Report No. 35951-GY Guyana Investment Climate Assessment (In Two Volumes) Volume II: Detailed Findings and Recommendations June 21, 2007 Finance, Private Sector and Infrastructure Latin America and the Caribbean Region (LCSFR) and Development Economics Research Group (DECRG) 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 CIDA Canadian International Development Agency CPAR Country Procurement Assessment Report CPI Corruption Perception Index CTO Caribbean Tourism Organization CTL Caribbean Telecommunications Ltd. DDL Demerara Distillers Ltd. DFID UK Department for International Development EU European Union FDI Foreign Direct Investment FIAS Foreign Investment Advisory Services FTA Free Trade Agreement 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 GTA Guyana Tourism Authority GT&T Guyana Telephone and Telegraph GUYSUCO Guyana Sugar Corporation GWI Guyana Water Inc. IAAC Inter-American Accreditation Cooperation IDB Inter-American Development Bank ICRG International Country Risk Guide ICS Investment Climate Survey ICT Information and Communication Technologies IEC International Electro-technical Commission IFS International Financial Statistics ILAC International Laboratory Accreditation Cooperation IMF International Monetary Fund IPA Investment Promotion Agency ISO International Organization for Standardization ISPs Internet Service Providers IPPs Independent Power Producers ITU International Telecommunications Union MSTQ Metrology, Standards, Technology and Quality NAFTA North American Free Trade Agreement OECD Organization for Economic Cooperation and Development OECS Organization of Eastern Caribbean States PAHO Pan-American Health Organization PUC Public Utilities Commission R&D Research and Development i THAG Tourismand HospitalityAssociation of Guyana TFP Total Factor Productivity TVET Technical and VocationalEducation and Training UNDP UnitedNationsDevelopmentProgram UNICEF UnitedNationsChildren's Fund USAID USAgency for InternationalDevelopment VAT Value-addedTax WBI World Bank Institute WDI World DevelopmentIndicators WDR World DevelopmentReport WEF World Economic Forum WHO World HealthOrganization WTTC World Travel and TourismCouncil ~~ ~ Vice President: PamelaCox Country Director: CarolineAnstey Sector Director: MakhtarDiop SectorManager: SusanGoldmark Task Manager: Stefka Slavova I I ii GuyanaInvestment Climate Assessment Volume 11: DetailedFindingsand Recommendations TABLEOF CONTENTS ACKNOWLEDGMENTS ............................................................................................................ X CHAPTER1 IMPROVINGTHE INVESTMENT CLIMATE INGUYANA:AN . INTRODUCTION ................................................................................................................... 1 AN OVERVIEWOFGUYANA'SECONOMICTRENDS ........................................................ 2 INVESTMENT CLIMATEASSESSMENT 13 MAINCONSTRAINTS TODOING BUSINESS GUYANAACCORDING TO THEICs ......................... ........................................................................................... IN 14 CHAPTER2 GOVERNANCEANDINSECURITY . ............................................................... 23 BUSINESS-GOVERNMENT RELATIONS.......................................................................................... 23 RECOMMENDATIONS ON BUSINESS-GOVERNMENT RELATIONS ................................................... 35 CONTRACT ENFORCEMENT THE JUDICIARY AND .......................................................................... 37 RECOMMENDATIONS OF CONTRACT ENFORCEMENT THE JUDICIARY ................................... 53 CRIME AND VIOLENCE................................................................................................................. AND 55 RECOMMENDATIONS ON CRIME AND VIOLENCE .......................................................................... 65 CHAPTER3 INFRASTRUCTURE . .......................................................................................... 67 ELECTRICITY ............................................................................................................................... 67 RECOMMENDATIONS ONELECTRICITYPOLICY ............................................................................ 81 TELECOMM~NICA~ONS ............................................................................................................... 83 RECOMMENDATIONSTELECOMMUNICATIONS........................................................................ ON 98 TRANSPORT ANDLOGISTICS ...................................................................................................... 102 WATER...................................................................................................................................... RECOMMENDATIONS ON TRANSPORT AND LOGISTICS ............................................................... 116 118 CHAPTER4 SKILLS,MIGRATION,TECHNOLOGY AND QUALITY . ......................... 124 INTRODUCTION .......................................................................................................................... 124 EDUCATION AND TRAINING: RECENTDEVELOPMENTSCHALLENGES AND ................................ 127 EMIGRATIONAND WORKERREMITTANCES ............................................................................... 136 THEETHNICSEGMENTATION OF THE POPULATIONAND ITS IMPLICATIONS ............................... 140 TECHNOLOGY AND INNOVATION ............................................................................................... 142 INFRASTRUCTURE FOR QUALITY ASSURANCE ........................................................................... 146 RECOMMENDATIONS ON SKILLS. MIGRATION. TECHNOLOGY AND QUALITY ............................. 149 CHAPTER5 FINANCE . ........................................................................................................... 151 ACCESS CREDIT..................................................................................................................... TO 151 COSTS AND ACCESS FINANCIALSERVICES: THEPERSPECTIVEOFTHE FIRMS TO ...................... 158 ACCESS FINANCIALSERVICES: A KEYPROBLEMFORFIRMSWITH GROWTH TO POTENTIAL.......................................................................................................................... 162 111 ... POLICY RECOMMENDATIONS TO IMPROVE THEACCESS AND COST ASPECTS FINANCE CHAPTER6 POTENTIALFORECO-TOURISMGROWTH . ...................................................172 OF 170 OVERVIEW................................................................................................................................. 172 CHARACTERISTICSOF TOURISTS ................................................................................................ 178 SUPPLY OFACCOMMODATION TOURISMRELATED SERVICES AND ............................................ 180 OCCUPANCY RATES AND PROFITABILITY .................................................................................. 182 INVESTMENT INCENTIVES AND RECENT INVESTMENTS INTOURISM .......................................... GUYANAAND ITSCOMPETITORS ............................................................................................... 184 185 COMPETITIVENESSOFTHE GUYANESE TOURISMSECTOR.......................................................... 186 CONCLUSIONSAND RECOMMENDATIONS .................................................................................. 195 REFERENCES .......................................................................................................................... 200 iv LISTOFTABLES Table 1-1: Structure of MerchandiseExports inGuyana. 2004.................................................................................... 7 23 Table 2-2: Percentageof Senior ManagementTime Spent Dealingwith Regulations................................................ Table 2-1: Starting a Business in 2005: A Cross-countryComparison...................................................................... 24 34 Table 2-4: Pre.Payment. Paymentat Delivery and Trade Credit: A Comparison....................................................... Table 2-3: InspectedFirmsand Frequency and Durationof Inspections.................................................................... 42 Table2-5: BusinessAssociationMembershipand Dispute Resolution...................................................................... 44 44 Table 2-7: Time. Costs and Number of Proceduresto Enforcea DebtContract in Court........................................... Table2-6: Proportionof Firmswith Overdue PaymentsThat Have Filed Court Cases. by Size................................ 50 Table 3-1: IndependentPower Producersin Guyana.................................................................................................. 73 Table 3-2: Localand Long DistancePricesin2003 (US$)......................................................................................... 94 Table 3-3: Percentof FirmsWhich View Transport as an Obstacle to Their Operationand Growth.by Size Table 3-4: Sea as Primary Meansof Transport by Company Size and Location...................................................... and Exporter Status ..................................................................................................................................... 104 109 Table 3-5: A Sampleof Average FreightRates, inUS$........................................................................................... 110 Table 3-7:Productivity Indicatorsfor the Portof Georgetownrelativeto Competitor Ports.................................... Table 3-6:Average StevedoringCharges for Georgetownrelativeto CompetitorPorts.......................................... 110 111 Table 3-8: GrowthRates of Guyana's Top 10Exports, NominalValues ................................................................. 113 Table 3-9: GrowthRates of Guyana's Top 10Imports, Nominal Values ................................................................. Table 3-10: ReportedIncidence of ExtraPaymentsat Customs, percentof interviewedfirms ................................ 114 115 Table4-1: Guyana: SelectedEducationIndicators. 2000-2004 ................................................................................ 129 Table5-1: PrivateSector Credit as Percentof GDP: An InternationalComparison. 2004....................................... 153 Table5-2: Guyana: CommercialBank Loansby Sector (% growth)........................................................................ Table5-3: InterestRateSpreads. InternationalComparison(%)............................................................................. 154 157 Table 5-4: Cost of Financeand Access to Finance: the Perceptions of Guyanese Firms.......................................... 161 Table5-5: EvenExporters and Large FirmsinGuyanaHave Trouble Getting US Dollar Loans ........................... 163 176 Table 6-2: Number of Natureand Eco-touristsin2003 (thousand) .......................................................................... Table 6-1: Tourist Arrivals in Guyana. 2002-2005................................................................................................... 177 Table 6-3: TouristArrivals in Guyanaby Placeof Stay (percent)............................................................................ 177 Table 6-4: Tourist Arrivals inGuyanaby Month. 2002-2004 (percent) ................................................................... 179 180 Table 6-6: Supply of Tourist Accommodations in Guyanaand CompetitorDestinations ........................................ Table 6-5: Supply of Hotel and ResortAccommodation in Guyana......................................................................... 182 185 Table 6-8: ComparativeCosts of NatureTourism .................................................................................................... Table 6-7: RecentInvestmentsunder the IncentivesRegime.................................................................................... Table 6-9: Daily Pricefor PackagedTours: aComparison....................................................................................... 185 186 Table 6-10:Expendituresof NationalTourismOrganizations.................................................................................. 195 V LISTOFFIGURES Figure 1-1:GrossNationalIncomeper CapitainGuyana and comparator countries: 1990-2004................................ 2 3 Figure 1-3: RealGDP Growth: 1991.2004. Guyanavs LAC and IDA Countries ....................................................... Figure 1-2:Guyana: RealGDPGrowth. 1966-2005..................................................................................................... 4 Figure 1-4: Consumer Price Inflation. %. annual average............................................................................................. . 5 6 Figure 1-6:Guyana: Structure ofthe Economy in 2004................................................................................................ Figure 1-5: Guyana: Structure ofthe Economy. 1966. 1991.and 2002........................................................................ 6 Figure 1-7:ManufacturingExports as Percentof Total MerchandiseExports:Guyana vs. LAC and IDA Figure 1-8: Growthin Gross FixedCapitalFormation(percent per annum) ................................................................ Countries. 1997-2003...................................................................................................................................... 7 9 9 Figure 1-10:ForeignDirect Investment.Net Inflows as percent of GDP. 1995-2003................................................ Figure 1-9: Gross FixedCapitalFormationin Guyana(percent of GDP)..................................................................... Figure 1- 12: Map of Guyana...................................................................................................................................... 14 Figure 1- 11: SampleCompositionby Sector ............................................................................................................. 10 13 Figure 1- 13: The Perspectiveof GuyaneseFirms-InvestmentClimateConstraints Ratedas "Major" or "Very Severe" by More than 25 Percent of SurveyedFirms inGuyana....................................................... 15 Figure 1-14:The Perspectiveof GuyaneseFirms- Investment Climate ConstraintsRatedas "Major" or "Very Severe" by between 10percent and 25 percent of SurveyedFirms in Guyana.................................. 16 Figure 1-15: The Perspectiveof GuyaneseFirms- Investment Climate ConstraintsRatedas "Major" or "Very Severe" by less than 10percent of SurveyedFirms inGuyana.......................................................... 17 Figure 1-16:Percentageof Sales Lost Due to QuantifiableConstraints inthe Areas of Infrastructureand Governance................................................................................................................................................... 18 Figure2-2: Percentageof Senior ManagementTime Spent on Regulations in Guyana. By Type of Firm................24 Figure2-1:Number of Days Neededto Obtainan Operating License: A Comparison.............................................. 25 Figure2-3: PerceptionsaboutTax Ratesand Tax Administration.............................................................................. 26 Figure2-4: CorporateTax Exemptionsin Guyana...................................................................................................... 28 Figure2-5: Importanceof Competition, Import Tax Exemptionsand IncomeTax Holidaysfor Reduction of 29 Figure2-6: Customs ClearanceTimes and ExtraPayments........................................................................................ Firms' Costs and Developmentof New Products......................................................................................... 30 Figure2-7: Eligibility and Use of Input Tax ExemptionsandTax Holidaysby Guyanese Tourism 30 Figure2-8: Percentageof Total Annual Sales Declaredto the Tax Authorities.......................................................... Companies..................................................................................................................................................... 31 32 Figure2-10: Bribesto "Get Things Done", percent of annual sales ........................................................................... Figure2-9: ReportedBribesfor GovernmentContracts, percent of contract value.................................................... 33 Figure2-11: Percentof Firms which Say that Bribesto "Get Things Done" are Common,percent of interviewedfirms .......................................................................................................................................... 33 Figure2-12: Percentageof RespondingFirmsWhich Were Asked a Bribe duringInspections,Guyana ..................35 Figure2-13: Share of FirmsWhichConsider GovernmentOfficials' Interpretationsof Regulations Unpredictable, by Country............................................................................................................................ 35 Figure2-14: Trust inthe Judiciary:Percentageof FirmsWhich Do Not Believethat the Courts Will Uphold Their Contractual and Property RightsinBusinessDisputes, by Country.................................................... 38 Figure2-15: Trust inthe Judiciary:Percentageof FirmsWhich Perceive the LegalSystemand Conflict 39 Figure2-16: Court UsersDistrustthe JudiciaryMuch More than Non-Users............................................................ Resolutionas Major or Very Severe Obstacles to Doing Business, by Country........................................... 40 Figure2-17: FirmsWhich the LegalSystemand Conflict Resolutionas Major or Very Severe Obstacles, by Figure2-18:Average Number of Weeks Necessaryto Resolve a DisputedPaymentinGuyanese Courts................45 Size................................................................................................................................................................ 40 Figure2-19: Average Durationof a PaymentDisputein Court: an InternationalComparison................................... 46 47 Figure2-21: Percentageof Firms which Think that Bribes to JudicialOfficials Are Common.................................. Figure2-20: A Comparisonof Court DurationData................................................................................................... Figure2-22: Bribesto Court Officials and Durationof Court Trials .......................................................................... 48 49 Figure2-23: Percentageof FirmsWhose CourtJudgments Are Executed................................................................. Figure2-24: Index ofJudicial Independence,(Scale: 1- No Independence,7 -CompleteIndependence)...............49 51 vi Figure2-25: Indexof Property Rights. (Scale: 1. defined and protected by law. 7 . defined poorly clearly and protectedby law).................................................................................................................................... 52 Figure2-26: Indexof Efficiency of LegalFramework, (Scale: 1-efficient and follows a clear, neutral Figure2-27: HomicideRates per 100,000 of Population, by Gender and WHO Region............................................ process, 7 -inefficient and subject to manipulation).................................................................................... 53 56 Figure2-28: Prevalenceof Theft, Robbery, Vandalism or Arson, percent of ICs respondents................................. 60 Figure2-29: LossesinTransit, Percentage of Consignment Value by Type of Firm................................................. 60 Figure2-30: Lossesdue to Crime and Firms' Costs to PreventCrime, by Firm Size................................................. 61 Figure2-31: Share of FirmsWhich Spend Some Amount on Security, percent of ICs respondents.......................... 61 Figure2-32: ReportedCases and SolvedCases by Police:An InternationalComparison.......................................... 62 Figure2-33: Trust inthe Judiciary in Guyana............................................................................................................. 63 Figure2-34: Trust inthe Judiciary:an InternationalComparison............................................................................... 63 Figure3-1: Average Number of Power Outagesin Latin American Countries........................................................... 68 Figure3- 2: Losses from Power Interruptionsin Guyana. percent of total annual sales............................................. 68 69 Figure3- 4: Cost of self-supply of electricity (US$ per kwh)..................................................................................... Figure3-3:Self-supplyof Electricity in Guyana........................................................................................................ 69 Figure3-5: Electricity Intensity (kWh per capita)....................................................................................................... 70 71 Figure3-7: ComparativeTransitionand Distribution Losses .................................................................................... Figure3-6: Average End-UserElectricity Prices (US cents per kWh) ....................................................................... 72 Figure3-8: ComparativeInstalledGenerationCapacity, by Country ......................................................................... 76 Figure3-9: HydropowerGeneration, by Country ....................................................................................................... 78 Figure3-10:Percentageof FirmsIdentifyingTelecommunicationsas a Major or Very SevereObstacleto BusinessOperation and Growth: An InternationalComparison................................................................... 83 Figure3-11: AverageWaiting Time for Telephone Line Installation(Number of Days): An International Comparison................................................................................................................................................... 84 Figure3-12: Average Waiting Time for Telephone Line Installation(Number of days), by Firm Figure3-13: FirmEmail and InternetUse, by Country............................................................................................... Characteristic................................................................................................................................................ 85 86 87 Figure3-15: Main LinesTeledensity and GDP per Capita in 2003 ............................................................................ Figure3-14: Mobile and FixedPenetrationRates in Guyana..................................................................................... 88 89 Figure3-17:Guyana's Mobile Subscribersper 100people, 2004 .............................................................................. Figure3-16:Cellular Teledensity and GDP per Capitain2003.................................................................................. 90 91 Figure3-19: InternetTotal Monthly Price (US$ per 20 hours of use, 2003) .............................................................. Figure3-18: Individual InternetUsers per 100Inhabitants, 2004............................................................................... 91 Figure3-20: InternetUse by InterviewedFirms in Guyana........................................................................................ Figure3-21: MainMode of Transportation of Firms' Products and Inputs, by Type of Firm.................................. 92 102 Figure3-22: Percentof Annual Sales Sold Domesticallyand Exported, by Type of Firm....................................... 103 Figure3-23: Percentof FirmsWhich View Transport as an Obstacleto Their Operation and Growth, by Industry....................................................................................................................................................... 104 Figure3-24:Average LossesDue to Damageand Theft during Shipmentof Goods, by Type of Firmand Type of Shipment........................................................................................................................................ 106 Figure3-25:Average LossesDue to Damageand Theft during Shipmentof Goods, by Industryand Type 108 Figure3-27: Past and ForecastTrade Growthin Guyana, Containers...................................................................... Figure3-26: Perceptionsof Transportation across Firms with and without Own Transport..................................... of Shipment................................................................................................................................................. 106 112 112 Figure3-29:Top 10CommodityImports in 2004 and Forecastfor 2010 in Guyana............................................... Figure3-28: Top 10CommodityExportsin 2004 and Forecastfor 2010 in Guyana............................................... 113 Figure3-30:ReportedIncidence of InformalPaymentsat Customs, by Firm Size .................................................. 116 Figure3-31: Use of Different Sources of Water for ProductionFirms, percent of Guyanese manufacturing Figure 3- 32: Provisionof Water from Public Sources, by Country......................................................................... firms............................................................................................................................................................ 119 120 Figure 3-33: Costs of Water Interruptions:percent of annual sales across firms that experienced water interruptions,by Country............................................................................................................................ 121 Figure3-35:Average Numberof Daysto ObtainWater Connection, by Type of Firm........................................... Figure 3-34: AverageNumberof Daysto Obtaina Water Connection, by Country................................................. 122 122 vii Figure 4-1: Guyana: Distribution of the Populationby Educational Attainment. 1990and 2002............................. 125 Figure 4-2: Guyana:Net Primary and Secondary School Enrollment Rates. 1980.2004. % of relevant age Figure 4-3: Proportion of Population with Secondary or Tertiary Education. selected countries............................. group........................................................................................................................................................... 127 128 Figure 4-4: Degree of Dissatisfaction with the Availability of Labor Skills. by Country ......................................... Figure 4-5: Guyana: Degree of Dissatisfactionwith the Availability of Labor Skills. by Type of Firm ..................131 132 Figure 4-6: Guyana: Educational Attainment of EmployeesinIndustry and Hotels. averagepercent of Figure 4-7: Percentof SurveyedFirms Whose ManagersHave Some University Education, by Country...............133 employeeswith a given educationlevel...................................................................................................... Figure 4-8: Provision of External Training by Manufacturing Firms. SelectedCountries........................................ 133 134 Figure 4-9: Twenty Countries with the Highest Accumulated BrainDrain. percentof population with 137 Figure 4-10: Twenty Countries with the Highest Skilled-Labor Emigration Rate, 2000.......................................... university education livingabroad.............................................................................................................. 137 Figure 4-11: Guyana: Worker Remittances. 1996-2004............................................................................................ 138 Figure 4-12: Guyana: Ethnic Distribution of Employment in SurveyedPrivate Firms............................................. 140 Figure 4-13: Guyana: Ethnic Distribution of Employment inthe Firms Coveredby the ICs................................... Figure 4-14: Percentageof Manufacturing Firms. Which Invested in New Technologies. Selected Countries........141 143 Figure 4-15: Percentageof Manufacturing Firms with Investment inNew Technologiesthat UsedPurchase of Machinery and Equipment as the Primary Method of Undertaking Such an Investment,by Country ....................................................................................................................................................... 143 Figure 4-16: Guyana: Top Most Important Methodof Investment inNew Technologies, by category of 144 Figure 4-17: Guyana: Percentageof Firms with Quality Certification...................................................................... manufacturing firms.................................................................................................................................... 145 Figure 4-18: Percentageof FirmsPossessingSome Quality Certification: Selected Countries................................ 145 Figure 5-1: Financial Sector in Guyana. Total Assets 2004...................................................................................... Figure 5-2: Private Credit in Guyana: 1991.2004. Percentof GDP.......................................................................... 151 152 Figure 5-3: Private Credit to GDP. 2000.2004. by Country or Region..................................................................... Figure 5-4: Long- vs. Short-Term Lending to the Private Sector in Guyana: 1999-2004......................................... 153 Figure 5-5: Maturity Structure of Time Depositswith Guyanese Commercial Banks. December2004...................154 155 Figure 5-6: Lendingvs.Deposit Rate Trend in Guyana. 1995-2004......................................................................... ............................... 157 158 Figure 5-8: Firms with Loans by FirmSize and Country. percentageof interviewed firms ..................................... Figure 5- 7: Firms with Loans: an International Comparison. percentage of interviewed firms 159 Figure 5-9: Proportion of Firms with Loans. Firms without a Need for Loans. and of Credit Constrained Firms. By Size. Percentage of Interviewed Firms....................................................................................... 160 Figure 5-10: Proportion of Firmswith Loans. Without a Need for Loans. and of Credit ConstrainedFirms. By Exporting Status and Location. percentage of interviewed firms.......................................................... 160 Figure 5-11: Financing Costs as an Obstacleto BusinessOperation and Growth: A Cross-country Figure 5-12: Percentageof Loans which RequireCollateral. by Country................................................................. Comparison................................................................................................................................................. 161 163 Figure 5-13: Collateral-to-Loan-Value Ratio. percent: By Country.......................................................................... 164 Figure 5-14: Sources of Collateral: by Firm Size...................................................................................................... 164 Figure 5-15: Main Uses of Bank Loans in Guyana: by Type of Firm....................................................................... 166 Figure 5-16: Use of Trade Credit inWorking Capital. percentageby country ......................................................... 167 Figure 5-17: Main Sources of Finance for Working Capital in Guyana. percent. by Type of Firm.......................... 167 Figure 5-18: Main Sources of Financefor InvestmentCapital in Guyana. percent. by Type of Firm...................... 168 Figure 5-19: Percentageof Firms with Externally Audited Annual Financial Statements. by Country .................... 169 Figure 5- 20: Percentageof Firms with Externally Audited Annual Financial Accounts in Guyana. by Type of Firm ........................................................................................................................................................ 169 Figure 6-1:Occupancy Rates of GuyaneseHotels and Lodges................................................................................. 182 187 Figure 6-3: Percentof Firms with Own Generatorand Number of Power Outages. by Type of Hotel..................... Figure 6-2: Number of Surveyed Tourism Establishmentsin Guyana...................................................................... 188 ... Vlll Figure6-4: TourismFirms:Perceptionsof ImportantObstacles. percentof firms sharing view that a given Figure6-5: Percentof TourismFirmsUsingEmail and Internet.............................................................................. area is very important or not important....................................................................................................... 188 193 ix ACKNOWLEDGMENTS This report was prepared by a team led by Stefka Slavova. Team members included Leonid Koryukin (Labor Skills, Quality and Technology), Michael Goldberg, Albert0 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 Burmanand 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). X CHAPTER 1.IMPROVING THE INVESTMENT CLIMATEIN GUYANA: AN INTRODUCTION Objective and rationale of the report Background 1.1 Work to improve the investment climate i s recognized as a key pillar of World Bank Group work to promote economic growth and poverty reduction indeveloping countries.' The mainfocus of Investment Climate Assessments (ICAs) is on microeconomic and structural dimensions of a nation's business environment, viewed in an international perspective. To this end, ICAs look in detail at factors constraining the effective functioning of product markets, financial and non- financial factor markets, and infrastructure services, including in particular weaknesses in an economy's legal, regulatory and institutional framework. ICAs also provide the tools and analytical framework to identify reform priorities in a country's investment climate, by linking constraints to firm-level costs and productivity. The main objective of this report is to develop a better understanding of the investment climate constraints that limit the growth and competitiveness of Guyanese firms. In particular, the report seeks to measure in a standardized way the investment climate conditions in Guyana, to provide comparisons of those conditions with those prevailing in other countries, and to identify the features of the investment climate that matter most for competitivenessand growth. Structure of the report 1.2 The present chapter provides the conceptual background on what is understood by the investment climate and how it affects economic growth and firm performance. It then reviews Guyana's general economic trends, summarizes the findings of previous assessments of the Guyanese investment climate, and provides a brief description of the characteristics and more general findings of the firm-level Investment Climate Survey (ICs) which was implemented for this report. The second through sixth chapters focus on the main microeconomic components of the investment climate: governance and insecurity, physical infrastructure, labor skills and technology, and finance. Each chapter benchmarks the corresponding component of Guyana's investment climate using standardized quantitative indicators, and performs sub-national comparisons across firms of different sizes, and across the sectors and regions covered in the survey. Each chapter summarizes the main findings of the survey and formulates the policy recommendationsthat can be derived from those findings. 1 "The central challenge in reapinggreater benefits from globalization lies in improvingthe investment climate-that is, in providing sound regulation of industry, including the promotion of competition; in overcoming bureaucratic delay and inefficiency; in fighting corruption; and in improving the quality of infrastructure. While the investment climate is clearly importantfor large, formal sector firms, it isjust as important-- if not more so -- for small and mediumenterprises (SMEs), the informalsector, agricultural productivity, and the generation of off-farmemployment. For these reasons, the investment climateitselfis a key issue for povertyreduction." NicholasStem, ChiefEconomist, March22, 2001. 1 ANOVERVIEW OFGUYANA'SECONOMICTRENDS 1.3 Guyana is the second poorest country in the Caribbean after Haiti, with a Gross National Income per capita of around US$990 in 2004, and the third-poorest in the Latin Americanand Caribbeanregion(LAC) after Haiti and Nicaragua. Its income per capita was more than three times less than the average of $3,600 for Latin American and Caribbean countries in 2004 (Figure 1-1). However, Guyana's GNI per capita in 2004 was almost 70 percent higher than the average for all International Development Association (IDA) member countries (US$990 vs. US$590). In fact, starting at approximately the same GNI per capita level in 1990, Guyana's GNI per capita grew at a faster pace than GNI per capita across IDA countries. The growth in Guyana's GNIper capita occurred between 1991 and 1997, when the economy benefited from the economic reforms of the early 1990s, but then stagnated between 1997 and 2003, as the country went through declining terms of trade for some of its key exports, and the internal political and security situation became at times less stable, e.g. in the aftermath of the 1997 General Election andheightened crime situation in 2002. Unfavorable weather conditions were also a contributing factor to the slow growth of the late 1990s. A modest recovery of GDP growth was registered in 2004, when real GDPgrowth was 1.6 percent, and real GDPper capita rose by 1.2 percent. Figure 1-1:Gross NationalIncomeper Capitain Guyana andcomparatorcountries: 1990-2004 4500 1 B r -7 Pia3000 2500 $ 2000 1500 1000 - - - - - e - 0 4 , I , I , , , , , , , , , , I 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 l+Guyana *Latin America& Caribbean-*-IDA totalI Source: World Development Indicators2005 1.4 Guyana's growth performancesince its independencein 1966 has beenmixed with - periods of high but very volatile growth rates, and a marked decline in growth during the mid-1980s. The real GDPgrowth rate averaged less thanhalf percent per year from 1966 to 1988 -lessthan the populationgrowthrate atthat time (Figure 1-2). Although initially, inthe 1960s and 1970s, growth and development advanced, GDP growth began a process of decline from 1974 onward. Throughout the 1980s Guyana's economic performance worsened (Figure 1-2). An overvalued exchange rate led to a decline in exports from US$410 million in 1980 to US$262 million in 1985. In the 1980s, economic output declined b y 3.5 percent per annum, standards of 2 living worsened along with the country's infrastructure and social services.2 In the late 1980s income per capita had fallen to US$350 (from US$786 in 1966) and the Government controlled over 80 percent of trade and investment. By 1988, Guyana was no longer capable of servicing its external debt. In response, an Economic Recovery Program (ERP) was implemented in 1989, marking the beginning of a move toward a marketeconomy and a democratic political system. Figure 1-2: Guyana: Real GDP Growth, 1966-2005 1 -15.0' Source: World DevelopmentIndicators 2005 Note: Growth in 2005 is an estimateby the IMF 1.5 The Guyanese economy recovered substantially in the 1990s after stabilization and structural adjustment programs in the areas of trade liberalization, exchange rate reforms and privatization of state enterprises. Economic growth averaged6.5 percent per annumduring 1991-1997, andpoverty measures improved (the poverty headcountfell from 43 percent in 1992to 35 percent in 1999). Furthermore, Guyana's GDP growth rate between 1991 and 1997 surpassed the average growth rate in Latin America and the Caribbean, as well as among IDA countries (Figure 1-3). Inflation was contained and brought down to 4.2 percent in 1997 (end-period) compared to the 80 percent rate at the end of 1991. Importantly, key sectors of the real economy recovered inthe early 1990s. The sugar sector increasedproduction from 132,000 tons in 1990to 321,438 tons in 1999. Rice production increased from 150,000 tons in 1991 to 365,469 tons in 2002.~ 1.6 During the last four decades, the Caribbean as a region grew at a faster rate than Latin America but not as fast as East Asia. Between 1961and 2002, the mediangrowth rate of GDP per capita for a Caribbean country averaged 2.8 percent per year. In all four decades, per capita GDP growth in the Caribbean was approximately half a percentage point higher than in LatinAmerica. The long-run growth of the Caribbean compares favorably with other comparators World Bank (2003), Guyana Development Policy Review World Bank (2002), GuyanaCountry AssistanceStrategy and Bank of Guyana Statistical Bulletin, March 2006. 3 such as the Pacific Islands and other small states, however, Guyana, along with Jamaica and Haiti, was one of the slowest growing countries inthe region over the same four decades. Figure 1-3: Real GDP Growth: 1991-2004, Guyana vs. L A C and I D A Countries I I 8.0 6.0 2 4.0 3 EF !i2.0 0.0 11991 1992 1993 1994 1995 1996 1997 lp 1999 2p 2001 2M2 2db3 2004 -2.0 -4.0 l+Guyana *LAC average +IDA counhies average] Source: World Development Indicators 2005 1.7 Following the period of high growth in the early 1990s, growth slowed down in the late 1990s. Unfavorable trade terms, the El Nifio drought, civil disturbances in the aftermath of the 1997 elections, and crime affected the Government's efforts to promote further reforms, and led to a decline in growth. The average real GDP growth rate between 1998 and 2004 was only 0.5 percent per annum. Importantly, Guyana's growth rate in this period was lower than the average across IDA countries, and, for certain years, below the average for LAC countries as well (Figure 1-3). Slow growth, weak tax collection and poor performance in several state-owned companies contributed to a higher public sector deficit in 2001 (6.1 percent of GDP). At the same time, inflationrates declinedfrom 8.7 percent in 1998to 5.5 percent in2004, andhavebeen lower than the average across LAC countries over the past 10 years (Figure 1-4). This was mainly because a large share of the financing of public sector deficits came from external aid, thereby limiting the amount of monetary expansion. In addition, credit to the private sector declined over this period. 4 Figure 1-4: ConsumerPriceInflation, %, annualaverage g 1 5 - 8B b? 10- 5 - 0 4 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 /+Guyana +LAC averageI Source: IMFInternationalFinancialStatistics 2005 1.8 While the engine of growth in the Caribbean region has shifted from agriculture to services, in Guyana the agricultural sector has maintained its relative importance. The share of agriculture value-added in GDP which was 22 percent in 1966, rose to 38 percent in 1991, and then declined to 31percent of GDP in 2002 (Figure 1-5), mainly due to the access to preferential markets for rice and sugar. The contribution of the service sector was 42 percent in 1966, and it declined to 30 percent in 1991, and then was back to its 1966 level by 2002. However, in the Caribbean, the service sector experienced an average median growth rate of nearly 5 percent per year for the entire period (1961-2002) according to World Bank (2005d)4. The share of industry declined from 36 to 29 percent of GDP over the period 1966-2002. Among industrial sub-sectors, manufacturing value-added has also stayed roughly the same over time - 12 percent of GDP in 1966, 13 percent in 1991, and 9 percent in 2002. In 2004, manufacturing contributed 9.6 percent of GDP (Figure 1-6). The other two industrialactivities include mining and quarrying (12 percent of GDP in2004), and construction (5.2 percent of GDP in2004). 