.3 - Degree of Dissatisfaction with the Availability of Labor Skills, by Country .......................................... 48 Figure 4.4 - Guyana: Educational Attainment of Employees in Industry and Hotels.................................................. 49 Figure 4.5 - Manager's Education, by Country............................................................................................................ 49 Figure 4.6 - Provision of External Training by Manufacturing Firms, by Country ..................................................... 50 Figure 4.7 - Twenty Countries with the Highest Accumulated Brain Drain................................................................ 51 Figure 4.8 - Guyana: Worker Remittances, 1996-2004................................................................................................ 52 Figure 4.9 - Manufacturing Firms with Investment in New Technology, by Country ................................................ 54 Figure 4.10 - Percentage of Manufacturing Firms with Investment in New Technologies that Used Purchase of Machinery and Equipment as the Primary Method of Undertaking Such an Investment, by Country........................................................................................................................................................... 54 Figure 4.11 - Guyana: Percentage of Firms with Quality Certification ....................................................................... 55 Figure 4.12 - Percentage of Firms with Some Quality Certification: selected countries............................................. 55 Figure 5.1 - Financial Sector in Guyana, total assets 2004 .......................................................................................... 58 Figure 5.2 - Private Credit in Guyana as Percent of GDP: 1991-2004 ........................................................................ 59 Figure 5.3 - Long vs. Short Term Lending to Private Sector in Guyana: 1999-2004................................................. 60 Figure 5.4 - Maturity Structure of Time Deposits with Guyanese Commercial Banks, December 2004.................... 61 Figure 5.5 - Lending vs. Deposit Rate Trend in Guyana, 1995-2004 .......................................................................... 63 Figure 5.6 - Firms with Loans: an International Comparison, percent of interviewed firms....................................... 64 Figure 5.7: Firms with Loans by Firm Size and Country, percentage of interviewed firms........................................ 64 Figure 5.8 - Proportion of Firms with Loans, Firms without a Need for Loans, and of Credit Constrained Firms, By Size, Percentage of Interviewed Firms.......................................................................................... 65 Figure 5.9 - Percentage of Loans which Require Collateral, by Country .................................................................... 67 Figure 5.10 - Collateral-to-Loan-Value Ratio, percent: By Country ........................................................................... 67 Figure 5.11 - Main Uses of Bank Loans in Guyana: by Type of Firm......................................................................... 68 Figure 5.12 - Use of Trade Credit in Working Capital, percentage by country........................................................... 69 Figure 5.13 - Main Sources of Investment Capital in Guyana, percent, by Type of Firm........................................... 70 Figure 5.14 - Percentage of Firms with Externally Audited Annual Financial Statements, by Country..................... 71 Figure 6.1 - Percent of Firms with Own Generator and Number of Power Outages, by Type of Hotel...................... 74 Figure 6.2 - Tourism Firms: Perceptions of Important Obstacles, percent of firms sharing view that a given area is very important or not important.......................................................................................................... 75 v ACKNOWLEDGMENTS This report was prepared by a team led by Stefka Slavova. Team members included Leonid Koryukin (Labor Skills, Quality and Technology), Michael Goldberg, Alberto Didoni and Corinne N'Daw Amany (Finance), Emanuel Salinas (Electricity), Robert Stephens and Juan Manuel Galarza Tohen (Telecommunications), Bernice Van Bronckhorst (Crime and Violence), Ben Hackett and Maria Bertram (Transport), Taimur Samad and Patricia Lopez (Water), Joel Bergsman (Taxation and Foreign Investment Regime), and Elizabeth Crompton (Tourism). Stefka Slavova prepared the sections on Contract Enforcement and the Judiciary, and Business- Government Relations. Leonid Koryukin prepared the descriptive and econometric analysis of the survey data. Amit Burman and Atif Ansar provided excellent research assistance. Constantinos Stephanou shared information on the Guyanese financial system and reviewed the chapter on Finance. The survey managers were Giuseppe Iarossi (AFTPS) and Giovanni Tanzillo (DECRG), and in the early stages, Tilahun Temesgen (DECRG). Moustapha Rouis provided advice at the early preparation stage. Additional inputs and suggestions were received from Caroline Anstey, Antonella Bassani, Susan Goldmark, Charles Feinstein, Marianne Fay, Pablo Fajnzylber, Jose Guilherme Reis, Homa-Zahra Fotouhi, Clara Ana Coutinho de Sousa, Angela Demas, David Satola, Adelaida Schwab, the IMF Guyana Team, Lucia Hanmer, Badrul Haque, Philip Keefer, Jack Stein and Daniel Wallace. Susan Goldmark and Jack Stein helped put together the team for this project and provided guidance at the concept stage. Alma Domenech and Eric Palladini provided excellent editorial and technical assistance with the document. Peer reviewers are George Clarke (AFTPS), Homa-Zahra Fotouhi (LCC3C), and Simeon Djankov (CICMA). vi Table 1 - Guyana's Investment Climate at a Glance Guyana Honduras Nicaragua Guatemala Grenada Topic 2004 2003 2003 2003 2004 Macroeconomic Indicators GNI per capita, PPP (current international $) 4,110 2,710 3,300 4,140 7,000 GNI per capita, Atlas method (current US$) 990 1,030 790 2,130 3,760 Population 765,000 7.1m 5.6m 12.6m 105,700 Exports of goods and services (% of GDP) 93 35 22 17 47 Imports of goods and services (% of GDP) 106 51 49 28 57 GDP growth (annual %) 1.5 4.6 3.7 2.7 -2.8 Gross fixed capital formation (% of GDP) 20.0 24.0 30.3 16.7 40.0 Foreign direct investment, net inflows (% GDP) 3.5 2.9 4.9 0.5 14.2* Infrastructure Indicators Percentage of firms that experienced a power cut 73 92 89 74 57 Sales lost due to power outages (% of annual sales) 3.8 3.0 3.9 2.3 .. Days to obtain an electricity connection 42 33 31 62 11 Personal computers (per 1,000 people) * 27 14 28 14 132 Percentage of firms using email in business operations 31 50 39 66 .. Percentage of firms using a webpage for business purposes 17 22 17 29 .. Days to obtain a telephone connection 84 175 118 48 26 Losses while in transport (% of shipment value) 4.6 1.4 0.6 1.7 Losses due to water interruptions (% of annual sales) 1.5 2.5 6.4 2.7 0.0 Days to clear customs for imports 20 5 5 9 5 Days to clear customs for exports 14 2 2 2 2 Governance Indicators Percentage of firms that do not trust the judicial system 15 39 41 48 14 Percentage of firms that do not trust government 20 46 46 71 14 Bribes on government contracts (% of contract value) 15.3 11.5 12.3 13.1 .. Payments "to get things done" (% of annual sales) 3.5 2.7 4.0 4.4 2.8 Percentage of firms experiencing a crime 39 30 27 52 38 Losses due to crime (% of annual sales) 3.4 3.3 3.3 3.9 4.0 Days to register a business 46 100 32 50 30 Days spent dealing with inspections (per annum) 46 12 21 10 5 Senior management time spent dealing with government regulations (% of total time) 3.4 8.5 7.8 10.3 6.8 Technology, Quality and Training Indicators Percentage of firms with a foreign license 9.8 15.2 9.1 19.6 30.7 Percentage of firms with quality certification (ISO or other) 16.9 22.3 23.8 15.3 .. Percentage of firms providing formal training to employees 26 49 37 55 84 Percentage of firms whose manager has higher education 45 66 62 75 .. Days to fill a vacancy for a skilled technician 29 31 28 42 36 Finance Indicators Interest rate for large firms1 18.0 11.0 13.3 10.2 10 Percentage of firms with a bank loan 30 51 44 44 42 Percentage of firms with audited financial statements 39 43 30 34 60 Percentage of loan value required as collateral for loans 218 154 217 121 55 Percentage of revenues reported for tax purposes 74 68 66 77 51 Note: An asterisk means that the data are as of 2002. 1For GYD-denominated loans in Guyana; USD-denominated loans elsewhere. vii Table 2 - Guyana's Performance in International Investment Climate Rankings Source Ranking Doing Business in 2006 Ease of Doing Business rank 105 out of 155 countries Getting Credit Index rank 145 out of 155 countries Enforcing Contracts rank 123 out of 155 countries Trading across Borders rank 112 out of 155 countries Closing a Business rank 104 out of 155 countries Protecting Investors rank 101 out of 155 countries World Economic Forum (WEF), Growth Competitiveness Index rank 115 out of 117 countries Global Competitiveness Report Macroeconomic Environment Index rank 113 out of 117 countries 2005-2006 Public Institutions Index rank 109 out of 117 countries Technology Index rank 112 out of 117 countries Business Competitiveness Index rank 106 out of 117 countries Quality of the National Business Environment Index rank 105 out of 117 countries Brain drain rank 117 out of 117 countries Pervasiveness of money laundering through banks rank 117 out of 117 countries Reliability of police services rank 116 out of 117 countries Centralization of economic policymaking rank 115 out of 117 countries Irregular payments in public contracts rank 114 out of 117 countries Heritage Foundation Index of Economic Freedom rank 79 out of 155 countries, category Mostly Unfree Transparency International Corruption Perceptions Index: rank 117 out of 159 countries viii EXECUTIVE SUMMARY Background 1. This document presents the main findings of the Guyana Investment Climate Survey (ICS) conducted between November 2004 and March 2005. 2. Guyana possesses a number of strengths which could contribute to more investment in its economy and higher growth. Among Guyana's strengths and potential sources of economic growth are the following: a relatively well-educated population, fluent in English; moderately low-priced labor; forestry and mineral resources; an untapped hydroelectric potential; natural, unspoiled scenic mountains, rainforest and rivers; and possibility to exploit the country's location between northern Brazil and the sea. 3. Over the past year Guyana has witnessed some remarkable achievements in the economic arena. For example, economic growth is estimated to have reached almost 5 percent in 2006, and is expected to remain strong in 2007. This is in marked contrast to the early 2000s, when growth was substantially lower and very variable. The strong growth performance of 2006 reflects a recovery in private sector credit, high private remittances and more foreign direct investment. The expansion in private credit was partially led by increased mortgage lending and construction, ahead of the 2007 Cricket World Cup (CWC), which Guyana co-hosted with other Caribbean states in March-April 2007. Importantly, Guyana received foreign debt write-offs under the multilateral debt relief initiative (MDRI), the IMF-World Bank heavily indebted poor countries (HIPC) initiative and additional debt relief was granted by the Inter-American Development Bank (IDB). The macroeconomic environment remained stable, with average inflation slowing down in 2006 to a rate of 6.7 percent, and the exchange rate to the US dollar remaining stable since mid-2004. Despite a strong public expenditure program, mainly aimed at restructuring and modernizing the state sugar company, and growth in imports, foreign reserves went up at the end of 2006. 4. One of the cornerstones of the Government's recent fiscal reforms has been the introduction of a value-added tax (VAT) as of January 1, 2007. This follows an ambitious program embarked upon in earlier years ­ such as removal of governmental discretion in issuing tax exemptions and holidays, as well as improving public financial management. New investor confidence is found in the construction boom in 2006 ­ such as private investment in hotels in preparation for the CWC, the building of a new cricket stadium, a new CARICOM headquarters building, the development of the Berbice Bridge project via a public-private partnership, the opening of a municipal airport under a public-private partnership, among others. A significant event in 2006 was the General Election, which passed peacefully and with the full participation of all political parties. Finally, the Government has made inroads into reducing crime and improving the security situation in the country. 5. Nearly 40 years after gaining its independence in 1966, Guyana's economy continues to be heavily concentrated in the production of agricultural commodities and minerals (sugar, rice, bauxite and gold), with a low share of manufacturing in GDP (10 percent in 2004). This heavy dependence on sugar and rice is increasingly problematic due to heavy competition from countries such as China and Vietnam. In addition, Guyana ­ as other small ix Caribbean economies exporters of sugar ­ faces the elimination of the preferential sugar arrangements by the European Union (EU) within the next four years, which will mean losses of markets, if costs of production are not lowered. Thus, since mid-2006 the price for Guyanese sugar paid by the EU has started to fall, and will drop by a total of 36 percent over a four-year period. This prospect, as well as stiff world competition, has led the Government to embark on a restructuring plan for the Guyana Sugar Company (Guysuco), which entails efficiency improvements through modernization of existing production facilities and substantial new investments2. 6. Guyana faces a number of investment-climate-related weaknesses, but recent efforts by the Government and the private sector are directed at improving and strengthening the business environment. Guyana is a country in urgent need of economic diversification and new opportunities for growth. Some of the key socio-economic characteristics of Guyana today are as follows: the population ­ as elsewhere in the Caribbean ­ is small (750,000) and has relatively low income (US$1,030 GNI per capita in 2005). This means a small internal market, with few economies of scale; huge out-migration (twice as many Guyanese ­ an estimated 1.5 million ­ live abroad as in Guyana3) and the associated brain drain (the worst among 117 countries around the world according to the World Economic Forum (WEF), 2005-2006), including entrepreneurs; deep divisions between the two main political parties with years of feuds and disagreements, which impede stable policies related to business and investment; criminal activities which deter investment; and expensive and unreliable infrastructure services, especially electricity, but also telecommunications and transport (roads, ports and bridges). Since the launch of discussions between the Government and the private sector in formulating a National Competitiveness Strategy in 2005, there has been a strong emphasis on improving conditions for the operation of private business and attraction of new investment. 7. Guyana's recent economic performance has been relatively modest, and subject to external shocks. After growth recovery in the early-to-mid-1990s, Guyana's recent economic growth performance has been modest (real GDP growth between 1999 and 2004 averaged less than 1.0 percent per annum). Growth was notably hurt by the significantly increased crime activity in 2001-2002, and then by the devastating floods of January 2005. The informal economy is estimated at around 30 to 50 percent of GDP4, a result of the high costs of doing business formally.5 In addition, organized crime and alleged drug trafficking ­ which have been on the rise in the Eastern Caribbean ­ pose additional costs to doing business, and weaken the security situation in Guyana. The relatively good education system in the country has not stimulated growth, as most well-educated Guyanese prefer to leave the country. In addition to the relatively high levels of crime and informality and problems with locating adequate labor resources, local businesses face a number of other difficulties, such as poor infrastructure (especially electricity), exorbitant cost of financing (despite significant liquidity in the banking sector), allegations of corruption, and economic policy uncertainty, to name a few. 2 According to the World Bank (2005), Guyana is the lowest-cost sugar producer in the Caribbean. It is expected that even after the abolition of preferential prices, its sugar industry may survive, if efficiency is improved and costs of sugar production are lowered. 3Many Guyanese live in the United Kingdom as well as in the US and Canada. 4See US State Department's Investment Climate Statement on Guyana, 2005. Available online at www.state.gov 5The relative size of the informal economy declined during the 1990s, after the start of economic reforms. For more on the4 evolution of the informal economy, see Faal (2003). x 8. In 2003 the Government took significant steps to improve the investment climate, which are currently ongoing. These included the passage of a new Investment Bill, an amended Tax Law and a Competition and Fair Trading Bill; enactment of Value-Added Tax (VAT) and Excise Legislation; establishment of a mediation center and a Commercial Court; efforts to tackle crime; improving access to land through institutional reforms within the Guyana Lands and Surveys Commission (GLSC); reforms within the Guyana National Bureau of Standards (GNBS), as well as efforts to improve public accountability and transparency. Furthermore, in 2005 the Government together with the private sector and international donors initiated the preparation of a National Competitiveness Strategy ­ a process which is currently well underway, with consultations being held and studies being conducted. The current draft Strategy (May, 2006) identifies key areas of competitiveness and proposes reforms to improve the competitiveness of Guyanese firms in foreign markets as well as attract foreign firms in Guyana. 9. A draft National Competitiveness Strategy (NCS) was presented at the First Presidential Summit on private sector development in May 2006, and proposes an Action Plan with 122 different actions. These cover National Competitiveness Program activities in the areas of taxation policy, investment promotion, trade facilitation, access to finance, business registration and operation, resolution of commercial disputes, competition and consumer protection policy, and business development services. They also include activities related to infrastructure improvement, ICT and specific sector polices (sugar, rice, fisheries, agro- processing, forestry, non-traditional agriculture, manufacturing and tourism). It is an ambitious program, which, if implemented, could lead to substantial improvements in the business environment in which Guyanese firms operate. Importantly, some of the policy recommendations which the ICA proposes are chosen also for their being among the top activities considered by the NCS and discussed further at the May 2006 summit (taxation policy reforms, commercial court reforms, enterprise registration reforms, customs reforms). What is a move in the right direction is the planned addition of export promotion services at Go-Invest (Trade Point), and the Government's commitment to strengthen Go-Invest and make its services available to all investors ­ foreign or domestic. The Investment Climate Survey 10. The ICA report provides an evaluation of different aspects of the environment of doing business in Guyana. It covers governance-related obstacles, labor and technology issues, the financial sector, and infrastructure.6 The ICA is based on the results of the World Bank Guyana Investment Climate Survey (ICS), as well as other sources of information, including an opinion survey of Guyanese commercial bank managers, and interviews with Guyanese entrepreneurs and government leaders. Additional national and international data sources are utilized in the analysis as well as other World Bank analytical work. The ICS was conducted with the participation of 164 Guyanese manufacturing firms and 32 hotels and tourism sector establishments, utilizing a standard World Bank questionnaire and methodology of data 6This analysis complements a series of previous studies, such as the World Bank reports on "A Time to Choose: Caribbean Development in the 21st Century" (2005), the Caribbean Infrastructure Assessment Report (2005), statistical data based on recent World Bank Doing Business reports and reports by the World Economic Forum (WEF), the Heritage Foundation, Transparency International, the US State Department's Investment Climate Statement 2005, and others. xi collection. The survey measured a wide set of indicators related to the Guyanese business conditions in several thematic areas: access to and cost of finance; infrastructure; business regulations, crime and contract enforcement; labor skills, technology and quality. The purpose of the survey was to benchmark Guyana against other countries for which similar survey data exist, and to analyze intra-country variations in conditions for doing business (such as among firms of different size, location, sector, ownership, etc.) so as to assess how level-playing the field is. Main Findings 11. One of the leading findings of the report is that Guyana's investment climate lags that of other countries in the Caribbean (e.g. Grenada, Trinidad and Tobago), and lags or similar to that of comparable Central American countries such as Nicaragua, Honduras and Guatemala. This is confirmed by different international benchmarking reports (see Table 1) as well as by the ICS data. Guyana ranks especially low internationally on objective measures of infrastructure bottlenecks related to the electricity and telecommunications sectors, and on the regulatory burden related to taxation, business regulations, customs regulations, and contract enforcement. Additional constraints on firms' operations are low access to credit and shortages of labor skills sought by the private sector. 12. The analysis indicates that Guyanese businesses incur significant costs related to electricity (much of which is self-provided), expensive telecom services, delays at customs, long times to deal with government regulations, and to win public contracts. Corporate taxation ­ despite recent efforts by the Government to streamline and reduce tax burdens ­ is an obstacle which indicators in this and other benchmarking reports (Doing Business, WEF) identify as being problematic. Insecurity and crime against businesses also raise firms' costs of doing business. 13. The surveyed Guyanese firms indicate that macroeconomic and political uncertainty is preventing investment and growth. For example, 44 percent of interviewed manufacturing companies perceive macroeconomic uncertainty to be a major or severe obstacle to their operation and growth, second only to costs of finance (with 56 percent of interviewed firms). Political uncertainty is also ranked among the top binding constraints ­ with close to one-third of surveyed firms (30 percent) reporting that it is a major or severe obstacle to doing business. These findings are also confirmed by the Guyana Business Outlook Survey 2006, which found political stability (risk) to be the second top ranked external factor (out of a list of 31) perceived by firms as most likely to affect their businesses in 2006 (alongside fuel prices, electricity supply and rates, consumer spending power, and exchange rates). 14. The playing field does not appear to be level across different firms in Guyana. Micro and small firms, and to a lesser extent, medium ones are more disadvantaged than large ones. Large firms are usually the ones that export, have better access to credit, use more new technology and quality certificates, train more workers and have more educated and skilled workers and managers. Large firms (as well as foreign-owned and exporting firms) are the ones more insulated from binding constraints such as unreliable electricity or water. They are more likely to invest in own generators and wells which, of course, come at a cost. While large firms are found to enjoy better investment-climate conditions in other countries as well, it is xii worthwhile to mention that Guyanese large firms seem to do worse than large firms in other countries. Even large firms face difficult investment climate conditions compared to firms in other countries. Therefore, their competitiveness is also hampered by investment climate deficiencies. Key recommendations 15. Reforms with the greatest potential to improve the investment climate in Guyana include: i) further reforms of the contract enforcement regime and the judiciary; ii) establishing a credit bureau and credit information sharing; iii) reductions of the regulatory burden (further tax reform, customs, licenses and inspections, etc.), and iv) further enhancement of the transparency of public procurement. In some of these areas (contract enforcement, tax policy, procurement) reforms are already underway, with international donor assistance, and have also been recognized as priority areas by the National Competitiveness Strategy currently under discussion and formulation. 16. On the other hand, electricity, transport and telecommunications ­ while also very important ­ are potentially costly efforts, likely to require substantial private investment and/or donor assistance, and longer to achieve desired improvements. Incremental measures may be the best option here ­ such as improving distribution and transmission of electricity, rehabilitating roads, etc. Finally, some other areas such as loss of labor skills due to out- migration and insecurity due to crime and violence, while a high cost to firms, would require sustained long-term efforts. 17. In the area of contract enforcement and the judiciary, use of the courts is low as they are slow and cumbersome. Thus, firms rely more on trade with known customers, thereby inhibiting new entrants into the market. A relatively inexpensive remedy for case backlogs is to create a system of fast-track resolution of small claims (e.g. through a small-claims court or mandatory mediation), and to send larger commercial cases to a specialized Commercial Court or a commercial claims division in the High Court. The establishment of a Commercial Court is underway with IDB financing for training of judges, purchase of computers and other office equipment. Further strengthening of alternative dispute resolution (ADR) mechanisms such as mediation (a Mediation Center has been operational at the High Court since 2002) is desirable. Other than that, court case management and case flow in the courts need improvement; and some administrative tasks currently performed by judges could easily be assigned to court clerks. Finally, judicial reforms work best if they create the right incentives for litigants and judges. In that respect, more judicial statistics and information to assess where the main bottlenecks lie in court procedures need to be undertaken7. Court procedure rules ­ if too cumbersome ­ can also be amended in the relevant legislation8. 7Data from the Registrar of the High Court on cases filed and resolved points to substantial backlogs as of 2004. 8Data on court procedures based on a survey completed by the Guyanese law firm of Hughes, Fields and Stoby in June 2004 suggest that many delays in court cases are due to procedural requirements. For instance, rules on service of process on a defendant require 1 to 2 weeks for personal service; if that fails, substituted service may take up to a month to complete (if publication in a newspaper is used). The defendant is then given another 42 days to appear in court after substituted service. xiii 18. In the area of access to finance, a credit bureau can help resolve problems with asymmetric information in the credit market. A credit bureau is seen as another measure which can help lenders better assess risk through access to borrower information and records. It is a relatively cheap undertaking, but one that requires substantial consensus to amend relevant banking laws, confidentiality laws, etc. Recent reform experiences in setting up public credit registries or private bureaus in other countries could guide Guyana how best to do that. 19. Concrete measures to reduce the taxation and regulatory burdens on private firms can stimulate investment and reduce informality. Despite the fact that perceptions of local Guyanese firms about the regulatory burden and taxes are not very negative, objective measures (time spent on regulations, days to get operating licenses, days spent dealing with inspectors) from both the survey and additional international reports (WEF, Doing Business) suggest that the regulatory burden is heavy (high taxes, inspections, etc.). This is likely to affect foreign firms and potential foreign entrants very strongly. It is also plausible that local firms are less concerned about the regulatory burden as they have already found ways to go about dealing with different regulations. Nonetheless, it is conceivable that all foreign and domestic firms would benefit, if the burden of regulation were to be eased. 