4See Chapter 1, Growth Performance in the Caribbean in "A Time to Choose - Caribbean Development in the 2Ist Century", World Bank (2005). 5 Figure1-5: Guyana: Structure ofthe Economy, 1966,1991,and 2002 1966 1991 Agnculture 22% Services Agnculture 42% 38% USW 36% Industry 32% 2002 Industry 29% Source: World Development Indicators 2005 Figure1-6: Guyana: Structureofthe Economyin 2004 I Source: Guyana Bureau of Statistics, 2005 1.9 Guyana's manufacturing exports are still low compared to LAC and IDA countries. While manufacturing exports grew from 14 to 24 percent of total merchandise exports between 1999 and 2003, this share i s still low compared to that of IDA and Latin American and Caribbean countries (Figure 1-7). For instance, manufacturing exports accounted for over half of total merchandise exports across LAC and IDA countries in 2003-2004; 57 percent across LAC countries in 2004, and 56 percent among IDA countries in 2003. This is important since 6 manufacturing exports allow for more gains from trade as value-added of the exporting product i s higher than when exporting raw materials and basic commodities. Sugar, rice, gold, bauxite and timber are the country's primary export commodities, accounting for 74 percent of total exports of goods andservices in 2004. Figure 1-7: Manufacturing Exports as Percent of Total Merchandise Exports: Guyana vs. L A C and IDA Countries, 1997-2003 0 4 1991 1998 1999 2000 2001 2002 2003 I+Guyana +LAC average +IDA average1 Source: World Development Indicators 2005 Table 1-1:Structure of Merchandise Exports in Guyana, 2004 Exports, US$ million Percent of total exports Gold 145 25 Sugar 137 23 Rice 55 9 Timber/plywood 45 8 Bauxite 45 8 Shrimplprawns 34 6 Rum 5 1 Molasses 3 0 Subtotal 470 80 Totalexports 589 100 Source: Statistical Bulletins, Guyana Bureau of Statistics, Bank of Guyana, 2005, and IMFdata, 2005 1.10 Gold and sugar constituted close to 50 percent of Guyana's exports in 2004. Thus, gold exports accounted for 25 percent of total exports, with sugar contributing 23 percent of exports. The value of gold exports was high due mainly to highinternational prices as the physical volume of gold production has started declining due to the closure of the largest gold mine in the country. Sugar exports also face challenges - such as the announced reduction of preferential prices and quotas to the E.U. market. Other agricultural, mining, forestry and fishing products such as rice, timber, bauxite and shrimp constituted 30 percent of merchandise exports in 2004 (Table 1-1). In these principal export commodities Guyana faces strong market competition 7 abroad, and it i s expected that in order to maintain current market shares its industries such as sugar and rice need to reduce production costs. 1.11 Guyanese firms are increasingly facing a difficult trading environment, with imminent losses of preferential prices and quotas of its sugar exports to the European Union market. Since its domestic market i s very small, Guyana must orient its economic output toward international markets. At the same time, Guyanese companies are facing a trading environment in which trade preferences are gradually being removed. Studies have suggested that the trade preferences enjoyed by the Caribbean have not been very beneficial because they have diverted investment and limited resources and entrepreneurship into sectors that are not necessarily competitive and have reduced the pace of trade liberalization. For example, according to the World Bank (2005d) the estimated costs of sugar production in Guyana and Belize are 50 to 60 percent higher than in other leading sugar exporting countries. Nevertheless, the two are the lowest-cost and most competitive sugar producingcountries inthe Caribbean. 1.12 Both gold mining and sugar industries suffered in 2005 due to the shutting down of the Omai gold mine and the flooding inJanuary 2005. The sugar sector i s likely to face a large setback as a result of EUproposals to cut its internal sugar subsidies by 36 percent in two phases over the next 4 years. The feared impact of these reforms on Guyana i s large in a country where the sugar industry generates 30 percent of the country's foreign exchange and provides a livelihood for at least 125,000 p e ~ p l e . ~The Guyana Sugar Corporation (GUYSUCO) calculates that the sugar subsidy cuts will reduce the sugar industry's revenues by $US22 million in each of the crop years 2005-2006 and 2006-2007, andthen by another US$37 million in the following crop year. Due to high aluminum and gold prices more private investment in bauxite mining and smaller gold mines has recently been attracted. 1.13 Inthe early 1990sGuyana enjoyed a healthy rate of fixed capital formation compared to the average rate across Latin American and Caribbean countries. Figure 1-8 demonstrates the high growth rates of capital formation that occurred as a result of the economic recovery at the start of the 1990s. However, while gross fixed capital formation rose sharply in 1991 and averaged45 percent of GDP in 1991-1993, subsequently it declined andwas down to 21 percent of GDP in 2002 (Figure 1-9), improving slightly to 24 percent in2004. 1.14 While public domestic investment was relatively stable over the 1990s, private sector investment was more variable - rising to 35.3 percent of GDP in 1992, but subsequently dropping to only 7.3 percent of GDP in 2004. After 1992-1994 the level of private investment rose sharply to more than 30 percent of GDP, driven by the privatization of state enterprises. However, private investment started declining after the domestic political instability following the 1997 general election, and went down from 13.4 percent to 7.4 percent of GDP between 1998 and 2002. Large foreign assistance inflows translated into public investment ranging between 12 and 19 percent of GDP for much of the 1990s. Major aid flows from the Inter-American Development Bank (IADB) and other donor organizations, in addition to the effects of the HIPC Initiatives, allowedthe Government to increase its investment ininfrastructure. "Caribbeanfears EU Sugar Reforms, but Brussels standsfirm", Guyana Chronicle, January 6,2005 8 Figure 1-8: Growth in Gross Fixed Capital Formation (percent per annum) * 60 B2a2 40 Annual Periods -Guyana -Latin Amrica & Caribbean Source: World Development Indicators 2005 Figure 1-9: Gross Fixed Capital Formationin Guyana (percent of GDP) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: World Development Indicators 2005 1.15 Although the Caribbean still attracts a disproportionate share of world FDI, this share has been falling since the 1990s. FDIin the Caribbean may be subjected to even greater pressure given the global decline in FDI and increased global competition for investment. Inthe Caribbean region, overall investment rates have been quite high, at about 30 percent o f GDP since 1990, with private investment at about 20 percent of GDP. In relation to the size of their economies, OECS countries have attracted substantial FDIinflows, especially St. Kitts and Nevis, St. Vincent and the Grenadines, and Grenada. In terms of distribution, FDIhas been concentrated in a few natural-resource related sectors, especially tourism, mineral extraction and segments within agriculture. 9 1.16 After some initial increases in FDI inflows in the early to mid-l990s, Guyana's FDI flows as percent of GDP have declined and are now at levels similar to those of other IDA and HIPC countries. For example, net flows of FDIdeclined from 12 percent of GDP in 1995 to 4 percent in 2003 (Figure 1-10). Compared to OECS countries, such as St. Kitts and Nevis and St. Vincent and the Grenadines, Guyana attracted considerably less FDIrelative to GDP throughout the late 1990s. Furthermore, net inflows of FDI as percent of GDP have been falling every year since 2000 (Figure 1-10) and while higher than average net FDIinflows for LAC countries, are at levels similar to those of IDA and HIPC countries (both recording net FDIinflows of 3 percent of GDP in2003). Figure 1-10: Foreign Direct Investment, Net Inflows as percent of GDP, 1995-2003 30 25 20 15 10 5 1995 1996 1997 1998 1999 2000 2001 2002 2003 +LAC average +Guyana -St. Kimand Nevis +St. Vincent and the Grenadines *Jamaica ---Heavily indebted poor counhies (HJPC) Source: World DevelopmentIndicators 2005 1.17 Guyana has attempted to encourage foreign direct investment (FDI) through a variety of measures. Among these are different incentives (e.g., income and corporation tax relief) for new investments in specific sectors (ICT, non-traditional agro-processing) or specific geographic regions. Inaddition, the Government has established a dedicated investment promotion agency - the Guyana Office for Investment (GO-INVEST). However, there are critiques that Go-Invest has been unable to become the catalyst for FDI generation into Guyana.6 Obtaining permits and concessions i s still considered burdensome. The U S State Department's 2005 Investment Climate Statement on Guyana as well as other sources emphasize that the high degree of governmental control and regulation and the high risks of crime and insecurity deter FDI flows. According to World Bank estimates, FDIdeclined from US$43.5m in 2002 to US$35m in 2004. Investment in the telecommunications sector in 2004 accounts for $25 million of FDIof the amount invested in the country that year. Recent legal disputes related to private investment in the mobile telecommunications markethighlightsthe uncertainties underlyingthe investment process. 1.18 Attracting large flows of FDI is not easy given a small internal market and limited labor resources. Guyana has a small population of 765,000 inhabitants, and very high rates of emigration of skilled workers (PRS Progress Report, 2005). This means that many educated U S State Department (2005), Guyana Investment Climate Statement, April 2005 10 people lack access to significant economic opportunity. Emigration poses a large threat to employers, with some reporting training fifteen employees for every five that they need.7 Although little data exist about the number of Guyanese living abroad, estimates suggest that the number lies between 500,000 and 1million, Orozco (2002). Remittances sent back to Guyana are estimated at over US$90 million (Orozco (2002)). This amount is more than all FDIinflows into Guyana, and almost as much as the official development assistancewhich the country receives. 1.19 Generally, public debt in the Caribbean region has been cited as having a dampening effect on private-sector-led growth. The average Caribbean debt in 2003 was 96 percent of GDP compared to 65 percent of GDP in the 6 Central American countries. Guyana reached the Enhanced HIPC (E-HIPC) Completion Point in December 2003, qualifying for US$329 million of debt relief in net present value (NPV) terms, additional to the debt relief of US$256 million in NPV terms obtained under the original HIPC in May 1999. Total public debt as a percentage of GDP decreasedfrom 194percent of GDP in 2003 to 164percent of GDP in 2004. Looking ahead, improved growth prospects and revenue effort, as well as the Multilateral Debt Relief Initiative (MDRI),are expectedto significantly improve Guyana's debt outlook'. 1.20 The period of economic growth experienced by Guyana inthe early 1990s contributed to reductions in poverty and improvements in its basic socio-economic indicators. The proportion of the population classified as poor in 1980 was estimated at 26 percent according to World Bank studies, increasing to 43 percent by the early 1990s. The economic reforms of the early 1990s had a large effect on the poverty rate which declined to 35 percent by 1999. The extreme poverty rates fell from 28.7 percent to 21.3 percent whilst income distribution remained moderately unequal with a Gini coefficient estimated at 0.4 for 1999 (World Bank 2004). Similar declines in poverty have been witnessed in the Dominican Republic (33.9 to 28.6 percent) and Jamaica (44.6 to 19.7 percent). Ineach case, the decline inpoverty is associated with a higher rate of GDP growth. Guyana's Gini coefficient is also lower than many of its regional peers, such as Haiti(0.65), St Vincent andthe Grenadines (0.60), Antigua andBarbuda (0.50) andthe Dominican Republic (0.47).' 1.21 The informal economy plays an important role in Guyana, with some estimates indicatingthat informal output is as high as 40 to 50 percent of recorded GDP. The growth of the underground economy can be traced to the reaction of businesses and consumers to the socialist system and its extensive systemof controls. However, businesseschoose to stay informal when the costs of formality in terms of taxation, business regulation are high. Faal (2003) estimates that the underground economy accounted for about 40 percent of GDP in the 1970s, and increasedfurther in the 198Os.l' He also contends that as much as 7 percent of GDP in annual tax I 'USOnState Department(2005), Guyana Investment Climate Statement, April 2005 March 28, 2006 the Board of IDA confirmed Guyana's eligibility for debt relief under the MDRI, which will cancel the IDA debt of some of the world's poorest countries starting on July 1, 2006, at the start of the Bank's new fiscal year. The Board of the IMFconfirmed Guyana's eligibility for the MDRI in December 2005, to be effective from January 2006. World Bank(2005), A Time to Choose - Caribbean Development in the 21st Century 10Faal(2003),"Currency Demand, the UndergroundEconomy, and Tax Evasion: The Case of Guyana", IMFWorking Paper, WP/03n. His estimates show increases in the size of the informal economy as a share of official GDP was 40 percent on average duringthe 1970s, but increasedto an average of 76 percent of official GDP during 1980-1989. 11 revenues was lost between 1970 and 2000 due to the large underground economy. The burdensome regulatory environment and the high and complex corporate taxes are among the reasonsfor the size of the underground economy." Guyana, the Dominican Republic and Jamaica have highrates of informal employment, compared to the relatively modest shares inthe Bahamas, Barbados, Suriname, and Trinidad and Tobago. 1.22 Crime in Guyana has worsened over the past few years leading people to lose confidence in the security forces and judicial system.I2 Since the late 1990s, Guyana's crime and violence have worsened, and it is estimated that at its peak in 2002 the homicide rate reached 60 per 100,000 inhabitants. Guyana ranks near the top interms of its rates of intentional homicide together with Jamaica, Honduras, and El Salvador, among others. It i s also confronted by increasingly complicated crime problems with the emergence of relatively new crimes such as extortion and kidnapping. Accompanying these developments are also new forms of criminal organizations such as transnational networks whose primary goal i s drug trafficking, which affect the Caribbean region in general (EIU (2006)).13 Alongside these forms of criminality i s also the emerging problem of juvenile or youth crime and violence. Overall in the LAC region, the proportion of violent crimes committed byjuveniles has been increasing. 1.23 Mutual suspicion between the two main political parties has hampered efforts to reform state institutions. The main opposition party, the PNC, i s dominated by the Afro- Guyanese population, who also dominate the police and defense forces. As a consequence of controlling the capital city Georgetown, the Opposition frequently organizes protests within the cityI4. The ethnic polarization index by Montalvo and Reynal-Querol (2005) ranks Guyana in the top quartile of most polarized countries inthe world-the index i s measuredon a 0 to 1scale, with higher values signifying greater polarization. Polarization coupled, with a high crime rate andlow security, raises investment risks and discourages investment. These constraints have not only discouraged domestic and foreign investment but also led to a rapid out-migration of skilled workers. 11In addition to a 2 percent minimumturnover tax, companies pay 35-45 percent of profits in taxes and for certain consumer items import taxes and duties are close to 100percent of the value (Faal(2003)). According to the Economist Intelligence Unit, public confidence in the Police remains low and the public prosecution appears weak. The police are often cited as forming part of the problem through their use of unlawful violent tactics to pursue suspects. In June 2005, President Jagdeo announced the formation of a national commission on law and order with wide civil society representation. l3In June 2005 the Government published a US$3.4 million 5-year counter-narcotics strategy. l4World Bank (2003), Guyana Development Policy Review. 12 INVESTMENT CLIMATE ASSESSMENT 1.24 The present Guyana Investment Climate Assessment is based on a survey of 163 manufacturing firms and 32 hotels conductedbetween November 2004 and March 2005. The survey i s known as the Investment Climate Survey (ICs) and follows a standard World Bank methodology. It i s difficult to measure and understand the issues related to a country's investment climate only on the basis of macroeconomic indicators. The ICAs in various countries have led to the collection of microeconomic data on the investment climate, by means of surveys of private enterprises ineach country. Figure 1-11:Sample Compositionby Sector 3% 6 % HFood 0 Wood 0 Garments Textiles 0 Chemicals E! Mining & quarrying Source: Guyana Investment Climate Survey, 2005 1.25 The Guyana ICs sample was drawn from 6 sectors -- food, wood, garments, textiles, chemicals, and mining and quarrying (Figure 1-11). Of the firms covered in the survey, 69 percent are non-exporters and 91 percent are domestically owned. About 20 percent were located in the capital city, Georgetown, with the remaining 80 percent located outside of the capital (see Figure 1-12). 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 (44 percent of the sample), medium (34 percent), and large firms (16 percent). The survey responses were collected by means of face-to-face interviews of company managers, performed by trained enumerators. The survey was conducted by the private Guyanese firm CEMCO Inc. and the World Bank. 1.26 The questionnaire used in the survey was based on the Standard Core Investment Climate Survey questionnairethat the World Bank is applying inother developing countries, such as Brazil, Guatemala, Honduras, Nicaragua, Peruand China. The general purpose of the survey i s to understand the investment climate in Guyana and how it affects business performance, with the objective of helping to improve it. The survey begins with questions about the origin and shareholding status of a business, including questions about the background of the owner or manager in order to determine if and how the interaction between investment climate and business performance varies by business type. It also addresses issues related to finance, technology, 13 relations with other firms, government regulation, contract enforcement, labor skills and training in order to provide a comprehensive picture of the environment in which businesses are operating in Guyana. Figure 1-12: Map of Guyana MAIN CONSTRAINTSTO DOINGBUSINESS GUYANA IN ACCORDING TO THE ICs 1.27 To construct subjective indicators of the main investment climate constraints in Guyana, the surveyed firms were asked to judge the severity of twenty potential investment climate problems on a five-point scale. Figures 1.13 to 1.15 report the percentage of manufacturing firms that evaluated the corresponding constraints as "major" or "very severe". Figure 1.13 shows the top constraints, defined as those that were mentioned as important by more than 25 percent of the surveyed firms, while Figures 1.14 and 1.15 include the constraints that were mentioned respectively by between 10 percent and 25 percent of the firms, and by less than 10 percent of the respondents. For comparative purposes, each figure also displays the average percentage of firms in Honduras, Nicaragua and Guatemala that rated the corresponding constraints as "major" or "very severe". 14 Figure 1-13: The Perspectiveof GuyaneseFirms Investment Climate Constraints Rated as - "Major" or "Very Severe" by More than 25 Percent of Surveyed Firmsin Guyana Cost of financing Macroecononucuncertiunty Electncity Skillsand educabonof aviulable workers Access to financing Politicaluncertaintylinstability Cnme, theft and disorder Access to land 0 10 20 30 40 50 60 70 % of surveyedfirms 10Guyana Average for Honduras,Nicaraguaand Guatemala 1 Source: World Bank Investment Climate Surveys, various years 1.28 A lower share of Guyanese firms report investment-climate-related constraints to their operation compared to surveyed firms in Honduras, Nicaragua and Guatemala. For example, the share of Guyanese surveyed firms which rank crime, theft and disorder as a major or severe obstacle to doing business i s half of that in Honduras, Nicaragua and Guatemala (30 percent vs. 61 percent, see Figure 1-13). A lower share of Guyanese firms complain about macroeconomic uncertainty and access to finance as obstacles to doing business compared to surveyed firms in the three Central American countries. This i s puzzling since, according to different other studies such the Doing Business in 2006 Report and the 2005-2006 WEF Global Competitiveness Report, Guyana ranks among the worst performers on many indicators o f the investment climate. A possible explanation i s that Guyanese firms are used to heavy regulations and have found ways around them. Among the worst perceived investment climate constraints, a higher fraction of interviewed Guyanese firms complain about electricity, skills and education o f workers, and access to land than interviewed firms inHonduras, Nicaragua and Guatemala taken together. 1.29 Four aspects of the investment climate were mentioned in the group of top constraints: cost of financing, macroeconomic uncertainty, worker skills and education, and electricity. Cost o f financing (56 percent) i s perceived as the top microeconomic constraint to business in Guyana with macroeconomic uncertainty (44 percent) cited as the second main constraint. The fraction of firms in Guyana which rate cost of financing as a major or severe constraint i s about the same as the average of the three comparator countries, Honduras, Nicaragua and Guatemala (55 percent). The perception of macroeconomic uncertainty is also probably determined by past experiences and the country's vulnerability to external shocks. However, b y comparison, the percentage of firms in Guatemala reporting macroeconomic uncertainty as a major or severe constraint (60 percent of surveyed firms) i s 36 percent higher than inGuyana (44 percent of surveyed firms). 15 1.30 Labor skills and technology as well as infrastructure are also viewed as major or severe constraints to business. The fraction of firms that regard skills and education of available workers as constraints in Guyana is 40 percent, which i s 60 percent higher than the average fraction for Honduras, Nicaragua and Guatemala, while labor regulations in Guyana are only viewed by 11 percent of firms as a constraint. The concern over the skill and education level of labor i s interesting, given the education standards and enrollment levels in secondary and tertiary education. It reflects, in a large measure, the high level of out-migration, which reduces the pool of available skills. In the area of infrastructure, telecommunications and electricity constraints are rated as important by respectively 25 percent and 41 percent of Guyanese firms, which i s over 100 percent higher than what firms report in Honduras, Nicaragua and Guatemala with regards to telecommunications constraints, and 24 percent higher for electricity constraints. In other infrastructure areas, transportation was reported as a constraint by only 17 percent of interviewed Guyanese firms, although access to land was reported by 28 percent of firms, which i s 75 percent higherthan the averagefor the three comparator Central American countries (Figure 1-13). Figure1-14: The Perspectiveof GuyaneseFirms-InvestmentClimateConstraintsRatedas "Major" or "Very Severe" by between 10percentand 25 percent of SurveyedFirmsinGuyana Telecommunications Customs and trade regulations Corruption 70 Tax rates Transponahon Anh-compehhve or informal practices 1 4 9 I I , I i 0 10 20 30 40 50 60 70 80 % of surveyedfirms IOGuyana WAverage for Honduras, Nicnraguaand Guatemala Source:InvestmentClimate Surveys 1.3 1 Within governance-related constraints, crime was mentioned by 30 percent of Guyanese firms whilst corruption was regarded as a constraint by 18 percent of interviewed firms. These results suggest that governance constraints are perceived as less of a problem in Guyana compared to Honduras, Nicaragua and Guatemala, where the percentageof firms reporting crime and corruption as a constraint is 61 percent and 70 percent respectively. Nevertheless, even though corruption was not perceived as a major obstacle, interviewed firms indicated that they spent 3.5 percent of annual sales on average in 2004 in "getting things done" (Figure 1-16). Interestingly, tax rates and tax administration appear less important in Guyana, with only 17 percent of firms reporting the tax rates as a constraint and 9 percent regarding the tax administration as a hindrance. As mentioned in Chapter 2, taxation is problematic; the low level of 16 dissatisfaction of firms i s most likely due to presence of tax breaks and exemptions and ways to evade taxes. Finally, firms in the three Central American countries are much more likely to rate anti-competitive or informal practices as important constraints (49 percent versus 13 percent in Guyana). Only 8 percent of interviewed firms reported the legal system as a severe obstacle (Figure 1-15). Figure1-15: The Perspectiveof GuyaneseFirms Investment ClimateConstraints Ratedas "Major" - or "Very Severe" by less than 10 percentof SurveyedFirmsin Guyana RegulatoryPolicy uncertanty Tax admnistrauon Legalsystem/conflict resoluuon Businesslicensingand operatingpemts 0 10 20 30 40 50 60 70 80 % of surveyedfirms I Guyana Averagefor Honduras, Nicaraguaand Guatemala1 Source: Investment Climate Surveys 1.32 The characteristics of the firms play an important role in their perceptions of the investment climate. Foreign firms are generally inclined to view infrastructure, finance and government regulations on a more demanding level when ranking the severity of constraints in comparison to domestic firms. For example, the percentage of foreign-owned firms reporting customs and trade regulations as a constraint is far greater than that of domestic firms, and a similar pattern i s observed in labor regulations, business licensing and operating permits. Interestingly, both foreign and domestic firms have similar perceptions of the constraints of Guyana's infrastructure and the skills and education of workers, suggesting that, regardless of ownership structures, there are certain elements within the investment climate that afflict all actors in the economy. Analyzing the survey results from the perspective of firm size shows subtle differences and similarities between small, medium and large firms. All the interviewed firms expressed similar concerns with the cost of and access to financing, skills and education of workers as well as infrastructure issues. Comparing firms located in and outside the capital city produces the observation that 27 percent of firms located in the capital city view corruption as a major or severe problem compared to 16 percent outside the capital city. Similarly, crime and violence are viewed as more serious concerns by firms located inthe capital city than those located inother towns andrural areas. 17 Figure 1-16:Percentage of Sales Lost Due to Quantifiable Constraints inthe Areas of Infrastructure and Governance Paymentsto "get things done" / / / / / / / F 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 % of sales 1EGuyana EAverage for Honduras,NicaraguaandGuatemala1 Source: Investment Climate Surveys 1.33 Failures in basic infrastructure services, such as electricity and water, add up to 5.3 percent of total sales for the average Guyanese firm interviewed in the survey, while governance costs take an additional 8.2 percent of annual sales. Figure 1.16 illustrates the actual losses that lie behind the perception that crime and corruption are important constraints in Guyana: expenditures in bribes to 'get things done" consume 3.5 percent of sales for the average firm and expenditure on security as well as the cost of incidents of crime amount to 4.7 percent of sales on average for Guyanese firms. In total, the above mentioned costs related to infrastructure and governance amount to an increase in the costs of doing business in Guyana that is equivalent to 13.5 percent o f the sales of the average firm - an amount which i s not trivial. Incomparison, the same costs in Honduras, Nicaragua and Guatemala average 11.9 percent of sales. The gap i s more pronounced in terms of infrastructure-related costs - 5.3 percent of sales in Guyana versus 4.1 percent o f sales across the three Central American countries. 18 ANNEX1.1:SUMMARY TABLES TableAl.1: InvestmentClimateIndicatorsfor Guyana, byFirm Size Size Range Under 15 15 to 50 50plus workers workers workers Governance & Insecurity Crime Losses(% of Sales) 6.1% 2.0% 1.9% Judicial SystemDistrust(% of Firms) 13.2% 16.4% 20.0% UndeclaredRevenues(% of Sales) 29.3% 22.5% 30.0% Bribes(% of Sales) 6.0% 2.5% 2.4% Inspections(No. per year) 11.4 9.8 15.4 Infrastructure Water Interruptions (No. per year) 8.9 0.6 1.9 Power OutagesLosses (% of Sales) 4.5% 2.9% 3.3% Internet Use (% of Firms) 9.9% 16.4% 42.3% EmailUse (% of Firms) 16.9% 32.7% 63.0% Transport Losses(% of Shipment Value) 3.9% 5.2% 5.4% Own Generator(% of Firms) 35.7% 81.8% 100.0% Water Supply from Ownor Shared Well (% of total water supply) 2.0% 6.8% 33.7% Access To Finance Access To Overdraft (% of Firms) 12.7% 48.2% 70.4% Access to Credit (% of Firms) 21.1% 37.5% 48.2% Banksfor Working Cap. (% of Firms) 18.8% 39.3% 63.0% Bank Use for Invest. (% of Firms) 14.1% 39.3% 37.0% Use of Supplier Credit (% of Firms) 1.9% 2.0% 11.1% Technology FirmsUsingForeignLicensed Technology (% of Firms) 6.3% 5.5% 30.8% InternalWorker Training (% of Firms) 24.3% 40.0% 51.9% ExternalWorker Training (% of Firms) 16.9% 32.7% 37.0% Quality Certification(% of Firms) 10.1% 16.1% 42.3% R&D Activities (% of Firms) 17.7% 23.6% 48.2% Source: World Bank GuyanaICs, 2005 19 Table A1.2: Investment Climate Indicators for Guyana, by Sector Sector Mining & Food Wood Garments Textiles Chemicals quarrying Governance & Insecurity Crime Losses (% of Sales) 2.6% 1.8% Judiciary Distrust (% ofFirms) 18.3% 11.9% 0.0% 0.0% 40.0% 11.1% UndeclaredRev.(% of Sales) 26% 31% 23.5% 7.1% 50% 8.1% Bribes(% of Sales) 2.5% 2.4% Inspections(No./year) 14.4% 9.1% 4.8% 1.8% 8.8% 9.0% Infrastructure Water Interruptions (No. /year) 6.3 3.5 2.0 0.0 2.0 1.7 Power Out.Losses (% of Sales) 4.6% 4.0% 2.2% 0.0% 0.0% 0.0% InternetUse (% of Firms) 14.1% 25.6% 16.7% 14.3% 0.0% 11.1% EmailUse (% of Firms) 30.2% 37.2% 16.7% 14.3% 20.0% 44.4% TransportLosses (% of ShipmentValue) 4.5% 6.3% 0.3% 2.4% 4.4% 4.8% Access to Finance Access to Overdraft(% of Firms) 39.1% 39.5% 8.3% 14.3% 20.0% 44.4% Banks-Work. Cap. (% of Firms) 19.2% 23.0% 8.3% 3.6% 8.0% 16.7% Bank -Invest. (% of Firms) 33.1% 25.9% 9.0% 8.3% 0.0% 0.0% SupplierCredit (% of Firms) 1.1% 0.2% 0.0% 0.0% 7.0% 7.8% Technology Firms UsingForeignLicensed Technology (% of Firms) 7.4% 19.0% 0.0% 0.0% 0.0% 12.5% SkilledWorker Training (% of Firms) 58.2% 84.8% 100.0% 100.0% 54.3% 100.0% UnskilledWorker Training(% of Firms) 47.2% 91.8% 47.5% 100.0% 75.0% 100.0% I S 0 Certification(% of Firms) 21.2% 14.0% 18.2% 0.0% 0.0% 11.1% R&D Activities(% of Firms) 26.7% 22.0% 16.7% 33.3% 40.0% 11.1% Source:World BankGuyanaICs, 2005 20 Table A1.3: InvestmentClimate(IC) Indicatorsfor Guyana, by Location(Insideor OutsideCapital City) Located Located Inside Inside Region Capital CaDital Governance d Insecurity Crime Losses(% of Sales) 0.8% 4.4% Judiciary Distrust (% of Firms) 12.1% 15.4% UndeclaredRev. (% of Sales) 24.9% 26.6% Bribes (% of Sales) 2.0% 3.7% Inspections(No. /year) 8.6% 11.7% Infrastructure Water Interruptions (No. I year) 8.8 3.9 Power Out. Losses(% of Sales) 4.7 3.4 Internet Use (% of Firms) 24.2% 15.0% Email Use (% of Firms) 42.4% 27.3% TransportLosses(% of Shipment Value) 2.4% 5.2% Access to Finance Access to Overdraft(% of Firms) 33.3% 36.4% Banks-Work. Cap. (% of Firms) 16.7% 18.7% Bank -Invest. (% of Firms) 20.0% 26.6% Supplier Credit (% of Firms) 3.2% 0.8% Technology FirmsUsingForeignLicensed Technology (% of Firms) 12.5% 9.2% SkilledWorker Training (% of Firms) 44.7% 73.1% UnskilledWorker Training (% of Firms) 25.0% 68.7% I S 0 Certification (% of Firms) 21.2% 15.9% R&D Activities (% of Firms) 27.3% 24.0% Source:World BankGuyanaICs, 2005 21 TableA1.4: Investment Climate IndicatorsinGuyana, Guatemala andNicaragua Country Guyana Guatemala Nicaragua Governance & Insecurity Crime Losses(% of Sales) 3.4% 3.9% 3.3% Judicial SystemDistrust(% of Firms) 14.6% 48.4% 42.3% UndeclaredRevenues (% of Sales) 26.2% 23.0% 35.1% Bribes (% of Sales) 3.5% 4.4% 4.0% Inspections (per 10Workers) N/A 3.3 12.3 Infrastructure Water Interruptions (No./ year) 4.7 19.6 55.3 Power Outages Losses (% of Sales) 3.8% 2.3% 3.9% InternetUse (% of Firms) 16.8% 27.8% 14.8% Email Use (% of Firms) 30.9% 64.7% 33.9% Transport Losses(% Sales) N/A 1.9% 1.9% Access To Finance Access To Overdraft(% of Firms) 35.6% 5 1.6% 27.0% Banks for Working Cap. (% of Firms) 18.2% 24.8% 16.3% BankUse for Invest. (% of Firms) 25.4% 34.1% 27.9% Use of Supplier Credit (% of Firms) 1.3% 19.6% 5.4% Technology Firms UsingForeignLicensed Technology (% of Firms)(% of Firms) 9.8% 19.56% 8.63% Worker Training (% of Firms)" 69.7% 54.2% 36.4% I S 0 Certification (% of Firms) 16.9% 3.5% 5.0% R&D Activities (% of Firms) 24.5% 35.7% 13.0% Source: World Bank Investment Climate Surveys. Averages for sector-province- size ranges were substituted for missing values. Percentageof permanent skilled workers trained 22 CHAPTER2. GOVERNANCEAND INSECURITY BUSINESS-GOVERNMENT RELATIONS 2.1 According to the Doing Business in 2006 data, Guyana has a faster, but costlier business registration system than other comparator countries in and out of the Latin America and Caribbeanregion. For example, it takes only 8 procedures and46 business days to register a firm (see Table 2.1), which compares favorably with other Latin American countries such as Guatemala, Ecuador, Bolivia, Peru and Honduras, but not so well with Jamaica it takes only six procedures and 9 business days to establish a business. Countries like Mauritius, Sri Lanka and SouthAfrica are comparable to Guyana in terms of numberof days and procedures to set up a firm. However, in terms of costs - including all the different fees in the process of opening a business - Guyanaranks better than only Bolivia and Haiti, with a total official cost of registration of 101percent of per capita income (or equivalent to US$lOOO). For comparison, in Jamaica, South Africa and Mauritius the same costs amount to less than 10percent of per capita income. Table2-1: Startinga Businessin2005: A Cross-CountryComparison 1Jamaica 6 9 8.3 2.2 The time to obtain a main operating license to start business activity in Guyana is comparable to that of other Latin American countries and shorter than in Sri Lanka and Senegal, but considerably longer than South Africa, for example. Guyanese firms wait, on average, 21 days to get an operating license (see Figure 2.1). While this wait i s considerably shorter than the same for firms in Senegal, it is longer than the average wait for such a license in Grenada (16 days) or South Africa (where it i s only 5 days). There are substantial differences in waiting times to get a license across Guyanese firms with different characteristics. For example, medium and large firms wait significantly longer than small firms do to get their operating license (29 and 36 days respectively versus 10 days for small firms). Exporting firms wait also longer than non-exporting ones (25 and 19 days respectively). Firms located in the capital of 23 Georgetown wait significantly less than those outside of the capital city (9 and 25 days respectively). Figure2-1: Numberof DaysNeededto ObtainanOperatingLicense:A Comparison Senegal 31 S n Lanka Ecuador Guyana Guatemala Grenada SouthAfrica 0 5 10 15 20 25 30 35 days Source: World Bank InvestmentClimate Assessments, various countries 2.3 Guyanese managers of manufacturing firms spend on average 3.4 percent of their time during a typical week to deal with requirements imposed by government regulations (the so-called "time tax"). This i s substantially lower than in the Central American countries (11 percent in Guatemala, 8.6 percent in Honduras, and 8.0 percent in Nicaragua), Ecuador (16 percent), South Africa (10 percent), as well as Grenada (6.8 percent on average). It is, however, comparableto the same measure for Sri Lanka (3.8 percent). Furthermore, large Guyanese firms as well as exporting firms spend considerably more time dealing with regulations than medium and small firms do (see Table 2.2). Firms located in Georgetown also spend longer on regulations than their counterparts inthe rest of the country do (7 percent vs. 2.5 percent). Table 2-2: Percentageof Senior ManagementTimeSpentDealingwith Regulations Type of Firm Mean Median No. of observations Micro and Small 2.9% 0.0% 67 Medium 2.5% 1.O% 55 Large 7.0% 2.0% 26 2.4 Guyanese hotel managers spend significantly more time percent -- - at an average of 8.6 on dealing with regulations, which is comparable to what managers of large manufacturing firms spend (7.0 percent). In a similar fashion, the GrenadaICs also found that 24 companies in tourism-related sectors encountered more administrative hurdles than other companies. Among manufacturing firms, those in the chemical and pharmaceutical industry also devote a higher proportion of their time to regulatory matters - 6.4 percent on average. In contrast, firms in the textile industry spend on average less than 1 percent 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 time). Figure 2-2: Percentage of Senior Management Time Spent on Regulationsin Guyana, By Type of Firm Non-exporter Exporter Outsideof capital city Incapitalcity Domestlc Foreign-owned Textiles Mirung& quanying Garments Food wood Chemcals Tounsm 8.6 0.0 1.o 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Source: Guyana ICs Taxation 2.5 Taxes did not emerge as a major problem in the survey of Guyanese manufacturing firms, and neither does tax administration; however among 32 surveyed tourism firms more than half find tax rates a serious obstacle, and close to one-third do the same for tax administration (Figure 2.3). Thus, 71 percent of manufacturing respondents said that tax rates were either no problem, or a minor problem; another 12 percent indicated that tax rates were a moderate problem. Only 17 percent of Guyanese manufacturing respondents found tax rates a serious problem. Among tourism companies, however, 57 percent found tax rates a serious problem, and 29 percent found tax administration a serious obstacle. Compared to the same measure in other countries, Guyana ranks among the best in terms of managers' perceptions about tax rates and administration for the sample of manufacturing firms (with similar 25 perceptions reportedin Chile, El Salvador, Sri Lanka and South Africa), but among the worst for the subset of tourism firms16. 2.6 Guyana's business taxes are high and complex, and there are many exemptions, remissions, holidays, etc. to compensatefor the high rates. Despite the favorable perceptions among manufacturing companies regarding corporate taxation, there are many problems with Guyana's tax system, and reforms are needed. Reforms o f the tax system, which are underway at present, will have to be deepened in order to reduce the taxation burden. For instance, tax rates are high: the corporate income tax (CIT) rates are 35 percent for manufacturing and 45 percent for trade and services. The 45-percent rate i s the highest in Latin America and the Caribbean, and the 35 percent rate i s among the top half-dozen; in 2004 the average CIT rate in Latin America was 30 percent. Roughly the same i s true for import duties and other charges for machinery and equipment; combined 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. Figure2-3: Perceptionsabout Tax Ratesand Tax Administration 90 80 70 60 50 b? 40 30 20 10 0 =Percentage of firms which consider tax rates a major or severe obstacle to doing business Percentage of firms which consider tax administration a major or severe obstacle to doingbusiness Source: GuyanaICs 2.7 Incentives or exemptions, which are the antidote to high CIT rates and no doubt the main reason why Guyanese manufacturing companies do not identify high tax rates as a serious problem, are still available under the current tax law, even though efforts have been recently made to reduce such exemptions and minimize discretion in the granting of exemptions. Eligibility for these incentives has been codified to some extent by the Fiscal l6Of course, the sample in all countries shown in Figure 2.3 covers manufacturingfirms only. 26 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. Inthis 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 startedin 2004 to publishannually the list of firms and personsbenefiting from tax exemptions, including the amounts. Furthermore, a limit of 5 years 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. 2.8 The Fiscal Enactment (Amendment) Act of 2003 represents some improvement, at least potentially, 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.l7If political influence i s to be removed, "incentives" must be automatic andmade part of the Tax Code.18 2.9 In line with the above, almost one third of large Guyanese manufacturing firms reported having had tax exemptions between 2000 and 2003, as do 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 10percent received such tax holidays. Tax exemptions were most common among firms from the mining (22 percent), chemical (20 percent) andwood (16 percent) industries. 2.10 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 inthe future (Figure 2.4). "PersonsinGeorgetowninterviewedbytheICAteamwere unanimousonthispointofcase-by-casediscretion. The US State Department's "2005 Investment ClimateStatement" reports the same. ''We must stress that the ICs was conducted around the time when new tax regulations and changes in tax legislationwere approved. Inthat sense, it might have been impossiblefor survey respondents' answers to reflect the ongoingreforms of the tax system. 27 Figure 2-4: Corporate Tax Exemptionsin Guyana 100 90 80 70 60 50 40 30 20 10 0 =Percentage of firms with tax exemptions between 2000 and 2003 I offirmswithtaxexepmtionswhoexpecttocontinuereceivingtaxexemptions Percentage Source: Guyana ICs 2.11 Exemptions from import taxes and charges are rated by Guyanese business executives as more important than corporate income tax holidays (21 percent of manufacturing respondents rated import tax exemptions as very important for reducing costs compared to 11percent for income tax holidays; see Figure 2.5). This i s intuitive as import taxes and charges are high, can be avoided only by smuggling or bribery, and come "up front," while taxable income i s subject to more subtle adjustments (many of which are legal) and inany event comesdue only inthe future, if and as profitsbeginto be earned. 28 Figure 2-5: Importance of Competition, Import Tax Exemptions and Income Tax Holidaysfor Reduction of Fkms' Costs and Development of New Products 80 70.8 , 70 60 - 50 8 40 30 20 10 0 Income tax holidays Pressurefrom foreign Tax exemptions on Pressurefrom domestic competitors imports competitors Source: Guyana ICs 2.12 The ICs found that the average time for imported goods to remain in customs is 20 days, and that two-thirds of the responding importers made extra payments to expedite customs clearance. Of these, close to one-third (30 percent) made informal payments (Le., bribes) to customs officials. For exporters, the situation is almost as bad, with an average of two weeks to clear customs and 60 percent reporting extra payments (see Figure 2.6). Of these, one- third (32 percent) made bribes to customs officials. The survey did not report on whether the bribewas to move the goods, andor to reduce the taxes paid, andor for other purposes, only that it served to expedite clearance. However, it seems likely that the very high taxes and port charges may be among the factors that lead to corruption in customs. Customs clearance costs are further increased by formal payments, made by practically all firms that report additional payments (96 and 92 percent for exports and imports respectively). These include payments to private agents who facilitate the process, without necessarily involving gifts or bribes. 29 Figure2-6: CustomsClearanceTimes andExtraPayments 120 100 80 60 40 20 0 Average number of Maximum number of Percentage of firms Percentage of firms Percentage of firms days to clear customs days to clear customs which had to pay making payments making payments extra to expedite paying formally paying informally customs clearance Source: Guyana ICs 2.13 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, with more than half of them (52 percent)usingsuch import tadduty exemptions, which is all the firms that were eligible for such import exemptions. In contrast, 12 percent of interviewed hotels were eligible for income tax holidays, and 10percent used such tax 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 f i r m s 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 a tax holiday. The latter finding probably reflects the higher importance attachedto import tax exemptions. Figure2-7: EligibilityandUse of InputTax ExemptionsandTax Holidaysby GuyaneseTourism Companies 160 1 140 120 100 80 60 40 20 II 1" 0 1 Tax holidays Customsexemptions on imported capital equipment or inputs IPercentageoffirmseligibletouseincentive0Percentageoffirmsusingincentive IAveragenumberofdaystogetincentive Source: Guyana ICs, Tourism module 30 2.14 The share of reportedsales for tax purposes in Guyanais comparableto other LAC countries at 73.8 percent of total sales among surveyed manufacturing firms, and 79 percent among tourism firms. Chile leads the way in the L A C region with self-reported 97 percent of annual sales reported for corporate taxation purposes (see Figure 2.8). Guyanese firms report, on average, 23 percentage points less than their Chilean counterparts, and in the vicinity o f what i s reported for tax purposes in Central America, Peru and Brazil. The share of sales that firms report to the government for tax purposes i s a useful indicator of the efficacy of tax administration, and reflects the general investment climate in the country. Figure 2-8: Percentage of Total Annual Sales Declared to the Tax Authorities 100.0 90.0 80.0 70.0 60.0 t 50.0 40.0 30.0 20.0 10.0 I Source: World Bank Investment Climate Surveys, 2002-2005 Bribes 2.15 While corruption does not feature high on the list of obstacles to doing business, with on1 18 percent of manufacturingrespondentsindicatingthat it is a major or severe obstacle ,bribes paid out by firms to secure public contracts are reported to be quite substantial2'. As shown in Figure 2.9, Guyana has a very high reported level of bribes to get government contracts - at 15 percent of the contract value. This i s second only to Peru, 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 l9Note, however, that surveyed hotels complained more about corruption, with 41 percent rating it a major or severe obstacle. 20While 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 117thamong 159 countries, on par with Afghanistan, Bolivia, Ecuador, Guatemala, Libya, Nepal, the Philippines and Uganda. 31 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 i s substantially lower. Figure2-9: ReportedBribesfor Government Contracts, percentof contract value Peru 20 Guyana Ecuador ElSalvador Guatemala Nicaragua Honduras Costa h c a 0 5 10 15 20 25 % Source: World Bank Investment Climate Surveys, 2002-2005 2.16 Almost one quarter of interviewed Guyanese manufacturing firms (24 percent) report that they are required to make gifts or informalpayments to public officials inorder to facilitate the issue of licenses, permits, and with regard to customs, taxes, regulations, etc., and the average amount of such payments made by Guyanese manufacturing firms is similar to that inother comparator countries, at 3.5 percent of total annual sales. Bribes to "grease the wheels'' of regulations in Guatemala, Nicaragua andEcuador are higher than those in Guyana, but not substantially so (see Figure 2.10). Yet, bribes "to get things done" - the so- called bribe tax - are reportedly lower in Honduras, Grenada and El Salvador. Interviewed Guyanese tourism firms also report higher average bribes - at 6.2 percent of total annual sales. 2.17 The share of Guyanese firms reporting that informal payments are common to ensure that `things get done" is much lower than the corresponding figure for the other Central American comparator countries (24 percent in Guyana versus 50 percent in Nicaragua and 64 percent in Honduras). Only in Grenada i s the share of firms indicating informal payments less than in Guyana (14 percent, see Figure 2.11). This finding perhaps explains why corruption in Guyana i s perceived as less of a business constraint (18 percent o f firms consider it a major or severe obstacle to doing business) than in Honduras, Nicaragua and Guatemala, where more than 60 percent o f interviewed firms consider corruption a major business constraint. 32 Figure 2-10: Bribes to "Get Things Done", percent of annual sales 7 0 60 50 4 0 I 30 20 10 0 0 Honduras Grenada El Salvador Guyana Ecuador Nlcaragua Guatemala Guyana (manu0 (tounsm) Source: World Bank InvestmentClimate Surveys, 2002-2005 Figure 2-11: Percent of Firmswhich Say that Bribes to "Get Things Done" are Common, percent of interviewedfirms Ecuador Honduras ~ 6 Guatemala Nicaragua 50 ~ Guyana Grenada 0 10 20 30 40 50 60 70 % Source: World Bank InvestmentClimate Surveys, 2002-2005 Inspections 2.18 Guyanese firms were inspected on average 11 times during 2004 by different government regulatory agencies; most frequently by oficials from the Environmental 33 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 (and a median 30 hours or 1.3 days). The lengthiest inspections were registered by officials from the Municipal Police - on average across 10 firms reporting such inspections - at 162hours (seven days) each. The latter, however, display wide variation: from 1 hour to 900 hours (38 days), with a median of 1.9 days. As shown in Table 2.3, both the frequency with which firms were inspected, and the average length of a single inspection were higherinGuyana comparedto Grenada. Environmental 80% 7 52 0.5 1.3 Total Inspections(including by other agencies) 95% NIA 121 NIA 1.3 2.19 In line with the frequency and duration of inspections by different agencies, bribes were reported as most frequently asked during inspections by the Police, followed by the Environmental Department. Thus, 11 percent of respondents inspected by the police were offered to pay a bribe, followed by 7 percent of those firms inspected by the Environmental Department (see Figure 2.12). Inspections, however, were most frequently realized by the Environmental Department (80 percent of firms were inspected), the Labor and Social Security Ministry (with 63 percent of respondents inspected), Fire and Building Safety (62 percent inspected), and the Tax Inspectorate (59 percent of respondents inspected). In contrast, only 8 percent of interviewed manufacturing firms were inspected by the Municipal Police Department. However, those firms inspected by the police bore the lengthiest average duration of a single visit by inspectors and were more likely to be asked to pay a bribe. Despite frequent and lengthy inspections, Guyanese firms were less likely to complain about officials interpretations of regulations and rules (Figure 2.13). 34 Figure 2-12: Percentageof RespondingFirmsWhich Were Askeda Bribeduring Inspections, Guyana Source: GuyanaICs Figure 2-13: Share of FirmsWhich Consider Government Officials'Interpretationsof Regulations Unpredictable,by Country __I_. Guatemala 71 Ecuador I I 46 Brazil I I I I 46 Honduras I I 46 I Nicaragua 45 Peru ElSalvador Zambia Guyana (tounsm) Indonesia Senegal Guyana(manuf) India Sri Lanka South Afnca Chile Uganda 0 10 20 30 40 50 60 70 80 Source: World BankInvestment Climate Surveys, 2002-2005 RECOMMENDATIONSON BUSINESS-GOVERNMENT RELATIONS 2.20 With respect to corporate taxation, Guyana needs deepening its ongoing tax reforms which aim at increasing the tax base. The recently launched National Competitiveness Strategy outlines VAT implementation and conducting a study o f the possibilities for reducing the corporate income tax rate as two efforts to continue the tax reforms. Efforts are also being directed at reducing the incentives for evasion while strengthening enforcement so as to increase 35 the actual costs of evasion. Indeed, reform in exemptions, remissions and tax holidays has already been underway as part of the IMF's Poverty Reduction and Growth Facilitation (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 exemptions2'. 2.21 Tax exemptions need to be made automatic, upon fulfillment of specific conditions. This would ensure more transparency and increaseinvestors' confidence. 2.1 The enactment of a Value-Added (VAT) and Excise Tax Law in 2005 is an important step inthe right direction if VAT can be implemented well. At present, progress - i s made with discussions involving the private sector on the regulations for implementing the VAT22. 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. Inthis regard, VAT could create fiscal room to facilitate further reforms of income taxes and customs duties. 2.22 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, healthpermits andpolice licenses should also be shortened. 2.23 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.FutureGovernment 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 membersof the Public ProcurementCommission, which i s entrusted with providing oversight for procurement matters. An e-procurement strategy i s currently being prepared - and when implemented will further enhance the transparency of government-firm interactions. 21 A Remissions Unit entrusted with making decisions on exemptions has been formed within the GRA, but reportedly capacity still remains an issue. 22 It isexpected that VAT will be implemented by January 1, 2007 after the 2006 General Election in Guyana. The legal and regulatory frameworks for VAT implementation have been approved and now preparatory work is ongoing. 36 CONTRACTENFORCEMENT THE JUDICIARYAND 2.24 Business disputes are inherent in commercial transactions. In a complex economy, involving many buyers and sellers, and complex goods and transactions, firms necessarily undertakerisks in dealing with new clients and suppliers, and face potential disputes with them. Without efficient courts and the expectation that courts will uphold their contractual rights and obligations, firms will be less willing to deal with new clients and suppliers, and fewer transactions will take place. 2.25 The functions of enforcing contracts and reducing the uncertainty faced by firms when engaging incommercial transactions is not restricted to the courts. These include both formal and informal mechanisms of enforcement, such as social networks, business associations, or public information channels to decide on whom to do business with and under what conditions. At a general level, contract enforcement mechanisms could be divided into personal relationships based on trust; self-enforcement through repeated transactions; third-party enforcement based on reputation; rivate enforcement; administrative government intervention, andcourt enforcement (litigation)2P.While each could potentially serve the same purpose, some of these mechanisms are inefficient since they exclude new clients (for instance conducting commercial transactions only with known, repeatedcustomers), or structuring transactions with a view to avoid business disputes, such as requiring pre-payment. Others, such as business associations, may sometimes not work well andbe rarely used. Trust inthe Judiciary 2.26 Despite notable weakness in the performance of Guyana's judicial system, firms' confidence in the courts is relatively high, at least compared to other Latin American countries. For example, only 15 percent of ICs respondents in Guyana distrust the judiciary in upholding their rights. This i s lower than in other comparator countries (Figure 2.14). However, users of the courts have generally worse perceptions of thejudiciary than non-users. 23See Hendley and Murre11 (2002) for a classification and analysis of the use of these mechanisms in supporting contractual agreements among Romanian firms. 37 Figure2-14: Trust inthe Judiciary: Percentageof FirmsWhich Do NotBelievethat the Courts Will UpholdTheir Contractual andPropertyRightsinBusinessDisputes,by Country Guyana Brazil Peru ElSalvador 26 Honduras Nicaragua Guatemala 4 Ecuador 56 0 10 20 30 40 50 60 Source: World Bank InvestmentClimate Surveys,2002-2005 2.27 0While there is room for improvement, in accordance with the above, Guyana performs satisfactorily compared to other countries in terms of firms' perceptions about how problematic the legal system and the resolution of conflicts are (see Figure 2.15). Ranking the legal system among 20 other constraints to business operation (ranging from macroeconomic uncertainty and political stability to costs and access o f financing to the quality of transport and energy), only 8 percent of Guyanese respondents describe the legal system and the judiciary as a major or very severe obstacles to doing business. The same proportion i s four times higher in countries such as Guatemala, Brazil and Nicaragua. In contrast to the legal system, problems with cost of financing, electricity quality and cost, labor skills and education, and crime appear of greater concern to private Guyanese businesses, with 56, 41, 40 and 30 percent of survey respondents respectively qualifying each area as a major or very severe constraint. 38 Figure 2-15: Trust inthe Judiciary: Percentage of FirmsWhich Perceive the Legal System and Conflict Resolution as Major or Very Severe Obstacles to DoingBusiness,by Country Nicaragua Brazil Guatemala Ecuador Honduras ElSalvador Guyana 0 5 10 15 20 25 30 35 40 percent Source: World Bank Investment Climate Surveys, 2002-2005 2.28 While overall perceptions of the judicial system are positive, the perceptions of court users point to significant problems in the courts. Thus, the percentage of 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 i s restricted to firms that have, in fact, been involved in a court case in the 3 years preceding the In the same fashion, 8 out of the 17 court users (or 43 percent) saw the legal system and conflict resolution as a major or severe obstacle to their business operation, in contrast to the 8 percent across the whole sample of firms. Among the 123 firms who have not used the courts in the three years prior to the survey, only 5 companies (4 percent) identified the legal system and conflict resolution as a major or severe obstacle. Therefore, Guyana has pronounced differences in perceptions o f the judiciary and the legal system depending on whether or not firms have had actual experience with them (see Figure 2.16). While similar discrepancies in the perception of the judicial system by court users and non-users, Le. users complaining more, are observed in other countries (e.g. Guatemala, Nicaragua, Honduras), the discrepancy between court users and non-users' perceptions o f the judiciary in Guyana i s higher than elsewhere. 2.29 As inother countries, the fraction of Guyanese firms which regardthe judiciary as a major or severe problem increases with firm size. Thus, 19 percent o f large firms view the court system as problematic compared to 11percent of medium firms and only 1percent o f small and micro ones (Figure 2.17). This is driven by the fact that court users are more likely to find the courts problematic and the fact that court use increases with firm size. Furthermore, foreign firms are much more likely to view the court system as a major or severe constraint than their domestic counterparts (33 percent vs. 7 percent), as are firms located in Georgetown compared to those in smaller cities and rural areas (12 percent vs. 7 percent) and exporting firms compared to non-exporting ones (14 percent vs. 5 percent). 24Only 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. 39 Figure 2-16: Court Users Distrust the Judiciary Much More than Non-Users 45 40 3s 30 2s 20 1s 10 S 0 Court users Court non-users I offirmswhichconsiderthelegalsystedconflictresolutiontobeaMajororVerySevereobstacletodoing Percent business ElPercent of firms which do not believe that thejudiciary will uphold their contractual and property rights inbusiness disputes Source: World Bank GuyanaInvestmentClimate Survey 2005 Figure 2-17: FirmsWhich the Legal System and Conflict Resolution as Major or Very Severe Obstacles, by Size so Nicaragua so I41 Guatemala Honduras ElSalvador 23 Guyana ~l9 0 10 20 30 40 50 60 Source: Source:World Bank InvestmentClimate Surveys,2003-2005 Note: Guyana's category of SmallFirmsincludesbothmicroand small firms (with 1to 15 full-time employees). 40 How Do GuyaneseFirms Avoid Disputes? 2.30 More than a third (35 percent) of the interviewed Guyanese firms report that they require pre-payment from their customers. This fraction i s the same as inBrazil, andless than inNicaragua, but above other regionalcomparators such as Guatemala (19 percent), El Salvador (23 percent) andEcuador (28 percent) (Panel A of Table 2.4). However, the average size of these pre-paid sales - for those firms which report some pre-paid sales - i s among the lowest in the region at 23 percent of annual sales (only Brazil has a lower share of pre-paid sales). Pre- payment is an indicator of problems with contract enforcement - presumably, if the contract enforcement mechanisms are ineffective, costly or time-consuming, firms will look for ways to avoid disputes. One way to avoid disputes i s to require that customers pay in advance. In this sense, the data indicate that firms are looking for ways to avoid disputes since a fairly large proportion demand pre-payment from their clients -even though the size of the pre-paid sales i s not as highas inother comparator countries. 2.31 A very large share of interviewed Guyanese firms 95 percent - -report that they demand payment at the time of sale, and this share is the highest in the region. These sales represent, on average, two-thirds (66 percent) of total annual sales, which i s also the highest in the region (see Panel B of Table 2.4). Requiring clients to pay at the time of delivery of the goods again ensures that disputes related to payment do not arise, i.e. the high share of firms demanding such payment and its high share in total sales indicate that firms in Guyana do, in fact, exercise caution and structure their transaction in a way that precludes disputes from arising. Suchstrategies are indirectly suggestingthat business disputeresolution is not efficient. 2.32 The fraction of Guyanese respondents which report selling goods on credit to their customers is, on average, 70 percent - slightly higher than in Nicaragua, Honduras and Peru, but lower than elsewhere inthe region. Such sales on credit constituted about 41 percent of annual sales for these firms - by far the lowest among the set of Latin American comparators (see Panel C of Table 2.4). For example, sales on credit averaged 84 percent of annual sales in Brazil, 76 percent in Ecuador, 67 percent in Guatemala, and 66 percent in El Salvador and Peru. The willingness of firms to sell their product on credit is usually associated with more confidence inthejudiciary; incontrast, when firms do not trust the courts they choose to transact with known customers, and build their transactions so as to avoid disputes25.Judging from the low proportion of firm sales made with deferred payment -even though a fairly large fraction of interviewed firms do allow some part of their sales to be paid at a later date - indicates again Guyanesefirms' unwillingness to undertake risk (deferring payment necessarily raises the risk of buyer default for the seller), and thereby a preference to avoiddisputes. 2.33 Given the high shares of Guyanese firms which demand payment at delivery or in advance, it is not surprising that a relatively high fraction of interviewed firms (31percent) report not having experienced any delays in payment from private customers in the year prior to the ICs. For comparison, only 8 and 11 percent of the firms that deal with private clients in Guatemala and El Salvador respectively indicate no payment delays, as do 19 percent of firms in Honduras and 20 percent in Nicaragua. Therefore, the prevalence of payment delays 25There is substantial literature on this topic. See, for example, Bigsten et al. (2000), Greif (2002), Hendley and Murre11(2003), Johnson, McMillanandWoodruff(2002), amongothers. 41 inGuyana-compared to the four Central American countries -- is consistent with the patterns of prepayment, payment at the time of delivery and sale on credit, reported in Table 2.4 (with Guyanese firms offering less credit, and demanding more frequently and a higher proportion of sales to be paid on the spot). The size of such delayed payments i s also lower in Guyana - at 22 percent o f sales, compared to 34 percent in Guatemala and 33 percent inEl Salvador. Table 2-4: Pre-Payment,Paymentat Delivery andTrade Credit:A Comparison ...paid in advance Share offirms which require Pre-paid sales (% of all Pre-paid sales (% of all by clients pre-payment sales) acrossfirms which sales) across allfirms require pre-payment Guyana 35% 23% 8% Nicaragua 39% 40% 16% Honduras 31% 42% 13% Peru 34% 30% 10% Brazil 35% 17% 6% Ecuador 28% 28% 8% ElSalvador 23% 30% 7% Guatemala 19% 34% 6% ...sold on credit to Share offirms which sell on Percentage sold on credit Percentage sold on credit clients credit acrossfirms which sell on across allfirms credit Guyana 70% 41% 29% Nicaragua 65% 50% 32% Honduras 65% 64% 42% Peru 69% 66% 46% Brazil 94% 84% 79% Ecuador 90% 76% 68% ElSalvador 81% 66% 53% Guatemala 77% 67% 51% Percentage paid at the time Percentage paid at time of of sale acrossfirms which sale across allfirms require payment at time of sale Guyana 95% 66% 63% Nicaragua 88% 59% 52% Honduras 76% 60% 45% Peru 82% 50% 41% Brazil 58% 24% 14% Ecuador 69% 35% 24% El Salvador 81% 49% 40% /Guatemala 79% 53% 42% 42 2.34 Guyanese firms, which allow credit and experience payment delays, spend, on average, 43 days to resolve an overdue payment (from the moment it becomes overdue to the day payment is received). This i s below what Salvadoran firms need (49 days), but longer than in Guatemala (38 days), Honduras (33 days) and Nicaragua (26 days). To resolve the same overdue payment by means other than court action (i.e. through direct negotiation or through third party such as mediators, business associations, private enforcement agents, etc.) takes 13 days on average in Guyana. Therefore, out-of-court dispute resolution appears to be three times shorter, on average, than that incourt. The Role of BusinessAssociations inDispute Resolution 2.35 Less than one third of Guyanese firms belong to a business association proportion of interviewed firms in any Latin American country -andof -the lowest these 30 percent receive assistance from the association in the resolution of disputes with government officials, workers or other firms. 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 (see Table 2.5). About 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 inPeru (14 percent), but substantially lower than elsewhere in the region (see column 2 of Table 2.5). 2.36 Very few (8 percent) of the firms that do get dispute resolution services from the businessassociation to which they belong rank these services as the most important among those being provided by the association to them. Incontrast, 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 importance26.Lobbying the government, provision of information and/or contacts on product and input markets, and accreditation of products are deemed as the most important services provided by the business association to which Guyanese firms belong. Therefore, as a third-party contract enforcement mechanism, business associations play a very modestrole inresolving businessdisputesin Guyana. 26 We must stress, however, that this comparison should be taken with caution as the structure of the question differed in the survey used in Guyana. Instead of allowing respondents to choose the degree of importance of each type of service provided by their association, Guyanese respondents had to answer which type of service was most important to them. The Chile ICs had the same question as Guyana, and the percentage of Chilean respondents attaching the highest importance to the dispute resolution services provided by their business association i s similar to that in Guyana (6 percent in Chile), even though Chile has a much higher degree o f business association membership (57 percent) and more firms report receiving dispute resolution services from the associations of which they are members (46 percent). 43 Fable2-5: BusinessAssociationMembershipandDispute Resolution Firms belonging to a Firms, whichreport Firms which report Firms which report businessassociation, that the association that the association's that the association's (share of allfirms) 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 31% 30% NA 8% 59% 59% 21% 31% Guatemala 53% 15% 26% 35% Nicara ua 43% 54% 13% 48% Honduras 11% 52% 21% 42% 41% 14% NA NA Brazil 14% 58% 16% 56% Ecuador 91% 32% 22% 32% DisputeResolutioninCourt 2.37 Guyanese firms filed, on average, 8.7 percent of their payment disputes in the two years preceding the survey with the courts, but there are substantial differences in this measureacross different types of firms. Thus, large firms filed a significantly higher share of their payment disputes with the courts (23 percent) compared to small firms (0.2 percent) and medium firms (2 percent). Similarly, exporting firms file with the courts a significantly higher share of their payment disputes than non-exporting firms do (14 percent vs. 5 percent), and foreign firms significantly more than domestic ones (73 vs. 3 percent). Firms located outside of Georgetown are also heavier users of the courts than those in the capital city - resolving 10 percent through court as opposed to only 1percent for firms in Georgetown. 2.38 In Guyana, as elsewhere in the region, a larger fraction of mediumand large firms than small firms use the courts to resolve their payment disputes (Table 2.6). Out of 24 firms that indicated having had payment disputes in the last two years, ten (42 percent) said 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 i s highest for medium and large firms (70 and 75 percent of those with payment disputes report some resolved in court). It i s worth noting that in comparison to the four Central American countries mediumand large firms inGuyana seem more litigious - with twice to three times the share of firms with payment disputes going to court. In the micro and small firm category, however, the share of firms going to court (16.7 percent) i s similar to that in Central America. Micro Firms Smallfirms Medium Firms Large Firms Guyana 16.7% 70.0% 75.0% El Salvador 1.5% 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: WorldBank Investment Climate Surveys, 2002-2004 Note: The categoryof smallfirms in Guyanacomprisedbothmicroand small firms (with 1 to 15 full-timeemployees). 44 2.39 Of 14 interviewed Guyanese firms that had payment disputes resolved in court, 11 reported the time it took to get a court decision (from the time of filing to the time of court decision). The average duration across all these Guyanese firms is 29 weeks (205 days). There are considerable differences in the duration of trial reported by different types of firms - foreign firms and large firms spend longer waiting for a court decision than domestic and small f i r m s (Figure 2.18). However, due to the small subset of firms that report court use (11 for the whole sample), any of these results are merely indicative. Figure 2-18: Average Number of Weeks Necessary to Resolve a DisputedPayment in Guyanese Courts 50 46 45 40 35 30 25 20 15 10 5 0 Source:World Bank GuyanaInvestmentClimate Survey 2005 -2.40 W e conduct a comparison of the time to disposition of a payment-related court case as reported by survey respondents - with the other available ICs data for Central America and South America, and find that Guyana ranks in the middle. Figure 2.19 shows the average duration of identical overdue payment cases from filing in court until the judge delivers a decision for Guyana andother Latin American countries. Guyana's courts are found to be slower in issuing judgments on payment cases than are the courts in El Salvador, Nicaragua and Guatemala, but faster than those in Brazil, Honduras, Senegal, Chile, Ecuador and South Africa. Therefore, at least compared to other countries in the region, Guyana's judicial system is not found among the most time-consuming. However, Latin America in general i s found to have some of the lengthiest and most procedurally burdensome judicial processes in the world (see Enforcing Contracts chapter of the World Bank Doing Business Reports 2004 and 2005). 45 Another explanation i s the legal origin of Guyana - it has a mixed legal heritage from its Dutch and English colonial experience. Nevertheless, the legal and judicial systems belong to the common-law family, which traditionally has a shorter and less burdensomejudicial process than incivil-law countries27. Figure2-19: Average Durationof aPaymentDisputein Court: an InternationalComparison 700 I 500 b 400 300 200 100 0 ~ ~~ ~ Source: World Bank Investment Climate Surveys, 2002-2004 2.41 According to the survey respondents court decisions are generally enforced - with 82 percent of court decisions over payment disputes reported to have been successfully enforced. Execution of thejudgment takes, on average, 7.5 weeks according to the 8 respondents whose court judgments were enforced. Therefore, the total amount of time from bringing the case to court until payment is obtained i s approximately 37 weeks (about 260 days). This measure is lower than the time to resolve a payment dispute reported by Doing Business in 2006 (the Doing Business information was gathered during the ICA preparation from a leading law firm inGeorgetown). According to the DoingBusiness data, contract enforcement ina Guyanese court over a commercial case where the claim i s 500 percent of GNI per capita (US$4000) will take 525 days (about 1 year and 5 months). This i s twice as long as the time reported by the Investment Climate Survey (260 days) for a similar type of case2*. 2.42 Interviewed hotels spend longer ingetting a court case resolved than manufacturing firms: on average 453 days for the 6 hotels which were involved in a court case over the ''For example, a study of court performance across 109 countries worldwide (Djankov et. a1 (2003)) found that common-law countries have generally faster judicial processes, with a lower degree of formalism in the courts. Several Caribbean islands of English legal origin were included in the sample, such as Jamaica, Grenada, St. Vincent and the Grenadines, and the Turks and Caicos Islands, and were found to perform well on various measures '*Differences of time, costs and complexity of thejudicial process. between the ICs and the Doing Business duration data are to be expected since the Doing Business case rests on specific assumptions such as the location (capital city), the transaction, the parties, the amount o f the debt, etc. The ICs does not restrict itself to such assumptions, and covers firms across the country. 46 three years before the The time varies from 2 weeks to three years, with amedian of 350 days. These figures are more in line with the duration of debt collection in court reported by the Doing Business database. Inaddition, 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 systemwill enforce their contractual and property rights inbusiness disputes. Only 14 percent of non-users from the set of interviewed hotels express the same lack of confidence in the judiciary. Figure2-20: A Comparisonof CourtDurationData ICs Hotels ICs ManUfaclUnng* 0 100 200 3 0 0 400 500 600 days Source: World Bank Guyana Investment Climate Survey 2005 * ICs Manufacturing refers to duration of court's resolution of payment disputes 2.43 and judges occurs - the number rises to 33 percent, if we only consider the subset of About 14 percent of interviewed Guyanese firms think that bribingof court offic.als respondents who had used the courts to settle payment disputes in the previous two years (Figure 2.21). Large firms are more concerned about court bribes than mediumand small ones - with one out of five (21 percent) reporting that bribe payments in the courts 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. 29 It i snot appropriate, however, to compare the time in court for any cases (as i s in the Hotels ICs Questionnaire) with the time to resolve a payment dispute (as i s 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 i s 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 assessing court disposition times on the basis of payment cases only may be misleading. 47 Figure2-21: Percentageof Firmswhich Think that Bribesto Judicial Officials Are Common J 1 I I 1 ~ I 0 5 10 15 20 25 30 35 70 Source: World Bank Guyana Investment Climate Survey 2005 2.44 The amount of bribes paid is not trivial: 2.2 percent of total annual sales for those firms which indicate that bribing of court officials is common. Small and medium firms spend a higher proportion of sales on such bribes (2.4 and 2.3 percent respectively), whereas large firms spend slightly less (1.8 percent). Paying bribes is associated with lower duration of court cases - the average time to disposition falls from 29 weeks to 18 weeks, when we only consider respondents that have indicated a positive amount of bribes being paid3'. Similarly, firms which indicate that bribes are paid, have their judgments enforced (100 percent), and wait less for judgment execution than other firms (6.75 weeks versus 8.25 weeks). Therefore, despite the small number of observations available, the data suggest that bribes to court officials result in shorter disposition and execution times, and in a higher likelihood of the judgment being enforced (Figures 2.22 and 2.23). 30 Again, this finding must be interpreted with caution as the number o f firms which have had court cases and indicate the typical bribe amount i s only four. 48 Figure2-22: Bribesto CourtOfficialsandDurationof Court Trials 25 20 4 15 10 5 0 Firms that pay bribes Firms that do not pay bribes LMDuration of vial =Duration of executionofjudgment 1 Source: World Bank Guyana Investment Climate Survey 2005 Figure2-23: Percentageof FirmsWhose CourtJudgments Are Executed Firms that do not pay b n k s F m s that pay b n k s 0 20 40 60 so 100 120 % Source: World Bank Guyana Investment Climate Survey 2005 2.45 Data on contractenforcementincourt from the World Bank Doing Businessin2006 database reveal that resolvinga payment dispute in a court when the value of the claim is 500 percent of Guyana's GNI per capita (about US$4,500) is going to take 525 days on average, which is higher than the Latin American average of 461 days. These data assume that the case i s heard in the country's largest commercial city (Le. Georgetown) as well as other specific procedural assumptions. As already mentioned, the difference between the duration of the Doing Business data and the ICs data can be attributed to a number o f reasons such as differences in respondents - the Doing Business data are collected through a detailed questionnaire answered by lawyers rather than companies; one law firm only fills out the Doing Business questionnaire as opposed to close to 200 firms interviewed for the ICs; the Doing Business questionnaire covers a standard commercial dispute, but also builds many assumptions into the case, which may not necessarily be true for the average payment dispute as envisaged by 49 respondents to the ICs; and finally, the ICs data cover the whole country, whereas the Doing Business data i s representativeof the largest commercial center only. 2.46 The time to enforce a commercial contract in Guyana according to the Doing Businessdatabase -- asshown inTable 2.7 -- is longerthan that ina numberof comparator countriessuch as Jamaica (202 days),Peru(381days), andEcuador (388 days),but similar to that in Argentina (520 days), Honduras (545 days) and Brazil (546 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 i s among the longest in Latin America, and much longer than the same for Caribbean countries with English common-law origin. Table 2-7: Time, CostsandNumber ofProceduresto Enforce a Debt Contract in Court Source: World Bank Doing Business in 2006 Database Note: Data are as of January 1,2005. 50 2.47 Guyana ranks marginally above the Latin American average interms of the costs of commercial litigation according to the Doing Business database (Table 2.7). The whole hypotheticaljudicial process would cost the plaintiff (creditor) 24.4 percent of the debt amount in official fees, such as attorney fees, court fees, and enforcement (bailiff') fees. Given the assumed claim amount, total costs in fees would be approximately US$1,098 - by no means a trivial amount in a country with an average income per capita of US$900 in 2004. 2.48 Guyana does not rank well among 116 other countries worldwide on its Public Institutions Index (109'h out of 117 countries) and its component -the Contracts and Law Sub-index - where it ranks 109th out of 117 countries according to the Global CompetitivenessReport 2005-2006 rankings. The Contracts and Law sub-index i s a composite of four further sub-indices, among which are the ones on Judicial Independence and Property Rights. On the sub-index of Judicial Independence, Guyana scores 2.4 on a scale from 1to 7, where higher values stand for higher degree of judicial independence. This score places it 96'h out of 116 countries, i.e. in the bottom quartile of the distribution. Figure 2.24 indicates that while Guyana's judiciary i s perceived as far less independent than the judicial systems of Costa Rica, Jamaica, Trinidad and Tobago, and Chile, it i s on a par with those of Guatemala and Honduras, andas more independent than the judiciaries of Venezuela, Nicaragua and Ecuador. Figure2-24: IndexofJudicialIndependence,(Scale: 1 No Independence,7 Complete - - Independence) 11111111111111111 Source: WEF Global Competitiveness Report 2005-2006 2.49 In a similar fashion, Guyana scores 3.3 (on the same 1to 7 scale) on Property Rights, placing it 99thout of 117 countries, and among the bottom-scoring L A C countries 51 (see Figure 2.25). This sub-index reflects answers to a survey question on whether or not financial assets and wealth are clearly defined and protected by law. Guyana scores well below the worldwide mean of 4.5 on this measure, and worse than countries such as Jamaica, Trinidad andTobago, and Brazil. Figure 2-25: Index of Property Rights, (Scale: 1 poorly defined and protectedby law, 7 clearly - - defined and protectedby law) Source:WEF GlobalCompetitivenessReport2005-2006 2.50 Finally, the Global Competitiveness Report ranks Guyana extremely low on its index of Efficiency of the Legal Framework31. Thus, Guyana scores 2.1 (on a 1 to 7 scale), placing it in 113thplace among 117 countries. Again, it is well below the sample average of 3.8, and close to the scores of four other LAC countries which occupy the last 4 places in LAC (Figure 2.26). This measure reflects again subjective survey answers to a question on whether the legal framework for private businesses to settle disputes and challenge the legality of government actions and/or regulations i s efficient and follows a clear, neutral process, or not. Therefore, this measure i s as closest as possible to the measures of dispute resolution we have been considering in this section. It i s very much in line with the information on bottlenecks in dispute resolution in court as reported by the respondents to the ICs and to the Doing Business Project. 31This sub-index is acomponent of the larger composite index of GlobalCompetitiveness. 52 Figure2-26: Indexof Efficiencyof LegalFramework,(Scale: 1 efficient andfollows a clear, - neutralprocess,7-inefficientandsubject to manipulation) Source: WEF Global Competitiveness Report 2005-2006 2.51 Alternative DisputeResolution(ADR) mechanismsare oftenprescribedto deal with long times to dispositionin court and case backlogs, and Guyana has recently taken steps in making such ADR methods available to the parties to a dispute. For instance, a Carter Center-sponsored project established a Mediation Center in October 2003, and as of March2004 78 court cases had been sent for settlement through the same Center. Court proceedings eligible for mediation cover debt cases and landlord-tenant relations. Mediation through trained mediators who guide the parties to an agreement has proven successful in other L A C countries, reducing court delays. For example, mandatory mediation o f certain commercial disputes was found to work well in Argentina. Furthermore, mediation is cheaper than going through a court procedure or through other ADR methods such as arbitration, making it an attractive option for relatively simple commercial cases. In many countries business associations provide mediation services to their members. RECOMMENDATIONSOF CONTRACT ENFORCEMENTTHE JUDICIARY AND 2.52 To improve court performancemeasures 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 1to 2 years from filing to disposition - something which was confirmed by the Doing Business data as well as statistics presented b y the Supreme Court. A typical recommendation to address high caseload i s 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 53 works well and certain types of cases - such as small claim cases or commercial cases can 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 mechanismto reducecase backlogs andimprove access tojustice. 2.53 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 Slovakia32).According to World Bank (2003), each judge currently has to spend 70 percent of hisher time on administrative tasks, thereby reducing their time for their main task - case adjudication. Clearly, this could be an areafor improvement -using donors' support. 