20. Efforts to enhance the transparency of the national public procurement system should be deepened. The Government of Guyana has made significant efforts to reform the national public procurement system. The rules governing public procurement were revised by the 2002 National Procurement Act, which was subsequently amended by the Tender and Procurement Act of 2003; National and Regional Tender Administration Boards have been established; and standard bidding documents and evaluation criteria have been developed according to international standards. Future Government efforts in this area should focus on establishing a functional procurement monitoring and evaluation system to monitor the application of the new legal and institutional procurement system, and appointing members of the Public Procurement Commission, which is entrusted with providing oversight for procurement matters. Even though corruption is not perceived as a major obstacle to doing business by interviewed Guyanese manufacturing firms, reported bribes to secure public contracts are very high ­ at 15 percent of the contract value on average across the surveyed sample of firms. This is an additional cost that firms have to bear. Generally, corruption can harm the investment climate in several ways: by raising entrepreneurs' costs, creating a constituency in support of red tape, and distorting policymaking decisions9. Enhancing the transparency of government-firm interactions has become one of the most common strategies of fighting corruption around the world.10 E-government and e-procurement have also been found to make public procurement more open, competitive, and subject to public scrutiny. 21. In conclusion, the investment climate in Guyana has to be improved so that the private sector and the economy can grow. The present ICA serves as a diagnostic tool to point to the main deficiencies and suggest possible solutions to them (see Table 3 for the main policy recommendations and Table A.1 in the Appendix for the full list of recommendations). The 9For an analysis of the effects of corruption on the investment climate, see chapter 2 of World Development Report 2005: A Better Investment Climate for Everyone, World Bank (2004). 10For a useful analysis of firm-level survey data on corruption for transition economies, and strategies to combat corruption in those countries, see Gray, Hellman and Ryterman (2004), Anticorruption in Transition 2: Corruption in Enterprise-State Interactions in Europe and Central Asia 1999-2002, World Bank (2004). xiv work to improve Guyana's competitiveness is already underway, and the ICA can catalyze further investment climate reform as the Government and the private sector in Guyana implement the National Competitiveness Strategy in the months and years to come. xv Table 3 - A Summary of Main Findings and Recommendations Issues by Aspect of the Investment Ongoing/short-term measures Medium- and long-term measures or Climate considerations Governance and Insecurity: Business Regulations and Taxes Business Regulations and Taxes Business Regulations and Taxes · Delays in government procedures (e.g. · Reduce the frequency and length of · Implement a comprehensive fiscal reform operating licenses), and lengthy inspections by the Municipal Police, and that aims at increasing the tax base, inspections, especially those by the Sanitation and Epidemiology officials reducing tax and import duty exemptions, Municipal Police, and Sanitation and · Reduce the number of procedures for reducing incentives for evasion and Epidemiology officials obtaining operating licenses, health strengthening enforcement · Corporate tax rates are high (45 percent permits and police licenses · Consider lowering maximum corporate maximum) and complex, and, combined income tax rates (at present 45 percent) with several tax and import duty · Consider lowering import duties, some of exemptions, distort incentives which are too high Contract Enforcement and the Judiciary Contract Enforcement and the Judiciary Contract Enforcement and the Judiciary · Resolution of business disputes in court is · Reduce case backlogs through fast-track · Reform judicial procedure legislation, time-consuming resolution of small claims (e.g. through a such as appeals and other tactics used by · Court case backlogs occur according to small-claims court or mandatory debtors to delay payment information from the Registrar of the High mediation), and send larger commercial · Improve court case management Court cases to the recently established · Separate administrative and judicatory · Official court fees, while not high in an Commercial Court court functions international perspective, are over $1,000 · Further strengthen alternative dispute · Gather judicial statistics on a regular basis for filing a court case over a payment resolution (ADR) mechanisms, such as and make available publicly dispute, which is prohibitively high for mediation (a mediation center has been micro and small firms functioning at the High Court since 2002) Corruption Corruption Corruption · While corruption is not perceived as a · Deepen ongoing government efforts to · Carry out annual audits of procurement major problem, bribes paid out by firms to increase transparency in public operations secure public contracts are very high, at 15 procurement through investment in · Implement e-procurement strategy percent of the contract value training and capacity building · Establish a functional procurement monitoring and evaluation system to monitor the application of the new procurement laws and regulations · Develop e-procurement strategy xvi Infrastructure: Electricity Electricity Electricity · Firms lose 3.8% of annual sales due to · Ensure the stability of power supply and · Improve collection of service payments power outages, which is very high enhance the reliability of provision of · Continue strengthening the regulatory compared to other countries services through improving distribution framework · The reliability of electricity supply in operations and reducing technical and · Invest in new generation capacity (where Guyana is low, characterized by frequent non-technical losses feasible), and use of new, renewable and long outages (the highest incidence of · Reduce service cost and raise quality energy resources (e.g. ongoing Bank outages in Latin America and the through improvements in the distribution Bagasse Co-generation Project) as well as Caribbean (41 per year)) end of the business hydropower generation · Self-supply of electricity by Guyanese · Enhance the regulatory framework, · Promote efficiency in the sector through firms is widespread, especially among including the transparency and certainty in an increase in competition medium and large firms (82% and 100% the definition of tariffs; avoid arbitrary of which own generators) interventions, and empower market · Electricity prices in Guyana are the third participants to cut commercial losses highest in the LAC region largely due to losses in generation and distribution, and to reliance on imported oil for generation Telecommunications Telecommunications Telecommunications · · Restructure the Public Utilities Guyanese firms waited 84 days on · Adopt the recently drafted National ICT Commission (PUC) within a two- to three- average to obtain a fixed telephone line, Strategy, and begin its implementation year period to allow it to regulate the longer than the average time to do so · Present before the World Trade whole industry across LAC countries (67 days) Organization (WTO) a Basic · · The Regulator should negotiate a tariff Internet and email use by surveyed firms Telecommunications Commitment, which rebalancing plan allowing GT&T to align to interact with customers and suppliers is could pave the way for opening the its tariffs to costs (and improve the lowest in the region country's telecommunications market · efficiency); introduce lower long-distance The Public Utilities Commission (PUC) of · Introduce public tenders for all universal rates over a two- to five-year period Guyana is not an effective regulator service/access projects Transport and Logistics Transport and Logistics Transport and Logistics · Surveyed Guyanese companies reported a · Carry out ongoing plans rehabilitation of · Invest in critical trade infrastructure (e.g., 4.6 percent of shipment value lost due to existing roads plans for a new road between the Brazilian transportation failures (theft, breakage and · Establish an integrated National border and Georgetown), if investment spoilage of goods in transit), which is very Transportation Strategy in conjunction financing is secured high with the National Competitiveness · Develop regulations to improve the xvii · Customs processing times are long ­ on Strategy services provided by the Guyanese average 14 days for exporters, with a · Adopt an action plan for customs reforms trucking industry maximum time of 23 days to clear through modernization of customs · Introduce more transparent customs customs procedures (e.g. through electronic procedures; set up a customs website with processing of customs declarations and guidelines on procedures and documents documents) required to export/import Skills, Migration, Quality, and Technology: Skills and Migration Skills and Migration Skills and Migration · The scarcity of skilled labor in Guyana · Develop executive and business education · Improve the quality of school education was perceived as a major problem by programs, especially for hotel workers and (curricula and teacher training programs) firms managers, the eco-tourism and · Promote training programs based on · A small proportion of firms provided Information Communication Technology specific needs identified by new/potential formal training to their employees (26 and (ICT) sectors foreign investors, with Go-Invest playing 35 percent of firms offered internal and · Develop a national training program that a crucial role external training respectively) would correspond to the demand for skills sought by investors (foreign and domestic) Quality Quality Quality · Implement awareness programs, aimed at · Only 17 percent of surveyed Guyanese · Stimulate firms' demand for quality increasing the knowledge about using firms have quality certifications which are certification through public procurement international quality standards, especially internationally recognized (ISO9000, etc.) · Enhance the institutional infrastructure for in tourism, agribusiness and other sectors · The institutional infrastructure for metrology, standards, testing and quality where Guyana has comparative metrology, standards, testing and quality is (MSTQ) by further strengthening of advantages weak despite recent improvements in the GNBS · Establish matching grant schemes ­ with operation of the Guyana National Bureau donor support ­ for quality certification of Standards (GNBS) Technology Technology Technology · Only 38 percent of surveyed firms · Encourage technology licensing and · Define a national technology and invested in new technologies, and the capital goods investment through fiscal or innovation strategy, given priority areas majority of these (77 percent) did so by other incentives for economic development and FDI and purchasing new machines or equipment · Establish appropriate financing export promotion mechanisms for the purchase of new · Encourage R&D investment by firms equipment and machinery through appropriate incentives xviii Finance: · Only 30 percent of interviewed firms have · Initiate a feasibility study to create a credit · Adopt the legal and regulatory norms for a bank loan, which is very low bureau credit information sharing with a view to · Banks impose a very high collateral · Enhance the system of firms' financial establish a public credit registry or a requirement for most loans (all firms need reporting to make it more reliable and easy private credit bureau collateral to get a loan; collateral-to-loan to verify borrowers' financial statements · Improve corporate reporting requirements ratios are over 200 percent) by lender further · Lack of assets accepted as collateral is a · Improve internal bank and financial firms' · Enhance creditor rights through serious barrier for micro and small firms systems, which could lower loan amendments to the Companies Act (1995) when they apply for bank loans application processing costs and delays · Complete the ongoing land titling program and establish a single Land Registry Source: Prepared by authors using the Investment Climate Survey data and additional sources of information xix 1. THE GUYANA INVESTMENT CLIMATE SURVEY 1.1 The present Guyana Investment Climate Assessment is based on a survey of 163 manufacturing firms performed between November 2004 and March 2005. About 20 percent of the firms surveyed were located inside of the capital city, Georgetown, with the remaining 80 percent located outside of the capital. The Guyana ICS sample was drawn from 6 sectors ­ food, wood, garments, textiles, chemicals and mining and quarrying. Of the firms covered in the survey, 69 percent are non-exporters and 91 percent of the firms are domestically owned. After determining the sample size at the sector level, the sample was stratified by location, size range, capacity and quality control. The final sample includes micro and small (46 percent of the sample), medium (36 percent), and large firms (18 percent). The data were collected by means of face-to-face interviews of company managers, performed by trained enumerators. The survey was executed by the private Guyanese firm CEMCO Inc. and the World Bank. Figure 1.1 shows the sample composition by sector. Additionally, 32 hotels, lodges and tourism firms were interviewed in the same period. Those data provide information on the main obstacles faced by tourism firms in Guyana, and are reviewed in detail in Chapter 6 of Volume 2. Figure 1.1 - Sample Composition by Sector 3% 6% 4% Food 7% Wood Garments 54% Textiles Chemicals 26% Mining & quarrying Source: World Bank Guyana ICS, 2005 1.2 Investment climate survey data provide both subjective and objective indicators about different obstacles which firms face. Among the former, are firms' perceptions and rankings (Figures 1.2 and 1.3). Among the latter are a multitude of indicators such as the percentage of time spent on regulations; the percent of sales spent on informal payments; the percent of sales spent on security costs; the share of consignment cargo lost during transportation, etc. In the comparisons under each thematic area that follow, we mainly focus on objective indicators, especially when performing international comparisons11. 11Comparing survey perception measures across countries is prone to problems to do with optimism/pessimism associated with recent economic growth performance, etc. 1 Box 1. What is an Investment Climate Assessment?12 Investment climate assessments systematically analyze the conditions for private investment and enterprise growth in a country, drawing on the experience of local firms to identify the areas where reform is most needed to improve the private sector's productivity and competitiveness. By providing a practical foundation for policy recommendations and involving local partners throughout the process, the assessments are designed to give greater impetus to policy reforms that can enhance the private sector's performance. Produced by the World Bank Group in close partnership with a public or private institution in each country, the investment climate assessments are based on a survey of private enterprises designed to capture firms' experiences in a range of areas -- financing, governance, regulation, tax policy, labor relations, conflict resolution, infrastructure services, technology, and training, and others. All these are areas where difficulties can add substantially to the costs of doing business. The survey attempts to quantify firms' costs associated with investment climate bottlenecks. Using a standard methodology, the assessment then compares the survey findings with those in similar countries to evaluate how well the country's private sector is competing, and to benchmark the country's conditions to those in other comparator countries. The findings of the survey, combined with relevant information from other sources, provide a practical basis for identifying the most important areas for reform aimed at improving the investment climate. The findings and policy recommendations emerging from the assessments are discussed extensively with the private sector and other stakeholders in the country. This broad dissemination of the findings is aimed at engaging not only policymakers but also business leaders, investors, nongovernmental organizations, and the donor community in shaping the national private sector development strategy, forging consensus on the priorities for reform of the investment climate, and laying the groundwork for concrete responses to the problems identified. The present assessment is based on a survey performed between November 2004 and March 2005, with a sample covering approximately 200 Guyanese firms. The sample covered establishments in seven industries, including 6 manufacturing sectors, plus hotel and hospitality services. The questionnaire was based on the standard World Bank ICS questionnaire, to contribute to the Bank's cross-country data set of general business environment issues. Specific questions regarding tax regulations and tax and import duty incentives were added, as it became clear that these aspects were very important to assess the overall investment climate. All firm sizes were included, including micro, small, medium and large firms. For this purpose, the following classification for firm size by number of full- time workers was used, i.e. large (50+ workers); medium (15-49), small and micro (<15). A World Bank team and the Guyanese company CEMCO selected the survey sample. Trained enumerators collected the data in face-to-face interviews of company managers. Finally, the Investment Climate Survey methodology differs from the Doing Business Project's methodology in several key aspects. While both the ICS and Doing Business use surveys, the ICS is a survey of firm managers, whereas Doing Business employs a survey of lawyers, accountants, business consultants and government officials. The ICS sample is drawn using information about all registered firms in a country, and covers between 200 and 1,000 companies, depending on the size of the economy. In contrast, Doing Business typically relies on the answers of usually one law firm per topic, with two senior partners verifying the survey answers. Since Doing Business uses factual information about what laws and regulations say, and uses multiple interactions with the respondents to clarify potential misinterpretations, having a representative sample is not considered a problem. Therefore, one would expect differences in, say, the time to start a business or the time to resolve a court case, as measured by the Doing Business and the ICS for any given country. Furthermore, Doing Business makes several crucial assumptions: usually the data are representative of regulations in the country's most populous city, and in that respect may not be a good reference point for the rest of the country. The ICS, however, covers all geographic regions of a country. Doing Business often focuses on one type of legal form of a business ­ the limited liability company. In contrast, the ICS covers all legal forms, including sole proprietorships. Finally, Doing Business also assumes that the firm has full information about required regulatory processes and does not waste time in completing procedures. This is not the case with the ICS data. 12 Adapted from World Bank (2006), Chile Investment Climate Assessment 2 Figure 1.2 - Ranking of Constraints to Doing Business: Percentage of Guyanese Manufacturing Firms who Rate Each Area as a Major or Very Severe Obstacle (0 ­ no obstacle, 4 ­ very severe obstacle) Cost of financing (interest rates) 56 Macroeconomic uncertainty (inflation, exchange rate) 44 Electricity 41 Skills and education of available workers 40 Access to financing (collateral) 31 Political uncertainty/instability 30 Crime, theft and disorder 30 Access to land 28 Telecommunications 25 Customs and trade regulations 18 Corruption 18 Tax rates 17 Transportation 17 Environmental regulations 13 Anti-competitive or informal practices 13 Labor regulations 11 Regulatory Policy uncertainty 10 Tax administration 9 Legal system/conflict resolution 8 Business licensing and operating permits 6 0 10 20 30 40 50 60 % Source: Guyana Investment Climate Survey, World Bank 2005 3 Figure 1.3 - Ranking of Constraints to Doing Business: Percentage of Guyanese Hotels who Rate Each Area as a Major or Very Severe Obstacle (0 ­ no obstacle, 4 ­ very severe obstacle) Cost of financing (interest rates) 59 Tax rates 57 Electricity 56 Macroeconomic uncertainty (inflation, exchange rate) 53 Crime, theft and disorder 53 Skills and education of available workers 50 Anti-competitive or informal practices 44 Corruption 41 Customs and trade regulations 34 Regulatory Policy uncertainty 29 Tax administration 29 Access to land 28 Legal system/conflict resolution 25 Telecommunications 22 Environmental regulations 19 Labor regulations 19 Access to financing (collateral) 16 Transportation (access to hotel nationally and internationally) 16 Health regulations 13 Business licensing and operating permits 13 Immigration rules for tourists 9 0 10 20 30 40 50 60 70 % Source: Guyana Investment Climate Survey, Hotels Module, World Bank 2005 Figure 1.4 - Percentage of Firm Sales Lost Due to Quantifiable Constraints in the Areas of Infrastructure and Governance Security costs 1.30 Costs due to water 1.50 interruptions Crime losses 3.40 Payments "to get things 3.50 done" Costs due to electricity 3.80 interruptions Costs due to transport 4.60 problems, incl. theft 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 % of total annual sales Source: Guyana ICS, 2005 Note: Costs due to transport problems are expressed as percent of shipment value. All other losses and costs are expressed as percent of firms' annual sales. 4 1.3 Guyanese manufacturing firms spend on average 13.5 percent of their total annual sales on different costs related to infrastructure bottlenecks (power and water interruptions), and to governance and insecurity, such as informal payments to "get things done" as well as direct losses related to crime and costs spent on security (Figure 1.4). These costs are higher since the 13.5 percent does not include transport losses (due to breakage, spoilage or theft during transportation of goods). The latter losses represent 4.6 percent of firms' shipment values on average. Therefore, total losses are high, and above reported losses related to the same problems in Central American comparator countries (11.9 percent on average for Nicaragua, Guatemala and Honduras; 9.9 percent for El Salvador). Therefore, these objective measures, point to potential savings and improved firm competitiveness if some of these bottlenecks were to be removed. 1.4 International investment climate comparisons for Guyana are complicated by the fact that only one other Caribbean country (Grenada) had an Investment Climate Survey in 2004, with reasonably comparable data (the two surveys were not identical)13. Other small Caribbean states, such as the OECS, have not had such a survey completed, and are not covered by most of the international benchmarking reports such as Doing Business or the WEF's Global Competitiveness Report. This leaves a set of Central and South American countries which have had Investment Climate Assessments and surveys in recent years, as well as other developing countries (mainly in Asia and Africa). 1.5 The comparator countries used in the Guyana ICA were chosen according to certain formal criteria, such as their per capita income, geographical location, population size, crime levels, ethnic polarization, and availability of ICS data. Following this approach, Nicaragua, Honduras (both low-income, IDA countries) were chosen as comparators. Caribbean countries are thought of as natural comparators for Guyana. Accordingly, an expanded comparator set included small states from the Caribbean such as Grenada, the OECS member states, as well as Jamaica and Suriname, where possible. In certain comparisons, e.g. crime and violence, Colombia, Jamaica, Trinidad and Tobago, and El Salvador were used, given similarity in crime levels. Mauritius and some other African countries where ICS data are available (Senegal, Uganda, Zambia) were used in limited comparisons related to emigration, training and worker skills. In all cases, comparisons with richer and larger countries should be treated with caution as small states possess a lower government capacity, and there may be high fixed costs of certain reforms, which ­ even if desirable ­ will be difficult to undertake in a small state. 13As of March 2006, an Investment Climate Survey of firms in the Dominican Republic was completed; however, a full-fledged ICA was not prepared. 5 2. GOVERNANCE AND INSECURITY BUSINESS-GOVERNMENT RELATIONS 2.1 High regulatory burdens ­ measured by the costs of interacting with government officials and regulators ­ are associated with worse rather than better economic outcomes. Governance, insecurity, contract enforcement and business-government relations are related facets of the business climate which affect risk in investment projects, and thereby firms' decisions to invest. Recent theories of regulation and growing empirical evidence challenge the public-interest theory, according to which governments enact regulations of business activity to achieve socially desirable goals. Thus, a number of recent empirical studies (e.g. Djankov et al. (2002), Djankov et al. (2003), Glaeser and Shleifer (2002), Glaeser and Shleifer (2003)) find that a heavier regulation of business registration ­ measured in both the time required to register a firm and its cost ­ is associated with worse rather than better economic outcomes. For example, Djankov et al. (2002) review data for the time, official cost and number of procedures to start a new firm in 85 countries, and establish that countries with heavier regulations of entry have a larger unofficial economy and more corruption, but not better quality of private or public goods. 2.2 According to the ranking of investment climate constraints shown in Figure 1, Guyanese manufacturing firms interviewed by the ICS find finance, electricity and labor force skills as key constraints to doing business. Yet, they also indicate that macroeconomic and political uncertainty is preventing investment and growth. Among interviewed hotels, high tax rates, customs regulations and regulatory policy uncertainty feature high on the list of obstacles to doing business (Figure 1.2). In view of these perceptions, we next summarize some of the findings with respect to the regulatory environment and the corporate taxation burden in Guyana. 2.3 The ICS data reveal that Guyanese hotel managers spend significantly more time on dealing with government regulations (e.g. registrations, taxes, inspections, licenses, customs, etc.) than manufacturing managers do. On average, 8.6 percent of the working time of hotel managers is spent on such regulations, and this figure is comparable to what managers of large manufacturing firms spend (7.0 percent) (Figure 2.1). For comparison, the Grenada ICS ­ conducted in 2004 ­ also found that companies in tourism-related sectors encountered more administrative hurdles than other companies. Among Guyanese manufacturing firms, those in the chemical and pharmaceutical industry also devote a higher proportion of their time to regulatory matters ­ at 6.4 percent on average. In contrast, firms in the textile industry spend on average less than one percent of their time on dealing with regulations. Finally, foreign-owned firms spend longer on regulations than domestic ones do (8.3 percent vs. 3.2 percent of senior management's time). More time spent on regulations is costly to firms, and it is generally associated with more opportunities for bribe requests by officials and less trust in the government by firms. 6 Figure 2.1 - Percentage of Senior Management Time Spent on Regulations in Guyana, By Type of Firm Non-exporter 2.4 Exporter 5.6 Outside of capital city 2.5 In capital city 7.0 Domestic 3.2 Foreign-owned 8.3 Textiles 0.9 Mining & quarrying 2.1 Garments 2.8 Food 3.5 Wood 3.6 Chemicals 6.4 Tourism 8.6 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Source: Guyana Investment Climate Survey, World Bank 2005 2.4 Guyana's business taxes are high and complex, and there are many exemptions, remissions, holidays, etc., to compensate for the high rates.14 The corporate income tax (CIT) rates are 35 percent for manufacturing and 45 percent for trade and services, which are very high. The 45-percent rate is the highest in Latin America and the Caribbean, and the 35 percent rate is among the top half-dozen; in 2004 the average CIT rate in Latin America was 30 percent.15 Roughly the same is true for import duties and other charges for machinery and equipment. Combined import duties, consumption taxes and port charges can add up to as much as 90 percent for some equipment ­ a prohibitively high amount which no investor can, or should be expected to bear. 2.5 Recently the Government has made efforts to reduce tax and import duty exemptions and minimize discretion in their granting. Incentives or exemptions are no doubt the main reason why Guyanese manufacturing companies do not identify high tax rates as a serious problem, are nevertheless still available under the current tax law. Eligibility for these incentives has been codified to some extent by the Fiscal Enactment (Amendment) Act of 2003, which defines sectors and geographic regions where investments are eligible. Recent fiscal legislation reforms have targeted the removal or minimization of discretion in the granting of exemptions. In this regard, the earlier discretionary powers of the Minister of Finance to grant or not grant exemptions (to taxes on imports and on corporate profits) have been eliminated, and at present the Guyana Revenue Authority (GRA) has full autonomy over the granting of tax exemptions and concessions. To increase transparency, the GRA started in 2004 to publish annually the list of firms and persons benefiting from tax exemptions, including the amounts. 14As shown in Figure 1, only 17 percent of industrial respondents viewed Tax Rates as a major or very severe obstacle to doing business, which made Tax Rates the 12th-ranked obstacle. Tax administration was ranked even less problematic--18th out of 20 different constraints. Hotel managers, however, were far more critical about tax rates ­ ranking them in second place out of 21 constraints, with 57 percent considering Tax Rates a major or severe constraint. 