2.54 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 i s high, and even though procedures are usually institutedto ensure fairness and impartiality of judgment, the empirical evidence suggests otherwise33. Simplification can apply to many elements of the typical civil judicial process - through instituting more oral rather than written procedures; through eliminating the needfor plaintiffs to present legally motivated claims; through eliminating interlocutory appeals and motions, which defendantsfile just to delay payment; through improving the system of notifications of claim to the defendantandof thejudgment to bothparties. 2.55 It is also recommended that the Government of Guyana address the perceived lack of independence and impartiality among judges, and interference by political power in court decisions. Both the World Economic Forum and the Heritage Foundation's 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." 2.56 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 seizedto pay the debt. Having ajudgment without the ability to collect on it i s not muchuse. Therefore, efforts could be made to institute and improve information-sharing among market participants. Improving the security of warehousing facilities of the execution agents (at present seized assets are kept in a location which i s often burglarized) should be made apriority. 32World Bank (2001), "Administration of Justice and the Legal Profession in Slovakia", Poverty Reduction and Economic Management Unit,Europe and Central Asia Region 33See Djankov et al. (2003). 54 2.57 Moving commercial disputes to commercial courts could also reduce court delays. The IADB is at present helping implement a Commercial Court Project in Guyana, with a focus on training commercialjudges and streamlining proceduresfor commercial cases. CRIMEANDVIOLENCE Background 2.58 Guyana has very high crime and violence rates, even by Latin American and Caribbean standards. While the region i s now mostly free of the political violence and ethnic conflicts that pervade Sub-Saharan Africa, according to the World Health Organization (WHO) the low and middle-income countries of the Americas still exhibit the highest rates of intentional homicide of the world: 27.5 homicides per 100,000 population in 2000, compared to 22.2 for the African region, 14.8 for low- and middle-income European countries, and less than 10for high- income countries and other regions of the developing world (see Figure2.25).34 2.59 Crime and violence problems deteriorated considerably in 2002, but have improved somewhat since then. In Guyana, the available statistics make it difficult to quantify the exact extent of different forms of crime and violence, and the way they have changed over time. However, it i s clear that since the late 1990s inparticular, Guyana's crime and violence problems have alarmingly deteriorated, and it i s estimated that at its peak in 2002 the homicide rate quadrupled to 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, Honduras, andEl Salvador, among others. 34See Krug et al. (2002), Ayres (1998) and Buvinic et al. (2002). 55 Figure 2-27: Homicide Ratesper 100,000 of Population, by Gender and WHO Region I Source: Word Health Organization (Kruget al. 2002) Note: (a) Low and middle incomecountries 2.60 Although no victimization data exist for Guyana, a recent national representative survey of children carried out by UNICEF and the Ministry of Labor, Human Services, and Social Security confirms the high levels of crime and violence. Thus, between 16 and 35 percent of the interviewed children had observed criminals, police, or other people shooting, and almost half of the children said a friend or someone they knew had been violently killed. Official reported crime rates are difficult to obtain and are often complemented by victimization survey data as the proportion of crimes reported in different countries and for different crimes can vary significantly. In Jamaica, for example, only 20 percent o f all crime i s reported to the police (Harriott, 2002). 2.61 Violence and crime are not new phenomena in Guyana, but neither could their current levels be attributed entirely to the ethnic polarization and political conflict that the country has endured for decades. Ethnic tensions and political violence continue today, but are exacerbated by poverty, social marginalization, unemployment and economic instability, the rise in the illegal drug trade, the trafficking of firearms, the corruption, the deportation of criminals, and the ineffectiveness of the existing criminal justice system. 2.62 Guyana has become an important regional trans-shipment point for large quantities of illicit drugs -particularly from Colombia and is an important player inthe Caribbean - illegal drug market, which was estimated to have generated an income of US$3.3 billion in 2000 (UNODC). Cocaine now accounts for about 85 percent of this. Drug trafficking and use tend to stimulate various other types o f crimes. There i s a strong association between the drug problem and gun use in criminal activity. According to Harriott (2002, page 7), "The need to protect drug production, trafficking, and local distribution operations, has given impetus to illegal gun acquisition and violent crimes. Drug trafficking provides established channels and systems for moving all types of contraband, including guns, andthe funds to buy them." 56 2.63 More generally, Guyana is confronted by increasingly complicated crime problems with the emergence of relatively new crimes such as extortion, kidnapping, and sophisticated forms of white-collar crimes, such as money laundering. Accompanying these developments are also new forms of criminal organizations such as transnational networks whose primary goal i s drug trafficking. Alongside these forms of criminality i s also the emerging problem of juvenile or youth criminality and violence. Overall in the region, the proportion of violent crimes committed byjuveniles has been increasing. 2.64 Itis widely recognizedthat the crime and violence problem in Guyana is extremely critical and is at the top of the agendaof the government, the media, the private sector, and society at large. Crime and violence have contributed to destabilizing Guyanese society and the country's political system, and particularly the economy. Crime and violence generate fear and anxiety, fuel migration, discourage long term investment, and severely compromise good governance. (Guyana Development Policy Review, World Bank, 2003). Crime and Violenceand Economic Development 2.65 Crime and violence are no longer considered just a `social' or `law and order' problem, but also as an obstacle to development which erodes poor people's human, physical, and social capital, and has high associated economic costs. While estimating the costs of crime and violence in Guyana is beyond the scope of this study, these include judicial costs; health care costs; foregone earnings; firms' costs on private security; loss of jobs, production, and competitiveness (see Box 2.2). Estimates of direct costs of crime in Jamaica for example amount to at least 3.7 percent of GDP (World Bank, 2003). 57 Box 2.1: The Costs of Crime and Violence The costs of crime and violence are often divided into four categories: direct /indirect costs, non-monetary costs, economic multiplier effects, social multiplier effects. Direct and indirect costs Direct costs of crime and violence measure the value of goods and services spent dealing with the effects of, andor preventing crime and violence through the use of scarce public and private resources on the criminal justice system, incarceration, medical services, housing and social services. The indirect costs include lost investment opportunities, foregone earnings of criminals and victims of crime and violence. Non-monetary costs Nonmonetary costs measurethe non-economic effects on the victims of crime and violence. It i s evaluated by taking into consideration: increased morbidity (diseases resulting from violence like disability, mental injuries), increased mortality through homicide and suicide, abuse o f alcohol and drugs, depressive disorders. Economic multiplier effects The economic multiplier effects measure the overall impact that crime and violence have on the macroeconomic situation o f a country, the labor market, as well as inter-generationalproductivity impacts. For example, victims of domestic violence have higher rates of absenteeism, are more likely to be fired from their jobs, and the domestic violence affects their earning power. Social multiplier effects The social multiplier effects measure the impact of crime and violence in such areas as: the erosion of social capital; the inter-generational transmission of violence; the reduction in the quality of life; effects on citizenship, and effects on the confidence in and functioning of the democratic process, government and its institutions. Sources: Buvinic and Morrison, 1999,World Bank, 2003 Effectsof Crime and Violence on the Investment Climate35 2.66 High crime and violence can have a negative impact on the investment climate and can deter or delay both domestic and foreign investment: They lead to higher costs o f doing business, because o f the need to employ different forms of security, and divert investments away from business expansion and productivity improvement, and may lead to a less-than-optimal operating strategy; They leadto business losses, arisingfrom looting, arson, theft, extortion and fraud; They lead to a loss of output because o f reduced hours o f operation (including avoiding night shifts), or losses o f workdays arising from outbreaks of violence, and avoidance o f certain types of economic activity; They also reduce output because of temporary (injury) or permanent (homicide) exit of individuals from the labor force; They can cause permanent shut-down o f firms or relocation to less crime-prone countries. 35This section is based on the Jamaica Report on?, World Bank, 2003. 58 2.67 In addition, crime and violence erode the development of human and social capital, and thus constrain potential growth. The crime situation in Guyana seems to be an important factor for migration. The migration of skills leaves the country unable to compete in many areas of production and in the provision of certain skilled services.36 2.68 Results from the Investment Climate Survey (ICs) indicate that the crime and violence situation is one of the most serious obstaclesthat firms in Guyana face. Thus, 30 percent of Guyanese firms consider crime, theft and disorder as a major or very severe obstacle to their doing business. This i s among the top five perceived constraints for doing business. 2.69 Other sources of informationalso confirmthat crime and disorder affect businesses negatively,and are perceivedas a problemby Guyanesefirms. For instance, another recent survey o f businesses in Guyana finds that the one issue that firms would most like to see the Government deal with i s the implementation o f a plan to tackle crime, followed by the reduction of the price of fuel, and the rates of exchange and interest (GuyanaBusiness Outlook Suwey, 2005). Below are some of the main results of the Guyana ICs, and the impact of crime and violence on business activity inGuyana. 2.70 The Investment Climate Survey data indicate that a total of 38 percentof all firms have been a victim of theft or vandalism in the past year in Guyana (see Figure 2). This affects firms in the capital city more than outside (50 percent vs. 35 percent respectively); affects exporters more than non-exporters (51 percent vs. 33 percent respectively), and i s particularly prevalent in the wood (60 percent), food (35 percent), and mining sectors (33 percent). Furthermore, prevalence of criminal activity was much higher for large firms (58 percent were subjected to it) compared to micro and small (with 30 percent affected) and medium firms (41 percent affected), something which i s observed in other countries as well (e.g. El Salvador ICA, Guatemala ICA, World Bank 2004). 36Interview with Cathy Hughes, President of the Tourism and Hospitality Association of Guyana (THAG), publishedin Stabroek News, May 3rd,2005. 59 Figure2-28: Prevalenceof Theft, Robbery,Vandalism or Arson, percentof ICs respondents 8090 Source: Guyana ICs 2.71 Theft in transit representsa total of 1.1percent of sales for all interviewed firms in Guyana. Exporters lose 3.3 percent of sales due to theft of domestic and international shipments. The wood sector i s most severely affected, and loses 2.6 percent of sales due to domestic theft of shipments (see Figure 2-29). Figure2-29: LossesinTransit, Percentageof ConsignmentValue by Type ofFirm - 3.0 2.8 I 2.5 2.0 c 1.5 1.o 0.5 0.0 Ui Lorrer due of theft for domestic shipments 8 Lorrer due to theft for international shipments Source: Guyana ICs 60 2.72 Guyanese firms often suffer crime losses, and invest in security measures, such as guards, equipment and professional security services (Figure 2-30). 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 - in U S dollar terms they exceeded several thousand in 2004. Thus, large firms lost on average US$12,578 as a result of such events, with medium companies losing on average three times less. Accordingly, a significantly higher share of large firms invests in security than small firms (92 percent vs. 39 percent). Generally, the shares of firms spending in security in Guyana are similar to the share of firms in Central America, which invest in security measures (Figure 2-31). Figure2-30: Lossesdue to CrimeandFirms' Coststo PreventCrime,byFirm Size I I 40000 35000 30000 25000 US$ 20000 15000 Source: Guyana ICs Figure2-31: Share ofFirmsWhichSpendSome Amount on Security, percentof ICs respondents 120 ......... ........................ I ~ 100 80 8 60 40 20 0 Guyana Guatemala El Salvador Honduras Nicaragua Source: World BankInvestmentClimate Surveys, 2002-2005 61 2.73 Security costs in Guyana are about 1.3 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 inGuyana, the average amount is 3 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. 2.74 More than 80 percent of Guyanesefirms that have been a victim of vandalism, theft, robbery or arson report the crime to the police, which is very high by international standards (Figure 2-32). Other countries with high prevalence of business-related crime also register a high share of criminal cases reported, e.g. Guatemala (70 percent) and El Salvador (69 percent). Exporters report relatively more (87 percent) than non-exporters (78 percent) as do foreign firms compared to domestic ones (91 vs. 84 percent). Of the cases reported, only 14 percent get solved by the police on average, which i s higher than in Guatemala and Ecuador, but lower than Nicaragua, Senegaland Sri Lanka. Figure2-32: ReportedCasesandSolved Cases byPolice: An InternationalComparison 80 70 60 50 P 40 30 20 10 0 1IY Percentage of criminal cases reported to the police I of reportedcases successfully solved Percentage 1 2.75 Confidence in the judiciary as measured by the question of whether the judiciary will uphold property rights is relatively high. Of all firms, 68 percent somehow agreed or tended to agree, and 32 percent tended to disagree, disagree in most cases or disagreed completely (Figure 2-33). This compares relatively well in the region with, for example, Honduras, Guatemala, Ecuador and Nicaragua showing much less trust in the judiciary (Figure 2-34). 62 Figure2-33: Trust inthe JudiciaryinGuyana I Somehow agree or tend to agree m Tend to disagree or disagree in most cases Disagree completely I Figure2-34: Trust inthe Judiciary:an InternationalComparison "Judiciarywill uphold my property rights",%respondents who ... ' ,I100% Fully agree 1 80% Agree in mostcases 60% Tendto agree 40% 0 Tendto disagree 20% Disagreeinmost cases ~ 1 0% Disagree Source: Guyana ICs 63 PublicPolicy to Preventand Reduce Crime and Violence 2.76 The Guyanese Government's response to the rapid increases in crime and violence over the last few years has been inadequate, at times implicated with the crime and violence, and unable to reverse the tide. The Guyana Police Force lacks sufficiently trained officers, and "as a general rule, i s quite underpaid, demoralized ...,937Inresponse, the Government of Guyana has launched the National Drug Strategy Master Plan, 2005-2009, to eradicate drug- trafficking and drug-related crime through a demand and supply-reduction strategy. In conjunction, a number of measures to prevent and reduce crime were also announced. These include3! Introduction of the Neighborhood Police - a full-time 600-strong community-based armof the GuyanaPolice Force; Penal reformwith emphasis on correction and reintegration of prisoners into society; Heightened attention to vulnerable, at-risk groups. Provision of more resources to increaseopportunities for unemployed, unskilledand out-of-school youth; Waiver of duties and taxes on surveillance technology for the private sector; More focus and resources to combat white-collar crime through strengthening of the Fraud Squad in CID and more resources to enhance the work of financial investigations; Modernization of the Guyanese Immigration and Naturalization Services to respond to an increase in the transnational nature of crime, alien smuggling and trafficking of persons; Introduction of new measures and tougher penalties to counter increases in gun- related crimes causedby inflows of illegal weapons; Strengtheningof law-enforcement agencies. 2.77 Inaddition, recently the following were announced: The establishment of aNationalCommission onLaw and Order which will have participation from the government, the opposition, the private sector, and civil society; Creation of aMinisterial Unit on Community Policing to improve managementof the Community Policing Initiative; Tougher action against racialincitement and violence by strengtheningthe legal framework andits implementation; Greater NGO involvement incrime prevention. 37 Stabroek News, September gth,2005. 38 Office of the Presidentof Guyana, online at www.o~.gov.gy 64 2.78 Some of these measures are already under implementation, and others are under consideration. RECOMMENDATIONS ON CRIMEAND VIOLENCE 2.79 If implemented and fully funded, the measures announced above may go a long way in addressing the crime and violence problems facing Guyana as a whole, and the private sector in particular. In these recommendations we will briefly highlight those measures that we see as priority interventions. 2.80 I t 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, inorder to evaluate not only the general trends of crime but also the effectiveness of these institutions in deterring crime. In addition, there i s 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. Little information has been collected on the impact of crime on the private sector. Inthis respect, 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. 2.81 A comprehensive national security policy should also incorporate measures aimed at reducing the proliferation of firearms, strengthening justice-sector 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. As for the role of educational programs, a good part of the social violence associated with homicides i s the product of a system of norms and values that emphasize the use of force to resolve conflicts. This culture of violence can be contained through conflict resolution and other life-skills programs. Finally, in the case of at-risk youth, it i s 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 andgangs. 2.82 At the level of the firm there is much that can be done to prevent and reduce crime and violence. Measures to improve safety of the premises and the employees can be taken through actions such as: improved lighting on and nearby the premises; provision of safe transportation for employees - particularly after regular hours; provision of conflict resolutiodmediation services and skills training for employees; provision of crime victim support services; and provision of domestic violence reduction programs - raising awareness and helping employees that are victims of domestic violence as well those who commit it. Larger 65 firms might also consider Early Childhood Education programs and vacation programs for childrenof employees-bothproven to reduce crime and violence inthe community. Supporting local Crime and Violence Prevention initiatives i s also very important; some methods include: providing resources for local diagnostic studies; support for community-level recreational activities; staff-community mentoring programs, and participation in youth training, internships, andjob-placement programs for local at-risk youth, young first-time offenders, etc. 2.83 The active participation of the private sector in formulating and supporting the country's policies against crime is fundamental. 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 informationon 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. 2.84 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.). It also shows that the primary responsibility i s not just that of the police; but that governments, communities andpartnerships at all levels also need to be actively engaged. This can be achieved through effective and multi-sectoral local partnerships with active private sector participation. An effective strategy must be based on comprehensive 'Safety Audits' or crime and violence diagnostics, and include elements of: (1) Judicial/ Policing Reform - ensuring that order, fairness, and access to due process i s 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. Box 2.2: Reducing Crime inBogoth The city of BogotB, Colombia, adopted such a comprehensive local crime-and-violence- reductionapproach and succeededin reducinghomicides by 50 percent over a period of seven years, changing its status from the most violent capital inthe world to one of the least violent of the larger cities in the region today. The Bogota Chamber of Commerce was an active and important partner inthis city-level initiative. 2.85 International cooperation and active participation in regional initiatives is also needed to combat crime which spans several countries. Some of the crime and violence problems facing Guyana such as drug and arms trafficking, money laundering, and other white-collar types of crime are transnational in nature, and will require trans-national solutions, actions, and cooperation inorder to be effectively addressed. 66 CHAPTER3. INFRASTRUCTURE ELECTRICITY The energy sector in Guyana 3.1 Deficiencies in infrastructure in Guyana may pose an important constraint for the developmentof the country. The wide-spread provision of reliable energy at adequate prices to companies and consumers alike i s a basic requirement for a country's economic The lack of reliable infrastructure and services affect the development of the private sector by reducing its competitiveness and discouraging additional private investment. InGuyana there i s considerable room for improvement inthe reliability of supply, the level of access and the cost of electricity4'. However, substantial investments and institutional enhancements must be made in order to achieve this. Reliability of Supply 3.2 The reliability o electricity supply in Guyana is low, and it is characterized by frequent and long outages, load discharges and voltage variations. Inturn, low reliability is linked to technical and institutional deficiencies on the sector. From a technical standpoint, electricity generation capacity in Guyana i s 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. 3.3 The poor reliability of electricity supply has placed a significant burden on companies in Guyana, which reduces their competitiveness. According to data from the Investment Climate Survey (ICs), 60 percent of respondents consider the poor quality of electricity supply to be an obstacle to growth. Similarly, the survey data show that interruptions in electricity supply were much more frequent in Guyana (more than 40 times during the year preceding the survey) than in other comparator countries in the Latin America region (see Figure 3.1). 39World Bank (2005) presents an analysis of sources of growth related to availability of basic infrastructure. 40World Bank (2005b) 67 Figure3-1: Average Number of Power Outages inLatinAmerican Countries 45R 41 I Source: Investment Climate Surveys, 2002-2005 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 o f these losses i s larger for small companies (see 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. The data from the I C s show that while 100 percent of large firms participating in the survey have their own power generation, the proportion of companies with such facilities along with the share of electricity generated internally decreases significantly with the size of the firms (see Figure 3.3). Figure3- 2: Lossesfrom Power InterruptionsinGuyana, percentof total annualsales 14.0 12.0 10.0 8.0 % 6.0 4.0 2.0 0.04"# I , - , - , , - , , , I , , , , = , , , , , , - , 1 Source: Guyana Investment Climate Survey 68 Figure 3-3: Self-supply of Electricity in Guyana loo 100% 100% 90 82% 80 80% 70 60 60% 50 40% 40 30 20% 20 10 0% 0 Large Medium Small II Proportion of companies with own generatort Proportion of elechicity from own generator Source: Guyana Investment Climate Survey 3.5 Self-supply of electricity by interviewed companies in Guyana is costly and generates economic inefficiencies. A side effect of the self-supply of energy i s that the corporate demand for electricity in some regions of the country has decreased significantly4'. 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, data from the ICs show that self-provision of energy appears more costly to companies (up to US$0.38 per KWh, see Figure 3.4) than regional and even local tariffs (on average around US$0.22 and US$0.25 respective~y)~~. Figure 3- 4: Cost of self-supply of electricity (US$per kwh) I 0.40 0.30 0.20 0.10 0.00 I Large Medium Small Source: Guyana Investment Climate Survey 41The demand for electricity in Georgetown has declined by 25 percent since 2000. 42World Bank (200%) 69 Access to electricity 3.6 Electrification in Guyana is low both in terms access of outreach (measured by access to ele~tricity~~) and depth (measured by the intensity of use). The access to electricity i s usually constrained by a country's level of income; however, in the case of Guyana, this indicator appears lower than what would seemjustifiable on the basis o f economic fundamentals. Indeed, studies by the World Bank44estimated that the electricity system in Guyana services only about 60 percent of the population, well below the level achieved by many regional peers (80 percent on average). Similarly, while electrification i s higher in coastal towns with a high industry concentration, there are vast areas of the country that appear under~erved~~.On this account, the ICs data show that even companies within regional access to the grid have to wait upto 99 days for connection. 3.7 The electricity intensity46among consumers served inGuyana is also well below that of other Caribbean countries (see Figure 3 . 3 , which means a significant constraint to economic development inthe country. I Figure 3-5: Electricity Intensity (kWhper capita) I 6000 I .- -% 5000 ~ 4000 : 2 Y 3000 2000 1000 0 I Source: UNDP Human Development Report 2005 3.8 It is important to note that both technical and institutional aspects affect access to electricity. While the consumption of electricity has increased substantially in the past few years (119 percent between 1998 and 2002), the installed generation and distribution capacity has increased at a lower pace. Obviously, self-generation has played an important role to fill the gap between consumption and generation of electricity. Similarly, other institutional factors appear 43Access in this case is measured by the proportion of population served by the system. 44World Bank (2003) 45For example an estimated 10,000 customers not served in the Berbice region. 46Electricity intensity refers to the amount of power used per person on average. 70 linked to the limited access to electricity, including low incentives for efficiency at electricity generation anddistribution, andlimited private participation. Electricity Tariffs 3.9 Electricity prices in Guyana are the third highest in the Caribbean largely due to absence of incentives for efficiency improvement. Figure 3.6 shows that electricity prices in Guyana are among the highest in the Caribbean, after Dominica and Saint Vincent. High tariffs are driven to a large extent by to two main factors: the country's reliance on imported oil for generation of electricity, and the sector's high level o f losses. Inturn, both factors appear related to the lack o f investments to upgrade the generation system. The latter problem i s due to andor compounded by the failure to attract loan funding and meet investment targets by the power company, hightechnical andcommercial losses from the time of privatization, which continue to date, and continuous increases in oil prices. In the end, the outcome i s the sector's inability to generate electricity efficiently andto provide a wider coverage o f service. Figure 3-6: Average End-User Electricity Prices(US cents per kWh) Source: CaribbeanInfrastructureAssessment Report2005, World Bank 3.10 Electricity provision in Guyana is affected by its high reliance on expensive imported oil and tariff-setting mechanisms. Most o f the installed generation capacity in Guyana i s based on diesel-engine-driven generators, exposing the sector to price shocks and the inherent volatility o f the international oil markets. Consequently, at present the cost of fuel i s considered to account for up to 60 percent of the total cost of electricity generation in Guyana. For generation purposes, GPL uses a diesel mixture o f heavy fuel oil and light fuel oil, and medium-speed generators, which are considered quite efficient. The main problems lie in the transmission and distribution, with high technical losses due to failures to undertake capital 71 improvements. The revision of tariffs to reflect higher input costs happen with a delay, and can also cause losses for GPL.47 3.11 The electricity sector in Guyana suffers major losses at both distribution and commercializationactivities, which are a major contributing factor to hightariffs. Losses at the distribution level account for up to 40 percent of the energy generated (Figure 3.7). At the commercial level, the utility has failed to enforce collection o f bills, and to eradicate theft48and inunder-billing of the service. Figure 3-7: Comparative Transition and Distribution Losses I "1 Source: World Bank. Caribbean Infrastructure Assessment report 3.12 An expected tariff reform will aimto rebalance the loads betweenindustrialanddomestic use through an increase in the domestic tariff, and a reduction o f the industrial tariff. The new tariff structure would be implementedwithin a timeframe of 4 to 5 years after its approval by the Prime Minister. 47 Electricity tariffs are revised on a quarterly basis to account for increased cost of generation. However, this revision is made on a realized cost basis, which implies that in scenarios of rapidly increasing oil prices, the delay in the adjustment in tariffs can affect significantly the financial position of the electricity producer. 48B y some accounts, theft by domestic consumers is estimated to have accounted for losses above 25% o f the total production of energy in 2003. 49Up to 40 percent of large firms participating in the ICs reported that bribes are required to get connected to the grid. 72 The structure of the electricity sector Participants 3.13 The electricity sector in Guyana is dominated by Guyana Power and Light (GPL), a vertically integrated government-owned utility with a monopolistic position on transmission and distribution, and a major stake in generation. The fragile financial position of GPL (due mainly to heavy system losses and high exposure to oil prices) constrains its investment capacity on essential maintenance and improvement of generation plants and transmission lines and grid. From a governance perspective, GPL's poor reliability of supply and high cost structure are linked to the lack of incentives for efficiency at the utility. 3.14 The privatization of the company was expected to address many of its technical and governance problems. The failure of GPL to significantly cut back its technical and commercial losses have been deemed to be largely due to the lack of incentives for efficiency due to its ownership structure. Accordingly, its privatization was expected to generate commercial incentives to improve efficiency, while also enhancing private funding to develop the system. However the privatized venture failed to deliver the results expected (see Box 3.1) and, after a few years returned to Government ownership. A future re-privatization of GPL i s unlikely to occur before the regulatory and institutional framework of the sector i s improved. 3.15 Electricity in Guyana is also generated by a limited number of Independent Power Producers (IPPs). IPPs are mainly large corporate firms that generate power for their own needs and sell excess capacity to the national grid. Inthe last few years, there have been formal efforts to enhance the relationships between IPPs and GPL; these include co-generation projects, plans for Power Purchase Agreements (PPAs), and explicit interest government interest in renewable energy projects. At the present time, five power generation tenders from IPPs are being evaluated, and the expectations for capacity growth are reliant on the participation of these independentproducers (see Table 3.1). Table 3-1: IndependentPowerProducersin Guyana Company Installed Capacity, MW GuyanaPower and Light 126 Omai Gold Mines Limited 47 Guyana Sugar Corporation 37 LindenPower Company 8 Berbice MiningEnterprise 4 Aroaima Mining Company 4 Total Installed CaDacitv 226 Source: The World Bank, EnergyEfficiency Project in Guyana 3.16 Some past measures taken by the industry regulator have affected the confidence of private investors. The sector i s regulated by the Public Utilities Commission (PUC), which is mandated to protect the interests of all participants in the sector. However, the PUC's actions have been considered partial in the past, which has sent negative signals to possible private 73 investors. At the same time in Guyana, the regulator seems to have considerable legal, personnel and financial constraints that limit its ability to fulfill its role. Accordingly, the institutional strengthening and enhanced independency o f the regulator, along with a clear and enforceable contracting framework, are considered necessary conditions for achieving successful private investment inthe sector. 3.17 There is still room for improvement in the regulation of the industry. Activities of June 20025 The latter document specifies GPL's arrangements for load management with IPPs IPPs are re7ulated through the Electricity ReformAct of 199850and a policy document issued in . as sources o f supply when GPL's two largest units o f capacity become unavailable. With respect to pricing, the document specifies that GPL will pay a price equal to its marginal cost o f production less 10 percent. The document also makes clear that GPL support IPPs which utilize renewable resources. 50The Act allows different entities to generate electricity under certain conditions, and sell energy to the national grid. 51The document is called "Policy for Working with Independent Power Producers", and was issued inJune 2002. 74 Box 3.1. The FailedPrivatizationof Guyana Power andLight GPL was privatized in 1999 after the Government o f Guyana (GoG) sold a 50 percent stake in the company to AC Power, a consortium of British Commonwealth Development Corporation (CDC) and Ireland's Electricity Supply Board International (ESBI). ESBI was designated to manage the operation of GPL through a private management contract that determined tariff-setting mechanisms, along with aggressive targets in terms of efficiency, reliability and new investment, A recently passed Electricity Sector Reform Act was supposed to foster the redevelopment of the sector, while providing means for reasonable profitability of the managing contractor, along with future incentives for efficiency. The Act guaranteed GPL exclusive rights over distribution and a five-year exclusivity in generation (after which period independent producers would be allowed to bid to supply power to the company). The new management brought about significant improvements at the beginning. Initial capital injections translated into enhanced reliability in the supply and increased collection rates. At the same time, a five-year System Development Plan was defined, with a US$55 million investment program intended to improve power generation (with especial focus on renewable resources) and distribution. ESBI also identified the need to drastically reduce technical and commercial losses at GPL. Inturn, reduction in losses was expected to generate a financial cushion to counterbalance the effects o f possible increases in oil prices. After the positive start, GPL faced important financial constraints. First, revenues were much lower than originally expected as tariffs lagged behind rising oil price?, and the regulator was perceived as preventing GPL from fully implementing new tariffs. Second, as required investments were put on hold pending funding, the achieved reduction in technical losses was well below expectations. As the financial position of the utility deteriorated, funding sources for planned investments dried out, bringing development activities to a halt. The initial improvements attained were unsustainable and systems losses actually increased from 24 to 40 percent of net generation. In light of the performance of the utility, the regulator (PUC) imposed a heavy fine53on GPL for failure to meet agreed targets for loss reduction54and capital expenditure. Disputes over performance targets and tariff-setting procedures ensued, ultimately causing a complete fall out between regulator and investors. InMarch 2003 the CDC pulled out of the consortium, and AC Power sold back its stake in GPL to the Government of Guyana for a nominal sum. ESBI ceased its mandate as a managing contractor, and the operation was handed back to the Government of Guyana. The demise of the investment consortium in GPL created a price shock (electricity tariffs increased by 15 percent in 200355) along with additional instability in the system due to under-investment in essential maintenance during private ownership. The Government of Guyana intends to reduce the problems of reliability, efficiency and system losses before attempting to privatize GPL again. This may prove challenging considering the large investment required and its possible effect on the fiscal stability of the country. At the same time, a prerequisite for successful privatization will be an improved contractual and regulatory framework for the sector. 52The tariff setting formula allowed GPL to pass on the increase in cost of fuel to users on a quarterly basis. However, since the formula was based on realized costs, it caused GPL's income to lag behindexpenditure. 53 GPL was required to hand back US$40 million to its customers as a penalty for failure to meet efficiency objectives. 54Although collection did increase, the aggressive target of 94% was not achieved. 55World Bank (2003) 75 Current Installed Capacity and Development Plans 3.18 A substantial increase in power generation capacity is desirable considering that higher generation capacity increases the reliability of the electricity supply, while it also lowers pricesfor consumers.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 the increase in the electricity intensity in Guyana to that o f peer Caribbean countries56 requires investments over the next 10 years between US$805 andUS$1,497 million57(between 10 and 19 percent o f Guyana's GDP). 3.19 The installed power generation capacity in Guyana is very limited considering the internal needs and the capacity of regional peers. The installed power generation capacity in Guyana stands at 226 megawatts (MW)58, which i s low as compared to that of other comparator countries in the region (see Figure 3.8), and it i s hardly sufficient to sufficient to cover the current demand for electricity in the country. Installed capacity i s expected to increase by a further 62.5 MW within the next two years, as part o f a US$120 million plan for future development managed by GPL. This plan also aims to address issues o f distribution (through the construction of transmission lines and enhancement o f the network) and efficiency (through loss reduction activities at the users' level). Figure 3-8: ComparativeInstalledGenerationCapacity, by Country I InstalledGeneration Capacity (MW) Trinidad HMlduras Jamaica Surinam Guyana M i i Barbados Source:LatinAmerican bergy Organization Source: LatinAmericanEnergy Organization 3.20 The majority of the generation capacity in Guyana is owned by GPL, and a considerable share of it relies on cost-inefficient technologies. GPL owns and manages 55 percent of the total installed generation capacity in the country (see Table 3.1), all o f which i s 56Guyana's power intensitystandsat 0.8MWh, compared to a target of 3 to 4 MWh. "World Bank (200.5~) Source: GuyanaEnergy Agency 76 based on thermoelectric plants with diesel-engine driven generat01-s~~.considerable proportion A of GPL's current power generation facilities are inefficient as the utility has resorted to the use of both own and rented high-cost small independent generation units6' in order to enhance generation capacity in some regions of the country. Similarly, financial constraints and missing incentives for cost efficiency may be preventing the company from switching from oil-based facilities (which are costly to operate) to renewable energy sources (which require higher upfront capital investment). In addition, a good share o f Guyana's generation capacity i s inefficient because of the prevalence of self-generation as GPL has insufficient capacity. 3.21 Independent Power Producers own and operate 45 percent of the installed generation capacity, which is also 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 (see paragraph 3.23), however this would still account for a relatively small share (10percent) of the generation capacity inthe country. 59Current power supply is generatedmainly from diesel fuel using a mixture of distillate (LFO) and heavy fuel oil (HFO). 60Independent units are intended to operate as stand-by emergency or peak generation units. Accordingly, their operatingcosts are higher than those of permanentgenerationfacilities. 77 Alternatives to Oil-Based Generation 3.22 Guyana has a massive but yet unrealized potential for hydropower generation. Hydropower generation capacity has been estimated at 7,600 MW, that is, more than 30 times the current installed capacity in the country. Feasibility studies have been carried out for specific projects61, but up to now, this potential remains untapped (Figure 3.9), mainly due to the considerable capital investments requiredto set up new power facilities. Indeed, beside the actual investment in generation plants, transmission lines would also be required, as most of the generation potential i s inland, far from the zones of heaviest demand along the coast. Such investments would increase the fiscal risk for the government if it was to finance them, and private capital i s unlikely to be committed under the current institutional framework. Figure 3-9: Hydropower Generation, by Country I HidropowerGeneration 8 000 120% - 7 000 looe/o btental 6,000 (W 5 000 80% 4 000 60% 3.000 40% 2 000 20% --ChStabd 1 000 capacny (A 0% of pOtenba$ Guyana Costa RcaSurinam D3mRep Haiti Arnica Scurce:LatinAmerican mergy Organization Source: Latin American Energy Organization 3.23 Guyana has opportunities for electricity generation based on renewable resources linked to its large sugar industry. Electricity can be generated using bagasse, a by-product of sugar production, as basic fuel for thermoelectric facilities. Bagasse generation benefits from lower and more stable cost of than oil-based generation, as well as lower carbon emissions63.A major bagasse co-generation project will be implemented by the Guyana Sugar Corporation (Guysuco). It will expand power generation capacity b y a further 25 MW (15 MW bagasse-based and 10 MW diesel-based) through an investment of US$27 million in a bagasse co-generation scheme64by the end of 2006. One third of the new capacity will be allocated to the 61There are long-standing plans for three hydroelectric facilities, but they are subject to formalizing power purchase agreements with GPL. 62Although bagasse is a by-product of sugar mills, it is not a cost-free fuel, as adequate handling and storage is required. 