15It is because of these very high top corporate tax rates that Guyana received the worst score on its Corporate Taxation Index by the Heritage Foundation for 2005 (the ranking is on a 1-to-5 scale, with higher values indicating worse outcomes). See Heritage Foundation, 2005 Index of Economic Freedom, Guyana Country Page. 7 Furthermore, a five-year limit on income tax holidays was introduced (with the exception of certain sectors, where the limit is 10 years). Finally, administrative guidelines and procedures under the Customs Duties (Amendment) Order 2004 were adopted to minimize the scope of discretion in the granting of customs duty exemptions. 2.6 In line with the above, almost one-third of large Guyanese manufacturing firms reported having had tax exemptions between 2000 and 2003, as did also 44 percent of foreign companies and 28 percent of exporting companies interviewed in the ICS. Among the interviewed tourism firms, 12 percent were eligible for tax holidays, and 10 percent received such tax holidays. Tax exemptions were most common among firms from the mining (22 percent), chemical (20 percent) and wood (16 percent) industries. 2.7 The Fiscal Enactment (Amendment) Act of 2003 represents some potential improvement over the earlier legal framework. It simplifies to some extent the criteria for granting incentives and it moves toward removing political influence on the granting of incentives. But the Act does not go nearly far enough. It still permits broad discretion, and in practice, according to all persons interviewed by the ICA team, incentives are perceived as still being given out on a case-by-case basis and as being subject to political influence. It must be noted that a case-by-case approach is within the letter of the law since the law does not provide for automatically enforceable rules.16 If political influence is to be removed, "incentives" must be automatic and made part of the Tax Code. 2.8 Even though Guyana has adopted new tax legislation aimed at reducing discretionary tax exemptions, not much appears to have changed. There is a lingering sentiment among the interviewed Guyanese private businesses that discretionary exemptions still remain. Referring respondents to the new tax legislation, the survey asked them whether they expected to continue receiving the tax exemptions that they had received prior to the tax law reform in 2003. An overwhelming majority of companies (90 percent) expect to continue receiving the same exemptions in the future (Figure 2.2). 16Persons in Georgetown interviewed by the ICA team were unanimous on this point of case-by-case discretion. The US State Department's "2005 Investment Climate Statement" reports the same. 8 Figure 2.2 - Corporate Tax Exemptions in Guyana, by Type of Firm 100 100 100 100 92 94 90 88 90 83 80 75 75 70 67 60 % 50 44 40 31 29 30 22 20 20 16 13 13 12 10 7 10 5 0 Sample all e ls edium Larg ng ing od orti porting stic ca me reign Wo urism Fo emi ole icro-Sm M To Ex Do quarry Ch M n-exp & Wh No ining M Percentage of firms with tax exemptions between 2000 and 2003 Percentage of firms with tax exepmtions who expect to continue receiving tax exemptions Source: Guyana ICS 2.9 Exemptions from import taxes and charges are rated by Guyanese business executives as more important than corporate income tax holidays. For instance, 21 percent of manufacturing ICS respondents rated import tax exemptions as very important for reducing costs compared to 11 percent for income tax holidays (Figure 2.3). Import taxes and charges are high, on the other hand, can be avoided only by smuggling or bribery, and come "upfront". Taxable income is subject to more subtle adjustments (many of which are legal) and comes due only in the future, if and when profits begin to be earned. Figure 2.3 - Importance of Competition, Import Tax Exemptions and Income Tax Holidays for Reduction of Firms' Costs and Development of New Products 80 70.8 70 60 50 39.3 %40 37.2 28.3 30 20.2 21.3 20 17.5 10.7 10 0 Income tax holidays Pressure from foreign Tax exemptions on Pressure from domestic competitors imports competitors Percentage of firms considering each a very important influence Percentage of firms attaching importance to each influence Source: Guyana ICS 2.10 The relative dominance of tax exemptions on imported inputs and capital equipment over tax holidays is also demonstrated by the surveyed 32 hotels in Guyana. More than half of them (52 percent) reported using such import tax/duty exemptions, which is all the firms that were eligible for such import exemptions to begin with. In contrast, only 12 percent of interviewed hotels were eligible for income tax holidays, and 10 percent used such tax 9 holidays. Both import tax exemptions and tax holidays were deemed equally important for firms' business and exports, and equally expensive in terms of administrative and other costs, deemed from moderate to substantial. However, the time to get the two incentives differs markedly: tourism firms waited on average four and a half months (135 days) to get an import tax exemption, and only about two weeks (13 days) to be granted an income tax holiday (Figure 2.4). The latter finding probably reflects the higher importance attached to import tax exemptions. Figure 2.4 - Eligibility and Use of Input Tax Exemptions and Tax Holidays by Guyanese Hotels 160 140 135 120 100 80 60 52 46 40 20 12 13 10 0 Tax holidays Customs exemptions on imported capital equipment or inputs Percentage of firms eligible to use incentive Percentage of firms using incentive Average number of days to get incentive Source: Guyana ICS, Tourism module 2.11 While corruption does not feature high on the list of obstacles to doing business, bribes paid out by firms to secure public contracts are reported to be quite substantial17. Only 18 percent of manufacturing respondents indicated that corruption is a major or severe obstacle18. However, as shown in Figure 2.5, Guyana has a very high reported level of bribes to get government contracts ­ at 15 percent of the contract value. This is second only to Peru (20 percent) in the region, even though the other comparator countries also record high levels of informal payments for public contracts ­ from 15 percent in Ecuador to 13 percent in Guatemala. Furthermore, a high share of Guyanese firms report incidence of such payments. For instance, 12 percent of interviewed Guyanese manufacturing firms say that when doing business with the government informal payments are expected to get the contract. In contrast, in countries with more transparent public procurement systems the share of firms who indicate the need to pay gifts to government officials to get government contracts is substantially lower. 17While the Guyana ICS for industrial firms did not reveal serious perceived problems related to corruption, other sources point to corruption being a problem. For example, Transparency International's 2005 Corruption Perceptions Index (CPI) for Guyana is 2.5 (on a scale of 1 (worst) to 10 (best)), placing it 117th among 159 countries, on par with Afghanistan, Bolivia, Ecuador, Guatemala, Libya, Nepal, the Philippines and Uganda. 18Note, however, that surveyed hotels complained more about corruption, with 41 percent rating it a major or severe obstacle. 10 Figure 2.5 ­ Reported Bribes to Obtain Government Contracts, percent of contract value Peru 20 Guyana 15 Ecuador 15 Nicaragua 14 Honduras 14 El Salvador 13 Guatemala 13 0 5 10 15 20 25 % Source: World Bank Investment Climate Surveys, 2002-2005 2.12 Guyanese firms were inspected on average 11 times during 2004 by different government regulatory agencies; most frequently by officials from the Environmental Department (five times on average), Sanitation and Epidemiology (three times) and Labor and Social Security (twice on average). Each visit by inspectors lasted, on average, 128 hours or about five days. The lengthiest inspections were registered by officials from the Municipal Police ­ on average across 10 firms reporting such inspections ­ at 162 hours each (seven days) each. The latter, however, display wide variation: from one hour to 38 days. As shown in Table 2.1, both the frequency with which firms were inspected and the average length of a single inspection were higher in Guyana compared to Grenada. Table 2.1 - Inspected Firms and Frequency and Duration of Inspections Share of Firms Maximum Frequency Median Duration Inspected in 2004 (visits per year) (days/visits) Guyana Grenada Guyana Grenada Guyana Tax Inspectorate 59% 12 12 1.0 0.04 Labor and Social Security 63% 6 30 0.6 1.3 Fire and Building Safety 62% 3 12 0.8 1.3 Sanitation/Epidemiology 47% 12 52 0.3 1.9 Municipal Police 8% N/A 52 N/A 1.9 Environmental 80% 7 52 0.5 1.3 Total Inspections (including by other agencies) 95% N/A 121 N/A 1.3 Source: Guyana ICS, and "Grenada ­ A Diagnostic Review of the Investment Climate", FIAS report, 2004 11 RECOMMENDATIONS ON BUSINESS-GOVERNMENT RELATIONS 2.13 With respect to corporate taxation, Guyana needs to deepen its ongoing tax reforms which aim at increasing the tax base. The strategy should reduce the incentives for evasion while strengthening enforcement so as to increase the actual costs of evasion. At the same time, discretion in granting any remaining incentives should be drastically reduced or simply removed. This applies to corporate income tax, as well as to duties and consumption taxes on imports. Indeed, as mentioned earlier, reform in exemptions, remissions and tax holidays has already been underway as part of the IMF's PRGF program. The discretionary powers of the Minister of Finance were removed in with the Tax Law amendments of 2004, and the Guyana Revenue Authority now has full autonomy over the granting of tax exemptions19. 2.14 The enactment of a Value-Added (VAT) and Excise Tax Law in 2005 is an important step in the right direction ­ if VAT can be implemented well. At present, progress is made with discussions involving the private sector on the regulations for implementing the VAT20. The Government has recognized that a small country such as Guyana, with high mobility of human resources and capital, should shift emphasis towards consumption taxes and away from taxes on income. Within consumption taxes, those on imports are too high, which creates incentives to smuggle and the need for legally-granted exemptions for investors. In this regard, VAT could create fiscal room to facilitate further reforms of income taxes and customs duties. 2.15 The National Competitiveness Strategy envisages more reforms in the area of corporate taxation. One issue is the implementation of VAT and excise taxes which are on track to be introduced on January 1, 2007. The Government is also planning to commission a study, examining different options for lowering the corporate income tax (CIT) rate, and to then take actions in lowering the CIT rate. 2.16 Given the reported high levels of bribes to get a public contract, the Government should enhance the transparency of public procurement. The Government of Guyana has made significant efforts to reform the national public procurement system. The rules governing public procurement were revised by the 2002 National Procurement Act, which was subsequently amended by the Tender and Procurement Act of 2003; National and Regional Tender Administration Boards have been established; and standard bidding documents and evaluation criteria have been developed according to international standards. Future Government efforts in this area should focus on establishing a functional procurement monitoring and evaluation system to monitor the application of the new legal and institutional procurement system, and appointing members of the Public Procurement Commission, which is entrusted with providing oversight for procurement matters. 2.17 Inspections by officials of the Police, Sanitation and Epidemiology, and Environment departments need to be reduced. In addition, the number of procedures for obtaining operating licenses, health permits and police licenses should also be shortened. 19A Remissions Unit entrusted with making decisions on exemptions has been formed within the GRA, but reportedly capacity still remains an issue. 20 VAT will be introduced in January 2007. The legal and regulatory frameworks for VAT implementation have been approved and now preparatory work is ongoing. 12 CONTRACT ENFORCEMENT AND THE JUDICIARY 2.18 While overall perceptions of the judicial system in Guyana are generally positive, the perceptions of court users point to significant problems in the courts. Thus, only eight percent of surveyed manufacturing firms found the judiciary a major or severe problem21. However, the percentage of interviewed firms who do not believe that the courts will uphold their contractual and property rights in business disputes rises dramatically ­ from 15 percent to 29 percent ­ once the sample is restricted to firms that have, in fact, been involved in a court case in the 3 years preceding the ICS22. In the same fashion, 43 percent of court users saw the legal system and conflict resolution as a major or severe obstacle to their business operation, in contrast to only 8 percent across the whole sample of surveyed firms. Only four percent of the firms who had not used the courts in the three years prior to the survey identified the legal system and conflict resolution as a major or severe obstacle. Therefore, Guyana has pronounced differences in perceptions of the judiciary and the legal system depending on whether or not firms have had actual experience with them (Figure 2.6). Figure 2.6 - Court Users Distrust the Judiciary Much More than Non-Users 50 47 45 40 35 29 30 25 20 15 13 10 4 5 0 Court users Court non-users Percent of firms which consider the legal system/conflict resolution to be a Major or Very Severe obstacle to doing business Percent of firms which do not believe that the judiciary will uphold their contractual and property rights in business disputes Source: World Bank Guyana Investment Climate Survey 2005 2.19 Dispute resolution services do not feature high on the list of services provided by business associations. First, only 31 percent of interviewed firms are a member of a business association. Of these a quarter (26 percent) indicate that their membership is mandatory, and 19 percent report that membership of their association is restricted to include only members of their industry. In contrast, more than half of interviewed manufacturing firms in Guatemala and El Salvador belong to an association, and close to three quarters of survey respondents in Honduras and Brazil (Table 2.2). Second, only one-third of the firms that belong to a business association say that they get help from the association when resolving disputes with other firms, workers or government officials. This share is comparable to that in Ecuador (32 percent) and higher than in Peru (14 percent), but substantially lower than elsewhere in the region (column 2 of Table 3). 21Note that the same percentage is substantially higher for the subset of interviewed hotels ­ 25 percent of them rank the legal system and the judiciary as a major or very severe obstacle to doing business. 22Only 17 firms indicated having been involved in a court case in the three years prior to the survey; 123 firms responded that they have not been in a court case during the same period. 13 2.20 Guyanese companies attach low importance to the dispute resolution services provided to them by the business association to which they belong. Out of five different services and areas of assistance, interviewed companies which belong to an association and receive dispute resolution services rank these the lowest. Only eight percent of the same firms say that the dispute resolution services provided are the most important service afforded to them by their membership of an association. In contrast, in other Latin American countries at least one-third of the same subset of firms qualify the same dispute resolution services as being of high or crucial importance (on a scale ranging from 0 (no importance) to 4 (crucial importance)). Table 2.2 - Business Association Membership and Dispute Resolution Firms belonging to a Firms, which report Firms which report Firms which report business association, that the association that the association's that the association's (share of all firms) helps in resolving assistance in dispute assistance in dispute disputes with resolution is of zero resolution is of high Government, or low importance or crucial importance workers, and/or other firms Guyana 31% 30% NA 8% El Salvador 59% 59% 27% 37% Guatemala 53% 75% 26% 35% Nicaragua 43% 54% 13% 48% Honduras 71% 52% 27% 42% Peru 47% 14% NA NA Ecuador 97% 32% 22% 32% Source: World Bank Investment Climate Surveys, 2002-2004 2.21 In Guyana, as elsewhere in the region, a larger fraction of medium and large firms than small firms use the courts to resolve their payment disputes (Table 4). Out of 24 firms that indicated having had payment disputes in the last two years, ten (42 percent) say that none of their disputes went to court, i.e. overall 58 percent of the firms with payment disputes resorted to court action. This share is highest for medium and large firms (70 and 75 percent of those with payment disputes report some resolved in court). It is worth noting that in comparison to the four Central American countries, medium and large firms in Guyana seem more litigious ­ with twice to three times the share of firms with payment disputes going to court.23 In the micro and small firm category, however, the share of firms going to court (16.7 percent) is similar to that in Central America (Table 2.3). 23We need to emphasize here that the sample in Guyana is very small, and much smaller compared to those in Central America. Therefore, the results above are subject to this caveat. 14 Table 2.3 - Proportion of Firms with Overdue Payments That Have Filed Court Cases, by Size Micro Firms Small firms* Medium Firms Large Firms Guyana .. 16.7% 70.0% 75.0% El Salvador 7.5% 16.4% 30.6% 24.2% Guatemala 9.8% 10.4% 16.2% 28.9% Nicaragua 4.9% 18.3% 35.4% 40.0% Honduras 4.4% 16.9% 36.2% 25.3% Source: World Bank Investment Climate Surveys, 2002-2004 * The category of small firms in Guyana comprised both micro and small firms (with 1 to 15 full-time employees). 2.22 It takes longer for hotels to get a court case resolved compared to manufacturing firms: on average 453 days for the 6 hotels which were involved in a court case over the three years before the ICS24. The time varies from two weeks to three years, with a median of 350 days25. These figures are more in line with the duration of debt collection in court reported by the Doing Business database (Figure 2.7)26. In addition, a small proportion of hotels involved in payment disputes resorted to the courts ­ only three out of 27 ­ and it took on average 22 weeks to get these payment cases resolved. Court users from the hotel industry in Guyana also express substantially less confidence in the judiciary ­ half of them do not believe that the judicial system will enforce their contractual and property rights in business disputes. Only 14 percent of non-users from the set of interviewed hotels express the same lack of confidence in the judiciary. Figure 2.7 - A Comparison of Court Duration Data for Guyana Doing Business 525 ICS Hotels 453 ICS Manufacturing* 258 0 100 200 300 400 500 600 days Source: World Bank Guyana Investment Climate Survey 2005 and Doing Business in 2006 * ICS Manufacturing refers to the duration of a court's resolution of payment disputes. 2.23 About 14 percent of interviewed Guyanese firms think that bribing of court officials and judges occurs ­ the number rises to 33 percent, if we only consider the subset of respondents who had used the courts to settle payment disputes in the previous two years 24It is not appropriate, however, to compare the time in court for any cases (as is in the Hotels ICS Questionnaire) with the time to resolve a payment dispute (as is used in the Manufacturing ICS Questionnaire). The time to resolve a payment dispute in court is 22 weeks for hotels and 29 weeks for manufacturing firms. The time for any court case for hotels is 453 days on average; the same question was not present in the Manufacturing Questionnaire. The difference in the average days to resolve any dispute in court and a payment dispute in court suggests that judging about court disposition times from payment cases only may be misleading. 25Again, a caveat is in order ­ the average time for solving a court case is based on a very small sample. 26The Doing Business and ICS data differ due to differences in methodology. See more in Box 1.1. 15 (Figure 2.8). Large firms are more concerned about court bribes than medium and small ones - with one out of five (21 percent) reporting that bribe payments in the judiciary are common. Only 10 percent of medium firms and 14 percent of small and micro ones indicate that such bribes are common. Domestic firms are also more likely to think of bribes to court officials as being common ­ 16 percent of interviewed domestic firms think so as opposed to none of the interviewed foreign companies. Figure 2.8 - Percentage of Firms which Think that Bribes to Judicial Officials Are Common Court users 33 All firms 14 0 5 10 15 20 25 30 35 % Source: World Bank Guyana Investment Climate Survey 2005 2.24 The time to enforce a commercial contract in Guyana according to the Doing Business database27 is longer than that in a number of comparator countries such as Jamaica (202 days), Peru (381 days), and Ecuador (388 days), but similar to that in Honduras (545 days). The time to collect an overdue payment has become a standard measure of how well the court system functions ­ with civil-law countries generally taking longer and having a more heavily regulated judicial process than common-law ones such as Guyana. The longer the duration of a court case, the higher the costs to both parties ­ both monetary costs and opportunity costs. The duration of a simple debt collection case through court action in Guyana is among the longest in Latin America, and much longer than the same for Caribbean countries with an English common-law legal system, such as Guyana28. 27As noted at the beginning, on the Enforcing Contracts index Guyana ranks 123rd out of 155 countries in the Doing Business database, indicating a cumbersome and slow judicial process. This is also confirmed by judicial statistics compiled by the High Court, where a regular civil court case is estimated to last on average 1.5 years (Annual Report for the Year 2003 of the Supreme Court Registry of Guyana). 28In fact, Guyana has a dual legal system, based on English common law and Dutch Roman law. 16 RECOMMENDATIONS OF CONTRACT ENFORCEMENT AND THE JUDICIARY 2.25 To improve court performance, measures need to be taken to reduce case backlogs. One of the symptoms of slow justice is the case backlog ­ and there is evidence that typical civil cases in Guyana take 1 to 2 years from filing to disposition ­ something which was confirmed by the Doing Business data as well as statistics presented by the Supreme Court.29 A typical recommendation to address high caseload is to increase the number of judges or bring in more computers and equipment; studies, however, have shown that this seldom works. Instead, the focus should be on making sure that court procedures are less cumbersome, case management works well and certain types of cases ­ such as small claim cases or commercial cases go to a specialized court, or be put on a track for mandatory mediation, for instance by industry associations. Alternative dispute resolution mechanisms ­ such as mediation (conciliation) and arbitration ­ are a proven avenue to pursue in order to reduce case backlogs and improve access to justice. 2.26 It is also important to improve court management and the collection of judicial statistics ­ on numbers of cases filed per year, numbers pending, types of cases, etc. Improving court case management through computerization and assigning these tasks to court clerks rather than the judges has produced good results in some countries which have undertaken similar reforms in recent years (e.g., in some of the courts in Slovakia30). According to a World Bank study (2001), each judge currently has to spend 70 percent of his/her time on administrative tasks, thereby reducing their time for their main task ­ case adjudication. Clearly, this could be an area for improvement. 2.27 Cumbersome judicial processes should be simplified as they breed judicial corruption and create delays. As evidenced in the Doing Business and Guyana Supreme Court data, procedural complexity is high, and even though procedures are usually instituted to ensure fairness and impartiality of judgment, the empirical evidence suggests otherwise31. Simplification can apply to many elements of the typical civil judicial process ­ through instituting more oral rather than written procedures; through eliminating the need for plaintiffs to present legally motivated claims; through eliminating interlocutory appeals and motions, which defendants file just to delay payment; through improving the system of notifications of claim to the defendant and of the judgment to both parties. 2.28 The Government of Guyana should also address the perceived lack of independence and impartiality among judges. Both the World Economic Forum and the Heritage Foundation's 2005 assessments raise doubts about the independence of Guyana's courts. The US State Department's 2005 Investment Climate Statement on Guyana expresses a similar sentiment: "The Constitution provides for an independent judiciary, but law enforcement officials and prominent lawyers questioned the independence of the judiciary and accused the Government of intervening in certain cases." The Guyana Justice Sector Reform Strategy 2006- 29 See Doing Business database at www.doingbusiness.org, and Supreme Court Registry of the Cooperative Republic of Guyana, (2004), Annual Report for the Year 2003 of the Supreme Court Registry of Guyana, Georgetown, Guyana. 30World Bank (2001), "Administration of Justice and the Legal Profession in Slovakia", Poverty Reduction and Economic Management Unit, Europe and Central Asia Region 31See Djankov et al. (2003). 17 2010 identifies judicial independence among the areas to work on, and proposes reforms to the budgetary process to insulate the finances of the judiciary from political manipulation.32 2.29 Reforms should also target information-sharing, which supports both execution of judgments as well as informal contract enforcement. Public credit registries are often cited as an example of information-sharing institutions, which can facilitate exchange by allowing a business to check the credit history of another business, thus expanding transaction opportunities. Credit and asset registries can also be helpful in ensuring that the debtor's assets can be located and seized to pay the debt. Having a judgment without the ability to collect on it is not much use. Therefore, efforts could be made to institute and improve information-sharing among market participants. Improving the warehousing facilities of the execution agents (at present seized assets are kept in a location which is often burglarized) should be made a priority. 2.30 Moving commercial disputes to commercial courts could also reduce court delays and is something the Government should continue to pursue. The Government of Guyana is currently implementing a Commercial Court Project in Guyana and streamlining procedures for commercial cases. This is a welcome endeavor, and one that, if successful, can ease pressures on the civil justice system and reduce backlogs. At the moment one judge has been trained and a second is undergoing training in commercial litigation in the UK. The Commercial Court will have jurisdiction over insurance claims, banking claims, bills of exchange, liquidation of companies, trademarks, mortgages, etc.33 An important consideration is to take into account the experience of other countries, which instituted Commercial Courts and the challenges they faced.34 CRIME AND VIOLENCE 2.31 Guyana has high crime and violence rates, even by Latin American and Caribbean standards. Available crime statistics are poor, however, it is clear that, since the late 1990s Guyana's crime and violence have increased, and it is estimated that at its peak in 2002 the homicide rate reached 160 per 100,000 inhabitants (BBC, 2005). While overall levels appear to have largely stabilized, and indeed somewhat declined since 2003, even within the highly violent Latin American and Caribbean region, Guyana still ranks near the top in terms of its rates of intentional homicide, together with Jamaica, Trinidad and Tobago, Honduras, and El Salvador, among others (Harriott (2004)). 2.32 Results from the Investment Climate Survey (ICS) indicate that the crime and violence situation is one of the most serious obstacles that firms in Guyana face. Thus, 30 percent of Guyanese industrial firms consider crime, theft and disorder as a major or very severe 32See Guyana Justice Sector Reform Strategy, 2006-2010, page 11, online at http://www.gina.gov.gy/ 33For more information, see Earle, J. "Commercial Court to be Launched Shortly ­ seen as fillip for investment", Stabroek News, February 26, 2006. 34For instance, Tanzania established a Commercial Court in 1999 in Dar-es-Salaam, with jurisdiction over larger claims (more than about US$12,500). It had a higher fee, but also handled claims much faster ­ in 3 to 4 months on average. By 2003, the court was experiencing difficulties as it did not have enough capacity to meet the growing demand for its services. Therefore, developing countries, especially small states, such as Guyana, where capacity is limited, may be better off instituting specialized commercial proceedings in the regular court, with training of judges and court personnel in commercial matters, educating lawyers, etc. See Finnegan (2004) for a detailed case study of the Tanzanian commercial court experience. 