63According to the Project Design Document of the World Bank's Guyana Bagasse Cogeneration Project, which i s for US$3.707 million for the purchase of carbon emission reductions, Guysuco's bagasse-based co-generation project has been designed to meet international environmental standards, and it is expected to result in a net reduction in carbon emissions by 61,433 tons on average per year. 64Co-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' needsand produce sellable residuals. 78 local grid65through a Power Purchase Agreement. Because of its climate, Guyana has a large potential for sugarcane crops, as well as a large sugar industry that could benefit from additional revenue opportunities such as energy generation66.Even though it may not be feasible to meet Guyana's power demand with bagasse-basedfacilities, they can help to reduce the reliance of the sector on imported oil, while having a positive environmental impact through reduced carbon emissions. However, an important constraint to Guyana's bagasse-based generation potential i s the lack of year-round supply of bagasse, which means that a substantial investment in storage andhauling will berequired. 3.24 The potential for wind-based generation is considered to be significant, although no comprehensive studies have been carried out. The Guyana Energy Agency reported a pilot project for a wind turbine in Guyana's east coast. This i s a small project with expected energy savings of around US$30,000, and a payback period of 40 months. However, no major projects are being put inplace. Other Caribbeancountries such as Barbados and St. Lucia have promoted the use of such renewable energy sources through initiatives that include the removal of taxes andimport tariffs on wind-farm equipment. Energy efficiency 3.25 The government of Guyana has started the implementation of energy efficiency programs in other government-owned public utilities. The World Bank i s currently supporting an Energy Efficiency Project for the Guyana Water Inc (GWI). Such programs aim to facilitate the attainment of sustainability of electricity tariffs through a more rationalized use of energy. Smaller programs of energy efficiency and awareness are being implemented for domestic users. IBox 3-2. Privatization and alternatives for efficiency incentives The case for privatization of public utilities has been made frequently. First, privatization of electric utilities has had positive effects in many Caribbean countries (see graph below) mainly through increases in the efficiency of the system. Second, public ownership of the power supply can pose fiscal challenges for the government in scenarios of high investment needs or loss-making utilities, as in the case of Guyana. 65The local grid refers to the Berbice InterconnectedSystem where there are 10,000 unservedcustomers according to BookerTate (2004). 66The Caribbean sugar industry has benefited from a preferential trade agreement with the European Union that includes a protected price for sugar. As this price is expected to decrease significantly (from Euro 524 to Euro 327 per ton) by 2007, sugar producersface strong pressures to diversify revenue sources. 79 However, privatization per se will not restore troubled electricity systems in the absence of a consistent institutional framework, including an independent regulatory body and an adequate and enforceable contractual structure. The institutional framework should protect the interests of all participants in the sector. Adequate efficiency standards should be defined and enforced to protect users. Similarly, arbitrary government intervention intariffs and enforceability of collection of utility bills are basic requirements to maintain the financial viability of electric utilities. However, while privatization can be a way to improve utilities' performance, other institutional settings may be used to generateincentives for efficiency. PrivateManagement Contractstransfer the operation of the utility to a private entity while retaining the public ownership of the productive assets. The managing contractor would be responsible to achieve pre- defined levels of generation and efficiency, which are embedded in the contract. In return, the contractor would have to be provided with the means to cover operating costs and achieve an adequate level of profitability, including enforceability of collection, and certainty over the tariff-setting process. However, if special caps on tariffs are imposed, government subsidies could be requiredin order to meet operating costs under scenarios of rising fuel costs. This can pose a high contingent fiscal burden for the government. as well as risks for the contractor related to the creditworthiness of the G~vernment~~. Conclusions 3.26 Access to reliable electricity supply at international prices is an essential factor for a country's economic growth. There i s considerable room for improvement in the level of access and reliability of supply of electricity in Guyana, but substantial investments must be made in order to achieve this. 3.27 Although Guyana may not be able to fully realize the economies of scale reached by larger countries, there i s room for improvement in terms of the cost of electricity and the outreach of this service, as compared to other Caribbean countries (which display a higher level of access to electricity and lower tariffs). 3.28 Financial difficulties of Guyana's electricity generation utility are largely due to net operating losses (tariffs below marginalcosts) and highcommercial losses. 67A similar scheme in the Dominican Republic created the so-called `financial blackouts', which were energy outages due to the utility's sustained operating losses since agreed government subsidies failed to materialize. 80 3.29 Key structural elements for success include: Private sector participation. Most commonly used i s an IPP that signs a long-term Power Purchase Agreement (PPA) with the buyer. Effectiveness of regulation. Most Caribbean countries that have made progress in the regulation o f their electricity sector have a regulatory agency empowered to set service standards and tariffs. In Guyana, the regulator seems to have considerable legal, personnel and financial constraints, all o f which limit its ability to fulfill its role6'. RECOMMENDATIONS ON ELECTRICITY POLICY 3.30 A strong emphasis must be placed on reducing Guyana's reliance on imported 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 o f service. Going forward, the ability of the country to create a better mix in power generation that includes more use o f renewable resources will be essential to ensure the stability o f the sector and enhance the reliability of provision. To this extent, it may be necessary to implement clear incentives for adoption of new technologies by GPL andindependent producers. 3.31 The Government should strive to facilitate the participation of private investors in the electricity sector. Public ownership of electricity supply poses fiscal risks for the government and limits the possibilities for required investments. The participation of the private sector in energy i s therefore desirable to strengthen the provision and quality o f the service. The privatization of GPL has rightly been maintained as a target for the government, and efforts have been made to enable private participation at generation. However, a significant enhancement of the regulatory framework will be required in order to ensure the viability o f GPL as a potential private venture, and to encourage more private investment. While private participation i s desirable, it may not lead to significant improvements when regulatory capacity i s weak and enforcement of contracts i s insecure, as i s the case inGuyana. 3.32 The Government should place particular emphasis on the enhancement of the regulatory framework including transparency and certainty in the definition of tariffs, avoidance of arbitrary interventions, and empowerment of participants to cut commercial losses. The financial difficulties of GPL are largely due to both net operating losses (Le. tariffs that were 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 o f price caps poses significant contingent liabilities on the go~ernment~~. Commercial losses are a major problem for GPL and hence must be addressed in order to ensure '''*WorldBank (2005b) Government subsidies may be required to maintain the operation of the company when price caps are implemented. 81 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. 3.33 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. 82 TELECOMMUNICATIONS 3.34 Telecommunications are a serious bottleneck to business operations in Guyana. Nearly a quarter of all 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. As shown in Figure 3-10, almost 25 percent of interviewed firms in Guyana identified telecommunications as a major or severe obstacle to their business operation and growth, 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 (41 percent of interviewed firms considered electricity as a major or very severe problem compared to 25 percent which considered telecoms as a problem), and ranked among the top ten constraints (out of 20 different ones) as a perceived obstacle. Figure3-10: PercentageofFirmsIdentifyingTelecommunications as a Major or Very Severe Obstacleto BusinessOperationand Growth: An InternationalComparison Peru El Salvador Brazil Guatemala Latin America and Caribbean Ecuador 18 Honduras 18 I 0 5 10 15 20 25 30 Source: World BankInvestmentClimate Surveys, 2002-2004 3.35 Foreign-owned firms as well as firms in the chemical sector and, to a lesser degree firms in the wood processing and mining sectors, see the telecommunications sector as a more acute problem than their domestic counterparts and firms in other industries. Thus, one-third of foreign firms consider telecoms a major or very severe obstacle compared to 23 percent of domestic firms. Chemical companies complain the most about telecoms - 40 percent of them consider Guyanese telecoms as a very severe constraint to their operations. In terms of firm size, medium-sizedand smallfirms are the most affected - with 27 and 24 percent of each group respectively considering telecoms a major or very severe constraint, compared to 19 percent o f large companies. 83 3.36 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 average", compared to an average of 67 days in the Latin American and Caribbean region as a whole, and several times more than the seven-day wait in El Salvador, 18-day wait in Brazil and 48-day wait inGuatemala (see Figure 3-11). 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 o f 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. Figure3-11: AverageWaitingTime for Telephone Line Installation(Number of Days): An InternationalComparison Latin America and Caribbean 0 20 40 60 80 IM) 120 140 160 180 days Source: World Bank InvestmentClimate 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. 'O This 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. 84 Figure3-12: Average WaitingTimefor TelephoneLineInstallation(Numberof days), by Firm Characteristic 180 _llll___-__lll__l___. ___ __ _-___lll__l_l" 160 . L55 140 120 b 100 80 60 40 20 0 Source: World Bank Guyana InvestmentClimate Survey, 2004-2005 3.37 Domestic firms, exporters and firms outside of the capital city wait considerably longer to get a telephone line as do also medium-sized firms (Figure 3-12). Thus, medium- sized firms wait, on average, 155 days to get a fixed phone line, large ones wait on average 5 times less (31 days). Micro and small firms wait double the time of large firms. Non-exporting firms wait less time (46 days) compared to those that sell abroad. Foreign companies wait, on average, three times less than domestic ones (31 vs. 89 days on average). Finally, location matters - firms in Georgetown wait on average two months, while firms located in rural areas and smaller towns wait about three months to get a fixed phone line. 3.38 The Investment Climate Survey found Guyana to have the lowest percentage of companies 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 (see Figure 3-13). 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, and usage rates of 55, 31, 28 and 22 percent in Ecuador, El Salvador, Guatemala and Honduras respectively. 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 i s important as previous Investment Climate Assessments (Honduras ICA, World Bank 2004) have found that use of Internet i s significantly associated with higher firm productivity, controlling for other factors. 85 Figure3-13: Firm EmailandInternetUse, by Country 90 83 80 70 60 50 be 40 30 20 I O 0 Guyana Nicaragua Honduras Peru ElSalvador Guatemala Ecuador ImPercentageof firms which use email regularly HPercentageof firms which use a webpage regularly1 Source: World Bank InvestmentClimateSurveys, 2002-2004 3.39 In accordance with the above findings, Guyana ranks poorly on the Information and Communication Technology (ICT) index published by the World Economic Forum (WEF) - 94'h out of the 117 countries in 2005. Given the growing importance of telecommunications and information technology to economic growth and competitiveness, the low usage of email and Internet by interviewed businesses in Guyana i s probably a significant factor that contributes to the fact that Guyana's economy was ranked as the 115'h least competitive out of 117countries rankedin 2004.71 Guyana'sTelecommunicationsMarket Fixed and Mobile Sectors 3.40 Guyana, with a population of approximately 770,000 people, had in 2004 around 102,700 fixed telephones for a penetration level of 13.4 percent, and 143,900 mobile subscribers for a penetration level of 18.8 percent.72As can be seen in Figure 3-14, the fixed penetration levels have nearly doubled since 1998, while the mobile penetration level was practically non-existent in 1998. 71World EconomicForum(2005), GlobalCompetitivenessReport2005-2006 72InternationalTelecommunicationsUnion (ITU) Database 2005 86 Figure3-14: MobileandFixedPenetrationRatesinGuyana 20.0 18.0 18.8 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: ITUdatabase, 2005 3.41 Guyana's fixed line network improved dramatically in the early to mid-1990s' both in terms of coverageand quality. This came about through new investments made during the early and mid-1990s by Guyana's fixed network operator, Guyana Telephone and Telegraph (GT&T), after it was privatized in 1990. As a result, Guyana went from having one the lowest fixed teledensity levels in Latin America to being tied with El Salvador with 13.4 fixed telephones per 100people, slightly above the 12.5 fixed telephone average for Central America, and marginally below the Latin American average of 15.7.73When comparing Guyana to 96 other countries in terms of fixed teledensity and GDP per capita, Guyana is slightly above the trend line (Figure 3-15).74 Guyana's relatively high fixed telephone penetration levels can be attributed to build-out obligations imposed on the monopoly operator, a relatively high GDP per capita, andthe fact that approximately 40 percent of the population lives inurbanareas 73 Guyana's fixed teledensity of 13.4 percent is higher than that of Guatemala (8.9), Honduras (5.3), Nicaragua (3.8), Panama(11.9), Paraguay (4.7), Dominican Republic (10.7), Ecuador (12.2), but below the levels of Grenada (21B),Costa Rica (31.6), Trinidad and Tobago (24.6), and Suriname (18.5) among others. 14Guyana was plotted against 96 countries in terms of fixed teledensity and GDP per capita (PPP method) using data from the ITUdatabase and the World Development Indicators. 87 Figure3-15: MainLinesTeledensityand GDPper Capitain2003 100 00 10 00 1 00 1 00 0 GDP per capita PPP Source:World Bank Indicatorsdatabase, World Bank, 2005, and ITUindicators,2005 3.42 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 Figures 3-16 and 3-17. Even though the mobile telephony has grown at a faster pace than fixed telephony, Guyana has one of Latin America's lowest mobile teledensity levels. With a mobile teledensity level of 18.8 percent in 2004, Guyana trails the Central American average o f 20.8, the Latin American average of 29.5, as well as the teledensity levels o f Suriname (48.5 percent), Grenada (43.3 percent), Ecuador (34.4 percent) and Guatemala (25 percent). When comparing Guyana to 93 other countries in terms of mobile teledensity and GDP per capita, Guyana is slightly below the trend line.75 ''Guyana was plotted against countries in terms of fixed teledensity and GDP per capita PPP, using data from the ITUdatabase and the World BankWorld DevelopmentIndicators. 88 Figure3-16: CellularTeledensityand GDPper Capitain2003 1000 -nnn??v.884: ff =0.7793 0 0 5,000.0 10,000.0 15.000.0 20,000.0 25,000.0 30,000.0 35,000.0 GDPPFQ Source: World Bank Indicators database, World Bank, 2005, and ITUindicators, 2005 3.43 As is detailed below, Guyana's relatively low mobile penetration levels can be attributed mainly to the de facto monopoly in the sector, the difficulty of new entrants to obtain interconnection to the GTN76,and the "litigation gridlock" that is the result of Guyana's weak legal and regulatory framework and institutions. The regulator has limited power and has been very reluctant to take regulatory actions against the incumbent operator. Furthermore, when the regulator does take action, the incumbent operator consistently and successfully goes to court to block all decisions by the sector regulator, most notably those related to interconnection. '`For example, there are currently three cellular mobile operators, the incumbent, Guyana Telephone and Telegraph Co. (GT&T), Cel*Star which operates a GSM 900 MHz network and has about 28,000 mostly pre-paid customers (November 2005), and Caribbean Telecommunications Ltd. (CTL), which provides a very limited service injust one region of the country (Berbice). It is believed that the latter has less than 200 customers mainly because of its inability to obtain adequate interconnection services from GT&T. A fourth company, Caribbean Wireless Telecom, licensed for a PCS system in the 1900 MHz band, never started operations. There is no spectrum auction system, and competitive licenses are granted on a "first-come, first-served" basis according to the availability o f spectrum frequencies. 89 Figure3-17: Guyana'sMobileSubscribers per 100people,2004 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Source: ITUdatabase, 2005 Backboneandlnternet Sectors 3.44 The Guyana Telephone and Telegraph (GT&T) company has a dejure monopoly over international data networks that link Guyana to the rest of the world. GT&T has the ability to carry its international voice and data traffic on two international submarine cables, and controls access to satellites via a number of GT&T-controlled earth stations. Although some companies and Internet service providers (ISPs) use their own earth stations (i.e. VSATs) to connect to the Internet, most of these companies are required to connect to GT&T. 3.45 Internet access in Guyana is a mixed story. On the one hand, the number of Internet users - which includes users that access the Internet via slow-speed dial-up and higher-speed networks - in Guyana i s relatively high, compared to similar countries, as i s illustrated in Figure 3-18. In 2004 Guyana had 18.9 Internet users per 100 inhabitants, the third highest rate in Latin America, after Costa Rica and Chile with 27.9 and 23.5 users per 100 people respectively. The relatively high number of Internet users has been stimulated by the low cost of Internet dial-up connections, which is cross-subsidized from international traffic, and the low costs due to the concentration of clients inthe capital city. Thus, internet prices are among the lowest inthe Latin America (Figure 3-19). 90 8 - 8 h8) 8o e8m8Q 8) P P P O O P P P ~ I u W P v I r n - J 0 0 0 0 0 0 0 0 Argentina Costa Rica Brazil El Salvador Guatemala Chile Honduras China Nicaragua Costa Rica Panama DominicanRep. Colombia Ecuador Grenada Guyana El Salvador Paraguay Estonia Argentina Grenada Brazil Guatemala Chile China Guyana Dominican Rep. Honduras Ecuador Ireland Estonia Israel Irlanda Israel Korea, Rep. Latin America & Korea Car. Lituania Lithuania Malasia Mexico Mexico Suriname Nicaragua Trinidad & Tobago Panama Central America Peru Laitn America Suriname OECD Trinidad&Tobago 3.46 While Guyana has a high number of individual users, only 17 percent of interviewed companies in Guyana use a website to interact with clients or suppliers. This i s low compared to the Latin American average of 38 percent, and to usage rates of 55, 52, 31, 29 and 22 percent in Ecuador, Peru, El Salvador, Guatemala and Honduras respectively (see Figure 3- 13). 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 connection^.^^ High-speed access to the Internet i s increasingly seen as 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 (Le. digital subscriber lines or DSL) is GT&T, and the highest upload and download speed available i s only 128 kbs (typical D S L speeds in other countries are 256 kbs and 512 kbs). GT&T's DSL service i s also reportedly very expensive and not very reliable.78 Although some companies are offering wireless broadband access in competition with GT&T, even these companies are arguably required to use GT&T in order to carry data traffic between Guyana and foreign countries. 79 Figure3-20: InternetUse by InterviewedFirmsinGuyana By FirmSize By FirmLocation By FirmType 30% 40% 37.5% I 25% 24.2% I 35% 20% 30% 25% 15% 20% 10% 15% 5% 10% 0% Large Msdium Small I 5% I Locatedincapital Located outside 0% City capital Exporters Non-titporters Source: Guyana Investment Climate Survey 2005 3.47 The business use of the Internet in Guyana is mainly used by large firms, located in the capital. Specifically, 65 percent of the large firms are taking advantage of the use of Internet in their business. In contrast, only 17 percent of the small firms in the country are using the Internet to do business (Figure 3-20). Also, only 15 percent of firms located outside the capital are using the website as a regular instrument in their work, and just 8 percent of the non- exporting firms in the country use a website regularly in their business. This i s much lower than the 38 percent of exporting companies reportedly using the Internet, and the 24 percent of companies in Georgetown doing the same. l7 Business users typically require access speeds of at least 256 kbps. l8 Telecommunications and Information Highways, page 12. Anecdotal information indicates that GT&T's ADSL rates are US$65 for residential and US$175 for businesses users. These rates are very high compared to ADSL rates in other countries which are in the US$35 to US$50 range. Telecommunications and Information Highways, page 12. 92 Market Shares and Competition 3.48 GT&T controls 100 percent of Guyana's fixed and international telecommunications. GT&T was privatized in 1991when Atlantic Tele-Networks (ATN) of the U.S. Virgin Islands purchased an 80-percent share of the company, with 20 percent of the company remaining in government hands. In 1991 the Government of Guyana (GOG) granted GT&T a 20-year monopoly over all national and international fixed, voice, and data networks and services, all public telephones, radio telephone, and payphone services, sale of phone directory advertising and all private line services. The GT&T monopoly, set to expire in 2010, i s renewable for another 20 years at the request of the company. As a result, GT&T has a 100 percent market share of Guyana's fixed and international voice market. All voice and data communications between Guyana and the rest of the world must also transit through GT&T facilities. The government-granted GT&T concession permits competition in Internet access, terminal equipment sales, insidewiring, call center and cellular mobile services. 3.49 Despite GT&T's monopoly, some companies have their own satellite earth stations (Le. VSATs). Companies use these to carry their corporate communications between their Guyana-based and foreign-based operations, even though these VSAT facilities are not allowed to be interconnected to Guyana's publicly-switched telephone network (PSTN). There are approximately 50 Internet cafes inthe country, half of which obtain Internet access directly from GT&T. Many of these cafes offer Voice-Over-IP (VoIP) services that enable consumersto place international calls, which in many cases bypass GT&T's network and offer calls at much lower rates than GT&T. This i s because VoIP calls bypass the international settlement regime as VoIP traffic does not pay Guyana's high settlement rates to the incumbent operator for incoming international calls. GT&T has brought lawsuits against these cafes, arguing that it i s a violation of its concession and of Guyanese law." As can be seen in Table 3.2, Guyana has one of the highest tariffs for international calls inLatinAmerica. 3.50 The Guyanese cellular telephony market is also dominated by GT&T's cellular operator. Of the three companies licensed to provide cellular services - GT&T's Caribbean Telecommunications Limited (CTL), Caribbean Wireless Telecom Ltd., and Cel*Star, only two are currently operating - CTL and Caribbean Telecom. Due to litigation and delays in obtaining interconnection with GT&T over several years, the new entrants have only recently begun to provide service. As a result, GT&T's CTL has nearly a 100-percent market share in the cellular sector even though its market share i s expected to decline as the other operators begin to compete.81 3.51 There are only around 6 to 8 Internet Service Providers (ISPs) using fixed wireless access technologies. ISPs normally obtain a connection to the Internet through the facilities of GT&T. Reports indicate that many ISPs, however, bypass GT&T's network using VSAT technology. Stern, Peter (2006), Promoting Investment in Information and Communications Technologies in the Caribbean, Economic and Sector Studies Series, Inter-AmericanDevelopmentBankWashingtonD.C. ''InformaTelecoms & Media, World Cellular Networks Data-pack, December 2005 edition, London,England. 93 Sector Prices and Revenues 3.52 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 international call pricesinthe same region. Local anddomestic calling rates are very low while international calling i s 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)82. On the other hand, residential line rental charges are US$2.50 (US$7.50 for business lines). Local calls are US$0.004 per minute during peak hours (US$0.002 per minute off peak), and domestic long-distance charges vary between US$0.012 and US$0.043 per minute, depending on the distance and time o f day. Table 3-2: Localand Long Distance Prices in 2003 (US$) Local Long Distance Local call perResidentia1 Business linelntemational 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 - ElSalvador0.023 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 CostaRica 0.008 4.09 4.97 0.45 0.01 Source: Regulatory agencies 3.53 The single most important source of revenues for GT&T has been revenues it receives from international telephone traffic between Guyana and other countries. International telephone traffic in Guyana i s paid as a result o f a mechanism known as the international settlement arrangement, which i s a legacy o f the pre-1990s when nearly all telecommunications traffic was carried by monopoly companies. Countries that receive more incoming traffic than outgoing international traffic receive settlement payments based on the volume of the imbalance of incoming versus outgoing traffic and a per-minute charge known as the accounting rate. Guyana has the highest accounting rate in the Americas (US$0.23 cents per minute) and a highly imbalanced traffic ratio - for every minute o f outgoing traffic during the last ten years Guyana received approximately four minutes o f incoming traffic.83As a result in 2003, U.S. telephone companies (around 50 percent of Guyana's telecommunications traffic comes from the United States) paid GT&T US$25.2 million in settlement payments.84 These settlement payments constitute more than 35 percent of Atlantic Tele-Network's (ATN is the 82 Stem, Peter (2006), Promoting Investment in Information and Communications Technologies in the Caribbean, Economic and Sector Studies Series, Inter-AmericanDevelopment BankWashingtonD.C. 83 Evidence indicates that as countries' telecommunications markets become more competitive, traffic imbalances typically are reduced. For example, prior to its market liberalization, Chile had a 2-to-1traffic ratio of incomingto outgoingtraffic. After Chile liberalizedits market, the traffic ratio became 1 to 1, and in some cases Chile began to generate more outgoing than incomingtraffic. Guyana's traffic ratio of approximately5 to 1 is typical of countries that lack competitionintheir domestic telecommunications market. 84 Statisticsof Communicationsof Common Carriers, 2004, Section43.61 reports, FCC. 94 owner of GT&T) revenues in 2003, and probably account for the vast majority of GT&T's and ATN's profits. 3.54 Nevertheless, the 2003 settlement payment is significantly lower than in the 1990s, when settlement payments to Guyana peaked at US$50.3 million. The decline in the settlement payments and incoming traffic to Guyana i s linked to three main factors - an FCC- mandated decline in Guyana's accounting rate from $0.85 per minute to $0.19 per minute, the migration of international audio-text (i.e. 1-900/adult call line traffic) from Guyana to other countries, and the proliferation of new technologies such as VoIP which bypass the accounting rate system.85It is expected that international settlement payments to GT&T and ATN will continue to decline, placing additional pressures on GT&T and ATN to re-balance tariffs as their finances becomemore precarious. Policy, Legal and Regulatory Framework and Institutionss6 3.55 Guyana's legal framework for the sector is comprised of GT&T's 1990 concession, the 1990 Telecommunications Act, the 1999 Public Utilities Commission Law (PUC Act) and the PUC Amendment Act of 2003. In 2003 a draft e-Commerce Bill was publishedthat provided for the legal recognition of electronic writing, contracts, signatures as well as other provisions required to enable and facilitate e-government and e-c~mmerce.~~The PUC, in principle, i s a multi-sector independent regulatory agency with authority to set rates, develop regulations, resolve disputes between operators, ensure that GT&T complies with its concession and expansion plan obligations as well as review and amend any GT&T program for development and expansion of facilities or services. 3.56 A recent IADB-financed report" notes, however, that "the government has recognized the importance of telecommunications for the development of an information- based society in Guyana including for the promotion of e-governmentS9,e-learning and e- commerce and has stated its desire to modernize this sector." In August 2001, the Office of the Prime Minister andthe Ministerof Public Works and Communications issued a Consultation '' In the 1990s GT&T and ATN successfully captured a large portion of the US audio-text traffic because the companies could earn large amounts of revenues due to the high settlement rates (among the highest in the Americas). However, due to competition from other countries, the emergence of voice-over-IP and other technologies, audio-text companies have shifted much of their traffic to other destinations. In 1996, Guyana received 162.9 million minutes of incoming traffic compared to only 88.46 million minutes in 2003. Source: Primetrica 2004 Traffic Data and FCCtraffic data. See Annex for an additional table on Guyana's telecommunications traffic. 86 Stern, Peter (2006), Promoting Investment in Information and Communications Technologies in the Caribbean, Economic and Sector Studies Series, Inter-American Development Bank Washington D.C. ''Telecommunications and Information Highways, page 4 88 Stern, Peter (2006), Promoting Investment in Information and Communications Technologies in the Caribbean, Economic and Sector Studies Series, Inter-American Development Bank Washington D.C. 89 The Government has constructed the initial section of a wireless network to connect all Ministries and to let them initially share a common payroll, human resources and an integrated Financial Management System (management of the Government's expenses and revenues). This is a first step indecentralizing government services and offering on- line government services such as license renewals, issuing of birth certificates, etc. This work, being done under the IADB'spublic sector modernization project, was interruptedby a lawsuit brought by GT&T against the IADB. 95 Paper" which outlined the issues and options for reform of the Guyanese telecommunications sector. 3.57 The Consultation Paper identified three areas of deficiency: the existing legislation governing the sector is old and, in many respects, inconsistent; the Government's failure to implement an effective regulatory policy; and the regulatory uncertainty brought about by court litigationbetween operators (e.g., in the cellular market segment). The Public Utilities Commission Act, 1999, and the Posts and Telegraph Act are outdated and do not take into account the substantial institutional and technical changes that have occurred in the telecommunications sector around the world since the early 1990s; There are inconsistencies and uncertainties among the basic legal instruments governing the sector. The Telecommunications Act, 1990 and GT&T's License were based respectively on the British Telecommunications Act of 1984 and the British Telecommunications PLC License also of 1984, whereas the Purchase Agreement (for GT&T) and the Public Utilities Commission Act are based on U.S. and North American jurisprudence. The provisions in the Telecommunications Act do not deal adequately with new types of services such as Internet; The Government has failed to implement the regulatory framework envisaged in the 1990 Telecommunications Act. Principally, it has failed to establish the Office of Director of Telecommunications, which would have, as its key functions, the regulation of access and interconnection. These functions overlap to a certain extent with those of the PUC. The demarcation of responsibilities between the PUC and the Director i s not clear. Furthermore, the PUC i s seriously under-resourced and under- funded. The National Frequency Management Unit (NFMU) does not have the necessary equipmentto adequately monitor the spectrum and enforce its use; The sector i s characterized by excessive litigation, which the Paper suggests has led to "litigation gridlock", and has increased regulatory uncertainty and delays. This, the Paper suggests, is one of the main reasons why competition has not developed in the cellular marketswhere legal entry restrictions never existed. 3.58 The Paper proposes reform basedon the following: Adoption of a national telecommunications policy; 0 Negotiating an early end to GT&T's monopoly and the implementation of a three- phased liberalization process. The monopoly has been under legal attack for years, Reform of the Telecommunications Sector in Guyana, Consultation Paper on Issues and Optionsfor Reform of the Telecommunications Sector, Office of the Prime Minister and Minister of Public Works and Communications, Project Execution Unit for Modernization of the Telecommunications Sector, August 2001 96 with arguments being made that the original grant of a monopoly to GT&T was unconstitutional or otherwise violated applicable law; 0 Rate balancing and replacement of GT&T's rate-of-return-based regulation with incentive (price-cap) regulation. Rate-of-return (ROR) regulation is a way of regulating the prices and conduct of a firm by setting a maximum or minimum amount of profits (i.e. return) on its operations. ROR regulation, which was prevalent in the telecom sector prior to the 1990s when telecommunications was provided through monopolies, imposed a heavy regulatory burden on operators and the regulator. Beginninginthe mid-1980s a growing number of regulators replaced ROR with less burdensome price cap regulations where the regulator simply sets a cap on the prices companiescan charge consumers. 0 Reorganization of the regulatory institutions, with one option being the establishment of a single telecommunications regulator combining the functions of The Director of Telecommunications, the National Frequency Management Unit and the telecommunications activities of the PUC; 0 Creation of a licensing regime with only two types of licenses: 1) individual licenses for the operation of networks which provide domestic and international public voice telephone services and which are interconnected with GT&T's network and/or which use the radio frequency spectrum; and 2) general authorizations for all other types of networks and services including ISPs, resellers, private networks, and value-added service providers. The latter would only needto register; Establishment of a transparent, non-discriminatory interconnection regime with cost- basedinterconnection charges; 0 Establishmentof an objective, timely, transparent and non-discriminatory regime for licensing and regulating scarce resources (spectrum, numbers, rights of way); Incorporating basic competition safeguards into the regulatory regime, including asymmetric regulation for dominant and non-dominant operators, safeguards against vertical price squeezingand cross ownership restrictionsg1. 3.59 The PublicUtilities Commission (PUC) of Guyana has never been able to operate as an effective regulator because of conflicts and inconsistenciesbetween the different pieces of legislation as well as legal proceedings initiated by GT&T that have consistently and effectively undermined and delayed the PUC regulatory authority. Exerting its monopoly position and through an apparent strategic use of legal proceedings, GT&T has effectively frustrated the sector reform efforts of the Government, PUC and intergovernmental organizations. In addition, the PUC has been hampered by a lack of stable leadership, insufficient staffing (it has only one financial analyst, and no technical or legal staff other than the Chairman), and lack of funding. The PUC is funded, in principle, by income equal to 0.1 The current regime does not distinguish between dominant and non-dominant operators and service providers. New entrants are regulated the same way as the incumbent is. For example, any public utility (which includes the competing mobile operators) which wants to changeany of its rates mustjustify the change and give the PUC a 30- day notice. See Section41 of the Public Utilities Commission Act. 97 percent o f GT&T's gross revenue^.'^ GT&T has disputed the amount o f this assessment since it i s not capped like those of other sectors, and it has refused to pay more than an annual cap of approximately $139,000. In most Latin American countries, all telecommunications operators pay approximately 1 percent of their revenues to finance the operations of the regulator, and another 1percent -towards a universal access fund. RECOMMENDATIONSON TELECOMMUNICATIONS 3.60 The following identifies key issues and policy recommendations and notes whether the policy recommendations can be implemented in the short-term (i.e. within a year) or mid-term (more than one year). 3.61 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. 3.62 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 hasbefore 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 included in its WTO commitments (see next paragraph). 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. 3.63 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 Guyana's 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 o f the 92 GT&T has refused to provide the PUC with cost or financial data. ATN, which owns 80 percent of GT&T, reported annual operating revenues of US$78.9 million for 2003. ATN's income from telephone operations amounted to US$34 million in 2003. See Telecommunications and Information Highways, page 7. 98 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 andregulatory 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 i s important that due care be taken in evaluating the impact of these reforms on existing authorized operators. For example, reforms may have the effect o f 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, possibly, provisions 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. 3.64 Guyana is among few countries in Latin America where telecommunications services continue to be provided by a monopoly with significant adverse effects on the competitivenessof their economies. Since 2000, the government, with the support of a US$1.5 million technical assistanceprogram from the IADB,has come close to, but failed, to renegotiate GT&T's concession. As a result, in September 2005, the IADB announced that it was terminating its technical assistanceproject to Guyana because o f a lack of progress on key issues. With the termination of its technical assistance project, the IADB also cancelled a follow-up IADB-funded project for $22.5 million that was aimed at buildinga national backbone, financing a universal-access project and implementing comprehensive e-government and e-commerce initiative^.^^ 3.65 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. Inparticular, the regulatory authority should be able to enforce its regulations on all players equally, including GT&T, in order to mitigate the risk perception o f 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. 3.66 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 i s no longer sustainable in a competitive market and needs to be addressed. 3.67 An amendment to the Telecommunications Law should be made by the legislature in the long run to delegate to the regulatory authority the concessioning of radio frequencies in order to allow for competition in wireless services. This i s because most new 93The IADB project was extended by two years in 2002 and additional extensions were not allowed. Gitanjali Sing, September 26,2005. 99 entrants will probably choose the provision of services via wireless technologies. In addition, a spectrumreallocation planneeds to be put inplace to improve the efficiency of spectrum use. 3.68 In the area of information gathering and dissemination, a revised Telecommunications Law should explicitly enable the regulatory agency to collect and verify information from all the operators and conduct audits on all players inthe industry, including the incumbent. A key to successful regulation i s the ability of the regulator to gather informationregardingthe sector and the behavior of operators. 3.69 In order to ensure fair treatment of all operators, all universal service/access projects should be tendered. Tenders provide the right incentives for efficient behavior among all operators bidding, including state-ownedincumbents. 3.70 Interconnection regulation must be set in place. Even though it usually involves a negotiation process among the parties, the regulatory entity must set the ground rules for these negotiations, and eventually intervene, if there i s no agreement among operators. In particular, the incumbent, and any dominant operator that may emerge in the future, needs to publish a reference interconnection offer available to all on equal terms, including the dominant players' own subsidiaries. 100 ANNEX 3.1 ADDITIONALTABLESAND CHARTSONTELECOMMUNICATIONS FigureA3.1: Guyana:Internetsubscribersper 100inhabitants 20.0 - 14.0 12.0 10.0 -1 6.0 - 2.0 2000 2001 2002 2003 2004 Source: ITUdatabase, 2005 Source: Traffic data, 2004, PriMetrica, Inc. Note: Data are in millions of minutes of public-switched telecommunications traffic. 101 TRANSPORT LOGISTICS AND 3.7 1 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 3-21). Similarly, foreign firms rely much more heavily on maritime transportation than their domestic counterparts. Transportation by air i s negligible except for exporting firms, 10 percent of which report that air transport i s the main mode of shipping their goods. Figure 3-21: Main Mode of Transportation of Firms' Productsand Inputs, by Type of Firm 90,. ...................................................................................................................... _ _ I ~ 80 70 60 ir 50 * w O 40 30 20 10 0 Source: Guyana ICs, 2005 3.72 Guyanese firms realize more than 80 percent of their sales domestically, with large and foreign-owned firms exporting, on average, a higher share of their sales than smaller and domestically-owned firms (Figure 3-22). According to the ICs data, Guyanese companies execute the majority of their sales in the domestic market, with the share of domestic sales by companies located in the capital city of Georgetown at 83 percent of total sales, and 82 percent for companies located in other parts of the country.94 While surveyed micro and small firms 94Across all the firms interviewed in the Investment Climate Survey, 17.8 percent of sales in the preceding year were realized through exports, while 82.2 percent of sales were realized domestically. Direct exports constituted 14.8 percent of sales, and indirect exports - 3.0 percent of sales. 102 execute close to 90 percent of their annual sales within Guyana, large firms sold 38 percent of their sales abroad - the majority of which is done through direct exporting. Similarly, foreign companies operating in Guyana supplied only 55 percent of their sales in 2004 to the local market, with the remainder being exported. Interviewed Guyanese firms have, on average, 12 years of export experience, with companies located in Georgetown averaging approximately 4 additional years of export experience than those located in other areas of the country (16 vs. 12 years respectively). Figure 3-22: Percent of Annual Sales Sold Domestically and Exported, by Type of Firm 100 90 88 83 83 83 ~7 80 g 70 1 6 0 a 3 40 s 50 b? 30 20 10 0 Micro- Medium Large Domestic Foreign Incapital Outside Small city of capital city Source: Guyana ICs, 2005 3.73 Only a minority of interviewed Guyanese firms viewed the current transportation infrastructure as an obstacle to their operations and growth. Guyana has witnessed an important improvement to its inland transportation infrastructure over the last few years as a result of a Roads project supported by the Inter-American Development Bank. The main road from Timehri to the port of Georgetown has been paved enabling easier access to major factories in the Georgetown area and allowing goods to be transported to port more effi~iently.~~The companies interviewed inthe ICs agreedthat this effort has greatly improved trucking efficiency andreliability. Inits current state, the road infrastructure in Guyana does not allow the trucking of goods between Guyana and neighboring Brazil. However, talks are currently underway to pave the existing road to make it suitable for freight traffic. While speeding and resulting accidents on major roads remain a hindrance to trucking efficiency, nearly 60 percent of companies included in the survey view the current transportation infrastructure as no obstacle to the their operations. Conversely, 7.4 percent of surveyed companies think that transportation is a severe obstacle to their operations. Figure 3.23 shows that companies viewing transportation as a '*The Mahaica-Rosignol Roads Project was approved by the IADB in 1997. For more information, see http:llwww.iadb.ora/EXR/doc98/aurl~y 1094e.udf 103 severe obstacle are primarily concentrated in the chemical industry, which has more sensitive transportation requirements.In addition, Table 3.3 indicates that large and exporting firms share a somewhat more negative perception of the transportation system (27 and 22 percent of interviewed large and exporting firms respectively consider transportation as a major or severe obstacle to doing business) than smaller and non-exporting firms. This i s hardly surprising as large and exporting companies are the ones that export a higher fraction of their sales, and dependmore on the transportation infrastructure of the country. Figure3-23: Percent ofFirmsWhichView Transportas an Obstacleto Their Operationand Growth,by Industry , Transportation Infrastructureas Obstacle to Growth 80.0% I 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% El No problem 01 Minor EModerate Ul Major Verysevere Source:World BankGuyana ICs Table3-3: Percent ofFirmsWhichView Transportas an Obstacleto Their Operationand Growth, by Size andExporterStatus Source:World BankGuyanaICs 3.74 With access to only a limited rail transportation system, Guyanese companies, across all sectors, rely upon land transportation for pick-up and delivery of goods. The ICs data demonstrate that, on average, 74 percent of companies in Guyana use land as their primary means of transportation as do 80 percent of small and medium companies, and 46 percent of large ones. Not surprisingly, nearly 80 percent of the companies located outside of Georgetown primarily rely on land as opposed to only 48 percent of companies inside of the capital city. 104 Landtransportation refers strictly to roads and river crossings by bridge. The only means of rail transportation inGuyana is a small railline that serves the transportation of bauxite 3.75 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 i s 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 i s 6.9 percent of the average shipment value. The corresponding figure for international shipments, involving direct exports or imports, i s 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 surveyedfirms report lossesdue to damage, and only 5 percent -losses due to theft. 3.76 Total shipment losses reported by Guyanese firms, at 4.6 percent of shipment value on average9', are higher than in Central American comparator countries. For instance, total 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 i s 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 3-24 and 3-25 illustrate the difference between the occurrences of damages in domestic shipments vs. international shipments. As exports are primarily shippedby sea and air, the risk of damage along the roadways i s dramatically reduced since transit time along the road takes up a smaller share of total transit time. The graph 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. 3.77 The bulk of the losses experienced by interviewed firms occurred during domestic shipments as a result of consignment cargo's breakage or spoilage (Figure 3-24). For instance, across the entire sample of interviewed companies, 3 percent of the shipment value was lost due to breaking and spoilage of the goods intransit domestically. This i s equivalent to over 5 percent of the shipment value lost, if we average only across the firms that did experience such losses. Incontrast, theft accounted for 1.1percent of shipment value being lost when goods were moved domestically. International shipments were reportedly far more secure - only 0.8 percent of the shipment value was lost due to breakage and spoilage when moving goods abroad (exporting or importing). Losses due to theft in this case were negligible - at 0.2 percent of the shipment value. There are important differences in losses realized during shipment across different types of firms, as demonstratedin Figure 3-24. For example, while losses due to theft appeared rather low across the whole sample, they were high for large and exporting firms 96After the previous rail line was closed, the track was removed and sold for the raw materials. 97Total lossesduring 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 1to 52 percent of shipment value. 105 during their domestic shipments. While foreign firms seemed immune to theft on both domestic and international shipment, they incurred high losses due to breakage and spoilage in their internationalshipment. Finally,firms locatedinrural areas and other towns lost a higher fraction of cargo shipments, irrespectiveof the type of shipment andcause for the loss. Figure3-24: Average LossesDueto DamageandTheft duringShipment of Goods,by Type ofFirm andType of Shipment 3.57 I 3.0 2.5 2.0 1.5 1.0 0.5 0.0 W Percentof cargo value lost due to breakageand spoilage in domestic shipments =Percent of cargo value lostdue to breakageandspoilage in international HPercentof cargo value lost due to theft in domesticshipments 0Percentofcargovaluelostdueto theftininternationalshipments Source: GuyanaICs Figure3-25: Average Losses Dueto Damageand Theft duringShipment of Goods, by Industryand Type of Shipment 7e,6.0 T--- I 4 5.0 4 E 4.0 3.0 2.0 rr * 0 1.0 0.0 1Percentofcargovaluelostduetobreakageandspoilageindomesticshipments mPercent of cargo value lost due to breakage andspoilage in internationalshipments BPercent of cargo value lost due to theft in domestic shipments OPercent of cargo value lost due to theft in internationalshipments Source: GuyanaICs 106 3.78 Although Guyanese firms face high trucking costs compared to industrialized countries, the ICs data show that the companies interviewed do not regard these costs as prohibitive. Average trucking costs associatedwith moving cargo between a factory and the port of Georgetown range betweenUS$80 and US$lOO per TEU, inclusive of insurance costs.98 The maximum trucking fee is US$215 per TEU, and the minimumfee - US$37 per TEU (depending on distance). These charges include the transfer of cargo between factory and port and the return trip of the truck, or the delivery of imports from port to factory and the return of the truck to the port. The ShippingAssociation of Guyana sets trucking rates on the basis of mileage and other costs, and i s planning increases in its trucking rates by 31 percent, caused largely by the rising cost of fuel. It i s 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 chargedbothfor the laden and the return trip of the truck across the bridge. 3.79 Due to the relatively 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 1.1 percent of value lost due to theft during domestic shipments in the year prior to the ICs.'' 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 on roadways is quite common. 3.80 While truck efficiency has improved with recent projects, there are still limitations to full efficiency. Trucking throughout the nation's interior remains difficult, but also unnecessary at this point. Roads leading to most factories'00 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 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, no trucks carrying cargo can pass Guyana's bauxite mines on the road that leads to Brazil. Should this road be paved in its entirety to Lethem, Guyana (and assuming that the bridge connecting Lethem and Brazil i s improved), the resulting trade increases will undoubtedly increase the demandplaced on Guyana's paved roadways. 3.81 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 i s 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 ShippingAssociation(GUY) Inc., ProposedTransportation Rates 99Guyana Investment Climate Survey, World Bank, 2005 100Currently, only travel to rice factories remainsdifficult. 107 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 usingtheir 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. 3.82 Interviewed companies which rely upon their own transport are found to have better perceptions of the transportation system than firms which use public or private transportation services (Figure 3-26). As mentioned earlier, transportation does not feature high on the list of obstacles to doing business. This is indeed the case across the subset of firms which use their own company transport facilities. However, among those firms which do not have their own transport means, perceptions are different. For example, 28 percent of the latter perceive transport to be a major or severe obstacle to operations as opposed to 11.5 percent of firms which have their own transport. Furthermore, while 69 percent of firms with own transport perceive transportation as no obstacle at all, only 37 percent of those without their own transport do so. These differences are large to be ignored, and signal that shipping services are not perceived to be of adequate quality by firm users. Figure 3-26: Perceptions of Transportation acrossFirmswith andwithout Own Transport Very severe obstacle Major obstacle Moderate obstacle 26 Minor obstacle No obstacle 69 0 10 20 30 40 50 60 70 80 % Source: Guyana ICs 3.83 Large companies and companies located inGeorgetown use sea transportation more than smaller companies and those located outside of the capital city. On average, 23 percent of all surveyed companies in Guyana utilize maritime transport as their primary mode of transportation. However, given the costs associated with bringing goods to port, this relatively low figure i s to be expected (Table 3.4). 108 I Total II Large Company Size I Medium I Location SmallI In Outside IPercent of Firms Using Sea I 22.9 1 54.0 I 20.0 I 12.9 1 48.3 17.3 Transportation as a Primary Method Source: World Bank Guyana ICs, 2005 3.84 Guyana's primary export destinations include Barbados, Trinidad and Tobago, Grenada,Suriname,Jamaica,the UnitedKingdom,Europe,Canadaandthe UnitedStates. Furthermore, due to its geographical location, trans-shipping plays a large role in the volume of goods handled by the port of Georgetown. Of the primary export destinations listed above, Barbados, the United States, and Trinidad and Tobago comprise the largest share, with 26 percent, 21 percent, and 16 percent of companies surveyedusingthese countries as their primary export destination in the year before the ICs."' The majority of imports corning into Guyana originate inthe UnitedStates, Canada, Western Europe, and the Caribbean, with a small portion of imports corning from the Far East. Due to the small volume of goods traded through Guyana, and Georgetown's location south of Port of Spain and Jamaica, transshipping plays a role in the shippingof Guyana's exports. All Guyanesegoods headedfor Mexico and Peru, for instance, are transshippedvia Trinidad and Jamaica. However, goods headedfor the UnitedStates and Europe do not have to be transshipped(with the exception of truck transportation to distribute goods on land).The port of Georgetown often imports via transshipment from Trinidad (Port of Spain) but i s not used itself for transshipment. 3.85 The port of Georgetown'sdepth and equipmentlevels are regardedas adequatefor the port's currentshippingvolume by the interviewedcompanies. However, the port may be inadequate to adapt to trends in the global shipping industr Georgetown i s the location of Guyana's chief port, handling sea trade for every commodity.YdzReceiving, 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 inthe harbor, and only 6.4 meters along the pier. For comparison, the port of Port of Spain in Trinidad has a depth of 12 meters at its deepest point.lo3 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 i s 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. The large gantry cranes seen at larger ports are unnecessary in Guyana. With regards to Georgetown's port equipment, those companies interviewed are of the opinion that the port equipment is adequate for current shippingvolumes. Source: Guyana Investment Climate Survey, World Bank, 2005 102A portionof bauxite exports travel through the port of New Amsterdam. 103Source: Authors' personal interview with Mr.ColinEdghill,June 23, 2005. 109 Table 3-5: A Sampleof AverageFreightRates,inUS$ Source: Background paper prepared for this report by Global Insight Inc. (2005); data from Guyanese sources 3.86 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 are benchmarked against those of the port of Port of Spain for two reasons: first, Georgetown's proximity to the Port of Spain makes them competitors; 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 would have to come down. As can be seen from Table 3-6, discharge and handling costs are significantly lower at the port of Port of Spainthan at Georgetown.'04This cost differentiali s largely due to the higher volume that the port of Port of Spainreceivesover Georgetown. 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 3.87 The port of Georgetown is more efficient when it comes to certain port-specific operations -for example, it is able to move almost twice the dry metric tons per hour than the port of Port of Spain (Table 3-7).'05 The key difference between the two ports, however, i s the volume they can and do receive. Not only is Port of Spain's import and export traffic more thandouble Georgetown's, but it also handlestransshipping 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, the port of Port of Spain is able to cater to the Panamax-size container ship vessel, which is beginning to dominate the global shippingindustry. 104The actual charges incurred at the port of Port of Spain are determined by 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 a crane required. lo5This comparison does not take into account the time spent incustoms. 110 Table 3-7: Productivity Indicators for the Port of Georgetown relative to Competitor Ports Attribute Category Georgetown Portof Spain Average TEU's per Import 500-600 1,351 week Export 350-400 1,403 Transshipment 0 2,936 Average time inport Container Ship 12- 36 18-36 (hours) Dry-Bulk Vessel 12- 36 40- 60 Cargovolume TEUs 14-20 15 -20 handledperhour Dry Metric Tons 80 - 100 40 -60 Equipment Gantry Crane 0 11 Draft(deepest point, 7.5 12 meters) Rail No Yes 3.88 The cost of complyingwith U.S. shipping regulationshas subsided according to all the firms interviewed. Following the September llth in the United States, shippers attacks sending goods into the United States were requiredto implement certain security measures and external controls. While costly during the transition period, the costs of complying with U S regulations have since declined. If shippers wish to insure their cargo, the cost for full coverage insurance is typically 0.5 percent of the value of the cargo. As security issues involved with sea transport are viewed as negligible, some companies choose to not obtain full coverage, and to only obtain liability insurance instead. 3.89 A lack of air infrastructurein Guyana means that air travel is expensiveand not a significantly utilized mode of transportation for trade in Guyana. Of all the companies interviewed in the ICs, only 3.2 percent use air as their primary mode of transportation. There are technically 49 airports in Guyana, but only 8 of them have paved runways necessary for freight traffic. 3.90 Georgetown's port may need to adjust to trends in global trade, but it should not expect significant shifts in its commodity profile. Figure 3-27 displays forecasts for trade (export and import growth) in Guyana. These forecasts are based on Guyana's GDP outlook, expected population growth, price indices and deflators, and exchange rates. The trade forecast neighbors.%6 also inco orates global trade growth and the economic growth of Guyana's immediate `06The trade forecast does not include an assumption on having a paved road between Guyana and Brazil. The forecast methodology, with a brief descriptionof the underlyingmodel and the assumptionsabout future population, GDP, GDP deflators, industrialoutput, exchange rates and export prices by country, are in the background paper prepared by Global Insight Inc. for this report. It utilizes past and forecast information about trade in 77 commodities (ISIC categories) among 55 countries and 16geographic regions aroundthe world. 111 Figure 3-27: Past and Forecast Trade Growth inGuyana, Containers 140,000 - 120,000 - 100,000 - 80.000 60,000 40,000 20,000 0 ,99" &pb,4." ,.y" ,99" +@ ?$' %p & (p %@? & ,sO,@ %6)" +Total Exports Contamers -Total ImportsContamers Source: Global Insight World Trade Service, 2005 Note: The methodology o f the trade forecast by Global Insight Inc. i s in the background paper for this report. 3.91 Total Guyanese exports in containers are expected to experience a CAGR of 1.6 percent between 2005 and 2010. In 2005 and 2006, container exports will witness growth of 2.2 percent and 1.9 percent respectively. Growth of total imports will be slightly higher, with a CAGR of 2.9 percentbetween2005 and 2010. In2005, that growth rate will be a relatively high 6.0 percent, beforedropping to 3.9 percentgrowth in2006 (Figure 3-27). Figure 3-28: Top 10 Commodity Exportsin 2004 and Forecast for 2010 inGuyana TOD10 Commodity Exports. 2004 (nominal value] Tor, 10Commoditv Exports, 2010 (nominal value) \ Wearing Wood Products Apparel Wood ProductS Wearing 2% 2% Other Meet and 270 Apparel Dairy ;" Other Meatand Corkand W A / / 1% Cork and Wood ,-miry Source: Global Insight World Trade Service, 2005 Note: The methodology of the trade forecast by Global Insight Inc. i s in the background paper for this report. 112 3.92 The composition of Guyana's top 10 exports is not expected to experience substantial changes between 2004 and 2010.'07 As such, Guyana will not need to drastically restructure its ports and roads to handle the trade of its 10 most dominant exports although the growth of the share of "Miscellaneous" products warrants highlighting. However, there i s not enough growth to compel specific changes in transportation. Table 3-8 shows the current and forecast CAGRs of each export. Table 3-8: GrowthRatesof Guyana's Top 10Exports,NominalValues Source: Global Insight World Trade Service, 2005 Note: The methodology of the trade forecast by Global Insight Inc. is in the background paper for this report. Figure3-29: Top 10 CommodityImportsin2004 andForecastfor 2010in Guyana Top 10 Commoditv Imports, 2004 (nominal value) Top 10 Commodity Imports 2010(nominalvalue) Plastic Products Pharmaceutical 4% Textiles /-hgines Textiles 4% iron 8 Beel- Machinery Aircraft 8 other urn ies Aircraft 8 other .... 1096-. 12% 11% 12% Source: Global Insight World Trade Service, 2005 Note: The methodology of the trade forecast by Global Insight Inc. i s in the background paper for this report, 3.93 The composition of Guyana's top 10 imports is not expected to experience substantial changes between 2004 and 2010, although certain small changes are likely to occur (Figure 3-29). Namely, imports of engines are expected to drop from lothto llth in the import list, and pharmaceuticals will rise from 20thto IOth position in 2010. Increased imports of pharmaceuticals are consistent with expectations of improvements in the standard of living. 107Since the top 10 export commodities represent approximately 96 percent of total export commodities, i t is sufficient to look at the 10rather than the entire commodity list. 113 Since Guyana i s already suited to importing chemicals, the projected increases in imports of pharmaceuticals/chemicals should not necessarily warrant the restructuring of ports and roads. Imports(Nominal Value) CAGR I sugar I -0.3% I I Ores I 4.0% I Source: GlobalInsightWorld Trade Service, 2005 Note: The methodology of the trade forecast by Global InsightInc. is in the backgroundpaper for this report. 3.94 In the long-run, Georgetown primarily needs to consider restructuring its port to accommodate the global growth in container trade. As seen in the commodity trade discussion above, no change in commodity trade will be significant enough to justify port restructuring. However, Figure 3-27 indicates the important global trend of container trade growth to which Guyana needs to eventually respond in order for it to increase its competitiveness in international trade. An example to follow might be that of El Salvador which passed a General Maritime and Ports Law, reforming the governance structure of the sector, and establishedthe framework for private sector participationinthe sector. The subsequent increased investment led to a 25-percent increase in cargo and traffic volumes, and a reduction in cargo unloading times. 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 be accomplished through 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 i s neededinthe near future. 3.95 Customs clearance procedures in Guyana are associated with unacceptable delays and can be time-consuming. Yet, more than half of the companies surveyed do not believe customs regulations are a hindrance to their operation and growth. Customs-related constraints in Guyana are mentioned less frequently in Guyana than in El Salvador, but more often than in Honduras. Exporters spend an average of 14 days in customs, with a maximum time of 23 days. This compares highly unfavorably to ElSalvador, 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 114 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. 3.96 Despite the time incustoms and occasional instances of reported bribery at customs, 67 percent of interviewed companies feel that the customs process is not a hindrance to their operation and growth. Conversely, 18 percent perceived customs problems as either a "major" or "severe" obstacle, compared to 24 percent of firms surveyed in Guatemala and 8 percent in Honduras. Those companies with a negative perception of the customs process tended to be those shipping chemicals and wood products (not surprisingly, the companies that spend the most time in customs). On average, 40 percent of chemical companies and 24 percent of wood companies viewed customs as a severe obstacle to growth. For comparison, consider Honduras where the average customs clearance time i s 2 days for exports and 3 days for imports.'O* 3.97 A large proportion of Guyanese exporters and importers face additional costs inthe 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. Incontrast, a larger share of interviewed medium and large companies compared to micro and small ones indicate that they had to make such extra payments during import clearance procedures (Table 3-10). 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 o f both groups report making extra payments when e~porting).'~' 3.98 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 o f all exporting firms and 20 percent o f all importing ones - percentages which are not trivial (see Figure 3-32). 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. Inthat sense, costs o f customs clearance are further increased. Table 3-10: ReportedIncidence of Extra Paymentsat Customs, percent of interviewedfirms Total Company Size Large Medium Micro and Small Exporters 59.6% 57.9% 61.5% 64.3% Importers 66.7% 70.0% 70.0% 54.6% 3.99 There are substantial differences in the reported incidence of informal payments (bribery) across firms of different size (Figure 3-30). Large exporting firms are far less likely to encounter bribes during customs clearance procedures of their shipments abroad than micro lo'Honduras Investment Climate Assessment, World Bank, 2004 logDue 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. 115 and small, and medium companies are (8 percent versus 37 and 15 percent respectively). They are, however, more likely to be asked for informal payments at customs when importing, with 27 percent of large importers reporting requests to make such informalpayments. Figure3-30: ReportedIncidenceof InformalPaymentsat Customs,by Firm Size 40 31 35 30 25 1 20 15 10 5 0 All firms Micro-Small Medium Large EPercentofa11exponingfirms EPercentof a11lmponingfirmsI Source: World Bank Guyana ICs, 2005 RECOMMENDATIONSON TRANSPORT AND LOGISTICS 3.100 The potential for trade with neighboring Brazil suggests that the country needs to pursue aggressively 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 Georgetown 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. Likewise, current estimates that the port in Georgetown has excess capacity imply that no drastic port restructuring is needed in the near future. Should the road to Brazil become suitable for freight traffic, incoming and outgoing goods between Brazil and Georgetown would increase the port of Georgetown's volumes andjustify a dredging project, or the construction of a deep water port. Until the volumes of goods and port traffic in Guyana increase, large capital investments inthe port in Georgetown would appear to be unwise. 3.101 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 recommendationsfollow Guyana's NationalDevelopment Strategy andthe World Bank's CaribbeanInfrastructure Assessment Report (2005): 116 3.102 The construction of a national road transport network will provide the foundation for the economic developmentof the entire country, and includesthe following: 0 Without an institutional set-up which can help bothto secure finance and to maintain the present improved technical capacity, there i s adanger that the primary road network will again fall into the unacceptablecondition of the past."' 0 Improvingintra-regional access will reducejourney times and fuel costs. 0 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. 0 Road andbridgecapacities must be increasedto reduce commuting times. 0 Modern construction, operation and maintenance standards for the national highway system mustbe established. 0 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.l1 3.103 Air infrastructure should be upgraded communications and navigational aids in order to increase the viability of this form of - - including runways, taxiways, freight transportation by widening Guyana's air capabilities. Investment in safety and security standards will be essential to obtaining ICAO certification - essential if Guyana's tourism industry i s to attract American tour operators. 3.104 Institutional and physical improvements in port infrastructure are essential for Georgetown to become a regionally competitive port facility. This would involve the following: 0 A Maritime Administration should be established in order to comply with the Caribbean Memorandum of Understanding on Port State Control. 0 Wharves andberths should be upgraded to international standards. Enhancementof port safety is essential. 0 The customs clearance time in the port of Georgetown needs to be significantly reduced, which requires streamlining of customs procedures. 'IoEUTransport Sector Study 2005 "'ibid 117 WATER 3.105 Evidencefrom the GuyanaInvestmentClimateSurvey (ICs) suggests that access to reliablewater supplyis nota principalbarrier to investmentandfirm growth. Nonetheless, findings do indicate that the lack of reliability in water utility services increasesfirms' costs and reduces profitability. This is particularly the case for larger firms concentrated in the food and beverage, textiles, and chemical industries, where water i s an important - if not essential - input into the production process. The ICs also provides evidence that small and medium enterprises receive less reliable water supply and experience significantly lengthier delays in connecting to the network comparedto their larger competitors. 3.106 Findingsfromthe ICs also demonstratethat an importantsegment of firms that are disproportionatelylarge, exportingand dependent on water in the productionprocess rely on own-source water supply. The long-term implications of self-provision are not well understood due to the absence of an effective regulatory environment and a comprehensive assessment of the status of groundwater resources, However, the Guyanese water utility i s concerned that current indiscriminate and unregulated ground water extraction will over time prove unsustainable and drive up costs for both firms and the public utility - Guyana Water Inc. (GWI). Usageand Sourcesof Water Supply 3.107 Water is an important input for many Guyanese firms even though it does not accountfor alargeproportionof firms' overallproductioncosts. Over 70percentof all firms surveyed use water in the production process. This ratio i s 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, textile, and chemical 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 i s obtained from own sources. A very small percentage of the interviewed Guyanese firms get access to water from private vendors. As demonstrated in Figure 3-31 below, large firms, foreign-owned enterprises and exporting firms disproportionately depend on own-sources for water supply, while small and medium 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 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. 118 Figure3-31: Use of DifferentSourcesof Water for ProductionFirms,percentof Guyanese manufacturingfirms Foreign Domeshc Non-exporter Exporter Micro-Small Medium Large 0% 20% 40% 60% 80% 100% [UPublic source OOwn source UPnvatevendon] Source: World BankGuyanaICs, 2005 3.108 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 that the GWI supply system cannot currently accommodate. Many of these firms also operate 24 hours a day and would 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 -particularlyin the food and beverage industry that require treated water in the production process - to access public water i s limited, as source water treatment in some GWI areas i s 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 i s not clear to GWI whether 24-hour public service would be considerably cheaper than self-provision for firms that rely on private generators. 3.109 Despite deficiencies in the water services provided by the public system, reliance on water supply from public sources is higher in Guyana than in other comparator Latin American countries. Over 90 percent of water supply to interviewed manufacturing firms comes from public sources, which is higher than in Honduras (56 percent), Guatemala (66 percent), El Salvador (81 percent), and Ecuador and Nicaragua (84 percent) (Figure 3.32). I t i s not clear what explains this pattern. It i s not likely that public water supply i s 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. 119 Figure 3- 32: Provisionof Water from Public Sources, by Country Guyana 90 3 Ecuador Nicaragua El Salvador Guatemala Honduras 0 I O 20 30 40 50 60 70 80 90 100 8ofallsupply Source: World Bank Investment Climate Surveys, various years 3.110 Additionally, a closer inspection of the ICs data shows that very few Guyanese firms rely on multiple sources of water supply as a means to mitigate the impact of water supply interruptions. Hence, firms are dependent almost entirely on either networked or own-source water supply. This trend may be changing as GWI reports that it has received an increasing number of applications for connections to the public water supply network from larger firms that depend primarily on water supplied through own-sources. This trend may also reflect improvements in the reliability o f public water supply services as a result o f the water sector reform program discussed at greater length below. Service Reliability 3.111 Despite recent improvements in service, reliability remains a concern for surveyed Guyanese firms. Approximately 18.4 percent o f all interviewed 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 Investment Climate Survey conducted by FIAS in Grenada in 2004, 22 percent o f firms experienced on average 12 interruptions lasting 6 hours 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) as 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 in other towns and rural areas. However, the average duration of interruptions for exporters was lower than that for non-exporting firms. 3.112 The ICs data indicate that the impact of water service interruptions on firm profitability is moderate but less than that in regional comparator countries. Figure 3-33 - depicts the percentage of sales lost as a result of water supply interruptions for interviewed firms in Guyana, Ecuador, El Salvador, Nicaragua, Guatemala and Honduras. The cost to Guyanese firms that do experience interruptions in water service i s estimated at 1.5 percent of sales as 120 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. Figure3-33: Costsof Water Interruptions:percent of annual sales acrossfirmsthat experienced water interruptions,by Country 8ofSales Source: World Bank InvestmentClimate Surveys, various years 3.113 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 ICs reported some form of interruptions or periods of insufficient supply which lasted for on average of 25 hours. Interruptions impact more adversely large hotels than their smaller competitors. The duration of water interruptions for larger hotels was over 68 hours as compared to 3.9 hours for small hotels, and the resulting overall economic cost to firms was 1.2 percent of sales for all surveyedhotels, and 2.2 percent of sales for large hotels only. Connecting to the Network 3.114 Guyana also compares favorably inthe region in terms of the length of time it takes to gain access to water supply. Figure 3-34 compares the time firms spend on obtaining a water connection in Guyana, Ecuador, El Salvador, Nicaragua, Guatemala and Honduras. In Guyana firms report that it takes on average 27 days"* to get connected to the water network compared to 63 days in Ecuador, 25 days in El Salvador, 68 days in Guatemala, 55 days in Honduras and 58 days in Nicaragua. Therefore, Guyana's average reported waiting time to get connected to the water supply network i s lower than in the other comparator countries, and close to that of El Salvador. 3.115 It takes micro and small Guyanese firms much longer (33 days) to get connected to the water network than it takes medium-sized and large firms to do so (15 and 17 days It must be noted that this average number of days to get access to water supply is based on answers by 23 Guyanese firms, which applied for water supply services in the two years preceding the ICs. The values range from 1to 30 days, with a median of 17 days. Given the small sample size, the results reported here are only indicative. 121 respectively). Additionally, it takes almost twice as long for firms outside of the capital city to obtain water supply than firms located in Georgetown (explained in part by the relatively underdeveloped infrastructure network in rural areas). The waiting times for different types of firms are illustrated in Figure 3-35. Finally, the ICs data reveal that large and foreign-owned firms are more likely to be required to pay bribes to access water supply services. Out of 6 large firms that applied for water connection, 2 were asked for an informal payment, as opposed to none of the micro, small and medium companies. Out of two foreign applicants, 1was asked for such an informal payment as well. Again, these results are subject to the caveat that there are very few observations for some types of firms which applied for the water connection. Figure3-34: Average Number of Daysto ObtainaWater Connection,by Country Nicaragua 58 Honduras Guyana ElSalvador I I I , , 10 20 30 40 50 60 70 Days Source: World Bank Investment Climate Surveys, various years Figure3-35: Average Numberof Daysto ObtainWater Connection,by Type of Firm 35 , I 30 25 5 20 15 10 5 0 122 Water Sector Reformand Sustainability Concerns 3.116 Reforms of the water sector are ongoing. In 2000, the Government of Guyana embarked on a comprehensive reform of the water sector, which has involved an improved regulatory framework, coherence in the institutional framework through the merger of the two existing water utilities into GWI, the award of a performance-based management contract to an international operator, and the development and financing of a comprehensive investment program to improve service quality inthe sector. It i s estimated that these reforms have gradually improved the reliability of service to industrial and commercial users. A substantial increase in new capital investments inthe sector scheduled over the next five years i s likely to continue this trend. 3.117 Despite recent improvements, a series of specific measures could be undertaken 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 - GWIcould increase the profitability of Guyanese firms, contribute to the reduction of firm costs, and increase incentives for firms to access public water supply. Inaddition, the Government of Guyana should consider strengtheningthe regulatory environment surrounding the licensing of extraction rights and conducting new analysis on the sustainability of groundwater resources. 123 CHAPTER4. SKILLS,MIGRATION,TECHNOLOGY AND QUALITY INTRODUCTION 4.1 Since its domestic market is extremely small, Guyana has to be especially concerned about creating an attractive businessenvironment. Given the limitedpotential inthe domestic market and the growing globalization, the businesses in Guyana have to be oriented mostly towards international markets. Domestically-oriented firms have to be able to survive the competition from the imports that can otherwise take the small market quickly. Creation of internationally competitive firms i s only possible if the investment climate i s such that adequate returns to investors are achievable, given international pricing and various country-specific risks (macroeconomic, political, security, infrastructure, etc.). 4.2 Otherwise, the country's resources, including skilled labor, would likely find their use elsewhere inthe world. The national income resulting after such resource reallocation (with heavy reliance on exports of natural resources and worker remittances) may not be sufficient to adequately support the population remaining in the country. The reforms should not tackle one specific area, but rather address all the major issues. For example, improvements in education without significant changes in infrastructure, security and other areas may only reinforce the already intensive emigration. 4.3 Since the beginning of the 1990s, considerable progress has been achieved in Guyana in increasing the coverage of secondary and tertiary education (see Figure 4-1). While for the whole period between 1990 and 2002 the population grew by only 3.6 percent, the number o f 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.113 large part, this i s a result o f the significant increase in the government's expenditure on education which rose from 4.9 percent of GDP in 1997 to 6.7 percent of GDP in 2004. At present, the Government i s working toward introducing universal secondary education. Even though public expenditure on education inGuyana i s now higher than the average for Latin American countries (4.1 percent of GDP), it is in line, or even lower than that recorded by the OECS and other Caribbean countries (7.1 percent o f GDP across the OECS in 2003)'14. The challenge for Guyana -as well as for most of the Caribbean -is how to translate this high public expenditure on education into better educational outcomes, such as students' test score performance, and years o f schooling. `13The improvements in the secondary and tertiary education coverage are, in fact, likely to be underestimated, given the high and, lately, growing emigration that is biased towards skilled labor - as discussed later in this chapter. A factor that works in the opposite direction i s the re-immigration of a notable number of well-educated Guyanese inthe first halfof the 1990s,but this effect is relatively small. For more information on public expenditure on education in the Caribbean, see chapter 7 of "A Time to Choose: Caribbean Development in the 21`` Century", World Bank, 2005. 