18 obstacle to their doing business ­ one of the top five perceived constraints (Figure 1.2). Hotels also rank crime as a serious obstacle ­ with 53 percent viewing it as a major or very severe one (Figure 1.3). Other sources of information also confirm that crime and disorder affect businesses negatively and are perceived as a problem by Guyanese firms (Guyana Business Outlook Survey, 2005). 2.33 The Investment Climate Survey indicate that a total of 38 percent of all firms have been a victim of theft or vandalism in the past year in Guyana (Figure 2.9). This affects firms in the capital city more than those in other towns (50 percent vs. 35 percent respectively); exporters more than non-exporters (51 percent vs. 33 percent respectively), and is particularly prevalent in the wood (60 percent), food (35 percent), and mining sectors (33 percent). Figure 2.9 - Incidence of Theft, Robbery, Vandalism or Arson, percent of ICS respondents who have experienced a case of theft, robbery, vandalism or arson 80% 70% 67% 60% 60% 58% 51% 50% 50% 41% 40% 38% 37% 36% 35% 35% 33% 33% 30% 30% 20% 17% 14% 10% 0% 0% ple all r s n ge te rs tic te eign ism od ow ent iles icals own sam es rrying Sm dium Lar por por Food Wo m get rget hole Me ex For Tour Text Ex Dom Gar Chem & qua Geor Geo W Non- ining In of M side Out Source: World Bank Guyana ICS, 2005 19 Figure 2.10 - Losses due to Crime and Firms' Costs to Prevent Crime, by Firm Size 40000 35000 30000 25000 US$ 20000 15000 10000 5000 0 Micro and small Medium Large Average crime losses, US$ Average security costs, US$ Source: World Bank Guyana ICS, 2005 2.34 Over 60 percent of interviewed Guyanese firms invest in security measures to guard their property and businesses (guards, equipment, professional security services) which reflects the losses they suffer due to crime (Figure 2.10). As shown above, medium and large firms are more frequently victims of criminal activities, and suffer higher losses as a result of such activities. The amounts are high ­ they exceeded several thousand US dollars in 2004. Large firms lost on average US$12,578 as a result of such events, with medium companies losing on average one third as much. Accordingly, a significantly higher share of large firms invests in security than small firms (92 percent vs. 39 percent). Generally, the shares of firms spending on security in Guyana are similar to the share of firms in Central America, which invest in security measures (Figure 2.11). Figure 2.11 - Share of Firms Which Spend Some Amount on Security, percent of ICS respondents 120 99 100 95 95 92 89 90 92 85 79 79 80 73 68 70 62 % 60 55 42 39 37 40 34 20 0 Guyana Guatemala El Salvador Honduras Nicaragua Micro Small Medium Large Source: World Bank Investment Climate Surveys, 2002-2005 20 2.35 Security costs in Guyana are about 1.4 percent of annual sales, which is below the averages for Central America (between 3 and 4 percent). In Grenada, the median value of security costs was found to be 2 percent of annual sales in 2004. For the subset of firms which spend on security in Guyana, the average amount is 2.25 percent of annual sales. The corresponding figures range between 5 and 6 percent in the four Central American countries. Despite the relatively low figures of average security costs, 10 percent of the subset of Guyanese firms with a positive expenditure on security, spend more than 4 percent of their total annual sales to secure their businesses. RECOMMENDATIONS ON CRIME AND VIOLENCE 2.36 A number of measures to prevent and reduce crime have been announced by the Government in recent years, and are currently underway. For example, the Government of Guyana has launched the National Drug Strategy Master Plan, 2005-2009, to help eradicate drug-trafficking and drug-related crime through a demand- and supply-reduction strategy. If implemented and fully funded, these initiatives may help reduce crime and violence in Guyana. The response to the rapid increases in crime and violence over the last few years has been inadequate and the Government has seemed unable to reverse the tide. The Guyana Police Force lacks sufficiently trained officers, and "as a general rule, is quite underpaid, and demoralized."35 2.37 It is fundamental to improve official data collection and the information systems of the institutions in charge of public security and justice, particularly those of the Guyana Police Force and the judiciary. This is critical to evaluate not only the general trends of crime but also the effectiveness of these institutions in deterring crime. In addition, there is a need to conduct frequent victimization surveys on the dimensions and impact of crime, especially to record unreported and under-reported crime. Lastly, the collection of information on the impact of crime on private sector activities needs to improve. The government's Bureau of Statistics could include questions on crime victimization at the firm level when collecting firm-level data. Business associations, such as the Guyana Chamber of Commerce, could develop databases on the frequency and types of crimes against their members. 2.38 A comprehensive national security policy should also incorporate measures aimed at reducing the proliferation of firearms, strengthening judicial institutions, creating educational programs to promote conflict resolution, and broadening education and employment opportunities for at-risk groups. Efforts must also be made to increase the efficiency and effectiveness of the police and the judicial systems, so that they act as more effective deterrents of criminal activities. This will include improved educational qualifications, professional training, and sufficient pay and allowances for the police, as well as better training, rationalization of the police staffing structure, monitoring and performance indicators, and reviewing salary structures and incentives. Finally, in the case of at-risk youth, it is very important to make every effort to keep young people in the educational system for as long as possible, and to provide employment opportunities for those at a greater risk of joining criminal groups and gangs. 35Stabroek News, September 9th, 2005 21 2.39 The active participation of the private sector in formulating and supporting the country's policies against crime is crucial. The participation of the private sector in the design, support and execution of policies to face the problems of crime and violence has been very limited. However, the business sector can play a much more important role, not only by supporting national campaigns and by producing information on the criminal cases that affect the members of business associations, but also by directly participating in educational and job training programs aimed at at-risk youth, as well as in other local and national crime prevention initiatives. 2.40 Experience from the Latin America and the Caribbean region and from elsewhere suggests that one of the most effective entry-points for crime and violence prevention is the local level and some of the most successful interventions are targeted interventions (e.g. a high-crime area, youth at-risk, etc.). This can be achieved through effective and multi-sectoral local partnerships with active private sector participation. An effective strategy must include elements of: (1) Judicial/ Policing Reform - ensuring that order, fairness, and access to due process is maintained in the day-to-day activities of the community and reducing the fear of crime; (2) Social Prevention - targeted multi-agency programs that address the causes and associated risk factors of crime and violence, with: (3) Situational Prevention - measures that reduce the opportunities for particular crime and violence problems through urban spatial interventions such as the Crime Prevention Through Environmental Design (CPTED) methodology. This involves integrating crime prevention principles in the design of public spaces, housing, lighting, public transport, recreational spaces, parks, etc. 22 3. INFRASTRUCTURE ELECTRICITY 3.1 Access to reliable electricity at a reasonable price is important for all types of firms. Poor electricity supply is costly as firms are often forced to self-supply at a higher price, or suffer damage to equipment from electricity voltage fluctuations. Thus, poor electricity supply makes investments less attractive. On the contrary, earlier World Bank Investment Climate Surveys have established that a reliable electricity supply increases firms' productivity.36 3.2 The reliability of electricity supply in Guyana is low. Supply is characterized by frequent and long outages, load discharges and voltage variations. In turn, poor reliability is linked to technical and institutional deficiencies on the sector. From a technical standpoint, electricity generation capacity in Guyana is limited and relies on aged and inadequate equipment, while underinvestment in the distribution grid has translated into high technical losses and vast underserved areas. From an institutional perspective, incentives for efficient provision of service under the current structure of the sector are low. Figure 3.1 - Average Number of Power Outages in Latin American Countries 41 45 40 35 30 29 30 ar yer 25 pe se 20 mit 12 14 15 10 6 10 5 0 u r ras a a Per ado mala du aragu yan El Salvador Ecu Guate Hon Gu Nic Source: Investment Climate Surveys, 2002-2005 3.3 The poor reliability of electricity supply has placed a significant burden on companies in Guyana, which lowers their competitiveness. According to data from the ICS, 41 percent of industrial and 56 percent of hotel respondents consider the poor quality of electricity supply to be an obstacle for growth. Similarly, the survey data show that interruptions 36 See chapter 6, World Bank (2004a), World Development Report 2005: A Better Investment Climate for Everyone, World Bank and Oxford University Press: Washington D.C. and New York, N.Y. 23 in electricity supply were much more frequent (more than 40 times in 2004) than in other comparator countries in the region (Figure 3.1). 3.4 The poor reliability of supply generates important losses for companies through lost revenues. Companies' losses attributable to energy outages are estimated to reach up to 4 percent of their total sales on average. However, the extent of these losses is larger for small companies (Figure 3.2), as they are more exposed to outages than larger firms, which can afford, and, indeed, invest in setting up their own power generation facilities to supplement or substitute the official supply. Losses are also higher for hotels (12 percent of sales on average). The ICS data show that while 100 percent of large firms participating in the survey have their own generators, the proportion of companies with such facilities along with the share of electricity generated internally decreases with the size of the firms (Figure 3.3). Figure 3.2 - Losses from Power Interruptions in Guyana, percent of total annual sales 14.0 12.2 12.0 10.2 10.0 8.0 % 6.0 5.4 4.4 4.6 4.7 3.8 4.0 4.0 3.5 2.9 3.2 3.5 3.4 2.2 2.0 0.0 0.0 0.0 0.0 ple ll r s ls ing ium rge rte tic ign urism Fo od od ents orgetoeorg wn own olesam Sma ed es icarry et La po porter m Wo rm M n-ex Ex Fore Do To Ga Textilehemqua C & Wh No ining In GeofG M side Out Source: Guyana Investment Climate Survey, 2005 Figure 3.3 - Self-Supply of Electricity in Guyana 100% 100% 82% 80% 64% 58% 60% 40% 37% 31% 20% 0% Large Medium Small Proportion of companies with own generator Proportion of electricity from own generator Source: Guyana Investment Climate Survey, 2005 24 3.5 Self-supply of electricity is costly and generates economic inefficiencies. A side effect of self-supply of energy is that the corporate demand for electricity in some regions of the country has decreased significantly. While private generation temporarily eases the pressures on the overall capacity for the sector, it also prevents the realization of economies of scale at a system level. Indeed, the ICS data show that self-provision of energy appears more costly to companies (up to US$0.38 per KWh) than regional and even local tariffs (around US$0.22 and US$0.25 respectively on average). 3.6 The electricity sector in Guyana suffers major losses in both distribution and commercialization activities, and these losses contribute to high tariffs. Losses at the distribution level account for up to 40 percent of the energy generated (Figure 3.4). At a commercialization level, the utility has failed to enforce collection of bills, and to eradicate theft and corruption in under billing of the service.37 Figure 3.4 - Transmission and Distribution Losses: An International Comparison 60 % 50 40 30 20 10 0 Fiji Haiti Singapore Vanuatu IrelandBarbados AntiguaSt. Lucia Grenada JamaicaDominica Samoa Guyana New Zealand St. Vincent Trinidad & Tobago Solomon Islands Dominican Republic Source: Caribbean Infrastructure Assessment Report, World Bank (2005) 3.7 An announced tariff reform will aim to rebalance the loads between industrial and domestic use through an increase in the domestic tariff, and a reduction of the industrial tariff. The new tariff structure will be implemented within a timeframe of 4 to 5 years after its approval by the Prime Minister. 3.8 The installed power generation capacity in Guyana is below internal needs and that of regional peers. The installed power generation capacity in Guyana stands at 226 megawatts (MW) or 0.4 MW per capita, which is lower than in other countries in the region (Figure 3.5), and is hardly sufficient to cover the current demand for electricity in the country.38 37By some accounts, theft by domestic consumers is considered to have accounted for a loss above 25 percent of the total production of energy in 2003. In addition, up to 40 percent of large firms participating in the ICS mentioned that bribes are required to obtain an electricity connection. 38Source: Guyana Energy Agency 25 Figure 3.5 - Installed Generation Capacity Per Capita, MW per 1,000 of population 1.2 1 0.8 0.6 0.4 0.2 0 Trinidad Barbados Suriname Guyana Jamaica Honduras Haiti Source: Latin American Energy Organization 3.9 The investment required to further develop the electricity sector in the long-term may be beyond the financial constraints of the Government of Guyana. The development needs of the power sector in Guyana include not only the enhancement of the installed generation and distribution facilities, but also the reduction of the reliance of the sector on fossil fuel and the improvement of energy efficiency. However, the required investments to meet these needs are high, which enhances the case for private participation. Indeed, the World Bank estimates that an increase in electricity intensity in Guyana to that of peer Caribbean countries would require investments over the next 10 years between US$805 million and US$1,497 million (between 10 and 19 percent of Guyana's GDP), Figure 3.639. However, under the current ownership structure of the system, this level of investment would pose a significant burden on the Government of Guyana, and would create considerable debt sustainability concerns. Figure 3.6 - Electricity Intensity (KWh per capita) 7000 6000 5000 itapacrep 4000 h 3000 W K 2000 1000 0 as e vis a tiguaepubl ic t ham m ina inidadrbados aica enad yana Haiti Ba Jam dNe An R Gu Sur Tr Ba an Gr .Vincen St Kitts St. minican Do Source: UNDP Human Development Report 2005 39Electricity intensity refers to the amount of electric power used per person on average. Guyana's power intensity stands at 0.8MWh, compared to a target of 3 to 4 MWh, World Bank (2005). 26 3.10 Independent Power Producers (IPPs) own and operate 45 percent of the installed generation capacity, which is thermoelectric. Moreover, all the installed capacity relies on oil for electricity production. There are plans for introduction of power generation facilities based on renewable resources, however, this would still account for a relatively small share (10 percent) of the generation capacity in the country. RECOMMENDATIONS ON ELECTRICITY 3.11 A strong emphasis must be placed on reducing Guyana's reliance on oil for electricity generation, through government initiatives for adoption of new technologies based on renewable resources. Guyana's reliance on oil for power generation has translated into high electricity prices and under-provision of service. Going forward, the ability of the country to create a better mix in power generation that includes more use of renewable resources will be essential to ensure the stability of the sector and enhance the reliability of provision. To this end, it may be necessary to implement clear incentives for adoption of new technologies by GPL and independent producers. One example of expansion of capacity and access through renewable sources is the Guyana Sugar Corporation (Guysuco) Bagasse Co-generation Project40, which is estimated to expand the company's generation capacity by a further 30 MW by the end of 2006 through a bagasse co-generation scheme (as part of the US$110-million Skeldon Sugar Modernization Project)41. One third of the new capacity would be allocated to the local grid42 through a Power Purchase Agreement. 3.12 The participation of the private sector in energy could strengthen the provision and quality of the service. Public ownership of electricity supply poses fiscal risks for the government and limits the possibilities for required investments. Efforts have been made to enable private participation in power generation. However, a significant enhancement of the regulatory framework will be required in order to ensure the viability of GPL as a potential private venture, and to encourage further private investment. While private participation is desirable, it may also not lead to significant improvements when regulatory capacity is weak and enforcement of contracts is insecure, as is the case in Guyana. 3.13 The Government should place a particular emphasis on improving the regulatory framework, including transparency and certainty in the definition of tariffs, avoidance of arbitrary interventions, and empowerment of GPL to cut commercial losses. The financial difficulties of GPL are due to a combination of net operating losses (i.e. tariffs below costs) and high commercial losses. With respect to operating losses, an adequate, transparent and enforceable tariff structure must be defined, taking into account that the implementation of price 40 The project will receive financial payments under the Clean Development Mechanism of the Kyoto Protocol through the purchase of Carbon Emissions Reductions. 41 Co-generation refers to the simultaneous generation and productive use of both thermal and electrical energy. Sugar mills represent good opportunities for co-generation as they require the provision of electrical and thermal energy in their production process: heating is required for the evaporation of sugar cane juice, while electricity is required for cane preparation and crushing equipment. Electricity generated using sugar bagasse can meet the mills' needs and produce sellable residuals. 42The local grid refers to the Berbice Interconnected System where there are 10,000 unserved customers according to Booker Tate (2004). 27 caps poses significant contingent liabilities to the government.43 Commercial losses are a major problem for GPL, and must be addressed in order to ensure the financial viability of the company, regardless of its ownership. Reducing these losses requires significant support by the Regulator, as well as empowering the utility to collect due bills from consumers. 3.14 The Government should consider additional short-term mechanisms to enhance efficiency in the sector through more competition. The consolidation of the institutional framework required to ensure a successful privatization of GPL may not be achieved in the short term. Some mechanisms can be further supported in order to create incentives for efficiency in the sector. One of these refers to the strengthening of competition in power generation. For example, a mechanism implemented in Jamaica requires a bidding process to supply energy to the utility, in which the generation arm of the utility itself must also participate, thereby subjecting the incumbent to market pressures. TELECOMMUNICATIONS 3.15 Telecommunications are a serious bottleneck to business operations in Guyana. Nearly a quarter of industrial companies that responded to the 2005 Guyana Investment Climate Survey (ICS) identified telecommunications as a major or severe obstacle to business operations, the highest in Latin America, more than double the average in the region and four times the rates in El Salvador, Guatemala and Brazil. Telecommunications also ranked second after electricity as a perceived obstacle to business by Guyanese firms among infrastructure-related constraints. 3.16 According to the ICS data, Guyanese businesses face one of the longest delays in Latin America to obtain a fixed telephone line ­ 84 days on average44, compared to an average of 67 days in the Latin American and Caribbean region as a whole (Figure 3.7). While Guyanese firms waited, on average, less than firms in Honduras, Ecuador and Nicaragua, the waiting time was substantially longer than that experienced by firms surveyed in Guatemala, Peru, El Salvador and Grenada, with the latter two countries' firms waiting on average one week to get a telephone line. In addition, 10 percent of the Guyanese firms which applied for a mainline telephone connection in the two years preceding the survey revealed that an informal payment (a bribe) was expected or required to get the service. 43Government subsidies may be required to maintain the operation of the company when price caps are implemented. 44This is based on 55 ICS respondent firms which applied for a mainline telephone connection in the two years preceding the survey. Three of these 55 firms indicated a wait time of more than one year. 28 Figure 3.7 - Average Waiting Time for Telephone Line Installation (Number of Days) Honduras 170 Ecuador 130 Nicaragua 118 Guyana 84 Latin America and Caribbean 67 Guatemala 48 Peru 10 El Salvador 7 Grenada 7 0 20 40 60 80 100 120 140 160 180 days Source: World Bank Investment Climate Surveys, 2002-2004 Note: The number of days for Grenada is the median across 44 firms which applied for a fixed telephone; elsewhere means are used. 3.17 Guyana has the lowest percentage of companies interviewed by the ICS that regularly use email to interact with clients or supplies among Latin American countries. It also ranks second lowest, after Nicaragua, on the percentage of firms that use a webpage to communicate with clients and suppliers (Figure 3.8). For example, only 17 percent of companies in Guyana regularly use a website to interact with clients or suppliers, compared to a Latin American average of 38 percent. In the same manner, less than one third of Guyanese firms (31 percent) use email regularly for interactions with clients, compared to more than one half of interviewed Peruvian firms, two thirds of Guatemalan firms, and about 90 percent of Chilean and Brazilian companies. This is important as previous Investment Climate Assessments (Honduras ICA, World Bank 2004) have found that use of Internet is significantly associated with higher firm productivity, controlling for other factors. Large exporting firms and firms located in Georgetown are using Internet more often than smaller, non-exporting firms and firms located outside of the capital (Figure 3.9). The lack of business use of the Internet in Guyana may be linked to the low quality and high cost of obtaining high-speed Internet connections.45 High- speed access to the Internet is increasingly seen as the key to generating productive use of the Internet by consumers and businesses. The only company that offers wire-line high-speed connections to the Internet (i.e. digital subscriber lines or DSL) is GT&T, and the highest upload and download speed available is only 128 kbs (typical DSL speeds in other countries are 256 kbs and 512 kbs). GT&T's DSL service is also reportedly very expensive and not very reliable.46 Though some companies are offering wireless broadband access in competition with GT&T, 45Business users typically require access speeds of at least 256 kbps. 46Telecommunications and Information Highways, page 12. Anecdotal information indicates GT&T's ADSL rates are US$65 for residential and US$175 for businesses users, which is very high compared to ADSL rates in other countries which range in the $35 to $50 range. 29 even these companies are arguably required to use GT&T in order to carry data traffic between Guyana and foreign countries.47 Figure 3.8 - Firm Email and Internet Use, by Country 90 83 80 70 65 63 60 55 52 52 50 50 % 40 36 31 30 28 30 22 20 17 15 10 0 Guyana Nicaragua Honduras Peru El Salvador Guatemala Ecuador Percentage of firms which use email regularly Percentage of firms which use a webpage regularly Source: World Bank Investment Climate Surveys, 2002-2004 Figure 3.9 - Internet Use by Firms in Guyana By Firm Size By Firm Location By Firm Type 65.4% 70% 30% 37.5% 40% 24.2% 60% 25% 35% 50% 20% 30% 15.0% 40% 32.7% 25% 15% 30% 20% 16.7% 10% 20% 15% 8.0% 5% 10% 10% 0% 5% 0% Located in capital Located outside 0% Large Medium Small city capital Exporters Non-Exporters Source: Guyana Investment Climate Survey, 2005 3.18 In 2004 Guyana had a penetration rate of 13.4 percent for fixed telephone lines and a penetration rate of 18.8 percent for mobile lines.48 As can be seen in Figure 3.10, the fixed penetration levels have nearly doubled since 1998, while the mobile penetration level was practically zero in 1998. While Guyana compares favorably to other countries in terms of fixed telephony, it does not fare as well in terms of mobile telephony, as illustrated in Figure 3.11. Even though the mobile telephony has grown at a faster pace than its fixed telephony, Guyana has one of Latin America's lowest mobile teledensity levels. Guyana, with a mobile teledensity level of 18.8 percent in 2004, trails the Central American average of 20.8, the Latin American average of 29.5, as well as the teledensity levels of Suriname (48.5 percent), Grenada (43.3 percent), Ecuador (34.4 percent), Paraguay (29.4 percent) and Guatemala (25 percent). When 47Telecommunications and Information Highways, page 12. 48International Telecommunications Union (ITU) database 2005. 30 comparing Guyana to 93 other countries in terms of mobile teledensity and GDP per capita, it is slightly below the trend line.49 Figure 3.10 - Mobile and Fixed Penetration Rates in Guyana 20.0 18.8 18.0 16.0 14.0 13.4 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1998 1999 2000 2001 2002 2003 2004 Cellular subscribers per 100 inhabitants Main lines per 100 inhabitants Source: ITU database Figure 3.11 - Cellular Teledensity and GDP per Capita in 2003 1000 y = 0.0033x + 3.8842 R2 = 0.7793 100 Singapore Ireland Korea Grenada Chile USA s Panama DR antt Ecuador ES nesil 10 ar habini Guyana ull e C 100 Nicaragua per 1 0.0 5,000.0 10,000.0 15,000.0 20,000.0 25,000.0 30,000.0 35,000.0 0 GDP PPP Source: World Development Indicators, (DDP World Bank) 2005, and ITU indicators (DDP World Bank) 2005 49Guyana was plotted against countries in terms of mobile teledensity and GDP per capita PPP, using data from the ITU database and the World Bank World Development Indicators. 31 3.19 Guyana has one of the lowest local and national calling charges in the Latin America and Caribbean region, which are subsidized by one of the highest priced international call prices in the Americas (Table 3.1). Local and domestic calling rates are very low, while international calling is among the most expensive in the region. For example, peak time calls to the USA are US$0.56 per minute (US$0.50 per minute off-peak)50. On the other hand, residential line rental charges are US$2.50 (US$7.50 for business lines). Local calls cost US$0.004 per minute during peak hours (US$ 0.002 per minute off peak), and long distance charges vary between US$0.012 and US$0.043 per minute, depending on the distance and time of day. Table 3.1 - Local and Long Distance Prices in 2003 (US$) Local Long Distance Local call perResidential Business lineInternational min. line charge charge (per min. to theNational US) (per min.) Guatemala 0.026 5.65 5.65 0.25 0.04 Guyana 0.004 2.50 7.50 0.50 0.012 ­ 0.043 El Salvador0.023 8.27 14.07 0.22 0.04 Honduras 0.020 2.29 5.74 0.84 0.09 Nicaragua 0.024 5.94 15.85 0.35 0.08 Costa Rica 0.008 4.09 4.97 0.45 0.01 Source: National telecommunications regulatory agencies RECOMMENDATIONS ON TELECOMMUNICATIONS 3.20 The Government should engage in more rounds of consultations on developing and publishing a comprehensive ICT Policy. Despite an excellent effort by the government in 2001 to develop an ICT-sector strategy, Guyana still lacks such a comprehensive policy for reform. The government should complete the 2001 effort and quickly issue its policy for the sector that includes its goals, strategy for obtaining those goals and an implementation timetable. In so doing, the government should conduct a broad stakeholder consultation process and work to obtain support from consumers, businesses and other stakeholders on the need for sector reform which will be critical to enabling the government to implement the strategy, including the recommendations in this report. The reform policy should be comprehensive, taking into account the legal, regulatory and market structure aspects of the sector. 