124 4.4 The lack of readily available skilled labor in Guyana is a major problem for private businesses. Around 40 percent of industrial firms responding to the ICs rated the lack of availability of skilled labor as a "major" or a "severe" obstacle to their growth and competitiveness. That number was even higher - SO percent - for hotels. In addition to the general decline in the quality of school education (despite the increased coverage), the two interlinkedfactors 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 adverse selection resulting from the significant emigration of skilled labor (brain drain). Related to the former issue i s the fact that the Guyanese education system is overloaded with different test, which i s a legacy of the old requirements of the British education system. Work has been underway to revise the lower secondary curriculum with the objective of making the education system more relevant to the needs of the country's economy. 4.5 Shortages of skilled labor affect other Caribbean countries as well. For example, the unavailability of skilled labor was rated the top obstacle to doing business b y surveyed firms in Grenada - with 40 percent of them identifying this as a major or severe constraint - exactly the same percentage as in Guyana. Therefore, Guyana's problems in the area of education and skills formation are not unique. According to the World Bank (2005d), several Caribbean countries fell behind in skills formation during the period of 1980-2000. Only Barbados recorded a faster increase in the average years of schooling of its adult population compared to the Latin American and world average increases. Guyana's average years of schooling rose only by 0.6 years between 1990 and 2000, which i s lower than the LAC average increase of 0.9 years, and the world increase of 0.7 years over the same decade. Similar trends - albeit to a different degree -wereobservedinTrinidadandTobago, Jamaica,HaitiandtheDominicanRepublic. Figure4-1: Guyana: Distributionofthe Populationby EducationalAttainment, 1990and2002 1993 2w2 Source: Guyana National Bureau of Statistics and the World Bank 4.6 The supply-demand skills mismatch in the industry seems to originate from two sources. First, the education system seems to be biased away from technical professions. Second, relative to other professions (perhaps, except for teachers and nurses), technical 125 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 employees. Interviewed firms indicate that they have to train three or more workers to retain one. This chapter describes the recent achievements in the educational system and addresses the reasons for the relatively low quality of labor in the country. It then proceeds to analyze the emigration issues. 4.7 Emigration, especially of skilled labor, has been a significant problem for decades. Various estimates suggest that, size-wise, the Guyanese Diaspora worldwide i s likely to exceed the population living in the country (the latter was around 751,000 in 2002) and consists, in a large part, of well-educated professionals. Currently, more than 85 percent of Guyanese university graduates live in OECD countries. That number i s (marginally) higher only for Suriname. The short periodof inflow of skilled labor attracted by the reforms at the beginning of the 1990s has been quickly reversed. The chapter assesses the reasons for the high emigration rates, analyzes the impact of the growing remittances, currently estimated at close to ten percent of GDP, andprovides policy recommendations. 4.8 There are practically no labor market rigidities, in the usual sense (minimum wage115,layoff benefits, social obligations, etc.), that would affect negatively the flexibility of employers in making hiring and firing decisions. A Guyana-specific problem, however, i s the significant polarization of the labor force across the ethnic and the (highly correlated with it) political lines. This segmentation restricts labor choices available to firms as well as puts barriers on the way of interactions between businesses as well as between businesses and the government. The chapter provides more detail on these findings. Given the endowment-type nature of the problem, the scope for recommendations inthis area is, however, very limited. 4.9 Investment in new technologies is far from being intensive, and is fairly unsophisticated. Only about a third of the surveyed industrial enterprises invested in new technologies in 2002-2004. In the overwhelming majority of cases - more than 75 percent - the investment came in the form of equipment purchases. Guyana fares very poorly in comparison with other countries in the LAC region with respect to the intensity and the sophistication of technological innovation. The number of firms with an internationally recognized quality certification is relatively small (17 percent).Il6 This chapter discusses the reasons for the lack of innovation activity. They range from security uncertainty to lack of qualified labor and inadequate, but developing, infrastructure for quality assurance. 4.10 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 bejustified 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 '15The minimumwage is notregulatedinthe private sector, and is aroundUS$1lO/monthinthe public sector. 'I6Mostof these are non-IS0certifications. 126 be noted inthat the GNBS, a semi-autonomousbody, has recently been able to finance more than 20 percent of its budget from selling its advisory services. The chapter discusses the structure of the quality assurance system, details the recent progress and provides recommendations. EDUCATION TRAINING: RECENTDEVELOPMENTSCHALLENGES AND AND 4.11 Over the last decade, the secondary and higher education coverage in Guyana has improved considerably. This was fueled by the sharply increased government expenditure on education that grew from 4.9 percent of GDP in 1997 to 6.7 percent of GDP in 2004. The already high population literacy of 96 percent in 1990 has now reached almost 100 percent. As Figure 4.2 indicates, the gross enrollment rate in secondary schools has grown significantly, especially in the new millennium, reaching 75 percent in 2004. Considerable efforts have also been undertakenin the area of tertiary education. As a result, while for the whole period of 1990 to 2002 the population grew by only about 3.6 percent117,the number of university-level graduates diploma holders grew by more than 80 percent.1 living in the country increasedby more than 3501 ercent, and the number of secondary education f Figure 4-2: Guyana: Net Primary and Secondary School Enrollment Rates, 1980-2004, % of I relevant age group 1 2 0 1 ........ .................................................................................................. I ~ Source: Guyana National Bureau of Statistics and Ministry of Education 4.12 As a result, Guyana ranks well incomparisons of levels of educational attainment in the LAC region measured by the share of population with secondary or tertiary education, and compares well on this measure to the rest of the world. Figure 4.3 indicates that, with 44 117For reference, the 2002 population was still 1.2 percent below the 1980 level due to the more intense emigration inthe 1980sthan inthe 1990s. 118 The improvements in the coverage of the secondary and the tertiary education are, in fact, likely to be underestimated, given the high and, lately, growing emigration that i s biased towards skilled labor - as discussed later in the Chapter. A factor that works in the opposite direction is the re-immigration of a notable number o f well- educated Guyanese in the first half of the 199Os,but this effect i s relatively small. 127 percent of the population with secondary and tertiary education, Guyana is positioned relatively well in the LAC region and among comparator countries. That number represents a significant increasefrom only 24 percent in 1990. Figure 4-3: Proportionof Population with Secondary or Tertiary Education, selected countries 60 A n 50 Source: De Ferranti (2003)and Guyana National Bureau of Statistics Note: The data are for 2000 for all countries, except Guyana - for which the year is 2002. 4.13 The Government is targeting universal secondary education, the achievement of which, however, may take considerable time. The objective of introducinguniversal secondary education is stated as a general goal in the Strategic Plan of the Ministry of Education for 2003- 2007 (SPME), yet with the timing not exactly bounded by the plan's horizon. The National Development Strategy for 2000-2010 (NDS) does not have this objective explicitly included. Indeed, with a secondary education enrollment rate of around 75 percent and significant shortage of qualifiedteachers, a lot of work i s requiredto achieve universal coverage. Recent efforts have concentratedmore on upgrading the education inthe first three grades of secondary schools, both -program-andinfrastructure-wise(includingthroughWorldBankandDFIDprojects). 4.14 While secondary education coverage has increased, the quality of school education is encountering serious difficulties - as reflected in the part of the NDS preparedby civil society representativesin 2000 (this text i s also cited inthe 2002 SPME): "A number of economic and social factors ... have led to a most unsatisfactory and unacceptable state of afsairs: learning rates in the schools are extremely low; a large proportion of the teaching force is unqualified and untrained; absenteeism on the part of both teachers and students is rife; and textbooks and other instructional materials are often unavailable. Guyana's success in attaining universal access to primary schools... has been eroded and has been replaced by 128 rising repetition and dropout rates. Moreover [there are] alarmingly high levels offunctional illiteracy. 11119 4.15 Underlying recent problems with the quality of education are the weakening motivation of students and the insufficient resources to support the necessary infrastructure and incentives for teachers. According to the Government, there i s "a widespread lack of motivation, and perhaps even the growth of a certain culture of acceptanceof prevailing conditions" (SPME). Insufficiency of the resources allocated to education i s also a major concern of the Ministry o f Education, despite the recent almost exponential growth of the available budgetary resources. While significant progress has been achieved in the new millennium in increasing secondary school enrollment, drop-out and repetition rates have stayed practically unchanged, the ratio of trained teachers to all teachers has declined, and the student- trained-teacher ratio has gone up (Table 4.1). Prepared in 2002, the SPME notes: "In the 1960s, Guyana's educational system was considered one of the best in the Caribbean. Today, it is considered one of the weakest, although some recovery has been achieved in the lastfew years". Table4-1: Guyana: SelectedEducationIndicators,2000-2004 Source: Guyana Ministry of Education 4.16 Generally, student-to-teacher ratios (STR) in Guyana are relatively low but student- to-trained-teacher ratios (STTR) are much higher at both the primary and secondary levels. For example, the STR at the primary school level in Guyana was 27-1 in 2004, while the STTR was 54-1 in the same year. While the STR at the general secondary school level was 25-1 in2004, the STTR was much higher - at 42-1.Finally, STRs at the primary tops and community Civil Society of Guyana on: National Development Strategy,May 2000, Mimeo, p.197. 129 high schools (which are types of secondary schools) was 17-1, even lower than in the general secondary schools in Guyana. In other words, the scarcity of trained teachers i s the problem. Therefore, upgrading teachers' skills would help enormously to lower the student-to-trained- teacher ratios. The Government i s already working toward this goal. 4.17 The lack of availability of trained teachers remains a major problem. Half of the school instructors and 40 percent of school heads are not trained as teachers. The relatively low school teacher salaries combined with the private sector and emigration opportunities are the factors behind the lack of teacher availability. The increased enrollment rates in secondary schools have created additional demand for teachers - which, in part, accounts for the lack of improvements in the student-to-trained-teacherratio. The government lacks the capacity to train as well as to retain the teachers. Problems in the remote areas are greater due to the lack of incentives for teachers to work there as well as the less adequate school infrastructure. 4.18 While the quality of the knowledge possessed by the Guyanese is so far perceived as relatively high, especially internationally, this perception may change if the quality of school education is not restored. The overall perception about the quality of education i s to a large extent driven by those aged 25-40, i.e., whose school education took place relatively long ago. In addition, the international perception i s likely to be biased due to the self-selection of emigrants based on the skills they possess. The problems with the quality of school education are likely to lead to a situation in which the differences in the intrinsic abilities and the motivation to study play an increasingly important role - widening the distribution of the skills across school graduates, mostly towards the lower end. As the emigration (observed at very high levels in the country) takes away the upper part of this distribution, the average quality of skills and knowledge of those remaining inthe country is likely to diminish. 4.19 The dissatisfaction of the firms located in Guyana with the availability of skilled labor is among the strongest in the world. Of the industrial firms interviewed in the World Bank ICs, 40 percent viewed the lack of the availability of skilled labor as a "major "or "severe" obstacle to the growth and competitiveness of their firm.'20 For surveyed hotels and other tourism establishments, this number was even higher - 50 percent. As Figure 4.4 indicates, the degree of dissatisfaction is higher than elsewhere in the region, and, outside of the L A C region, close to a numberof countries inAfrica.I2' This number drops to 39 percent, if only manufacturing firms are considered. 121Comparisons of perceptions like in Figure 4.4 should be treated with caution. Much depends on the general economic situation in the country. In countries that experience low economic growth, dissatisfaction tends to be higher in general (Guyana falls into this category). Another possibility for an upward negative perception bias is a rapidly growing economy - in which constraints are felt stronger, especially if the Government persistently highlights them in its programs. These biases are difficult, if not impossible, to eliminate (for example, the "average" degree of dissatisfaction may or may not represent the aggregate bias well; besides, the bias may be unequally distributed among different obstacles). The I C s asks a number of quantitative questions to complement the perception-based ones - such as the number of days to fill a vacancy for a skilled technician, among others. 130 Figure4-4: Degreeof Dissatisfactionwith the Availability of Labor Skills, by Country Source: World Bank, IC surveys, various years 4.20 At the same time, on average, only around four weeks are needed to fill a vacancy for a skilled technician in an industrial firm in Guyana - while in many countries of the region this time i s much longer (more than eight weeks in Brazil, around six weeks in Guatemala, etc.). Therefore, the "lack of availability of skilled labor" means, in practice, a low average quality of a worker that the firms, nevertheless, seem to be willing to accept. On the supply side, the relatively small size of the domestic labor market, aggravated by racial segmentation, explains this phenomenon: the employers know the supply well (as the market is small) and simply accept the best available option - although it i s often far from being ideal. 4.21 The frustration of the firms is fueled not only by the inadequacy of the labor supply, but also by the scarcity of their own resources. Interviews with companies inGuyana indicate that, given the risks present in the economy, combined with the international mobility of skilled labor, the price of a high-quality employee i s often prohibitively high. If the high price is paid, though, the required skills can either be found or created through training. This finding i s supportedby the ICs data. 4.22 Specifically, the average search time for a skilled employee and the degree of dissatisfaction with the quality of labor are both lower infirms with greater resources. For example, search time i s greater than five days for non-exporters (that are confined to the small domestic market with weak demand), while it i s close to three days for exporters, and is less than two days in the firms with high capacity utilization.`22 Dissatisfaction caused by the inadequacy of available labor skills i s negatively correlated with search time (and, hence, with resource availability). Nonetheless, the absolute level of dissatisfaction with available labor skills i s still very high from an international perspective (recall Figure 4.4). 122Highcapacityutilization is defined as capacity utilization exceeding75 percent. 131 Figure 4-5: Guyana: Degreeof Dissatisfactionwith the Availability of Labor Skills, by Type of Firm Percentageof respondents that view lack of labor skills as a "major" or "severe" problem 45 45 40 G c EF 35 30 Source:World Bank GuyanaICs, 2005 4.23 Partly as a result of skilled labor scarcity, employees with incomplete secondary education and below constitute a wide majority in industrial firms according to reported education levels inthe ICs. As Figure 4.6 indicates, 75 percent of employees of non-exporting industrial establishments inGuyana, on average, do not have complete secondary education. This figure goes down to 64 percent for exporters. Regardlessof a company's export orientation, only four percent of its employeeshave some university education. 4.24 Inthe hotelsector elevenpercent of employeeshavestudiedat 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) resources in the hotel sector and, as detailed later in the text, (ii) greater the fact that the education systemdoes not emphasize the development of problem-solving skills and critical thinking. 132 Figure 4-6: Guyana: EducationalAttainment of Employees inIndustry and Hotels, average percent of employeeswith a given education level incomplete completed incomplete completed some university primaryeduc. primaryeduc. secondary educ. secondary educ. education Source: World Bank, Guyana ICs, 2005 4.25 The educational level of firm managers in Guyana is also relatively low, with only 44 percent of interviewed companies having a top manager with at some university-level education. 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 only fares better than some countries in Africa. The econometric analysis based on the data from the IC surveys for various countries shows that, in almost all cases, managerial education i s a significant determinant of firms' total factor productivity, a key ingredient of a firm's competitiveness. Figure 4-7: Percent of Surveyed FirmsWhose Managers Have Some University Education, by I Country loo 91 I I Source:World Bank, IC surveys, various years 133 4.26 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 i s 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 4.8). 4.27 I t is worthwhile noting the striking difference between countries in Central America such as Guatemala, and Guyana: while the dissatisfaction with the availability of skilled labor is practically the same in the two countries, the provision of training differs enormously. While in both countries 40 percent of respondents rated lack of skilled labor availability as a "major" or a "severe" obstacle, only 26 percent of Guyanese industrial firms provide training, while this figure is as high as 55 percent in Guatemala. 4.28 The factors behind this phenomenon include the scarcity of resources at the firms, the threat of emigration, and the lack of training centers.'23 Very few companies have been able to establish their own training centers - such as, for example, the Diamond Technology Training Center at the Demerara Distillers Limited (DDL),a major holding with a mainbusiness of production and exports of liquors. And although DDL i s able to offer among the best salary packages in the country, 25-30 percent of the employees trained in its center still end up going abroad. '24 Figure 4-8: Provision of External Training by ManufacturingFirms,SelectedCountries I 70 - .- - - - - 49 20 0 ~ Guyana Nicaragua Honduras Peru Guatemala Ecuador Ethiopia Source: World Bank, IC surveys, various years 123An additionalpossible reason, though, is that the firms are mostly small and do not use advancedtechnologies - which makes the simple learning-by-doingthe preferred type of training. Yet, the industry mix may also have an endogenous component- that is, the industries in which formal training is important simply do not choose Guyana becauseof the impossibilityof organizingsuch training in an efficient way. 124This informationwas obtainedduringan interview with senior managementat DDL inMay 2005. 134 4.29 An additional concern for the Guyanese education system is to focus on developing students' mathematics and science skills, and to foster problem-solving skills and critical thinking. The growing unwillingness of students to engage in technical professions, as well as the lack of the necessary educational institutions (e.g., vocational training) and teachers are seen as major problems. They are readily acknowledged by the Government, including in the NDS that envisions "focusing more on scientific and technical education". As the SPME states, "the emphasis will be placed on setting up a National Accreditation Body, a National Council for Teacher Education and a National Council for Technical and Vocational Education." Among others, the TVET (Technical and Vocational Education and Training) program of the CDB i s aimed at creation of technical institutes and training centers in Guyana. 4.30 The unwillingness of students to engage in technical professions likely stems from the substantialunderdevelopment of the industrial sector in the country - and reinforces it, creating a vicious circle. Indeed, industrialenterprises 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. Therefore, it makes sense to concentrate in a technical discipline mostly with an expectation of emigrating in the future - an expectation which i s likely to be self-fulfilling, The move away from technical professions starts at the secondary school level - where few students opt for technical and related disciplines. The provision of better training infrastructure for technical specialties may not bring desired results if the negative attitude to such professions stays unchanged. 4.31 Reforms in education must, therefore, be undertaken together with major improvements in the other areas of the investment climate. Without significant changes in the business environment, Guyana will continue to face a substantial reduction in the supply of high-quality technical specialists. Subjected to the contracting supply of skilled labor as well as unable to offer adequate wages in the currently prevailing risky business environment, the industrial sector in the country will face serious challenges. Other sectors may follow this fate as well. 4.32 The changes should address the whole set of the problems identified in this and other studies. This set includes - inaddition to the lack of skilled labor macroeconomic - instability, high crime rates and other security issues (e.g., drugs transshipment, alleged money laundering, etc.), inferior infrastructure (especially electricity), among others. Improvements in these areas will positively impact the education sector by refocusing students' incentives and expectations onto the desired path through boosting the resources on the domestic labor demand side. If these incentives and expectations stay unaltered, the reforms in education will be unlikely to bringthe desired results -they will likely only fuel further emigration. 4.33 Otherwise, the current reforms ineducation seem to have the right direction. While expansion of secondary education coverage (in terms o f years) i s very important, improving the quality of school education is, perhaps, a more urgent task. Given the serious constraints with the supply of qualified teachers, reaching universal secondary coverage in the near future may imply a further reduction in the quality of the education - unless serious economic progress is achieved leading to greater supply of teachers. 135 4.34 Another importantelement of the reforms,especially important for industry,is the provision of the necessary infrastructure and legislationfor private training centers. The Government's efforts inthe above areas are being actively supportedby international multilateral and bilateral organizations, includingthe World Bank. EMIGRATION WORKER REMITTANCES AND 4.35 Emigration in Guyana slowed down in the beginning of the 1990s, but increased thereafter, andfurther acceleratedinthe new millennium. The airline data available from an EUTransportation Sector study suggests anincreaseinemigration ratesto around 16personsper 1000 - from approximately 10 in 1996-2000. This number is practically the same as the one implied by the ICs, which indicates that, on average, 1.5 percent of employees of the surveyed industrial establishments left the country in 20O3.lz5 The high rate of emigration explains the absence of notable increases in the population of the country over the last two decades.'26 The recently conducted Rights of the Child (ROC) Survey indicated that over 85 percent of young people do not see a future in Guyana. The Guyanese diaspora currently by all accounts exceeds the population living inGuyana. 4.36 While the whole Caribbean suffers from high rates of emigration of skilled labor, the braindrain from Guyana is the highestin the region, after Suriname (see Figure 4-9). Understandably, skilled workers stand a much higher chance of obtaining good jobs and being absorbed into the societies abroad. In addition, the skills-sensitive immigration policies in many developed countries lower the mobility of low-skilled 1ab0r.l'~ In the 1 9 9 0 ~more than 40 ~ percent of the emigrants from Guyana had tertiary education, and around 77 percent of those with tertiary education left the country (Carrington and Detragiache, 1998). In 2000, approximately 86 percent of the Guyanese who received tertiary education in Guyana lived in OECD countries (Docquier and Marfouk, 2004). Note that most of the countries in Figure 4-9 have a relatively smallpopulation size. 4.37 A small domestic market coupled with globalization is likely to be a major factor behind the brain drain which many small countries are experiencing.'28 According to Docquier and Marfouk (2006), in 2000 Guyana had the highest recorded skilled-worker lZ5 Data on emigration rates differ substantially across sources, though. The World Fact Book (CIA) has an estimate of only 7.5 per 1,000 for 2005. 126 Between 1980 and 2002 the population actually decreased from 760 thousand to 751 thousand. In 1990 the population was estimated at around 724 thousand. The slight increase in the population between 1990 and 2002 i s explained, to a large extent, by the slowdown in the emigration in the first half of the 1990s. 12' For example, Canada has the skills-based scoring system for prospective immigrants. In the United States, emphasis has been put on the selection of highly skilled workers, through a system o f quotas favoring candidates with academic degrees and/or specific professional skills, etc. Adams (2003) cites two reasons why brain drain may be good or bad. It is bad because it reduces the human capital necessary for growth. It might be good as it happens due to the existence of better returns to skills in more developed countries - which gives more incentives to acquire education (in the hope to emigrate) and may result in an increase in the quality of the human capital stock remaining in the country, since the emigration, supposedly, takes only a small part of the skilled labor force. While the first argument suffers from the presumed exogeneity o f the brain drain for growth, the second one is hardly applicable to Guyana and other, mostly small, countries in the Caribbean - as the migration rates o f skilled labor there are extremely high. 136 emigration rate at 89 percent of the educated labor force (Figure 4-10). Several other Caribbean islands shared a similar rate of skilled-labor out-migration - Grenada and Jamaica (85 percent), St. Vincent and the Grenadines (84.5 percent), Haiti (84 percent), Trinidad and Tobago (79 percent) and St. Kitts and Nevis (78.5 percent). St. Lucia, Antigua and Barbuda, and Dominica all had skilled-labor emigration rates above 60 percent. These high rates of skilled-labor emigration in the Caribbean are alarming as they mean a loss of skilled workers for the domestic economies, with potential negative impacts on economic growth. Figure 4-9: Twenty Countries with the Highest Accumulated BrainDrain, percent of population with university education living abroad I 100190....................... -, 1 Source: Docquier and Marfouk (2004) Figure 4-10: Twenty Countries with the Highest Skilled-Labor Emigration Rate, 2000 100 I Source: Docquier and Marfouk (2006) in Ozden and Schiff, Eds., (2006) 137 4.38 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 4.11 illustrates that the remittances sent by Guyanese nationals working abroad grew from approximately US$15 million (2 percent of GDP) in 1996 to around US$lOO 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). Figure4-11: Guyana: Worker Remittances,1996-2004 120 90 60 .3 -3 C B3 30 0 -30 -60 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Bankof GuyanaandIMFdata 4.39 A crucial questionis whether remittances are being used ina productive manner by recipient countries and whether they enhance their investment and growth. A recent regional report prepared by the World Bank (2006)'*' examines the development impact of remittances in LAC. It finds that remittances have an overall positive impact on recipient economies, increasing growth and reducing poverty levels. This i s 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 healthindicators inthe recipient economy. 4.40 While remittances have potential benefits for the recipient economy, these positive impacts can be higher when remittances are accompanied by better recipient-country According to the study, remittances come at a cost -they affect negatively the supply of labor in institutions and policy environment with respect to remittances (World Bank, 2006). 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 i s found to be relatively low. In this sense, countries with high 129 World Bank (2006), "The DevelopmentImpactof Workers' Remittancesin Latin America andthe Caribbean", a draft study, Finance, Private Sector and Infrastructure, and Chief Economist's Office, Latin America and Caribbean Region, June 2006, World Bank,Washington D.C. 138 remittances flows, such as Guyana, need to minimize the negative impacts of remittances by focusing on improving the regulatory environment and ensuringa regime of secure and low-cost transmission of remittances. 4.41 Finally, the overall impact of remittances in Guyana is significantly undermined by the outward counter-flows that cancel out at least half of the inflows. As Figure 4.11 shows, outward remittance^'^' have been increasing along with inflows of remittances - and currently constitute about one half of the latter. This implies that the previously discussed level of inflows should be significantly discounted. Guyana i s the only low-incomecountry inthe LAC region in which outward remittances are of the order of the magnitude of the inflows. One possible explanation for the co-movement of inward and outward flows and their size, confirmed in numerous interviews, would be the recent growth in the illegal economic activities131 that allegedly require money laundering and thus undermine investor confidence. 4.42 Therefore, the best way out is to undertake major reforms that would restore investor confidence, reduce investment risk, and result in significant investment activities, thus increasingthe demand for labor. As the history of the 1990sdemonstrates, the Guyanese diaspora is a very powerful potential investor. Meanwhile, though, the majority of those who returned in the 1990s have already downsized their businesses and sent their families abroad13*. Therefore, once they move out, not only will economic activity further contract, but also their subsequent incomes will have no impact on the country's development. The directions of the reforms are well-known and, in addition to reducing crime and ensuring political stability, include curbing existing illegal activities, restoring macroeconomic stability, resolving infrastructure needs, etc. Many of these issues are addressed in other chapters of this Investment Climate Assessment. 4.43 While Guyana does not have any policies directly related to emigration, such reforms taken alone are unlikely to work. While specific re-immigration policies aimed at attracting a part of the diaspora back into the country could be considered (e.g., like the retiree program inBelize), they are unlikely to work at least until the security and infrastructure (mostly the reliability of electricity) issues are resolved at a minimum. 4.44 The Government has already undertaken significant steps in implementing its legislative and regulatory reform agenda. They included the passage of an Investment Act in 2004 and the preparation of the Competition and Fair Trading Bill. The objectives of the Bill are to: (a) promote competition and enhance economic efficiency in production, trade, and commerce; (b) prohibit anti-competitive business conduct which prevents, restricts or distorts 130These data were collected by the Bank of Guyana through surveys of financial institutions. There is some scope for errors, including possible misclassification of other flows as remittances - as it i s often difficult to adhere to the definition of the latter, given the uncertainty about the exact origin and the exact intended use of the transferred funds. However, the general picture must be correct. Interested readers may see Reinke and Patterson (2005) for the precise definitions and related discussions. 13'The IMFand Go-Invest estimate informal economic activity in Guyana to be close to 50 percent of GDP. 13'This information is based on an article in Stubroek News of May 3, 2005 that covers interviews with Mr. Bal Persaud, Executive Director of the Private Sector Commission, as well as on additional interviews held with representatives of the private sector. 139 competition or constitutes the abuse of a dominant position in the market; and (c) promote the welfare and interests of consumers. The Bill establishes a national Competition Commission as the implementation body invested with the powers to investigate potential abuses, to prohibit anti-competitive agreements or activities, and to levy fines. The Bill also grants powers of investigation and sanction to the CARICOM Regional Community Competition Commission, which will be authorized to act with regardto cross-border competition issues. THEETHNICSEGMENTATIONOFTHE POPULATIONANDITSIMPLICATIONS 4.45 The population and the labor force in Guyana 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 population of an African origin (Afro- Guyanese), around 35 percent. The rest are dominated by the country's indigenous people and by Chinese.'33 Figure 4.12 shows that, according to the ICs data, the proportion of Afro-Guyanese workers inindustry and miningi s somewhat smaller than that of Indo-Guyanese workers. Figure 4-12: Guyana: EthnicDistributionofEmploymentinSurveyedPrivateFirms (manufacturing andmining) li. . II 56 25 Indo-Guyanese Afro-Guyanese Indigenous and other Source:World Bank, Guyana ICs, 2005 4.46 The ethnic groups tend not to mix, which may impose certain costs on doing businessin the country. As Figure 4.13 illustrates, the proportion of a certain racial group in a firm tends to be either zero or 100percent. Had there been no racial segmentation, the shape of the distribution would have come out to be between uniform and peaking at sample means, rather than havingpronounced peaks at the extreme ends-which it happensto do. The existing ethnic segmentation obviously narrows labor choices of firms' managers, which i s likely to result in 133Afro-Guyaneseare, in a large part, the descendants of the slaves brought to Guyanainthe and the beginning of the lgthcenturies.Many slaves left the country following the abolitionof slavery by the Britishin the first halfof the 19Ihcentury. The labor shortagewas filled by a moderatenumber 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. 140 higher inefficiencies of employed labor. At the same time, better networking within the ethnic groups may, to an extent, compensate for the negative effects of this ~egmentati0n.l~~ Figure4-13: Guyana:EthnicDistributionofEmploymentinthe Firms Coveredby the ICs I 1 1 1 , 1 1 1 1 1 1 1 1 1 1 I I I I I 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95100 ratioof africansto (&carts+othernon-indians),% Source: World Bank, Guyana ICs, 2005 Note: the step between bars is one percentage point 4.47 Local-level reforms may be particularly affected by the ethnic divide. The events in the political arena have, of course, been dominated by the struggle of the opposing parties with ethnically-defined membership since the time the People's National Congress (PNC, consisting mostly of Afro-Guyanese) separated from the People's Progressive Party (PPP) back in 1957. The strong ethnic dimension of the political divide may impose certain costs on the local-level 134See a good review of the economics of racial discrimination inArrow (1998). 141 reforms, because the communities are also often divided by the same principle. This may have negative effects on the implementation of microfinance, basic infrastructure and other micro- level policies. TECHNOLOGY INNOVATION AND 4.48 Investment in new technologies is far from being intensive and is fairly unsophisticated. Only just over one-third of the surveyed industrial establishments invested in new technologies in 2002-2003. This i s considerably less than in many other countries in the region (Figure 4.14).'35 In the overwhelming majority of cases - more than 75 percent - the investment came in the form of simply purchasing new equipment, which i s the highest proportion among surveyed countries in the LAC region (Figure 4.15). These numbers are practically the same for large and small companies (Figure 4.16). 4.49 Licensingor purchases of turnkey operations as well as hiringof key personnel were used by a negligible minority of Guyanese producers, except for the few foreign-owned firms covered by the ICs. Technological underdevelopment i s 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 didnot use web pages for communicating with clients or ~r0viders.l~~ 135Note 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 4.13 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. 136This result is in a large part driven by the limited provision of telecommunication services inGuyana. 142 Figure4-14: Percentageof ManufacturingFirms,Which InvestedinNew Technologies,Selected Countries 1 60 ................ . ............... .......... ......................................................................... .................... ..... ..... ...... ....... ............................... C . 53 J 1 45 46 B 4 n 2 gP 20-- O T Guyana Guatemala Honduras Ecuador Nicaragua Source: World Bank, IC surveys, various years Figure4-15: Percentageof ManufacturingFirmswith InvestmentinNew Technologiesthat Used Purchaseof MachineryandEquipmentas thePrimaryMethodof UndertakingSuch an Investment,by Country 60 d840 L n 2 Ep 20 0 Guyana Honduras Nicaragua Ecuador Guatemala Peru Source: World Bank, IC surveys, various years 143 Figure4-16: Guyana: Top Most ImportantMethodof Investment inNew Technologies,by category of manufacturingfirms 71 ALL Large Small Dom.Private Foreign-owned erations fromforeign firms I erations from domesticfirms Source: World Bank, Guyana ICs, 2005 4.50 The number of Guyanesefirms that possess at least some internationally recognized 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. Figure 4.17 illustrates that export-oriented foreign-owned companies had a substantially higher proportion of quality certifications than the rest of the interviewed Guyanese firms. While the ICs question does not allow us to distinguish between I S 0 and other types of quality certification (HACCP, etc.), additional interviews with the GNBS and the experience of other countries in the region reveal that the vast majority of these certifications are not ~ 0 ' ~ ~ . Internationally, Guyana fares relatively poorly - yet, is ahead of Guatemala and Peru (Figure 4.18). 13* 137 Inall the comparator countries in Figure 4.17 the share of firms with an I S 0 certification did not exceed six percent, and was less than three percent for Peru. Unfortunately, this figure is not available from the Guyana ICs. The 17 percent obtained from the survey might represent a slight overestimation, as some firms could wrongly take the National Quality Mark to be an internationally accepted certification. 144 Figure 4-17: Guyana: Percentage of Firmswith Quality Certification Source: World Bank, GuyanaICs, 2005 Figure 4-18: Percentage of FirmsPossessingSome Quality Certification: SelectedCountries Source: World Bank, IC surveys, various years 4.51 The weaknesses of the business environment related to quality and technology are reinforced by the absence of adequate enforcement of intellectual property rights. According to the U.S.Department of State, "patent and trademark infringement are ... common. Piratingof TV satellite signals i s widespread and takes place with impunity."'39 The weaknesses in the business environment result in a lack of resources, both financial and in terms of skills, available to firms - which prevents them from investing in high-level technologies. This self- 13'This is a reference to the U.S. Department of State that appears in a 2004 Country Profile for Guyana by the Economic IntelligenceUnit. 145 selection, reinforced by the weakness in intellectual property rights protection, has led to a relatively low level of technological advancement of the industrialsector in Guyana. 4.52 S M E policies in the country at this moment are essentially equivalent to general economic policies. It i s customary to discuss in an Investment Climate Assessment the existing SME policies, their impact on the creation of and support to technologically-advanced firms and related problems. Due to its size and economic problems, Guyana i s a special case in that, with rare exceptions, all domestic businesses are small, at least on an international ~ca1e.l~'Only seven percent of the establishments surveyed inthe ICs had more than 100employees, including temporary workers. This means that, using the scale o f a larger economy, for example, the majority o f the surveyed firms in Guyana would have been classified as micro or small. 