3.21 Recognizing that GT&T's 20-year monopoly is the single biggest obstacle to the development of the ICT sector in Guyana, the Government should make a thorough assessment of the range of options it has before it to reform and liberalize the sector, as well as the consequences of those options, as the basis of its Policy development and to be 50Stern, Peter (2006), Promoting Investment in Information and Communications Technologies in the Caribbean, Economic and Sector Studies Series, Inter-American Development Bank Washington D.C. 32 included in its WTO commitments (see below). Important lessons should be drawn from similar, successful efforts in other countries that have renegotiated long-term exclusive licenses and transitioned from sectors dominated by private monopolies to competitive multi-operator environments. These countries include Jamaica, the Eastern Caribbean and Samoa, to name a few. To be successful, this long-term effort needs high-level and pro-active political support, with donors providing assistance, acting as an honest broker, and, where appropriate, convening and facilitating consultations and other processes in connection with helping the government to realize its reform objectives. 3.22 The Government should submit a schedule of specific commitments under the World Trade Organization (WTO) Basic Telecommunications Agreement, which could pave the way for opening the telecommunications market. Although Guyana is a member of the World Trade Organization (WTO), it has not submitted its schedule of specific commitments on market opening and regulatory principles under the Fourth Protocol of the General Agreement on Trade and Services (GATS). Each country can tailor its commitment, subject to agreement of the Working Party (usually the major trading partners of that country who are members of the WTO). Some countries' WTO commitments simply restate the existing legal and regulatory framework, while others are more ambitious and are used as reform levers to bring about changes in domestic market structure and the legal and regulatory enabling environment. In this context, it is important that due care be taken in evaluating the impact of these reforms on existing authorized operators. For example, reforms may have the effect of eliminating exclusive rights, which while developmentally not beneficial, may be legally binding. In evaluating the impact of reforms, an analysis of potential claims, and their merits, should be undertaken and, possible, provision made to address potential claims. A well-crafted WTO market-opening commitment implemented over a one- to three-year period can become a valuable tool to leverage change. 3.23 In accordance with its Policy and WTO Commitments, the telecommunications regulatory agency ­ the Guyana Public Utilities Commission ­ should be restructured within a two- to three-year period to allow it to regulate the whole industry and ensure fair competition. In particular, the regulatory authority should be able to enforce its regulations on all players equally, including GT&T, in order to mitigate the risk perception of potential private investors. In addition, the regulatory authority should have a higher degree of independence and a wider scope of regulatory authority in line with the WTO BTA Reference Paper, including transparency, fairness and non-discrimination in terms of competition policy, interconnection, licensing, management of scarce resources, and universal service. 3.24 The regulator should negotiate a tariff-rebalancing plan, allowing GT&T to align its tariffs to costs (and improve efficiency) and lower long-distance rates over a two to five- year period. Evidence suggests that there exist cross subsidies between long distance and local services. This situation is no longer sustainable in a competitive market and needs to be addressed. 33 TRANSPORT AND LOGISTICS 3.25 Guyanese companies involved in domestic and international trade rely heavily upon the country's sea and land transportation infrastructure. Guyanese companies rely on land and maritime transport to conduct business. Companies involved in international trade require the greatest amount of transportation infrastructure as their delivery process frequently involves trucking from factory to port (very occasionally air), and then from port to final destination. The principal mode of transport utilized by interviewed Guyanese firms depends on their characteristics. For instance, micro, small and medium companies rely mostly on land transportation ­ with 80 percent of them defining land transport as their main mode of shipment of final goods and inputs. In contrast, more than half of large firms use sea transport as their main mode of shipment of goods and inputs (Figure 3.12). Similarly, foreign firms rely much more heavily on maritime transportation than their domestic counterparts. Transportation by air is negligible except for exporting firms, 10 percent of which report that air transport is the main mode of shipping their goods. Figure 3.12 - Main Mode of Transportation of Firms' Products and Inputs, by Type of Firm 90 83 80 80 78 80 80 76 74 70 60 54 s 52 m 4848 50 46 firfo 38 40 % 30 23 20 20 22 17 20 17 13 10 7 10 3 4 3 3 0 0 0 0 0 firms all ge Lar orter mestic eign city tal All icro-Sm porter Medium Ex -exp For Do pital city capi M Non In ca of Outside Land transport Maritime transport Air transport Source: Guyana ICS, 2005 3.26 Guyana has witnessed an important improvement in its inland transportation infrastructure over the past few years but still has no roadway into Brazil. As a result, only a minority of the firms surveyed viewed the current transportation infrastructure as an obstacle to growth.51 The main road from Timehri to the port of Georgetown has been paved, thus enabling easier access to major factories in the Georgetown area and allowing goods to be transported to port more efficiently.52 The companies interviewed through the ICS agree that this effort has 51Only 17 percent of industrial firms surveyed deemed Transportation a major or very severe obstacle to doing business. 52The Mahaica-Rosignol Roads Project was approved by the IDB in 1997. For more information, see online at: http://www.iadb.org/EXR/doc98/apr/gy1094e.pdf 34 greatly improved trucking efficiency and reliability. In its current state, however, the road infrastructure in Guyana does not allow the trucking of goods between Guyana and neighboring Brazil, thereby impeding trade. 3.27 While most of Guyana's primary roads are paved, a very high proportion of the secondary road network is not, and is in a poor condition. The existing road network is approximately 1,610 miles long, 19 percent of which comprises primary roads in the coastal and riverain areas serving the agricultural sector, while the road to Linden serves the mining and forestry sectors. Most access roads are reported to be in poor condition.53 Nearly 90 percent of the primary network is paved, while the proportion is below 15 percent for the feeder network. Virtually all the undeclared network ­ 1,570 km of interior roads and trails ­ are mostly unpaved and are likely to further deteriorate if their maintenance continues to be neglected. This situation has occurred largely because of inadequate financing and the failures of the government bodies placed in charge of their maintenance over the past twenty years.54 Some 99 percent of road passenger traffic and road freight transport takes place in the coastal area, thereby reflecting the focus of road maintenance activities.55 Table 3.2 - Classification of Guyana's Road Network, 2005 Of which % of Class of Road Total/km paved/km56 category Primary roads 493 435 88 Coastal area minor roads (feeder roads) 514 66 12 Interior roads & trails 1570 21 1 Total 2577 522 20 Source: EU Transport Sector Study 3.28 More than half of interviewed Guyanese companies (56 percent) report some losses due to breakage or spoilage of their goods during domestic shipments, and 15 percent report some part of the consignment value being stolen during domestic shipments. On average across all interviewed firms, 3.7 percent of the consignment value is lost either due to breakage, spoilage or theft during domestic shipments. Across the subset of firms that do experience some losses, the total value lost during domestic shipments is 6.9 percent of the average shipment value. The corresponding figure for international shipments, involving direct exports or imports, is 7.0 percent of shipment value. However, a significantly lower share of interviewed firms report losses due to damage or theft in international shipments ­ only 13 percent of surveyed firms report losses due to damage, and only 5 percent ­ losses due to theft. 3.29 Total shipment losses reported by Guyanese firms, at 4.6 percent of shipment value on average57, are higher than in Central American comparator countries. For instance, total 53SDNP Guyana Project 54EU Transport Sector Study 2005 Technical Appendix 8 55EU Transport Sector Study 2005 Technical Appendix 1 56Paved roads are engineered roads with a wearing course of bituminous material or concrete. 57Total losses during transportation amount to 4.6 percent of the shipment value across all surveyed firms, i.e. firms which experienced and firms which did not experience losses in the year before the ICS. When we restrict the sample to only those firms which experienced some losses (there were 92 such firms), the average amount of total losses rises to 8.1 percent of shipment value. The losses range from 1 to 52 percent of shipment value. 35 shipment value lost in transit was 1.7 percent in Nicaragua and 1.6 percent in Honduras. While 4.6 percent might appear high, this value is more likely the result of the high occurrence of accidents along main roadways, and does not reflect the improvements in road quality in recent years. Figures 3.13 and 3.14 illustrate the difference between the occurrences of damages in domestic shipments vs. international shipments. As exports are primarily shipped by sea and air, the risk of damage along the roadways is dramatically reduced since transit time along the road takes up a smaller share of total transit time. Figure 3.14 also indicates that mining goods and chemicals are more susceptible to damage during domestic shipment, while the garments industry experiences almost no shipment losses. Finally, losses due to theft affect mostly firms in the wood industry, which report losing about 2.6 percent of the typical cargo value to theft during domestic shipments. Firms in the food industry are affected by theft too, albeit to a lesser degree. Figure 3.13 - Average Losses Due to Damage and Theft during Shipment of Goods, by Type of Firm and Type of Shipment 3.5 uel 3.0 va 2.5 nte 2.0 pm 1.5 his 1.0 of % 0.5 0.0 s all lfirm Sm dium Large porter orter estic eign lcity lcity o- Al exp For icr Me Ex Dom capita M Non- Incapita of tside Ou Percent of cargo value lost due to breakage and spoilage in domestic shipments Percent of cargo value lost due to breakage and spoilage in international shipments Percent of cargo value lost due to theft in domestic shipments Percent of cargo value lost due to theft in international shipments Source: Guyana ICS Figure 3.14 - Average Losses Due to Damage and Theft during Shipment of Goods, by Industry and Type of Shipment 6.0 uel 5.0 va nte 4.0 mp 3.0 his 2.0 of 1.0 % 0.0 d ts uc ents Foo oodprod rm Textiles aceuticals Ga quarrying W calsandpharm ing& in M Chemi Percent of cargo value lost due to breakage and spoilage in domestic shipments Percent of cargo value lost due to breakage and spoilage in international shipments Percent of cargo value lost due to theft in domestic shipments Percent of cargo value lost due to theft in international shipments Source: Guyana ICS 36 3.30 While Guyanese firms face high trucking costs in relation to the industrialized world, ICS data show that the companies interviewed do not regard these costs as prohibitive. Average trucking costs associated with moving cargo between the factory and the port of Georgetown range between 80 and 100 USD per TEU inclusive of insurance costs.58 The maximum trucking fee is 215 USD per TEU, with the minimum fee of 37 USD per TEU (depending on distance). These charges include the transfer of cargo between factory and port as well as the return trip of the truck and the delivery of imports from port to factory and the return of the truck to port. The Shipping Association of Guyana sets trucking rates on the basis of mileage and other costs. It is important to note that while travel from the West Bank over the Demerara River into Georgetown involves fewer miles than travel from some other locations east of the Demerara, West Bank trucking fees are higher due to bridge tolls incurred for traveling over the bridge. Shippers are charged both for the laden and the return trip of the truck across the bridge. 3.31 Due to the low risk of theft in Guyana, the insurance charges for moving goods by truck are low and consequently most companies choose to obtain limited coverage. Of the firms surveyed, companies reported only a 1.1 percent of shipment value lost due to theft last year.59 The risk perception is such that some shipping companies choose to obtain liability coverage only, and bear the remaining risk themselves. For those who choose to obtain full coverage insurance for cargo, the costs are typically 0.5 percent of the cargo value. Traffic accidents and resulting delays pose the most prevalent security threat as speeding is common. The police force possesses some speed guns, but it is clear that speed limits are widely ignored, and that much dangerous driving continues to take place. This raises questions about the quality and supervision of driving schools, and the standards applied in driving tests.60 The cost of fatal accidents has been estimated at approximately US$8 millions per annum (equivalent to 1.5 percent of GDP). The cost of non-fatal road accidents has been estimated at about US$18 millions per annum (equivalent to 3.2 percent of GDP).61 3.32 While truck efficiency has improved with recent projects, there are still limitations to full efficiency. Trucking throughout the nation's interior remains difficult. Roads leading to most factories62 are passable but development of future factories should coincide with road development leading to them. Much of the trucking inefficiencies result from the floating bridge that allows passage across the Demerara River near Georgetown. Due to the nature of its construction, trucks are limited in their total weight to 22 tons. Thus, trucks carrying loads that push it above the 22-ton weight limit are forced to reload onto smaller trucks to traverse the river, increasing monetary costs as well as the opportunity cost of time. Currently, there is ongoing work to improve the Linden to Lethem road that leads to Brazil. Should this road be paved in its entirety to Lethem, and if the bridge connecting Lethem and Brazil is completed, the resulting trade increases will undoubtedly increase the demand placed on Guyana's paved roadways. 58Shipping Association (GUY) Inc. Proposed Transportation Rates 59Guyana ICS 60EU Transport Sector Study 2005, Technical Appendix 8 61EU Transport Sector Study 2005, Technical Appendix 1 62Currently, only travel to rice factories remains difficult. 37 3.33 Over 70 percent of interviewed Guyanese firms use their own transport for shipment of goods and inputs. Among those that do so, the share of shipments made with own vehicles is 80 percent of total shipments on average. Medium and large firms are more likely to employ their own transportation ­ 75 and 74 percent of them respectively move goods with their own transportation means, as opposed to 69 percent of micro and small firms. Yet, the share of shipment made with firms' own transport is higher, on average, for micro and small firms (83 percent) than for medium and large ones (78 and 73 percent of shipments respectively). In contrast, foreign and exporting firms are both less likely to use own transport, and if they do, they move a lower share of their shipments than domestic and non-exporting firms. Finally, more than three-quarters (78 percent) of the firms that report using their own transportation means to move goods use land transportation (roadways) as their primary mode of transport. Therefore, own transport essentially refers to trucks and road vehicles, and only seldom to boats and maritime transport means. 3.34 Given the poor condition of Guyana's land infrastructure, water transport remains the cheapest method of carrying goods over long distances. Large companies and companies located in Georgetown use sea transportation more than smaller companies and those located outside of the capital city. On average, 23 percent of all companies in Guyana participating in the survey utilize the sea as their primary mode of transportation (Table 3.3). However, given the costs associated with bringing goods to port, this relatively low figure for exports is to be expected. Table 3.3 - Sea as Primary Means of Transport by Company Size and Location Total Company Size Location Large Medium Small In Outside Georgetown Georgetown Percent of Firms Using Sea 22.9 54.0 20.0 12.9 48.3 17.3 Transportation as a Primary Method Source: World Bank Guyana ICS, 2005 3.35 Guyana's water infrastructure is along the banks of the country's navigable rivers ­ Essequibo, Demerara and Berbice. The main port of Georgetown, situated at the mouth of the Demerara River, is made up of several wharves, the majority of which are privately owned.63 New Amsterdam on the Berbice River is the largest port in Guyana in throughput terms. The major facility there is a multi-buoy mooring (MBM) for midstream transshipment of bauxite from river barges to bulk carriers.64 Estimates report that approximately 1,000 km of waterways in Guyana are used for commerce purposes. Guyana has an extensive and very important river system, much used for north-south freight transport to the interior, particularly to provide access to the ports on the Berbice and Demerara Rivers.65 On each river, however, rapids and other navigational obstructions limit navigational possibilities particularly on the Essequibo. Internal barge transport is crucial for transporting bauxite, sugar, rice and other commodities. Nearly 98 percent of the sugar produced for export is delivered to Georgetown by barge.66 63SDNP Guyana Project 64EU Transport Sector Study 2005 Technical Appendix 8 65ibid 66ibid 38 3.36 The port of Georgetown's current depth and equipment levels are regarded as adequate by the companies interviewed. However, the port may be inadequate to adapt to trends in the global shipping industry. Georgetown is the location of Guyana's chief port, handling sea trade for every commodity.67 Receiving, on average, 20 ship calls per month, the port deals with between 500-600 TEU per week in imports, and loads between 350-400 TEU per week in exports. The port has a draft of 7.5 meters in the harbor, and only 6.4 meters along the pier. For comparison, the Port of Spain in Trinidad has a depth of 12 meters at its deepest point.68 While this shallow draft inhibits larger ships from calling on Georgetown, the demand for larger ships does not currently exist. With average ship sizes ranging between 600-1000 TEU for container vessels and 3000-3500 metric tons for bulk vessels, coupled with low volume through the port, the need to handle 4,700 TEU Panamax-sized container ships is not pressing. Georgetown's port equipment is also consistent with current volume. The port has several small cranes, used to load and unload rice bags, which can move 1 metric ton at a rate of approximately 50 metric tons per hour. 3.37 The most significant factor influencing trade and shipping to and from Caribbean ports is the freight rate from the U.S., followed by the rate from Europe and elsewhere. Freight rates are more important than port charges in terms of the cost of imports to and exports from the Caribbean. Port charges only represent about 10 percent of the freight rate from Miami, for example. The main driver of freight rates is likely to be volume. Freight rates for groceries and building materials from Miami to Georgetown are comparable to those to Barbados but are more expensive than the rates to Trinidad and the Dominican Republic. Table 3.4: Average Stevedoring Charges for Georgetown relative to Competitor Ports Attribute Category Georgetown Port of Spain 20' Container Discharge $220 $135 ­ 160 Loading $150 $90 ­ 104 40' Container Discharge $440 $135 ­ 160 Loading $225 $90 - 104 Source for data on Port of Spain: Colin Edghill, June 2005 3.38 Government policy should facilitate more inter- and intra-country port competition.69 Competition among ports within larger countries (Jamaica and the Dominican Republic), and among those in different countries has improved port performance. The port of Georgetown is more expensive, but is almost as efficient as the nearby port of Port of Spain, Trinidad (not including customs). The port of Georgetown's statistics were benchmarked against those of Port of Spain's for two reasons: first, Georgetown's proximity to the one in Port of Spain makes it a competitor; and second, a portion of Georgetown's exports are transshipped through the port of Port of Spain. It is important to note that Georgetown has a high long-term potential for demand as Guyana's shared border with Brazil provides the country with a large market for trade requiring port access. However, in order for Georgetown to be truly competitive, its charges have to come down. Port discharge and handling costs are at present 67A portion of bauxite exports travel through the port of New Amsterdam. 68Authors' interview with Colin Edghill, June 23, 2005 69Caribbean Infrastructure Assessment 2005, World Bank 39 significantly lower at the port of Port of Spain than at Georgetown (Table 3.5).70 This cost differential is largely due to the higher volume that Port of Spain receives over Georgetown, which allows it to realize economies of scale. However, Georgetown is more efficient when it comes to port-specific operations as it is able to move almost twice the dry metric tons per hour than Port of Spain.71 The key difference between the two ports is the volume they can and do receive. Not only is Port of Spain's import and export traffic more than double Georgetown's, but Port of Spain also handles transshipping traffic. A key factor underlying Port of Spain's ability to handle increased traffic lies in its deeper draft and more sophisticated equipment. With a 12 meter draft, 11 gantry cranes, and rail infrastructure, Port of Spain is able to cater to the Panamax-sized container ship vessel, which is beginning to dominate the global shipping industry.72 3.39 Georgetown needs to consider restructuring its port to accommodate the global growth in container trade. With its current infrastructure, Georgetown's draft will not allow for large container ships that are increasingly dominating global trade. As Guyana's trade in containers grows, its port will need to grow with it. This can either take the form of a dredging project or the construction of a different port with a deeper natural draft. However, current estimates by shippers suggest that the port of Georgetown has excess capacity, thereby implying that no drastic port restructuring is needed in the near future. 3.40 Customs clearance procedures in Guyana are associated with unacceptable delays and can be time-consuming. Although, more than half of the companies surveyed do not believe customs regulations are a hindrance to their operation and growth, exporters spend an average of 14 days in customs, with a maximum time of 23 days, compared to El Salvador, where exporters take an average of 1.6 days to clear customs and the average and longest delays reported by importers were between 6 and 12 days. The sluggish pace of the customs clearance process in Guyana does not seem to discriminate between firms of different size, as large and small companies alike spend approximately 12 days in storage, with medium companies spending closer to 18 days. Mining companies spend the least amount of time in customs at only 4 days, with wood, chemical and food companies spending the longest at 17, 14, and 12 days respectively. The Doing Business data on Trading across Borders which also measures the speed and efficiency of customs clearance confirms these finding, and even records longer times to clear customs for exports and imports. 3.41 A large proportion of Guyanese exporters and importers face additional costs in the customs clearance process. On average, 60 percent of interviewed Guyanese exporting firms reported that they make extra payments to expedite the clearance process. 67 percent of importers do the same. Interestingly, there are no major differences among the share of different size firms making extra payments in export processing at customs. In contrast, a larger share of 70The actual charges incurred at the Port of Spain are dependent on the size of crane needed to complete the work. Where Georgetown has fixed rates for 20' and 40' containers, Port of Spain accounts for different sized containers through the size of crane required. 71This comparison analysis does not include time spent in customs. 72 Ships classified as `Panamax' are of the maximum dimensions that will fit through the locks of the Panama Canal, each of which is 1000 ft long by 110 ft wide and 85 ft deep. Thus a Panamax ship will usually have dimension of close to 965 ft long (294m), 106 ft wide (32.3m) and a draft of 39.5 ft (12.04m). 40 interviewed medium and large companies compared to micro and small ones indicate that they had to make such extra payments during import clearance procedures. In terms of industry, food processing and wood companies are most likely to be subjected to extra payments (formal or informal) at customs (over 60 percent of both groups report making extra payments when exporting).73 3.42 About one-third of exporting and importing firms that make extra payments to expedite customs clearance report that they make such payments informally. This represents 19 percent of all exporting firms and 20 percent of all importing ones ­ percentages which are not trivial (Figure 3.15). Furthermore, informal payments are made, for the most part, over and above what these companies pay in formal fees to agents and other facilitators to help with customs clearance. In that sense, costs of customs clearance are further increased. Figure 3.15 - Reported Incidence of Informal Payments at Customs, by Firm Size 40 37 35 30 27 25 22 20 % 20 19 16 15 15 10 8 5 0 All firms Micro-Small Medium Large Percent of all exporting firms Percent of all importing firms Source: World Bank Guyana ICS, 2005 73Due to small sample sizes, it is not possible to make inferences about extra payments made by the firms in the other 4 industries which were interviewed. 41 RECOMMENDATIONS ON TRANSPORT AND LOGISTICS 3.43 The potential for trade with neighboring Brazil suggests that the country needs to pursue its investment plans for improving and maintaining its road infrastructure. Long- term improvement measures will ultimately depend on when the road to Brazil is paved and fully functional for freight traffic between Guyana and Brazil. Currently, low disposable incomes by the Guyanese, low productivity, and lack of ability to transfer goods by truck (or rail) to neighboring countries results in low volume at the Georgetown ports. Should the road to Brazil become suitable for freight traffic, incoming and outgoing goods between Brazil and Georgetown would increase Georgetown's volumes and justify a dredging project, or the construction of a deep-water port. 3.44 To improve efficiency and to facilitate the sustainable development of trade in the near-term, Guyana needs to address the deficiencies inherent in its transportation systems. The following recommendations follow Guyana's National Development Strategy 2001-2010, the EU Transport Sector Study (2005) and the World Bank's Caribbean Infrastructure Assessment (2005): 3.45 The construction of a national road transport network will provide the foundation for the economic development of the entire country. This includes: · Without an institutional set-up which can help both to secure finance and to maintain the present improved technical capacity, there is a danger that the primary road network will again fall into the unacceptable condition of the past.74 · Improving intra-regional access will reduce journey times and fuel costs. · Establishing road linkages between Guyanese regions and with Brazil and Venezuela will assist in the development and facilitation of trade through greater access to the country's economic zones. · Road and bridge capacities must be increased to reduce commuting times. · Modern construction, operation and maintenance standards for the national highway system must be established. · Specific revisions to the traffic laws, rules and regulations may be needed to provide the necessary framework for the Traffic Police to carry out effective targeted enforcement of the main traffic accident causes (i.e. speeding, impaired driving (driving under the influence of drink and/or drugs), reckless/dangerous driving, and overloading of public transport vehicles).75 3.46 Air infrastructure should be upgraded ­ including runways, taxiways, communications and navigational aids ­ in order to increase the viability of this form of freight transportation by widening Guyana's air capabilities. Investment in safety and security standards will be essential to obtaining International Civil Aviation Organization (ICAO) certification ­ essential if Guyana's tourism industry is to attract American tour operators.76 74EU Transport Sector Study 2005 75ibid 76Please see Volume 2, Chapter on Infraestructure for more on air transport Guyana. 42 3.47 Institutional and physical improvements in port infrastructure are essential for Georgetown to become a regionally competitive port facility. This would involve the following: · A Maritime Administration should be established in order to comply with the Caribbean Memorandum of Understanding on Port State Control. · Wharves and berths should be upgraded to international standards. · Enhancement of port safety is essential. · The customs clearance time in the port of Georgetown needs to be significantly reduced, which requires streamlining of customs procedures. WATER 3.48 Water is an important input for many Guyanese firms even though it does not account for a large proportion of their overall production costs. Over 70 percent of all firms surveyed use water in the production process. This ratio is relatively evenly distributed across firms of different sizes and those enterprises that either export or produce primarily for the domestic market. A greater percentage of firms in the food and beverage, textiles and chemicals sectors use water in the production process. On average, respondent firms receive 90 percent of water supply from the public utility and 9 percent of water supply is obtained from firms' own sources. A very small percentage of the interviewed Guyanese firms get access to water from private vendors. As demonstrated in Figure 3.16 below, large firms, foreign-owned enterprises and exporting firms disproportionately depend on own-sources for water supply while small and medium-scale firms almost exclusively rely on water supply from the public utility network. While data on actual volume of usage were not available through the ICS, these findings seem to suggest that the largest-volume users are increasingly dependent on own sources with important implications for the medium- to long-term sustainability and costs of groundwater extraction. Figure 3.16: Use of Different Sources of Water for Production, percent of manufacturing firms Foreign 59 40 Domestic 92 7 Non-exporter 95 4 Exporter 78 22 Micro-Small 96 2 Medium 93 7 Large 66 34 0% 20% 40% 60% 80% 100% Public source Own source Private vendors Source: World Bank Guyana ICS, 2005 43 3.49 According to GWI and currently reported levels of service, the decision of potential commercial or industrial clients to self-provide water services is determined by demand, reliability, quality and cost concerns. Large manufacturing companies demand large volumes of water in their production processes, which the GWI supply system cannot accommodate. Many of these firms also operate 24 hours a day and require a reliable and continuous supply of water. The majority of the GWI water network, however, does not currently provide 24-hour supply. Furthermore, the incentives for firms ­ particularly in the food and beverage industry that require treated water in the production process ­ to access public water is limited, as source water treatment in some GWI areas is still non-existent, and firms have constructed on-site treatment facilities for their own-source water. A thorough financial analysis of the true costs of providing public and own-source water does not exist for Guyana. However, given the extremely high cost of electricity, it is not clear to GWI whether 24-hour public service would be considerably cheaper than self-provision for firms that rely on private generators. 3.50 Nonetheless, reliance on water supply from public sources is higher in Guyana when compared to other countries in the region. Over 90 percent of water supply to firms comes from public sources as compared to 56 percent in Honduras, 66 percent in Guatemala, 80 percent in El Salvador and 84 percent in Ecuador and Nicaragua (Figure 3.17). It is not clear what explains this pattern. It is not likely that public water supply is markedly more reliable in Guyana relative to these comparator countries. Other, more likely, explanations to be investigated may include the relatively higher costs of ground water extraction and the relatively weaker purchasing power of Guyanese firms. Figure 3.17: Provision of Water from Public Sources, by Country 90.3 Guyana 84.0 Ecuador 83.8 Nicaragua 80.5 El Salvador 66.2 Guatemala 55.7 Honduras 0 10 20 30 40 50 60 70 80 90 100 % of all supply Source: World Bank Investment Climate Surveys, various years 3.51 Despite recent improvements, the reliability of service remains a concern for firms. Approximately 18 percent of all firms experienced on average 4.7 water interruptions or periods of insufficient water supply in the year prior to the ICS. These interruptions lasted on average for 6.8 hours. In comparison, according to the firm-level survey conducted by FIAS for Grenada in 2004, 22 percent of firms experienced on average 12 interruptions lasting 6 hours 44 each. When examined more closely, the ICS data for Guyana reveal that interruptions are a greater problem for small firms (8.9 interruptions per year) compared to large firms (1.9 interruptions per year). Interestingly, exporters and firms located in Georgetown experienced interruptions far more frequently than non-exporters and firms located outside of Georgetown. 3.52 The ICS data indicate that the impact of water service interruptions on firm profitability is moderate, and less than that in regional comparator countries. Figure 3.18 analyzes the value last to firms as a percentage of sales for Guyana, Ecuador, El Salvador, Nicaragua, Guatemala and Honduras. The cost to Guyanese firms that do experience interruptions in water service is estimated at 1.5 percent of sales as compared to 4.4 percent for Ecuador, 0.5 percent for El Salvador, 2.7 percent for Guatemala, 2.5 percent for Honduras and 6.4 percent for Nicaragua. Figure 3.18: Costs of Water Interruptions: percent of annual sales across firms that experienced water interruptions, by Country 6.4 Nicaragua 4.4 Ecuador 2.7 Guatemala 2.5 Honduras 1.5 Guyana 0.5 El Salvador 0 1 2 3 4 5 6 7 % of Sales Source: World Bank Investment Climate Surveys, various years 3.53 It is important to note that the impact of water supply interruptions on the hotels sector is equally, if not more, acute. Over 73 percent of hotels surveyed through the ICA reported some form of interruptions or periods of insufficient supply which lasted for on average 25 hours. Interruptions adversely impact large hotels as compared to their smaller competitors. The duration of interruptions for larger hotels was over 68 hours as compared to 3.9 hours for small hotels and the overall economic cost to firms as a percentage of sales was 1.2 for all hotels and 2.2 for large hotels. Connecting to the Network 3.54 Guyana also compares favorably in the region in terms of the length of time it takes to gain access to water supply. Figure 3.19 compares the delay in obtaining a water connection in days for Guyana, Ecuador, El Salvador, Nicaragua, Guatemala and Honduras. In Guyana firms report that it takes on average 27 days as compared to 63 days for Ecuador, 25 days for El Salvador, 68 days for Guatemala, 55 days for Honduras and 58 days for Nicaragua. 45 3.55 A closer examination of the Guyana data reveals that it takes small firms much longer (32.8 days) to get connected to the water network as compared to the 17 and 14.6 days it takes for medium-sized and large firms to connect. Additionally, foreign firms get connected much sooner (7 days) than domestic firms and it takes almost twice as long for firms outside of the capital to obtain water supply than firms located in Georgetown (explained in part by the relatively underdeveloped infrastructure network outside of the capital). Lastly, the data reveals that large (40 percent) and foreign (50 percent) firms are far more likely to be required to pay bribes to access service. Figure 3.19: Average Number of Days to Obtain a Water Connection, by Country 68 Guatemala 63 Ecuador Nicaragua 58 55 Honduras 27 Guyana 25 El Salvador 0 10 20 30 40 50 60 70 Days Source: World Bank Investment Climate Surveys, various years RECOMMENDATIONS ON WATER 3.56 Reforms of the water sector are ongoing. The Government of Guyana embarked in 2000 on a comprehensive reform of the water sector which has involved an improved regulatory framework, coherence in the institutional framework through the merger of two water utilities into GWI, the award of a performance-based management contract to an international operator and development and financing of a comprehensive investment program to improve service quality in the sector. It is estimated that these reforms have gradually improved the reliability of service to industrial and commercial users and a sharp increase in new capital investments in sector scheduled over the next five years will likely complement this trend. 3.57 Nonetheless, a series of specific measures could be taken by GWI and the Government of Guyana to increase the reliability of service for industrial and commercial users and to mitigate the potentially adverse impact of poorly regulated groundwater extraction. Through investments in increased capacity leading to 24 hour service, rehabilitation of networks to reduce in leakages and interruptions and more water treatment ­ GWI could increase the profitability of firms, contribute to the reduction of firm costs and increase incentives for firms to access public water supply. Additionally, the Government of Guyana may consider strengthening the regulatory environment surrounding the licensing of extraction rights and conducting new analysis on the sustainability groundwater resources. 46 4. SKILLS, MIGRATION, TECHNOLOGY AND QUALITY 4.1 Since the beginning of the 1990s, Guyana has made considerable progress in increasing the coverage of its secondary and tertiary education systems (Figure 4.1). While for the whole period between 1990 and 2002 the population grew by only 3.6 percent, the number of university-level graduates living in the country increased by more than 350 percent and the number of secondary-education-diploma-holders grew by more than 80 percent. In a large part, this is the result of a significant increase in government expenditure on education that rose from 4.9 percent of GDP in 1997 to 6.7 percent of GDP in 2004. The Government is now working toward introducing universal secondary education. Figure 4.1 - Distribution of the Population by Educational Attainment, Guyana, 1990 and 2002 41 40 39 37 35 30 noita 23 pul 20 pofo 20 % 10 3.1 0.9 0 1990 2002 Incomplete primary or none Primary Secondary Tertiary Source: Guyana National Bureau of Statistics and the World Bank 4.2 Guyana ranks well in international comparisons of educational attainment, measured by the share of the population with secondary or tertiary education. As Figure 4.2 indicates, with 44 percent of the population with secondary and tertiary education, Guyana is positioned relatively well in the Latin American and Caribbean region. This number represents a significant increase from only 24 percent in 1990, and was substantially higher than in comparator Central American countries in 2000. Figure 4.2 - Proportion of Population with Secondary or Tertiary Education, by Country 60 49 50 44 42 noita 40 37 popul 25 of 20 % 20 18 16 13 0 go Haiti ala ras dor ua aica na u Guatem ndu ag uador Toba Per car Jam Guya Ho Salva Ec & Ni El d ida Trin Source: De Ferranti et al. (2003) and Guyana National Bureau of Statistics Note: The data are for year 2000 for all countries, except for Guyana, for which the year is 2002. 47 4.3 Despite improvements in the level of educational attainment, the lack of skilled labor in Guyana is perceived as a major problem by the country's businesses. Around 40 percent of industrial firms responding to the ICS rated the lack of skilled labor as a "major" or "very severe" obstacle to their growth and competitiveness. That number was even higher ­ 50 percent ­ for hotels. The two main factors underlying this problem are (1) the mismatch between the skills produced in the educational system and those required by businesses, especially in industry, and (2) the significant emigration of skilled labor (brain drain). 4.4 The dissatisfaction of Guyanese interviewed firms with the availability of skilled labor is one of the strongest of all the countries where ICS data are available. Of the industrial firms responding to the World Bank IC survey, 40 percent indicated that they viewed the lack of skilled labor as a "major "or a "severe" obstacle to the growth and competitiveness of their firm.77 For hotels, this number was even higher ­ 50 percent. As Figure 4.3 indicates, the degree of dissatisfaction is higher than elsewhere in the LAC region and, outside the region, comparable to that in Uganda. Figure 4.3 - Degree of Dissatisfaction with the Availability of Labor Skills, by Country 45 40 41 36 34 31 31 30 26 22 % 17 15 12 0 ana mala uras ragua Peru anda bia a ania Guy Guate nd nz Ho Ecuador Nica Ug Zam Ethiopi Ta Source: World Bank, IC surveys, various years 4.5 Most employees in industrial firms have not completed secondary education. As Figure 4.4 indicates, on average, 75 percent of employees of a non-exporting industrial establishment do not have complete secondary education. This figure goes down to 64 percent for exporters. Regardless of a company's export orientation, only 4 percent of its employees have some university education. Surprisingly, in the hotel sector, 11 percent of the employees have studied at a university ­ and the average percentage of those with incomplete secondary education or below is only 48 percent ­ in sharp contrast to the industrial sector. The two factors that likely explain the phenomenon are (i) greater resources in the hotel sector (better pay), and (ii) the fact that the education system does not emphasize the development of problem- solving skills and critical thinking. 77This number falls to 39%, if only manufacturing firms are considered. 48 Figure 4.4 - Guyana: Educational Attainment of Employees in Industry and Hotels 50 46 47 39 40 35 32 eesyol 30 27 26 25 emp 21 rm fifo 20 % 12 11 10 3 4 4 4 0 incomplete completed incomplete completed some university primary educ. primary educ. secondary educ. secondary educ. education Industry: non-exporters Industry: exporters Hotels Source: World Bank, IC survey for Guyana, 2004-2005 4.6 The educational level of managers in Guyana is also relatively low, with only 44 percent of interviewed companies having a top manager with at some university-level education (Figure 4.5). This is among the lowest percentages of industrial enterprises, whose managers have at least some university education, across a set of comparator countries (Figure 4.7). Guyana lags its Latin America comparators. The econometric analysis based on the data from the IC surveys for various countries shows that, in almost all cases, manager's education is a significant determinant of the total factor productivity, a key ingredient into firm's competitiveness. Figure 4.5 - Manager's Education, by Country 100 91 80 75 67 66 63 60 rms fifo 44 44 % 40 36 20 0 Ecuador Guatemala Peru Honduras Nicaragua Guyana Ethiopia Uganda Source: World Bank, IC surveys, various years 49 4.7 The supply-demand skills mismatch in Guyana's industry seems to originate from two sources. First, the education system seems does not deliver enough technical specialists. Second, relative to other professions (perhaps, with the exception of teachers and nurses), technical specialists are in high demand abroad. While employer-financed training programs could potentially correct the mismatch, the emigration threat significantly diminishes the incentives of employers to provide training to their employees. Firms complain that it often takes to train three or more workers to retain one. 4.8 The unwillingness of students to engage in technical professions likely stems from the substantial underdevelopment of the industrial sector in the country ­ and reinforces it, creating a vicious circle. Indeed, industrial enterprises in Guyana are generally very small ­ with only seven percent of the surveyed establishments reporting permanent employment of more than 100 employees. Food processing and forestry and wood products are the dominating industries. High-tech industries are practically absent. 4.9 Employer-financed formal training of firm employees in Guyana is very limited. Interviewed firms complain that they often need to train three or more employees to retain one. The rest are very likely to emigrate. As a result, the provision of training financed by employers is very low. Of the surveyed industrial establishments, 65 percent do not provide any formal training (internal or external) to their workers, and 74 percent do not provide external training at all. The latter number is the highest in the region, and is also close to the bottom of the worldwide distribution (Figure 4.6). Figure 4.6 - Provision of External Training by Manufacturing Firms, by Country 80 70 60 54 55 49 s firm 40 38 of % 26 22 20 0 Guyana Nicaragua Honduras Peru Guatemala Ecuador Ethiopia Source: World Bank, IC surveys, various years 4.10 Out-migration, especially of skilled labor, has been a significant problem in Guyana for decades78. Various estimates suggest that, size-wise, the Guyanese diaspora worldwide is likely to be double the population living in the country (the latter was around 751,000 in 2002) 78Guyana has the worst rank among 117 countries worldwide covered by the WEF on the Brain Drain index. 50 and to consist, in a large part, of well-educated professionals. Currently, more than 85 percent of Guyanese university graduates live in OECD countries, and Guyana is among the countries with the highest brain drain worldwide (Figure 4.7). That number is (marginally) higher only for Suriname. The short period of inflow of skilled labor attracted by the reforms at the beginning of the 1990s has quickly been reversed. Figure 4.7 - Twenty Countries with the Highest Accumulated Brain Drain 100 90 86 83 82 78 80 74 72 71 abroad 69 67 67 65 61 59 59 59 59 living 60 57 55 s 51 40 national ed 20 ege-educat coll 0 of e renada Sam oa % Surinam uyana maica aiti nga bia Fiji alia alta H bago evisBarbudapeV erde ren. N am inica G M Belize G Ja To To G G om Som & BarbadosD Seychelles inidad itts& Ca St.K ntigua& incent& Tr A St.V Source: Docquier and Marfouk (2004) 4.11 There are practically no labor market rigidities (minimum wage, layoff benefits, social obligations, etc.) that would, to a notable extent, negatively affect the flexibility of employers in making hiring and firing decisions.79 A Guyana-specific problem, however, is the significant polarization of the labor force across ethnic and (highly correlated with it) political dimensions. This segmentation restricts labor choices available to firms and puts barriers on the way of interactions between businesses as well as between businesses and the government. 4.12 Following the globalization of financial systems and the acceleration of emigration, flows of workers' remittances to Guyana have been increasing at a fast rate. Figure 4.8 illustrates that the remittances sent by Guyanese nationals working abroad grew from approximately US$15 million (2 percent of GDP) in 1996 to around US$100 million (13 percent of GDP) in 2004. In general, remittances have become an important source of financing in developing countries, accounting today for more than 30 percent of total financial flows to developing countries (Global Economic Prospects 2006). 4.13 A crucial question is whether remittances are being used in a productive manner by recipient countries and whether they enhance their investment and growth. A recent regional report prepared by the World Bank (2006)80 examines the development impact of 79The minimum wage is not regulated in the private sector and is around US$110 per month in the public sector. 80World Bank (2006), "The Development Impact of Workers' Remittances in Latin America and the Caribbean", a 51 remittances in LAC. It finds that remittances have an overall positive impact on recipient economies, increasing growth and reducing poverty levels. This is mainly achieved through remittances leading to higher savings, investment and financial development. Remittances are also found to be associated with lower output volatility, better educational attainment and better health indicators in the recipient economy. Figure 4.8 - Guyana: Worker Remittances, 1996-2004 120 90 60 n 99 100 millio 30 51 D,S U 27 15 15 21 22 14 0 -20 -14 -18 -24 -23 -19 -48 -45 -51 -30 -60 1996 1997 1998 1999 2000 2001 2002 2003 2004 Outward Inward Source: Bank of Guyana 4.14 While remittances have potential benefits for the recipient economy, these positive impacts can be higher when remittances are accompanied by better recipient-country institutions and policy environment with respect to remittances (World Bank, 2006). According to the study, remittances come at a cost ­ they affect negatively the supply of labor in the recipient economy (number of hours worked per week, and labor force participation in some countries). They are also associated with real exchange rate appreciation pressures, lowering exports. When these costs are taken into account, the positive counterbalancing effect on investment and growth is found to be relatively low. In this sense, countries with high remittances flows, such as Guyana, need to minimize the negative impacts of remittances by focusing on improving the regulatory environment and ensuring a regime of secure and low-cost transmission of remittances. 4.15 The population and the labor force consist of a few distinct ethnic groups. According to the Guyana Bureau of Statistics, about half of those employed in the formal sectors are of an Indian (Indo-Guyanese) origin: 119 of the 245 thousand as of the end of the 1990s. The second-largest group is comprised by the population of an African origin (Afro-Guyanese), around 35 percent. The rest are dominated by the indigenous people and the Chinese.81 For draft study, Finance, Private Sector and Infrastructure, and Chief Economist's Office, Latin America and Caribbean Region, June 2006, World Bank, Washington D.C. 81Afro-Guyanese are, in a large part, the descendants of the slaves brought to Guyana in the 18th and the beginning of the 19th centuries. Many slaves left the country following the abolition of slavery by the British in the first half of the 19th century. The labor shortage was filled by a moderate number of workers from China, but much more so by the indentured workers who came in large numbers from India and now constitute the ethnic majority in the country. 52 example, the ICS data show that Indo-Guyanese represent 56 percent of the employees in industry and mining; Afro-Guyanese are 25 percent and indigenous and other groups represent 10 percent. 4.16 Investment in new technologies by Guyanese firms is far from being intensive and is fairly unsophisticated. Only about a third of the surveyed industrial companies invested in new technology in 2002-2003. This is considerably lower than in many other comparator countries in the region (Figure 4.9).82 In the overwhelming majority of cases - more than 75 percent - the investment came in the form of simply purchasing equipment ­ which is the highest proportion among surveyed countries in the LAC region (Figure 4.10). Licensing or purchases of turnkey operations as well as hiring of key personnel were used by a negligible minority of the producers, except for few foreign-owned firms covered in the survey. As noted in paragraph 3.17, technological underdevelopment is easily evidenced by the low usage of the Internet: two thirds of the firms surveyed in the ICS did not use e-mail on a regular basis and 83 percent did not use web pages for communicating with clients or suppliers. 82Note that the Guyana ICS asks a direct question whether investment in new technologies has been made or not in the two years prior to that of the interview. The ICS surveys for other countries used in Figure 38 ask about introducing a substantially new technology in the three years prior to the interview. While the time span in the latter case is larger, the question is narrower. For example, much higher percentages are obtained for the countries other than Guyana if one uses the question whether or not a new product line was introduced. 53 Figure 4.9 - Manufacturing Firms with Investment in New Technology, by Country 60 53 51 45 46 40 38 stn de ponser % 20 0 Guyana Guatemala Honduras Ecuador Nicaragua Source: World Bank, Investment Climate Surveys, various years Figure 4.10 - Percentage of Manufacturing Firms with Investment in New Technologies that Used Purchase of Machinery and Equipment as the Primary Method of Undertaking Such an Investment, by Country 80 77 62 62 59 60 51 stne 44 pondser 40 % 20 0 Guyana Honduras Nicaragua Ecuador Guatemala Peru Source: World Bank, Investment Climate Surveys, various years 4.17 The number of firms that possess at least some quality certification is relatively small. Of the 151 manufacturing establishments that responded to the question, only 26, or 17 percent, had an internationally recognized quality certification. Export-oriented foreign-owned companies had a substantially higher proportion of quality certifications than the rest (Figure 4.11). While the ICS question does not allow us to distinguish between ISO and other types of certification, additional interviews with the GNBS and the experience of other countries in the region suggest that the vast majority of these certifications are not ISO83. Internationally, Guyana fares relatively poorly on certifications ­ yet is ahead of Guatemala and Peru (Figure 4.12).84 83In all the comparator countries in Figure 41 the share of firms with an ISO certification did not exceed 6 percent, and was less than three percent for Peru. Unfortunately, this figure is not available from the Guyana ICS. 84The 17 percent obtained from the survey may be a slight overestimation, as some firms could wrongly take the National Quality Mark to be an internationally accepted certification. 54 Figure 4.11 - Guyana: Percentage of Firms with Quality Certification 50 8 40 15 14 s nt 30 pondeser of 20 5 38 5 5 % 3 1 29 29 10 17 16 17 11 12 0 lfirms e all rs ic Larg ium ned ed dSm orters mest ow Al M croan n-exporte Exp Do No Foreign- Mi Have quality certification In process of obtaining quality certification Source: World Bank, Guyana ICS, 2004-2005 Figure 4.12 - Percentage of Firms with Some Quality Certification: selected countries Source: World Bank, IC surveys, various years 4.18 Limited progress can be seen in the area of government support to introducing quality-control measures in industry. The infrastructure for quality assurance essentially consists only of the Guyana National Bureau of Standards (GNBS). However, its departmental structure and activities include all the important elements of a typical national quality system. While the all-encompassing nature of the GNBS may allow for conflicts of interest, the institutional integration can partly be justified by the very small size of the market as well as the budgetary difficulties that may require cross-subsidization of the activities. Recent progress can be noted in that the GNBS, a semi-autonomous body, has recently been able to finance more than 20 percent of its budget from selling its advisory services. 55 RECOMMENDATIONS ON SKILLS, MIGRATION, QUALITY AND TECHNOLOGY 4.19 Reforms in the labor and education as well as the technology and quality areas must be an integral part of a global reform program. The existing problems in these areas are likely to be more a consequence rather than the cause of the weak business activity in the country. Therefore, the reforms in these areas should only be undertaken in parallel with the removal of the other obstacles, most of which are identified and discussed in this document ­ including crime and insecurity (also related to drug trade activities and money laundering) and, importantly, the serious lack and/ or inadequacy of key infrastructure (e.g., electricity, transportation, telecommunications). Otherwise, reforms in education would likely only reinforce the already intensive brain drain and the incentives of employers to provide training would remain low - as would their willingness to engage in sophisticated technologies. Productivity and, hence, international competitiveness would then stay relatively low, reducing the demand for quality control that is especially important for international transactions. 4.20 While significant progress is observed in the formal level of educational attainment, the quality of school education over the last 20 years has deteriorated and is a matter which the Government is working to address. The loss of qualified teachers ­ largely caused by emigration ­ is a critical issue. Thus, the Ministry of Education's Strategic Plan 2003-2007 (SPME) identifies this as a problem -- "the present attrition rate for teachers from Guyana is high and appears to be rising with aggressive recruitment by other countries." Similarly, the National Development Strategy (NDS, 2000) states that "Guyana's success in attaining universal access to primary schools... has been eroded and has been replaced by rising repetition and dropout rates." The lack of qualified teachers, in large part caused by their continued emigration, is a major issue. Problems in the remote areas are greater due to low incentives for teacher to relocate there and worse school infrastructure. It is important to put greater accent on improving the quality of school education, with an emphasis on developing skills such as problem solving and critical thinking, and indeed the SPME regards quality of education as one of the key areas to work on. Government efforts in improving the education system are supported by a number of projects by international developmental organizations, including the World Bank. 4.21 Work towards the creation of a greater number of vocational training centers for technical professions is necessary as is also a greater emphasis in the school curricula on problem-solving skills and developing critical thinking (through math and sciences). Recognizing this, the Government is working towards the provision of the necessary infrastructure and legislation for private training centers. It is important to note that provision of training centers by itself is unlikely to have a significant effect if the general pessimism of the youth about the future of the country, as well as the high emigration of technical specialists, remain intact. 4.22 The recently accelerated brain drain is difficult to stop without creating a favorable business environment. Guyana has a great potential for rapidly increasing the investment into its economy due to the huge diaspora abroad that substantially exceeds the population remaining in the country. The return to the country of numerous investors in the beginning of the 1990s stands testimony to this. Unfortunately, the expectations of these investors were not met. 56 Reliance on remittances as a primary source of resources in the economy is hardly the way to go. Specific policies to attract select categories of Guyanese living abroad back to the country will hardly work unless the general security level is substantially heightened, and the access to and the quality of infrastructure are improved. 4.23 Except for improving intellectual property rights protection, technological advancement at this stage hardly requires specific policies, being more a function of the general stance of the business environment. The low technological sophistication of the Guyanese firms is likely a result of the high-risk environment in which the businesses operate and the consequent under-investment. In other words, again, alleviation of major constraints, such as the lack of security, poor infrastructure, is a prerequisite for technological advancement. Improvement of the intellectual property rights protection is also a necessity. While specific SME policies are normally considered important for technology adoption, practically all the firms in Guyana are small, on an international scale. 4.24 The development of the quality assurance infrastructure has recently shown notable progress that must be supported. Conflicts of interest in the GNBS may be a matter of concern and could be addressed through greater internal independence within the GNBS. The existence of good quality assurance infrastructure is an important prerequisite for successful growth, especially in a very small and sufficiently open economy like Guyana. The GNBS, the institution in charge of performing all the functions of a typical national quality system, appears to have been doing a good job recently. At the same time, conflicts of interest may arise from the GNBS being simultaneously the developer of standards, the provider of services for their adoption, the certification and accreditation institution, as well as the supervisory and oversight authority. Technically, these functions should be institutionally separated. However, the extremely small size of the market and the budgetary difficulties requiring cross-subsidization of the activities may partly justify the institutional unification, provided due diligence is exercised by the respective departments. Therefore, the GNBS Board of Directors should ensure sufficient inter-departmental independence. 57 5. FINANCE ACCESS TO CREDIT 5.1 The Guyanese financial sector is relatively sizeable, although statistics are overestimated due to the high level of the underground economy. The total asset base of the financial sector amounts to US$1.19 billion, which represented more than 1.5 times the Gross Domestic Product (GDP) in 200485. Given the significant level of informality of the Guyanese economy, estimated to be more than 30 percent of the GDP, the size of the financial sector appears to be overestimated. The sector comprises six commercial banks86 and a number of non- bank financial institutions (NBFIs), including a building society, three trust and investment banks, five non-life insurance companies, five trust companies and 25 foreign exchange dealers. Like other Caribbean economies, the Guyanese financial system is largely dominated by commercial banks whose combined assets of US$734 million represented 62 percent of the overall financial sector in 2004. Unlike the majority of the Caribbean countries, pension schemes are also quite large, accounting for almost 7 percent of total assets (Figure 5.1)87. Figure 5.1 - Financial Sector in Guyana, total assets 2004 800 735 700 600 500 n illio m 400 $S U 300 200 170 129 100 81 35 42 0 Finance Trust Companies Pension Scheme New Building Insurance Commercial Companies and Society Companies Banks Merchant Bank Source: Bank of Guyana Statistics 2004 5.2 Private credit to GDP by commercial banks has plummeted by a third during 2001- 2004, while private credit by the non-bank financial sector has registered a moderate increase. Private credit of commercial banks represented 31 percent of Guyanese GDP in 2004, 85The size of the financial sector appears to be overestimated, given the high level of informality of Guyanese economy. 86The six commercial banks are: the National Bank of Industry and Commerce Ltd; Guyana Bank for Trade and Industry Ltd; Bank of Nova Scotia; Bank of Baroda (Guyana) Inc.; Demerara Bank Ltd, and Citizen's Bank Guyana Inc. 87Among the Caribbean countries, the same degree of expansion in public pension schemes can only be found in Trinidad and Tobago, (see Worrell et al. (). 58 down from 45.2 percent in 2001. Private credit by commercial banks expanded steadily during the 1990s (from 17 percent in 1991 to 48 percent in 1998), but exhibits a downward trend since then. Private credit doubled between 1997 and 1999 (from 6 to 12 percent), but has been stable (around 14-15 percent of GDP) since 2001. Instead of offering credit, commercial banks turned to securities (primarily treasury bills), which jumped from 15 percent of total assets in 1999 to 40 percent by 2004. Also, banks have become more risk-averse after suffering large losses during the rice crisis of the late 1990s, due to a very slow resolution of claims. Figure 5.2 illustrates the dynamics of private credit by banks and NBFIs in Guyana over the period 1991-2004. Figure 5.2 - Private Credit in Guyana as Percent of GDP: 1991-2004 60.0 50.0 40.0 tnec 30.0 per 20.0 10.0 0.0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year Banks NBFIs Source: IMF International Financial Statistics, and World Bank World Development Indicators (WDI), and authors' calculations 5.3 By international standards, the level of financial intermediation in Guyana is low, and below that of other comparator countries. Indicators of financial depth in Guyana - as measured by the domestic credit to the private sector - are consistently lower than those of other Caribbean countries, but above the levels in Central America and some South American countries (Table 5.1). Private credit as percent of GDP is higher in Panama, Grenada, and several other OECS states, for example. In addition, there are very limited investments in branch networks (only 30 branches in the country) and automated teller machines (ATMs, only about 50). While Guyana has a relatively high number of savings accounts (around 100,000), the number of individual bank borrowers is very low (about 20,000, based on interviews with commercial banks and other sources). This situation points to a conservative stance on the part of the Guyanese financial institutions or a perceived lack of lending opportunities, both of which are likely to be caused by weaknesses in the operating environment such as political and economic uncertainties, among other things. The legal framework contributes to a lack of lending, since creditor rights are not well protected, with the only insolvency options being liquidation and receivership (often freezing creditor rights until final resolution). 59 Table 5.1 - Private Sector Credit as Percent of GDP: An International Comparison (2004) Domestic credit to Private Sector (% GDP) Guyana 44.8 Trinidad and Tobago 27.8 Barbados (*) 57.1 Grenada 84.6 St. Vincent and the Grenadines 58.6 St. Lucia 83.9 St. Kitts and Nevis 69.8 Guatemala 19.8 Nicaragua 28.1 Ecuador 22.5 Peru 18.7 Panama 90.8 (*) As of 2003. Source: World Bank World Development Indicators (WDI) 5.4 Much like in other Caribbean economies such as the six OECS states, long-term lending makes up half of commercial banks total loans to the private sector.88 In 2004, long- term loans to households and firms amounted to more than 50 percent of the total financial resources lent to the private sector.89 This represents a marked increase over the past three years, as in 2001 long-term loans represented 42 percent of the total. In reality, the economic stagnation and the lack of bankable projects determined a rapid decline in commercial banks' exposure to the private sector overall, and short-term loans declined more rapidly than long-term ones (Figure 5.3). Figure 5.3 - Long vs. Short Term Lending to Private Sector in Guyana: 1999-200490 250 200 n 150 llioi m $S U 100 50 0 1999 2000 2001 2002 2003 2004 Short-term Long-term Source: Bank of Guyana Statistics, 2005. 88Long-term credits represent about 60 percent of commercial bank loans and advances in the OECS, but this figure includes a large proportion of real estate mortgage loans. 89This figure does not include real estate mortgage loans. 90 Original data are adjusted for inflation and exchange rate. Base year: 2001. 60 5.5 The amount of long-term deposits, the main source of funds for commercial banks, is significantly lower than long-term loans to the private sector. As of December 2004, the amount of time deposits exceeding twelve months represented only 4.6 percent of long-term loans to the private sector91. This percentage is extremely low and the maturity mismatch could pose a significant threat in case of a rapid bank run. The risk is underscored by the fact that, at the same date, 75 percent of banks deposits were constituted by demand and savings deposits, which could be liquidated under a very short notice.92 The preference of deposit-holders for short-term saving instruments also emerges by looking at the time deposits structure, where time deposits with at least a year of maturity only represent three percent of the total amount (Figure 5.4). Figure 5.4 - Maturity Structure of Time Deposits with Guyanese Commercial Banks, December 2004 3% 42% 40% 0% 15% <3 months >3 and <6 months >6 and <9 months >9 and <12 months >12 months Source: Bank of Guyana Banking System Statistical Abstract, January 2005 5.6 The percentage of funds lent to the top twenty borrowers continues to increase, confirming the conservative attitude of Guyanese banks and the concentrated nature of the real sector93. As of December 2003, the amount of credit disbursed to the top three borrowers was almost 20 percent of the total. This reflects the large fraction of economic activity concentrated in the hands of the government (e.g., Guysuco, Guyana Power & Light), foreign groups and a few domestic economic groups. The trend is also coupled with an increasing tendency toward loaning out funds following others than purely opportunity-cost criteria based on the business to be financed. Credit disbursed to related parties doubled since 1997, and represented six percent of the total in 200594. 91The ratio has halved since 2001, meaning that long-term deposits have shrunk at a faster pace than long-term credit disbursed by commercial banks. 92Savings withdrawals require a minimum of one-day notice, whereas demand deposits are not subject to notice. 93Source: Bank of Guyana. 94Related parties comprise director, senior officers and shareholders with 20 percent or more of shares. 61 COST OF CREDIT 5.7 Interest rate spreads are high, above the regional average, and fees and commissions increase the effective interest rate95. As of December 2004 the Guyanese commercial bank prime lending rate amounted to about 14.5 percent, while the small deposits interest rate averaged 3.4 percent over the same period. Though substantially high by developed economies standards, interest rate spreads in Guyana are comparable to those in other small economies in the region. Interest rate spreads in Guyana over the period 1999-2004 are second only to Suriname, and well above those of leading Caribbean economies such as Barbados and the Bahamas (Table 5.2). Table 5.2 - Interest Rate Spreads, international comparison Countries Yearly Average 1999 2000 2001 2002 2003 2004 1999-04 Guyana 9.9 10.4 10.9 12.5 12.1 12.3 11.4 Barbados 6.5 7.1 7.6 7.9 7.7 7.7 7.4 ECCU 7.4 7.3 7.7 7.3 7.4 7.4 7.4 Bahamas 7.4 7.8 7.2 7.2 8.1 8.3 7.7 Trinidad & Tobago 9.5 8.8 8.4 8.8 8.6 7.1 8.5 Jamaica 10.4 8.4 8.4 8.7 10 9.2 9.2 Belize 10.5 10.8 11.1 10 9.3 9.6 10.2 Suriname 12.6 13.6 12.4 12.9 12.5 13.1 12.9 Sources: Caribbean Centre for Monetary Studies, Staff Estimates, Central Bank of Trinidad and Tobago, and Bank of Guyana 5.8 The significant spreads between lending and deposit rates are determined by the lack of alternatives for investing local savings and, mainly, a credit supply which is not sufficiently elastic. The real savings rate rapidly declined in Guyana over the past decade and the deposit interest is currently negative, which has not discouraged savers from depositing an increasing fraction of their resources in bank accounts. Despite seasonal variations, over the same period the cost of borrowing as measured by the Prime Rate did not significantly drop below 10 percent per annum, which would point to a credit supply insufficiently responsive to changes in market conditions (Figure 5.5). Among the reasons for such rigidities is the fact that banks are allowed by law to freely modify the interest rate charged on their ongoing loans. 95Bank intermediation spreads refer to the difference between the weighted average lending rate and the average three-month deposit rate. Information on fees and commissions was provided in interviews with commercial banks (ICA mission, May 2005). 62 Figure 5.5 - Lending vs. Deposit Rate Trend in Guyana, 1995-2004 25 20 15 entcr pe 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Prime Rate Small Savings Deposits Source: Bank of Guyana Banking System Statistical Abstract, January 2005 5.9 Surprisingly, the additional risk premium for small and medium enterprises (SMEs) that want to borrow from commercial banks is quite low. According to a survey realized with Guyanese banks, lending conditions for SMEs are similar to the ones for the corporate sector in general. The average nominal lending interest rate charged to SMEs is 16 percent per annum. This rate is only 1.5 percent higher than the average rate applied to larger corporate firms (i.e., 14.5)96. The result might be explained by existing difficulties in assessing the creditworthiness of potential borrowers, as demonstrated by the lack of credit scoring mechanisms in almost all commercial banks and the rejection rate of credit applications from SMEs, as high as 27 percent per year; hence, only the least-risky SMEs receive credit. COSTS AND ACCESS TO FINANCIAL SERVICES: THE PERSPECTIVE OF THE FIRMS 97 5.10 Guyanese firms are more credit constrained than firms in other comparator countries. Thus, only 30 percent of interviewed firms report having a loan from a financial institution (Figure 5.6). This is comparable to Mozambique (29 percent) and Zambia (33 percent), but substantially lower than comparator countries from Latin America such as Guatemala (44 percent), Ecuador (50 percent), Honduras (52 percent) or El Salvador (63 percent). Firms in other regions also appear to enjoy a better access to credit: for instance, half of Indonesian firms report having a loan, as do 48 percent of firms interviewed in Sri Lanka and 38 percent of those surveyed in South Africa. 96 Data are elaborated on information provided by the Questionnaire on Supply-Side Issues of the Guyana Investment Climate Assessment (ICA). 97 This section reflects the results of a firm-level survey, i.e. the Guyana ICS, of 164 manufacturing firms and 32 hotels. The survey included a large cross-section of existing firms across regions, sectors, and firm size. The opinions discussed in this section may vary from actual practices of banks, although the general trends and conclusions are consistent with statistical information and interviews with financial institutions. 63 Figure 5.6 - Firms with Loans: an International Comparison, percent of interviewed firms El Salvador 63 Honduras 52 Ecuador 50 Nicaragua 45 Peru 45 Guatemala 44 Zambia 33 Guyana 30 0 10 20 30 40 50 60 70 percent Source: World Bank Investment Climate Surveys, 2002-2004 5.11 A low share of surveyed firms in Guyana report having access to credit. Only 21 percent of micro and small firms have access to credit as do 38 percent of medium-sized businesses and half the large firms. The percentage of small firms that have a loan is low by international standards ­ for instance, 59 percent of micro and small Salvadoran firms, 39 percent of micro and small Guatemalan firms and 51 percent of micro and small Honduran firms have an outstanding loan (Figure 5.7). Guyanese exporting firms are significantly more likely to have access to credit than non-exporting ones ­ 54 percent of exporters have a loan versus only 20 percent of non-exporters. Finally, 27 percent of firms in Georgetown have a loan compared to 31 percent of firms located outside of Georgetown. More than one half of firms in the wood industry have a loan, and only a quarter of those in the food-processing industry. Figure 5.7: Firms with Loans by Firm Size and Country, percentage of interviewed firms 90 84 78 80 70 68 70 63 60 59 60 54 55 50 51 50 cent 43 39 per40 38 38 33 30 20 21 20 10 0 Zambia Guyana Guatemala Nicaragua Honduras El Salvador Micro and Small Medium Large Source: World Bank Investment Climate Surveys, 2002-2004 64 5.12 A high proportion of Guyanese firms are credit-constrained, especially among micro and small ones. For analytical purposes, the sample of interviewed firms can be divided into three categories: firms with loans, firms which report that they did not apply for loans as they do not need them, and firms which need a loan but do not have one (i.e. the credit- constrained firms). The credit-constrained firms include those that applied for a loan but were rejected; firms which applied for a loan and were still awaiting the bank's decision at the time of the survey interview; and firms which did not apply for a loan due to perceived constraints such as cumbersome application procedures, high collateral requirements or high interest rates, among others. As shown in Figure 5.8, more than one-third (34.6 percent) of all surveyed Guyanese firms are credit constrained. There are substantial differences in the proportion of credit constrained firms depending on firm size. Thus, 42 percent of micro and small firms are credit constrained compared to 29 percent for medium and 21 percent for large ones. An interesting observation, however, is the fairly large proportion of firms which also report not having any demand for a loan. Thus, more than one-third of micro and small (37 percent) and medium firms (34 percent) as well as one-quarter of large ones indicate that they do not need a bank loan. These are high numbers by international standards, and the reasons for this situation are discussed later and in Volume 2. Figure 5.8 - Proportion of Firms with Loans, Firms without a Need for Loans, and of Credit Constrained Firms, By Size, Percentage of Interviewed Firms 100.0 90.0 20.8 28.6 34.6 80.0 42.3 70.0 25.0 60.0 33.9 50.0 34.6 40.0 36.6 30.0 54.2 20.0 37.5 30.8 10.0 21.1 0.0 Micro and small Medium Large Total Firms with loans Firms which do not need loans Credit constrained firms Source: World Bank Guyana Investment Climate Survey, 2005 5.13 The cost of finance is rated as the highest ranking obstacle to business operation and growth identified by firms in Guyana. This concern is shared by all firms, regardless of firm size and whether they export products or only sell in the domestic market. It is a slightly more important concern for medium-sized firms than others, and for non-exporting companies, as Table 5.3 below reveals. (In contrast to costs, access to financing is the fifth most important constraint, cited by approximately half as many firms.) While these figures only reflect the subjective opinions of the interviewed firms, we next show that, objectively, interest rates and collateral requirements are among the main deterrents to firms' applying for loans. 65 Table 5.3 - Cost of Finance and Access to Finance: the Perceptions of Guyanese Firms Percentage of firms which rated as a "major" or "severe" obstacle to Small- Non- their operation and growth: All Large Medium Micro Exporters Exporters 1. Cost of financing (e.g., interest rates) 56% 58% 61% 51% 58% 50% 5. Access to financing (e.g., collateral) 31% 31% 29% 32% 30% 32% Source: World Bank Guyana ICS, 2005 ACCESS TO FINANCIAL SERVICES: A KEY PROBLEM FOR FIRMS WITH GROWTH POTENT 5.14 Access to financial services is an important issue, with less than one third of the interviewed firms in Guyana having loans from a bank or other financial institution.98 This is lower than in comparable countries such as Guatemala, Peru, Honduras and Ecuador. This is true despite the high degree of liquidity in the banking system. In fact, Guyana is among the lowest ranked countries in the world, rated 145 out of 155 on the Getting Credit aggregate index in the World Bank Doing Business 2006 database, which measures the legal rights of lenders and the extent of credit information sharing. 5.15 Access to loans varies significantly with the currency denomination of the loan (Table 5.4). More than 93 percent of the loans extended to small firms were local currency loans, while one third of the loans extended to large firms were denominated in foreign currency. One in four loans extended to exporting firms were in foreign currency, while only 5 percent of the loans extended to non-exporting companies were foreign-currency denominated. This is an indication that the commercial banks may not be willing or prepared to manage currency risk. The majority of exporting firms take on the currency risk, which can make doing business internationally more expensive and limit their competitiveness. Table 5.4 - Even Exporters and Large Firms in Have Trouble Getting US Dollar Loans Type of Firm Loans in USD or other Loans in GYD (% of foreign currency firms with access) (% of firms with access) Small 6.7 93.3 Medium 9.5 90.5 Large 36.4 63.6 Non-exporting 4.5 95.5 Exporting 24.0 76.0 Whole sample 14.9 85.1 Source: World Bank Guyana ICS 2005 98The lack of financing for private firms is frequently reported in Guyana's news media. One recent review in the Ram and McRae Annual Business Outlook Survey found that firms cited interest rates as the most important constraint to investment (Stabroek News, October 5, 2005). 66 5.16 When credit is provided, banks impose a very high collateral requirement for most loans. This reflects a lack of reliable, timely information on borrower behavior and indebtedness, caused by the lack of a credit information system, audited financial statements, and bankable business plans. All loans obtained by the firms interviewed through the ICS in Guyana are backed by collateral, higher than any other country with such a survey in the LAC region. For instance, this requirement was less important in Nicaragua (where 93 percent of firms reported needing collateral) and Honduras (89 percent), and Grenada (60 percent in 2004, a drop from 90 percent in 2001) (Figure 5.9). Based on the survey results, the average collateral requirement in Guyana was a very high 218 percent, making Guyana the most costly in terms of collateral in the region (along with Nicaragua), and reflecting a very conservative banking sector (Figure 5.10). The required level of collateral ranged from 195 percent for large firms to 250 percent for small firms. Figure 5.9 - Percentage of Loans which Require Collateral, by Country Guyana 100 Nicaragua 93 Honduras 89 El Salvador 86 Guatemala 74 Ecuador 73 Peru 70 Grenada 60 0 20 40 60 80 100 120 % Source: World Bank Investment Climate Surveys, 2002-2004 Figure 5.10 - Collateral-to-Loan-Value Ratio, percent: By Country 250 218 217 200 177 154 150 123 122 % 115 100 50 0 Guyana Nicaragua Ecuador Honduras El Salvador Peru Guatemala Source: World Bank Investment Climate Surveys, 2002-2005 67 5.17 The main source of collateral for Guyanese firms is real estate (land and buildings), followed by personal assets of firm owners, and immovable plant and machinery. The use of different assets as collateral varies across different types of firms. For medium and large firms, the most common forms of collateral included land and buildings (about 94 percent), followed by plant and machinery (62 percent for large, 71 percent for medium), and personal assets (67 percent). For small firms, personal assets and land and buildings were the leading forms of collateral (71 percent each), with movable machinery and equipment (36 percent) and plant and installed machinery (29 percent) also playing a role. 5.18 The main use of bank loans in Guyana was to buy machinery and equipment (60 percent of outstanding loans), followed by purchase of inputs and supplies (23 percent) and purchase of land and other fixed assets (10 percent). The use of new loans to pay off old loans was negligible (2 percent - Figure 5.11). However, there are significant differences among micro and small firms on the one hand, and medium and large firms on the other in terms of the main use of their bank loans. Thus, micro and small firms use bank credit principally to finance the purchase of inputs and supplies, with 50 percent of their outstanding loans in 2004 utilized for this purpose. In contrast, medium and large Guyanese companies used bank credit mainly to invest in new machinery and equipment, with 71 percent of medium companies' loans and 69 percent of large firms' loans used to this end. The corresponding figure for micro and small firms was about half that of medium and large ones: i.e. only 36 percent of small firms' loans financed the purchase of new machines and plant equipment. Figure 5.11 - Main Uses of Bank Loans in Guyana: by Type of Firm 90% 80% 77% 73% 71% 69% 70% 67% 60% 60% 60% 50% 50% 45% 41% 40% 36% 33% 33%33% 30% 24% 23% 22% 20% 14% 14% 15% 15% 17% 10% 9% 10% 8% 8% 5% 5% 3% 0% 0% ple all s utilization utilizat ion um rge ivate olesam Sm rters reign d edi La porter an M Fo o Expo esticPr ty Wh icr Non-ex m acity aci M Do cap cap w gh Lo Hi Buy machinery and equipment Buy other fixed assets (e.g. land and buildings) Buy inputs, supplies, goods for re-sale Repay earlier loans and other uses Source: World Bank Guyana ICS 2005 5.19 Beyond credit, there are few financing alternatives to firms in Guyana. Overdrafts and credit lines are available to about three quarters of large firms (73 percent) and about half of the medium-sized companies (48 percent). In contrast, only 13 percent of micro and small firms have an overdraft facility. Similarly, exporting and foreign firms are more likely to have an overdraft: 54 percent of exporters and 67 percent of foreign companies have one as opposed to 28 percent of non-exporters and 35 percent of domestic companies. Overdrafts are reported to be used to their full extent ­ the average non-used amount is only 14 percent of the total available across all firms, ranging from 8 percent for micro and small firms, and 16 percent for medium- sized ones. Therefore, short-term overdrafts are replacing more long-term bank financing, 68 especially among the more constrained micro and small borrowers. The monthly overdraft interest rate ranged from 3.7 percent per month for medium firms to 7.3 percent per month for micro and small firms. 5.20 Other financing arrangements such as leasing, factoring and trade credit are almost non-existent in Guyana, and the country's equity market is small and underdeveloped. Trade credit use is low in Guyana, compared to the Central American economies, for example. While trade credit provided only a negligible 1.3 percent of working capital needs for firms in Guyana, regardless of size, this source of funds provides 18 percent of working capital needs in Guatemala, 19 percent in El Salvador, 13 percent in Honduras, 16 percent in Ecuador and Nicaragua, and 15 percent in Peru.99 Similarly to Guyana, Grenadian firms financed only 4.5 percent of their working capital needs through trade credit (Figure 5.12). Figure 5.12 - Use of Trade Credit in Working Capital, percentage by country El Salvador 19 Guatemala 18 Ecuador 16 Nicaragua 16 Peru 15 Honduras 13 Grenada 5 Guyana 1 0 2 4 6 8 10 12 14 16 18 20 % Source: World Bank Investment Climate Surveys, 2002-2005 5.21 Guyanese firms rely primarily on retained earnings and own funds to finance their working capital needs: retained earnings financed 72 percent of working capital needs on average versus 18 percent coming from commercial banks (domestic and international) and 5 percent from equity sales. Thus, retained earnings represent a significant source of funds for large firms (57 percent of capital) and exporting firms (60 percent). For foreign-owned firms, access to domestic and international banks alleviated the reliance on retained earnings (which amounted to only 30 percent of total working capital financing). However, for small firms, 81 percent of financing comes from internally generated funds. For the textiles sector, firms relied heavily on retained earnings -- almost 90 percent of working capital financing needs came from retained earnings, while mining firms covered only 60 percent of their working capital financing needs from this source. 99Figures taken from Investment Climate Assessments for Guatemala (2004), Nicaragua (2004), Honduras (2004), Peru (2003), Ecuador (2004), El Salvador (2004) and Brazil (2005). 69 5.22 The heavy reliance on retained earnings to cover the investment needs of firms limits their ability to purchase new machinery and equipment, and invest in innovative production and certification processes. Firms are able to meet a slightly higher percentage of investment needs with bank credit (25 percent), compared to only 18 percent of working capital requirements. Retained earnings cover 80 percent of the long-term investment financing needs of small firms, 59 percent of those of medium-sized companies, and 48 percent of investment requirements of large businesses (Figure 5.13). Leasing, trade credit, equity sales, credit cards, and investment funds are all negligible sources of financing for long-term investment needs, regardless of firm size. Oddly, small firms report that 6.6 percent of working capital and 2.5 percent of long-term financing come from equity sales; for large firms, the comparable levels are only 2.7 percent and 1.2 percent. Figure 5.13 - Main Sources of Investment Capital in Guyana, percent, by Type of Firm 90 80 80 77 68 68 70 59 60 50 48 50 47 42 40 37 35 30 25 26 25 18 19 20 16 10 6 6 22 3 3 1 2 0 0 0 1 3 2 3 1 1 1 2 2 0 0 0 0 ple ters sam Small edium Large or porters ole Foreign and M n-exp Ex esticPrivate Wh icro No M Dom Retained earnings Commercial banks Equity sale Family and friends Trade credit Source: World Bank Guyana Investment Climate Survey 2005 5.23 Access to credit is also limited by the lack of a private credit bureau. In other countries, the credit bureau plays a key role in providing timely, confidential, accurate credit histories of firms and individuals. In some cases, credit bureaus incorporate financial transaction information from a wide range of sources, such as utilities (electricity, telephone) and large department stores. According to Doing Business (2006), Guyana has a "0" ranking for credit information, given the lack of both a public registry and a private credit bureau. This would require a legal and regulatory framework that insures banking information confidentiality. 5.24 Firms' access to credit is also constrained by firms' relatively low use of audited financial statements, particularly by micro and small firms. On average, 39 percent of Guyanese firms have their accounts certified by an external auditor, which compares favorably to countries such as Guatemala (35 percent) and Nicaragua (26 percent), but is much lower than El Salvador (79 percent) or Ecuador (47 percent) (Figure 5.14). There are significant differences in the use of audited financial statements across different types of firms, with only 17 percent of micro and small firms using them as opposed to 44 percent of medium-sized and 88 percent of large companies. The use of external auditors is also twice as high among exporting companies 70 (62 percent) and foreign firms (75 percent) compared to non-exporting ones (30 percent) and domestic ones (39 percent). Two out of three firms located in Georgetown have audited accounts (67 percent) compared to half that number in the countryside (32 percent). Finally, mining, chemical and wood companies are more likely to have audited financial statements than firms in the food, textiles and garment industries. Having an external auditor confirm the financial statements (balance sheets and income statements) of borrowers is another way to resolve informational problems in the credit market about borrower project quality and past borrower behavior. Figure 5.14 - Percentage of Firms with Externally Audited Annual Financial Statements, by Country El Salvador 79 Ecuador 47 Honduras 42 Guyana 39 Guatemala 35 Nicaragua 26 0 10 20 30 40 50 60 70 80 90 percent Source: World Bank Investment Climate Surveys, 2002-2005 POLICY RECOMMENDATIONS ON FINANCE 5.25 The lack of basic financial infrastructure (such as credit bureaus) and the related legal and regulatory framework present a disincentive to banks to lend to the private sector. Developing such systems and encouraging firms to present audited financial statements would help reduce transaction costs, improve information about potential clients, and mitigate the risks perceived by the banks. Credit bureaus are commonly used mechanisms to enhance access to credit by reducing the degree of asymmetric information between borrowers and lenders. Cross-country studies show that private credit registries are associated with lower perceived financial constraints and higher shares of bank financing, while public registries do not seem to significantly affect the financing constraints faced by firms. Private credit registries compile information on the credit history of individuals in collaboration with banks and other organizations, such as utility companies, department stores, car dealerships and leasing companies.. 5.26 Guaranteeing the confidentiality of financial information will be critical to private sector participation. In many countries, the reluctance to develop a credit bureau market is linked to possible breaches of confidentiality or access to internal systems by unauthorized parties. There are also fears that this information may fall into the hands of competitors. The 71 government should therefore provide an incentive to the use of private credit registries by defining the scope of information available and helping to establish norms to govern the use and confidentiality of the information. Many of the current problems in lack of information might be solved if private credit registries fill the information gap by collecting positive and negative information on borrowers that will allow people and firms to build a credit history. This is particularly important for micro and small firms that can establish a positive credit history through payment records with utility companies for example. Increased information on potential borrowers should encourage banks or other lenders to increase lending to the private sector, especially to smaller firms. 5.27 The banks and finance companies need to improve internal systems, which could lower processing costs and delays. While the Guyanese banking sector's administrative costs are not high by regional standards, the use of parametric models which can classify good and bad clients efficiently could lower these costs and reduce loan application processing times significantly. Given the poor quality of the existing loan portfolios, banks should improve client selection techniques to move beyond reliance on physical guarantees, thereby opening up financial markets to more small and medium firms. Once the confidentiality of financial information is guaranteed, banks should participate in the broad private sector credit bureau initiative to enhance their information base on actual and potential clients. They could also improve the menu of payments and transfer products, lowering profit margins to broaden coverage. 5.28 Given the enormous disadvantage to firms caused by existing extremely high collateral requirements, the government and the banks should discuss legal and regulatory issues that may contribute to such collateral levels. Judicial reform would contribute to a greater likelihood of speedier and more effective contract enforcement. The improvements in credit information would also address the perceived credit risk. There may also be other causes of high collateral requirements that could be addressed through regulatory adjustments. Also, a legal and regulatory framework for the creation of a movable asset registry would be an important step in broadening the collateral available for borrowers, thereby increasing the outreach of the financial system significantly. 5.29 The existing National Bankers' Association could play a larger role in developing systems and practices that increase private sector access to credit. In the 1990s, the National Bankers' Association of Guyana was an active partner in consultations on changes in the Banking Act. It could play an important role in the future in terms of improved payment systems, the credit bureau, and the development of new financial products. 72 6. POTENTIAL FOR ECO-TOURISM GROWTH "A largely forested country with spectacular waterfalls, distinctively large plants and trees and a thick tropical rainforest teeming with brilliantly-colored birds, insects and a wide variety of mammals, Guyana is potentially a lucrative eco-tourist destination" BBC online 6.1 Recent dialogue on the National Competitiveness Strategy is very much centered on the idea that Guyana needs to diversify its economy and improve the competitiveness of its current economic activities in order to achieve higher economic growth. A search on the Stabroek News website for published material with the word "competitiveness" produces 218 hits ­ articles published between August 2004 and March 31, 2006. Among the most common views are that the country should seek to develop eco-tourism, ICT services (back office outsourcing and others), and high-value agro-processing. We focus on Guyana's potential for eco-tourism growth. 6.2 In 2005, President Bharrat Jagdeo announced that his government was convinced that tourism was a viable development option for Guyana and invited the private sector to enlist the Government's help in moving ahead. The Guyana Tourism Development Charrette Report (2003) was prepared by the Government, in collaboration with The U.S. Agency for International Development (USAID) and the U.N. Development Program (UNDP). The document provides a blueprint for investing in the tourism sector. The Charrette participants set out to identify Guyana's most important natural, cultural and historic attractions and create a complete and truly compelling world-class tourism itinerary suitable for a seven- to 21-day vacation. Although targeted primarily at international tourists, this package was also designed to be attractive for visiting Guyanese residing abroad and domestic tourists. 6.3 A major milestone was reached in 2005 when Kuoni, a highly regarded tour operator catering largely to the European market, offered a package tour that combined a 7-night resort holiday by the sea in Barbados with three days in a resort on the Essequibo River (the Baganara) in Guyana. This was Guyana's first entry into the international tour package market and is indicative of new strategies of combining the tourism resources of two or more countries in one package. The relative ease of establishing these associations is one advantage to Guyana's membership in CARICOM. Guyana's has also begun to be included in the travel itineraries of several web-based tour operators. Most of these cater to individual tourists or small groups of people, rather than packaging tours for a mass market. 6.4 Well managed hotels in Georgetown catering to foreign visitors operate at about 60 to 65 percent average annual occupancy; but these are probably no more than half a dozen of the 30 hotels in Georgetown and its vicinity. Conclusions about profitability cannot be drawn from average occupancy rates. Profitability will vary with category and location, and between new and fully amortized hotels and with the efficiency of management and marketing. Nevertheless, hotels in Georgetown with 60 to 65 percent occupancy rates should be profitable. Like with resort hotels, the weak market has led to lower maintenance and refurbishing of hotels and has affected the quality of and number of services provided by several establishments. Resort hotels and lodges in the interior are reputed to have annual average occupancy rates between 40 to below 20 percent. 73 6.5 The cost and unreliability of Guyana's electricity supply have been identified as a major obstacle as electricity accounts for about 30 percent of most hotels' operating costs (Figure 6.1). The rate charged to hotels is G$55.70 per KWH (US cents 0.28 per KWH). This rate is higher than in any of the other comparator countries, except Barbados. A relatively small hotel in Georgetown operates a generator which cost US$8,000 when new. In addition to this capital cost, the hotel must pay for the fuel consumed by the generator and for its maintenance.100 Discussions with hotel managers and/or owners in Georgetown led to complaints about the cost and unreliability of electricity. The wild fluctuations in voltage cause incalculable damage to equipment, with surge protectors having been known to melt when in use. All big companies and most hotels and resorts have their own generators. Recently, however, there have been fewer blackouts, more load shedding and more power generated. Figure 6.1 - Percent of Firms with Own Generator and Number of Power Outages, by Type of Hotel 100 90 80 70 60 50 40 30 20 10 0 Whole sample Small Large In capital city Outside of capital city Percent of firms with own generator Number of power interruptions Source: World Bank Guyana ICS 2005, hotel module 6.6 The high level of import duties on imported foodstuffs reduces the mark-up that hotels and restaurants can charge customers. Hotels also face periodic shortages of food and beverage items due to customs issues. Imported foodstuffs are subject to varying levels of import duties. Interviewed hotel managers had particular concerns regarding imported wines, alcohol and foodstuffs. Most hotels and restaurants buy from a local importer or distributor rather than import directly from an overseas source. Business people expressed concern with the high rate of duties on imported goods. Import duties on wines, for example, run at 100 percent of cost, plus a 50 percent consumption tax. As a result the high price for a relatively common bottle of wine reduces the level of the mark-up they can charge customers (beer and rum are produced locally). Hotels also pay the consumption tax charged on these items. Hoteliers also pointed to periodic shortages of specific menu and alcohol items that can occur when imports of goods are delayed in customs. 100Tourism & Industrial Development Company of Trinidad & Tobago (TIDCO) 74 6.7 Just like with manufacturing firm, hotel managers are concerned about taxes -- 62 percent of interviewed managers in the ICS considered concessions on taxes and import duties as very important (Figure 6.2). Hotel taxes are normally charged at a fixed percentage of the bill. The tax rates range from 5 percent to 10 percent; Guyana charges the higher rate on tourist accommodation of more than 15 rooms and also charges a corporate tax rate of 30 percent on profits. Sales of food and beverages are also taxed at 10 percent. As pointed out in earlier chapters, in 2005 Guyana adopted legislation for the introduction of VAT, and its regulations for implementations are at present being further discussed. It is not known if the VAT for hotels will absorb the hotel tax or whether it will be additional, over and above what hotels are already subject to. Figure 6.2 - Tourism Firms: Perceptions of Important Obstacles, percent of firms sharing view that a given area is very important or not important 70 62 60 50 41 38 37 40 31 % 30 21 20 10 0 Paying no taxes or import Avoiding government Having unfair access to duties regulations prime land Very important Not important Source: World Bank Guyana ICS 2005, hotel module 6.8 Training ­ as discussed in Chapter 4 of Volume 2 ­ is insufficient and is regarded as a weakness in the sector's performance. A lack of skills among entry-level staff in all segments of the tourism sector is reported by managers. Instilling high standards amongst staff members is also regarded as an obstacle. In the surveys undertaken by USAID, and other comments on the web, many travel industry people and visitors complained about receiving poor service while in Guyana. Most accommodations and restaurant and tour managers expect to train staff in-house. The Carnegie School of Home Economics (CSHE) located in Georgetown, has had a limited impact on the sector. Managers of larger hotels relied principally on their in- house training programs to produce the quality of staff they required. RECOMMENDATIONS ON POTENTIAL FOR ECO-TOURISM GROWTH 6.9 Given Guyana's potential for expansion into the adventure and eco-tourism markets and the requirement to raise the value of the product to induce and retain such an expansion, the Minister of Tourism should take a central role in strategy formulation. The 75 Charrette Report provided a first step in the process of defining a strategy for tourism development in Guyana. There should be a project unit in Ministry of Tourism, Industry and Commerce to act as advisers to the Minister and to do the actual work related to the process. The many stakeholders, including other Ministries and the private sector, who should participate in the process, will have to be kept informed and their views sought. 6.10 To maximize the efficiency of the use of its promotion funds and improve its market targeting, Guyana needs to learn more about its current tourists by gathering statistical information about tourist arrivals. Guyana also needs to know, how much the different groups spend, how long they stay and which are the internal destinations that they visit, ranked in priority order. This information establishes what type of supply is needed and where and what occupancy rates are attainable. Visitor surveys that are undertaken frequently in the Caribbean islands should also be done by Guyana. A donor organization could fund such surveys and the CTO could lend its technical assistance. 6.11 The costs of a visit to Guyana are already high enough, so other sources of income for promotion, other than visitors taxes, should be sought, if possible. Some francophone countries in Africa include a small charge or tax for promotion on the room rates of visitors. According to the USAID Cluster Market Assessments report, Venezuela's tourism promotion agency, the Instituto Nacional de Turismo (INATUR), receives one per cent of all tourism revenues to fund international marketing activities to promote the country. 6.12 Tourism, if carefully managed, can become a tool for environmental protection and for financing conservation. Visits to or (preferably) in the vicinity of National Parks are helping reduce a serious financial gap in park funding by accommodating visitors in the parks and by environmental taxes on those visitors worldwide. If an increase in park fees were presented to the visitor to Kaieteur as a means of supporting local communities and conserving the park, it should be possible to raise the fees from US$12.00. 6.13 In order to credibly market itself as an eco-tourism destination, Guyana must obtain the environmental `green' accreditations for its tourist accommodation and services. Green accreditations receive wide publicity and become an effective marketing tool for the accommodation, and, in the process, for the country. Many lodges and hotels worldwide are already doing so and Dominica is even working towards attaining Green Globe destination status for the entire island. The fact that Guyana, whose main attraction is as an ecotourism destination, does not have any accredited "green" tourist accommodation appears to be an anomaly. Worse, if accommodation and service managers are not using environmentally benign practices, tourists could be repelled. "Green" tour operators in developed countries increasingly only establish business relationships with hotel and lodge managers that have adopted "green" practices--as is demanded by a growing number of tourists, particularly European ones. A major benefit from adopting benign environmental processes is that a large number of awards or "eco labels" are now offered for good environmental management of hotels and other accommodation. A good source of information on these eco-labels is the Caribbean Hotel Association (CHA), which itself offers annually the CHA/American Express Green Hotel of the Year award in large and small hotel categories. 76 REFERENCES Adams, Richard H. (2003), "International Migration, Remittances, and the Brain Drain: A Study of 24 Labor-Exporting Countries", Policy Research Working Paper No. 3069, World Bank, Washington D.C., online at http://econ.worldbank.org/. Ayres, Robert L. 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World Economic Forum, Global Competitiveness Report 2005-2006, online at www.weforum.org. 80 Worrell, DeLisle, Desiree Cherebin and Tracy Polius-Mounsey, (2001), "Financial System Soundness in the Caribbean: An Initial Assessment", IMF Working Paper WP/01/123, International Monetary Fund, Washington D.C. 81 of and base, pay reform the some staffing the or tax corporate and police crime regular exemptions, percent) and at of fiscal evasion Security the 45 duties, police courts, Company duty institutions training, reducing for impact measures the the Taxes surveys at maximum collection in present of the import National and import sector improve increasing (at data on the aimed comprehensive and enforcement high education, include long-term a at incentives lowering rates justice systems into tax lowering too officers; official victimization and firms tax better and are Violence questions measures Regulations aims and police prisons private Implement that reducing reducing strengthening Consider income Consider which Strengthen through for Improve information and Conduct intervals, Census on Incorporate Policy Medium- considerations Business · · · Crime · · · · of and for an time health better company business the unity length control Police, a in (already m crime officials and in of com Recommendations and procedures initiatives policing, licenses, step registration in crime of employment groups firearms and Taxes Municipal the measures licenses Registrar and s and community munity at-risk places) efforts associations 82 the frequency Epidemiology reservation prevention groups; number the lower for (com APPENDIX Findings by operating mandatory police transnational and the a public program the the and Company education initiative) crime ongoing at-risk as Violence involve sector in business Main- Regulations the fighting and A.1 Reduce inspections Sanitation Reduce obtaining permits Eliminate name registration; with Broaden opportunities ongoing Establish which private lighting Continue policing, and Involve prevention Ongoing/short-term Business · · · Crime · · · · Table and by to over in Climate (e.g. and and percent the percent with Registrar crime spent America combined by delays (45 duty of 3.4 to and, costs Interviewed are Latin lengthy comparable costly, high port American Investment Taxes procedures those Sanitation the is due levels is and Company im are incentives high. in the and and losses cost the and high Latin security of complex, are which officials Insecurity: the rates by region especially with tax distort and and very crime government Police, of and licenses), tax standards countries registration even firms sales, Aspect in has Violence losses direct Regulations several ptions, IDA by percent days) Caribbean and annual Delays operating inspections, Municipal Epidemiology Business 80 registration (18 Corporate maximum) with exem Guyana violence, Caribbean Crime Guyanese firms' of other and Issues Governance Business · · · Crime · · h by suc and and basis and publish of used common judicatory Caribbean social regular whereby the (licenses, and Judiciary legislation, and a education tactics CARICOM procurement strategy on provided; the with applying of dure system, performance services and other management publicly in within the prevention firearms, programs, proce payment audits services case statistics on of and laws the agencies skills crime Justice e-procurement scorecard delay administrative available annual a judicial court coordination to government rate judicial updates Enforcement functions kea in of out of appeals m proliferation parenting situational Reform as debtors Improve Separate court Gather and Work Court commercial CSME Carry operations Implement Introduce users permits) regular government Contract · · · · · Corruption · · · Electricity a in as 2002) to been to judiciary in fast-track through such dispute has since the efforts new business in commercial the Judiciary (e.g. to of system the and disseminate the center Court public of through mandatory larger in regulations e-procurement established investment building procurement and practices and claims or alternative mechanisms, High related structure and for 83 send government evaluation the collect backlogs small court and recently Court mediation and through corrupt at capacity laws associations, agencies of (ADR) (a functional and application to strategy online on case the strengthen ongoing transparency a and the a Enforcement to information data business Reduce resolution small-claims mediation), cases Commercial Further resolution mediation functioning Make performance available Deepen increase procurement training Establish monitoring monitor procurement Develop Use community press government Contract · · · Corruption · · · · Electricity is to 15 the to High sales an at for a 6.2 court in the in $1,000 as firms percent and affect in of informal annual high by high, 3.5 s, for firms problematic, officials high over payment Judiciary according of as with a out very are firm bribes not are the disputes other court perceived over paid are value occur Registrar seen done" not and and is firms, and percent while hotels; especially the 2 case prohibitively is firms is bribes for business larger fees, contracts contract things of hotels from judges perspective, firms backlogs manufacturing by to around court small the get sales a industry corruption court which of for of large Enforcement case and corruption problem, public "to filing sales Resolution time-consuming, interviewed tourism Court information Court Judicial especially payments averaging Official international for dispute, micro While major secure percent Bribes of percent mainly Contract · · · · Corruption · · Infrastructure: Electricity an as a three- align (where well over to the tariff to Bank as through a efficiency); payments rates two- regulatory a capacity renewable sector GT&T regulate the Project) service ongoing the Utilities to negotiate improve new, of in within it of (e.g. allowing (and period Public long-distance generation use allow should generation (PUC) competition the to plan costs collection strengthening new and Co-generation efficiency in to lower in resources five-year industry period Regulator to tariffs Improve Continue framework Invest feasible), energy Bagasse hydropower Promote increase Restructure Commission year whole The rebalancing its introduce two- · · · · Telecommunications · · in non- and of ICT which draw efforts and into price liabilities certainty and of the supply quality distribution arbitrary losses entation market distribution market and taking National provision the technical raise Trade successful avoid power of in framework, contingent implem Basic opening concession; a Commitment, of and transparent and empower commercial drafted its for unications improving structure, World m 84 reducing cost tariffs; implementation GT&T way transparency of and cut the reliability regulatory begin to tariff the (WTO) the similar stability and significant the the through losses business the adequate, recently and telecom the service improvements the the an that before government the from pave of poses definition the Ensure enhance services operations technical Reduce through end Enhance including the interventions, participants Define enforceable account caps on Adopt Strategy, Present Organization Telecommunications could country's Renegotiate lessons · · · · Telecommunications · · · of is to to LAC and in firms tariff third of power is 100% line, and region, due in so firms highest due frequent by other among the on do the high by incidence and generation short suppliers local LAC supply Guyanese are is market to of sales largely for days surveyed and the very by days) reported several (82% distribution, oil arbitrary transparent telephone 84 time in one is highest is investment by lowest to especially energy to no (67 by annual icity Guyana countries region and limited firms capacity is fixed the of electricity (the in new the a use region which of characterized year) waited electr generators) of prone average customers charges LAC imported been there other per of large countries email the among 3.8% to low, compared prices the own the on has and firms obtain with in subsidized is outages (41 widespread, and generation generation demand; to and has calling lose outages, in is in than LAC are reliability long regulation Guyana which lowest reliance interact Firms power compared The Guyana and outages in countries) Self-supply firms medium of Electricity highest losses to Current meeting generation The ineffective interventions; scheme Guyanese average longer across Internet to the Guyana national which · · · · · · Telecommunications · · · to to to the of with the order all (e.g., a players suitable Law in Law Brazilian of agency all the from on the made website documents wireless investment expansion customs authority in GT&T if and in Guyanese and environment audits infrastructure Georgetown improve frequencies regulatory between construction of to the customs the information built, invest or by a trade regulatory radio including road is Port transparent up conduct regulatory procedures Telecommunications of the competition Telecommunications verify secured set enable and Logistics new Georgetown), the export/import the critical a is traffic, dredging port) more on the to Brazil for the of regulations provided industry to and industry, and in and to for allow the freight road Amend delegate concessions to services Amend explicitly collect operators in Invest plans border financing If for capacity (through deep-sea Develop services trucking Introduce procedures; guidelines required Strengthen · · Transport · · · · Water · of 5) in and to 4 of and reforms universal Airport, s including project) clearance Port all bridges rehabilitation conjunction for (regions the customs Jagan networks bridge of through National in custom electronic of declarations of for customs plans countries, on concrete 85 OECS tenders IADB Cheddi roads Competitiveness plan through projects Strategy reduce the Mahaicony efficiency the customs integrated to public Logistics ongoing concessions (e.g. planned of Caribbean and roads and the an action existing country's National modernization rehabilitati and out an in of the the other in Jamaica Introduce service/access Carry existing Construct Mahaica (part Improve Georgetown, and appropriate Establish Transportation with Strategy Adopt through procedures processing documents) times Invest · Transport · · · · · Water · of a the to and that very of in and on of and as and firms on is higher s due ­ a (PUC) port as rely well reported trends of as GT&T lost the long with exporters regulatory breakage which and to toward clear custom LAC regulator conflicts of exporting by transport expensive Guyanese are to firms by in of port; value regarded air is mode (theft, adapt by PUC's Commission companies nte depth large, transit), to industry times days exporters, percent prices effective legislation of initiated the in while travel trade 23 bribery because bribe) Guyanese in