4.53 Of course, even within the existing population of firms in Guyana the relative size matters -as highlighted, on several occasions, inthe analysis in this chapter and elsewhere inthe document. However, it seems that the first most important task is the resolution of those problems that affect all firms. Once the investment climate becomes one that gets the incentives right and leads to higher investment and growth, then will be the time to elaborate specific micro-enterprise and SME policies. 4.54 Right now, there do not seem to be any formal difficulties with registering an enterprise, no serious constraints stemming from labor regulations. Inpart because certain inspections may simply not function, there seem to be no problems with lengthy red tape procedures. There appear to be no problems with pledging collateral (except for lack o f resources to pledge). While there are problems with enforcing collateral, it seems that at least court decisions can be obtained in a reasonable time.14' 4.55 A major problem, especially for smaller firms, is the high cost of financing. However, coupled with the high liquidity in banks, the high interest rates mostly mean that, at present, investment in Guyana i s a very risky business. It i s unlikely that, ceterisparibus, some specific SME policies would significantly reduce this cost and still leave the lenders profitable. Institutionally, the country seems to have a good basis for micro-enterprise development, including the private Institute for Private Entrepreneurship Development (PED) with 72 staff engaged in various micro-lending operations. INFRASTRUCTURE FOR QUALITY ASSURANCE 4.56 While created long ago, the infrastructure for the provision of Metrology, Standards, Testing and Quality (MSTQ) services has started to function only recently. 140Globalization is a major factor behind considering the firm size on an international scale. 14' Business licensing and operation permits as well as the quality of the judiciary were the two lowest-rated constraints to doing business identified in the ICs. The confidence in the judiciary i s relatively high - with two thirds of the respondents to the ICs indicating that they at least tend to agree that the judiciary will uphold their rights in a business dispute. The time needed for a court resolution of an overdue receivable averaged in the ICs to only 43 days, whereas an out-of-court settlement required less than two weeks. Note that other sources o f data may indicate longer times for conflict resolution; see Chapter 2 on this topic. 146 Globalization requires the use of internationally accepted standards and norms. This is especially important in a small economy where the effects of globalization are likely to be felt stronger and faster. Thus, a solid national MSTQ infrastructure is an important determinant of growth and competitiveness. While created back in 1984, the GNBS, the principal (and, in practice, the only) element of Guyana's quality infrastructure, started to function only in 1994. Yet, until recently GNBS had been experiencing serious financial difficulties. Significant improvements started around 2003 - when the GNBS budget increased and was topped up from the sale of advisory andother services. 4.57 GNBSis a semi-private, but government-controlled, institution that implementsand coordinates practically all the MSTQ programs in the country. Responsible to a Board of Directors, the GNBS receives most of its financing through government subventions. Due to the recent positive developments, the GNBS was able to sell its services, the proceeds from which now comprise more than 20 percent of its budget.'42 This has allowed GNBS, in the last two years, to preserve its staff that usedto rotate very frequently in the past andincrease it from only 13 employees in 1994 to 52 in 2005, including 15 inspectors. The pay ranges from US$200 per month (entry level) to US700 per month (intermediate management level) and above, which i s notably higher than similar current levels in the public sector. The GNBS is responsible for carrying out all the MSTQ-related tasks in the country. The activities it undertakes cover all the main components of a typical national quality system, with some country-specific extras (like the MetrificationProgram). Box 1briefly describes the programs currently managedby the GNBS. 4.58 The all-encompassing nature of the GNBS is a matter of concern, as conflicts of interest may arise from the same body being 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 (resulting so far in only 52 employees at GNBS) and the budgetary difficulties requiring cross-subsidization of the activities may partly justify the institutional unification, provided due diligence i s exercised by the respective departments. Inother words, a substantial inter-departmental independencewithin the GNBS is requiredandmustbe amatter of serious attention. 142This, and most o f the rest, information is based upon an interview with the GNBS. 147 Box 4.1: Activitiesof the Guyana National Bureauof Standards(GNBS) e Develoument of standards. The GNBS works with 15 sectoral committees and sub-committees on the development of national standards. e Metrologv and testing services. The GNBS develops or otherwise introduces the necessary measures and provides laboratory and similar services for calibration and testing (e.g., rice quality certification, gold quality testing, etc.). e Accreditation services. The GNBS i s responsible for accreditation of private quality measurement facilities to certain standards. The ongoing work includes the expansion of the set of the standards to which the GNBS can accredit -such as, for example, IS09001. e Product certification. The GNBS may assign its own National Standard Mark to products that meet specific characteristics. This mark is recognized in selectedcountries. e Standardscomuliance. The GNBS directly enforces standards compliance. Currently, there are 25 categories of goods under the oversight. e Audit and conformitv assessment. The GNBS has just started a specific technical assistance service whereby it assesses (but not, yet, accredits) the readiness of the existing quality control systems for the various IS0 9001+ certifications. e Other technical assistance and training. The GNBS provides technical assistance to private firms that need to prepare their facilities for I S 0 and other certifications. Currently six firms are being assisted in their preparation for I S 0 9001 certification. The GNBS also works with micro- enterprises and SMEs (currently 17 of them) on the development of special, client-specific, standards that include the various features of I S 0 standards, but are less strict. The sectors represented by these clients include rice, furniture and jewelry. The GNBS also provides formal training to companies in all the aspects of quality control. D Advisory and information services. The GNBS undertakes efforts to familiarize the business community in the country with the quality control framework and the importance of quality certification. The GNBS maintains a library of standards and related information. D Metrification program. The GNBS i s responsible for the gradual introduction of the metric system in the various sectors. While the education and health system have already undergone the transition, along with selected other sectors, such as petroleum, a lot of work still remains to be done -especially inmarketplaces that are the slowest to adjust. D International programs and cooDeration. The GNBS, with the assistance of the Food and Agriculture Organization of the United Nations (FAO), participates in the CODEX, an international food standards organization - which i s important, given the significant weight of the food industry in the country. The GNBS i s also a member of the CARICOM Regional Organization for Standards and Quality (CROSQ), ISO, IEC, ITU, etc. The membership in these international organizations i s extremely important for the worldwide recognition of the GNBS accreditations and certifications. Source: Author's interview with GNBS, May 2005 148 RECOMMENDATIONS ON SKILLS, MIGRATION, TECHNOLOGY QUALITY AND 4.59 Reforms inthe 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 other obstacles, most of which are identifiedand discussedin this report - including the notable crime activity (that includes drug-related activities) and, importantly, the serious lack andor inadequacy of key infrastructure (e.g., electricity, transportation, telecommunications). Otherwise, reforms ineducation would likely only reinforce the already intensive braindrain; the incentives of employers to provide training would remain low - as would their willingness to invest in sophisticated new technologies. Productivity and, hence, international competitiveness would then stay relatively low. 4.60 The recently accelerated brain drain is difficult to stop without creating an adequate and stable business environment, which is conducive to growth. Guyana has a great potential for rapidly increasing investments into its economy by the huge diaspora abroad which exceeds the population remaining in the country. The return to the country of numerous investors in the beginning of the 1990s provides testimony to this. Unfortunately, the expectations of these investors were not met. Reliance on remittances as a primary source of resources in the economy will not be sufficient. Specific policies to attract select categories of Guyanese living abroad back to the country will hardly work unless the general security level i s substantially heightened, and the access to andquality of infrastructure are improved. 4.61 While significant progress is observed in the formal level of educational attainment, the quality of school education over the last 20 years has substantially deteriorated and should be a matter of major concern for the Government. The lack of qualified teachers, in large part caused by their continued emigration, i s a major issue. Problems in the remote areas are greater due to low incentives for teacher to relocate there and worse school infrastructure. It i s 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. Government efforts in improving the education system are supported by a number of projects by international developmental organizations, includingthe World Bank. 4.62 Work towards the creation of a greater number of vocational training centers for technical professions is necessary to complement the skills developed in technical disciplines in the general schools. Recognizing this, the Government i s working toward the provision of the necessary infrastructure and legislation for private training centers. It i s important to note that provision of training centers by itself i s unlikely to have a significant effect, if the other two factors underlyingthe bias remain intact, namely the general pessimism of the youth about the future of the country as well as the high emigration of technical specialists. 4.63 Greater consensus among ethnic groups is needed. Guyanese society is significantly split by the ethnic principle - which manifests itself in the ethnicity-based segmentation of 149 ge~graphy,'~~businesses and politics. While the ethnic polarization of the labor force may impose certain costs on doing business due to the restricted choice of labor that employers have, this effect may partly be offset by the greater intra-ethnic networking effects. On the political side, local-level reforms may experience difficulties due to the ethnicity-based community segmentation o f the population. Finding consensus seems to be the only way to resolve the problems. There i s no racial discrimination in the sense of a profound explicit suppression of general rightsand freedoms of any particular ethnic group. 4.64 Intellectual property rights protection needs improvement. Patent infringements and other pirating o f intellectual property lower investor confidence. The low technological sophistication of Guyanese firms i s likely a result of the high-risk environment in which the businesses operate and the consequent under-investment. Inother words, again, alleviating major constraints, such as the lack of security, infrastructure bottlenecks, etc. i s a prerequisite for technological advancement. It i s not possible to say whether certain market failures in the technology and innovation market are present - this may require further research. 4.65 The development of the quality assurance infrastructure has recently shown notable progress that should be continued. The existence of a good quality assurance infrastructure i s an important prerequisite for successful growth, especially in a very small and sufficiently open economy like Guyana. The GNBS, as the institution in charge o f performing all the functions of a typical national quality system, appears to have been doing a satisfactory job recently. 4.66 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 o f the market and the budgetary difficulties requiring cross-subsidization of GNBS activities may partially 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 to minimize potential risks of conflicts o f interest. 143This mostly means separation at a local, community level. 150 CHAPTER5. FINANCE ACCESSTO CREDIT 5.1 The Guyanese financial sector is relatively sizeable, although statistics are overestimated by 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 2004. Given the significant level o f informality of the Guyanese economy, estimated to be more than 30 percent o f the GDP, the size of the financial sector appears to be overestimated. The sector comprises six commercial banks'44 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 i s largely dominated by commercial banks whose combined assets of US$734 million represented 62 percent o f the overall financial sector in 2004. Unlike the majority o f the Caribbean countries, pension schemes are also quite large, accounting for almost 7 percent of total assets (see Figure 5-1)145. Figure5-1: FinancialSector inGuyana,TotalAssets 2004 800 735 700 600 -,g'S500 400 s tft 300 200 100 0 Finance TrustCompanies PensionScheme New Building Insurance Commercial Companiesand Society Companies Banks MerchantBank Source: Bank of Guyana, Statistics 2004 144The 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. 145Among the Caribbean countries, the same degree of expansion in public pension schemes can only be found in Trinidad and Tobago, (see Worrell et al.). 151 5.2 Private credit to GDP by commercial banks 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, 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), whichjumped from 15 percent of total assets in 1999to 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 NBFIsin Guyana over the period 1991-2004. I Figure5-2: PrivateCreditinGuyana: 1991-2004,Percentof GDP m'o - I 20.0- 1991 1992 1993 1994 1995 1996 1997 1998 1999 2030 2001 2002 2003 2004 Year I ' c B ~ ~ +NBFB,] Source: IMFInternationalFinancial Statistics, 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 measuredby 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 (see Table 5-1). Private credit as percent of GDP i s higher in Panama, as well as 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 Guyanahas a relativelyhigh number of savings accounts (around 100,000), the number of individual bank borrowers i s 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 causedby weaknesses inthe 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 152 insolvency options being liquidation and receivership (often freezing creditor rights until final resolution). Table 5-1: PrivateSector Credit asPercent of GDP: An InternationalComparison,2004 I Domestic credit to the Private Sector (% GDP) I Guyana 44.8 Trinidad andTobago 27.8 Barbados(*) 57.1 Grenada 84.6 St. Vincent andthe Grenadines 58.6 St. Lucia 83.9 St. Kitts andNevis 69.8 Guatemala Ecuador Peru Panama 90.8 (*) As of 2003 Source: World BankWorld DevelopmentIndicators(WDI) Figure5-3: PrivateCreditto GDP,2000-2004,by Countryor Region 0 2000 2001 2002 2003 2004 +Jamaica *Heavily indebtedpoor countries(HIPC) -*-Latin America & Caribbean +Guyana +Trinidad and Tobago -Barbados Source: GuyanaFSAPbackgroundinformation 5.4 The decline incommercial bank lending occurred in all sectors, decreasingavailable loans to localfirms and private households. Financialexposure o f Guyanese banks in terms of loans to local enterprises gradually diminished over time. This reduction stems from multiple factors such as the stagnation of the local economy, the bad experience with agricultural lending 153 in the late 1990s, and the present institutional constraint^'^^. The reduction in credit volumes also affected private households, which are now worse off in terms of access to credit than in 2001 (see Table 5-2). Interms of a sectoral breakdown, services currently account for 54 percent of total loans, followed by manufacturing (32 percent) and agriculture (13 percent). Table 5-2: Guyana: Commercial Bank Loans by Sector (% 2001-2002 2002-2003 2003-2004 BUSINESSENTERPRISES -13.5 -26.5 -11.8 Agriculture -20.7 -50.8 -8.8 Mining and Quarrying -8.3 -5.9 -43.8 Manufacturing -14.1 -30.6 -17.8 Services -9.8 -13.9 -6.9 HOUSEHOLDS -2.0 -7.4 -10.1 5.5 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.'48 In2004, long-term loans to households andfirms amounted to more than 50 percent of the total financial resources lent to the private ~ect0r.l~'This represents a marked increase over the past three years, as in 2001 long-term loans represented 42 percent of the total. Inreality, 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 (see Figure 5-4). Figure 5-4: Long- vs. Short-Term Lendingto the Private Sector in Guyai a: 1999-2004150 I 250 50- 1 /-CShoR-lem -CLong-lem 1 Source:Bankof GuyanaStatistics, 2005 14`Significant barriers are the weak credit information infrastructure,the lengthy foreclosure proceedings and poorly protected creditorrights. 14'Original data are adjustedfor inflation usingthe UrbanConsumer PriceIndexof Georgetown.The base year is 2001. 14*Long-termcredits represent about 60 percent of commercialbank loans and advances in the OECS, but this figure includesa large proportionof real estate mortgageloans. 14'This figure does not include real estate mortgageloans. Original dataare adjustedfor inflation andthe exchange rate. Base year: 2001. 154 5.6 The amount of long-term deposits, the main source of funds for commercial banks, i s 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 sector'". This percentage is extremely low and the maturity mismatchcould pose a significant threat in case of a rapid bank run. The risk i s 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.'52 The preference of deposit-holders for short-term saving instrumentsalso 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 (see Figure 5-5). Figure 5-5: Maturity Structure of Time Deposits with Guyanese Commercial Banks, December 2004 3% 0Yo 15% I IQ c3 months I3 aid c6 months 0 >6 ande9 months 0>9 and c12 months I months r >12 1 Source: Bank of Guyana Banking System Statistical Abstract, January 2005 5.7 The percentage of funds loaned out to the top twenty borrowers continues to increase, confirming the conservative attitude of Guyanese banks and the concentrated nature of the real ~ector''~. 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 conservative trend i s also coupled with an increasing tendency toward loaning out funds following others rather than following purely opportunity-cost criteria based on the business to be financed. Credit disbursedto related parties doubled since 1997, and represented six percent of the total in 2005'54. 151 The ratio has halvedsince 2001, meaningthat long-termdepositshave shrunk at a faster pace than long-termcredit disbursed by commercialbanks. Savings withdrawals requirea minimum of one-daynotice, whereas demand deposits are not subject to notice. '53 Source: Bank of Guyana. I54 Relatedparties comprise director, senior officers and shareholders with 20 percent or more shares 155 5.8 The reduced exposure of commercial lenders is also the result of loan portfolio quality problems. Despite recent improvements mainly attributed to the loan restructuring process, the level of non-performing loans is still quite high (18.8 percent of total loans as of end 2004). Provisions for loan losses have declined rapidly since 2001, and are still far below the level of doubtful loans, covering only 33.3 percent in2003. The percentage of total loans written off has increasedconsistently over time (jumping 53 percent from 2002 to 2003, and 90 percent from 2003 to 2004), although part of it is due to the privatizationof loss-making banks.'55 5.9 The range of guaranteesaccepted by the financial system is quite limited, leading to a financial bottleneck for Small and Medium Enterprises (SMEs). Collateral instruments required by Guyanesebanks are either physical guarantees, such as real estate andland, or liquid assets, mainly constituted by cash. Other forms of guarantees such as machinery, inventories and accounts receivables are scarcely accepted, which might be due to the lack of expertise by commercial banks on the evaluation and tradability of those firms' assets. The lack of possibilities for firms to use movable assets as guarantees certainly represents a significant obstacle for smaller firms' access to finance. Banks are often faced with a choice - accept reputational collateral, or not lendto large numbers of clients. Costs of Credit 5.10 Interest rate spreads are high by developedeconomiesstandards, above the regional average, and fees and commissions increase the effective interest rate156. As of December 2004, the Guyanese commercial bank prime lending rate amounted to about 14.5 percent (with a range from 13 percent to 17 percent), while the deposit interest rate averaged 3.4 percent over the same period. Though high by developed economies standards, interest rate spreads in Guyana are comparable to those in other small economies in the Caribbean region. Interest rate spreads inGuyana over the period 1999-2004 are second only to those in Suriname and Belize, andwell above that of leading Caribbean economies such as Barbados and the Bahamas (see Table 5-3). 5.11 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 i s 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 (see Figure 5-6). Among the reasons for such rigidities is the fact that banks are allowedby law to freely modify the interest rate charged on their ongoing loans. 155The portfolio of one privatized bank constituted by a large fraction of non-performing loans was transferred to a state-owned recovery agency in 2003. Bank 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 team mission, May 2005). 156 Table 5-3: Interest RateSpreads,InternationalComparison (%) 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: CaribbeanCentrefor Monetary Studies, Staff Estimates,and CentralBank of TrinidadandTobago, Bank of Guyana Figure5-6: Lendingvs. DepositRateTrendin Guyana, 1995-2004 15 5 - 0 4 I 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 I+Prirne Rate *Small Savings Deposits1 Source:Bank of GuyanaBankingSystemStatistical Abstract, January 2005 5.12 Surprisingly,the additionalrisk premiumfor smalland mediumenterprises(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 i s 16 percent per annum. This rate i s only 1.5 percent higher than the average rate applied to larger corporate firms (i.e., 14.5)'57. The result might be explained by existing difficulties in assessing the creditworthiness of potential borrowers, as demonstrated by the inexistence of credit scoring 15'Data are based on informationprovided by the Questionnaireon Supply-side Issues of the Guyana Investment Climate Assessment (ICA). 157 mechanisms in almost all commercial banks and the rejection rate of credit applications from SMEs, as high as 27 percentper year. COSTSAND ACCESS FINANCIAL TO SERVICES: THE PERSPECTIVE OF THE 5.13 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. This is comparable to Mozambique (29 percent) and Zambia (32 percent), but substantially lower than comparator countries from Latin America such as Guatemala (44 percent), Ecuador (50 percent) or El Salvador (63 percent). Firms in other regions also appear to enjoy abetter access to credit: for instance, a 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 (Figure 5.7). Figure 5- 7: Firmswith Loans: an International Comparison, percentage of interviewedfirms El Salvador Honduras Ecuador Indonesia Sn Lanka Nicaragua Peru Guatemala South Afma Brazil Zambia Guyana Mozambique 0 0 100 20 0 30 0 40 0 50 0 -5.00 70 0 percent Source: World Bank Investment Climate Surveys, 2002-2004 5.14 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 i s low by international standards - for instance, 59 percent of micro and small Salvadoran firms, 39 percent of micro and small Guatemalanfirms and 51 percent of micro and small Honduran firms have an outstanding loan (Figure 5-8). 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 inthe food-processing industry. This section reflects the results of a firm-level survey of 164 Guyanese manufacturing firms. 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. 158 Figure 5-8: Firmswith Loans by Firm Size and Country, percentage of interviewed firms 90_I x4 7 R r 70 :: 60 B 30 20 10 0 Zambia Guyana Brazil Guatemala Nicaragua Honduras ElSalvador Source: World Bank InvestmentClimate Surveys,2002-2004 5.15 A high proportion of Guyanese firms are credit-constrained, especially among micro and smallones. For analytic-a1purposes, the sample of interviewedfirms 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 (Le. 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; andfirms which didnot apply for a loan due to perceived constraints such as cumbersomeapplication procedures, highcollateral requirements or high interest rates, among others. As shown in Figure 5-9, more than one-third (34.6 percent) of all Guyanese firms are credit constrained. There are substantial differences in the proportionof 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, i s 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) andone-quarter of large ones indicate that they do not needabank loan. These arehigh numbers by international standards, and the reasons for this situation are discussed later. 159 Figure5-9: Proportionof Firmswith Loans,Firmswithout a Needfor Loans,and of Credit ConstrainedFirms,By Size, Percentage of InterviewedFirms 00 0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Micro and small Medium Large Total 10Firmwithloans .Firins which do not nccdloans OCredit constrancdfim 1 Source:World Bank GuyanaICs, 2005 5.16 Firms in Georgetown and non-exporters are more credit constrained than firms located outside of the capital and engaged in exporting. This i s likely due to the fact that most of the wood industry firms (logging and processing) and the food processing ones are outside of Georgetown and are mainly exporters. As illustrated in Figure 5-10, 53 percent o f firms in Georgetown are credit constrained (Le. have unmet demand for credit) versus only 30 percent o f firms in the countryside. In terms o f exporting activity, 40 percent o f non-exporters are credit-constrained in contrast to 23 percent o f exporters. Interestingly, a large proportion o f non-exporting companies declare that they have no demand for bank loans - 41 percent, which probably reflects a lack o f opportunities to export and grow. Figure5-10: Proportionof Firmswith Loans,Without aNeedfor Loans, and of Credit Constrained Firms,By ExportingStatus and Location,percentage of interviewedfirms iW.0 90.0 80.0 70.0 m.0 s0.0 40.0 30.0 20.0 10.0 0.0 Non-expumrs EXpolterS In Georgcioun Ouoide of Georgetown [EtIFimnwith lums .Firms which do not needloans OCrcdit cunstraned firmsj Source: World Bank GuyanaInvestment ClimateSurvey, 2005 160 5.17 The cost of finance is rated as the highest ranking obstacle to business operation and growth identified by firms in Guyana. This concern i s shared by all firms, regardless of firm size and whether they export products or only sell in the domestic market. It i s a slightly more important concern for medium-sized firms than others, and for non-exporting companies, as Table 5-4 below reveals. (In contrast to costs, access to financing i s 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 amongthe main deterrents to firms' applying for loans. Percentageof 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% Figure5-11: FinancingCostsasan Obstacleto BusinessOperationandGrowth: A Cross-country Comparison Cost offinancing as a "major" or "very severe" obstacle, international comparison (%) I 80% 60% 40% 20% 0% Source: World Bank Investment Climate Surveys, various years 5.18 The average annual nominal interest rate on loans denominated in Guyanese dollars reported inthe survey isjust over 19 percent, ranging from 20 percent for small firms to 18 percent for large firms. These interest rates do not include fees, commissions, mandatory savings balances and other expenses related to the loan transaction, which are common in Guyana. Only about 15 percent of responding firms' outstanding loans in 2004 were denominated in foreign currency (US dollars mainly). For US-dollar-denominated loans the nominal rate of interest rangedfrom 3 to 13 percent per annum, and its recipients were only large firms. In sectoral terms, the nominal lendinginterest rate for Guyanese-dollar-denominatedloans 161 i s highest for food, wood and textiles manufacturers (19 percent) and lowest for garments (13 percent)'59. For USD-denominated loans the nominal interest rate was 13 percent per annum for one large mining company and 3 percent for one large food processing firm. It is likely that the differences reflect the relative risk of the sector, as well as the amount of fixed asset collateral available to back a loan. Both exporting and non-exporting firms pay the same interest rate on averageon their Guyanese-dollar-denominated loans (19 percent). Exporters pay markedly lower interest rates (nominal, annual) than non-exporters (3 percent versus 13 percent) on their US- dollar-denominated loans, but this comparison should be taken with caution as only 2 firms provided information. Geographic location matters little, with firms located in the capital paying almost the same (19 percent) as firms in secondary cities and rural areas. ACCESSTOFINANCIAL SERVICES: A KEY PROBLEMFORFIRMSWITH GROWTH POTENTIAL 5.19 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?60 This i s lower than in comparator countries such as Guatemala, Peru, Honduras and Ecuador. This i s true despite the high degree of liquidity in the banking system. In fact, Guyana i s 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 andthe extent of credit information sharing161. 5.20 Access to loans varies significantly by the currency denomination of the loan (Table 5-5). More than 93 percent of the loans extended to small firms were local currency loans, while one third of the loans extendedto 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 extendedto non-exporting companies were foreign-currency denominated. This i s an indication that the commercial banks may not be willing or preparedto managecurrency risk. The majority of exporting firms take on the currency risk, which can make doing business internationally more expensive andlimit their competitiveness. The 13 percent nominal annual interest rate for textiles is based on one observation, i.e. only one firm is reported having a loan and provided information about its rate of interest. 160 The lack of financing for private firms is frequently reported in Guyana's news media. One recent review in the Ram and McRae Annual Business Survey found that firms cited interest rates as the most important constraint to investment (Stubroek News, October 5,2005). Guyana was not included in the sample of the Doing Business in 2004 and 2005 reports hence no comparison with previous years is possible. It should be noted that the Getting Credit index of Doing Business places a heavy emphasis on the existence of a credit bureau, which can negatively bias against financial systems that are otherwise performing adequately, but lack a functioning credit bureau (public or private). 162 Table 5-5: Even Exporters and Large Firmsin Guyana Have Trouble Getting US Dollar Loans Source: World BankGuyanaICs, 2005 5.21 When credit is provided,banksimpose a very high collateralrequirementfor most loans. This reflects a lack of reliable, timely information on borrower behavior andindebtedness, 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 L A C region. For instance, this requirement was less important in Nicaragua (where 93 percent of firms reported needing collateral), Honduras (89 percent), and Grenada (60 percent in 2004, a drop from 90 percent in 2001) (Figure 5-12). Based on the survey results, the average collateral requirement inGuyana was a very high218 percent, makingGuyana the most costly interms of collateral in the region (along with Nicaragua), and reflecting a very conservative banking sector (see Figure 5-13). The required level of collateral ranged from 195 percent for large firms to 250 percent for small firms. Figure 5-12: Percentage of Loans which Require Collateral, by Country I I 1 Guyana 100 I 1i I I II Nicaragua 93 I I Honduras I I I El Salvador I I ~ 8689 ~ Guatemala 1 I 74 I Ecuador 73 I I I Peru 70 I I I I B T a Z l I 67 I I Grenada 1 60 -I I I I Source:World BankInvestmentClimate Surveys, 2002-2004 5.22 Interestingly,credit-constrainedfirms which had not appliedfor a bank loan (those with demandfor creditbutno access) did notlistcollateralbut rather highinterestratesas the most important reason for their failure to apply. However, among those credit- constrained firms whose loan applications were turned down, lack of acceptance of the property as collateral was the principal reason for rejection of 58 percent of the micro and small firms' applications, and none of the applications of medium and large firms. Therefore, lack of 163 acceptable collateral assets i s a serious barrier for micro and small firms when they apply for a loan. Figure 5-13: Collateral-to-Loan-Value Ratio, percent: By Country 250 Z I R 717 200 150 100 50 0 Guyana Nicaragua Ecuador Honduras Brazil El Salvador Peru Guatedt Source: World BankInvestmentClimateSurveys, 2002-2005 5.23 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 installedmachinery (29 percent) also playing a role (see Figure 5-14). Figure 5-14: Sources of Collateral: by Firm Size 100 90 80 70 60 50 40 30 20 10 0 Land and buildings Immovable plant and Movable machinery Other tangible assets Personal assets of machinery and equipment (accounts receivable. ownerhanager inventories) Source: World BankGuyanaICs, 2005 164 5.24 When credit is provided,maturitiesare very long by regionalstandards, especially for largefirms. Inoverall terms, the average loan maturity in Guyana for ICs sample of firms i s 80 months'62. The average Guyanese-dollar loan maturity i s 61 months for small firms, increasing to 84 months for medium sized businesses and 114 months for large companies. Exporters obtain a loan with an average maturity of 86 months, slightly above the 77-month average for non-exporting firms. These long maturities were confirmed in interviews with senior representatives of the leading banks operating in Guyana. However, maturities of Guyanese- dollar loans for small and medium enterprise (SME) lending were reported in the latter survey to be closer to 42 months (3 and a half years) rather than the 61-month average of the ICs. There were three USD-denominated loans in the ICs, with maturities of 12, 20 and 60 months. In addition, only two loans had a maturity of 10years (120 months) each.'63 5.25 The main use of bank loans in Guyana was to buy machinery and equipment (60 percentof outstandingloans),followedby purchaseof inputsand supplies (23 percent)and purchaseof land and other fixed assets (10 percent). The use of new loans to pay off old loans was negligible (2 percent). However, there are significant differences among micro and small firms on the one hand, and mediumand large firms on the other in terms of the mainuse of their bank loans. Thus, micro and smallfirms 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 usedto 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. Only 8 percent of large firms' loans, and 14 percent of mediumfirms' ones financed inputs and supplied. Interestingly, small firms and large firms used a similar share of their loans to invest in land and buildings (14 and 15 percent respectively), in contrast to only 5 percent of medium firms' loans being used for the same purpose. Furthermore, exporting firms and firms with high capacity utilization exhibit a higher propensity to use bank credit to buy plant machinery (73 percent and 77 percent of loans were for new machinery and equipment respectively) than non-exporting companies and firms with low capacity utilization (46 percent and 33 percent of loans were for machinery and equipment among them, respectively). Figure 5-15 illustrates the use of bank loans by type of firm in Guyana. Firms interviewedfor a DiagnosticAssessment of the Investment Climate in Grenadain 2004 also reported long maturitiesof their outstanding bank loans: more than half of those firms with loans (56 out of 104 firms) indicated a duration of the loan of more than 4 years. The maximum reported loan duration was by Grenadian firms was 20 years. 163Giventhe small numberof valid observations inthese examples, the averages reportedfor the ICs hereshould be interpreted with caution. 165 Figure5-15: Main Uses of BankLoans in Guyana: by Type of Firm 7" I" 80% Source:World BankGuyanaICs, 2005 5.26 Beyond credit, there are few financing alternatives available 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 smallfirms 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 i s 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, 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. 5.27 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 i s low in Guyana, compared to the Central American economies, for example (see Figure 5-16). 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.'@ Similarly to Guyana, Grenadian firms financed only 4.5 percent of their working capital needs through trade credit. 164Figurestakenfrom InvestmentClimate Assessments for Guatemala (2004), Nicaragua(2004), Honduras(2004), Peru(2003),Ecuador (2004),El Salvador (2004)and Brazil(2005). 166 Figure5-16: Use of Trade Credit inWorkingCapital,percentageby country .................,..................,................. .......................... ~ ~ .............. ..... ..........,......., .......~1 l..... , l.. 19 8 0 2 4 6 8 10 12 14 16 18 20 Source: World BankInvestmentClimate Surveys, 2002-2005 5.28 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 (Figure 5-17). 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. Figure5-17: MainSourcesofFinancefor WorkingCapitalinGuyana, percent,by Type ofFirm Source: World Bank GuyanaICs 2005 167 5.29 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 (see Figure 5-18). 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 financingcome from equity sales; for large firms, the comparable levels are only 2.7 percent and 1.2 percent. Figure5-18: MainSourcesof Financefor Investment Capitalin Guyana, percent, by Type ofFirm 70 60 50 40 30 20 10 0 I /.Retained earnings DCommercial banks .Equity sale WFamily and friends .Trade credit1 Source:World BankGuyana ICs 2005 5.30 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 andindividuals. 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 alegal and regulatory framework that insures bankinginformation confidentiality. 5.31 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 Guyanesefirms have their accounts certifiedby 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 5-19). 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 168 large companies. The use of external auditors i s also twice as high among exporting companies (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 (see Figure 5-20). Having an external auditor confirm the financial statements (balance sheets and income statements) o f borrowers i s another way to resolve informational problems in the credit market about borrower project quality and past borrower behavior. Figure5-19: Percentageof Firmswith ExternallyAuditedAnnualFinancialStatements, by Country El Salvador Ecuador Honduras Guyana Guatemala Nicaragua 0 10 20 30 40 so 60 70 80 90 percent Source: World Bank Investment Climate Surveys, 2002-2005 Figure5- 20: Percentageof FirmswithExternallyAuditedAnnualFinancialAccounts inGuyana, by Type of Firm ~~ 1008 90% 80% 70% 60% 50% 40% 30% 208 10% 0% Source:World Bank Guyana ICs 2005 169 5.32 There are other reasons for the low levels of external financing for the private sector in Guyana. These include a generally slow rate of economic growth, a scarcity of well- developed business plans for smaller firms, and problems with creditor rights protection and contract enforcement. Combined with slow liquidation, unreliable financial statements, and low-risk investment opportunities for commercial banks, it i s clear that the lack of private sector access to financing i s caused by structural realities of the national financial sector as well as by features of its institutional environment which supports credit markets (insolvency regime, contract enforcement, judiciary performance, etc.) POLICY RECOMMENDATIONS TO IMPROVE THE ACCESS AND COST ASPECTS FINANCE OF 5.33 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. For instance, Djankov, McLiesh and Shleifer (2005) find that credit information sharing raises the ratio of private credit to GDP significantly across a cross-section of 129 countries worldwide. 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. 5.34 Guaranteeing the confidentiality of financial information will be critical to private sector participation. In many countries, the reluctance to develop a credit bureau market i s 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 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 inlack of informationmight 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 i s 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. 5.35 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 170 financial markets to more small and medium firms. Once the confidentiality of financial information i s 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. 5.36 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 requirementsthat 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. 5.37 The existing National Bankers' Association could play a larger role in developing systems and practicesthat increase private sector access to credit. Inthe 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, andthe development of new products. 171 CHAPTER6. POTENTIALFOR ECO-TOURISMGROWTH OVERVIEW 6.1 Throughout much of Guyana's post-independence history, tourism was de- emphasized as an economic development tool. More recently, tourism has been recognized as an important source for foreign direct investment and a tool to create linkages and encouragejob creation. In 1999, the National Development Strategy (NDS) included a chapter on tourism and recommendedthe establishment of a statutory body-the Guyana Tourism Authority (GTA)-to bring together public and private sector interests in the management and marketing of the sector. Inresponse to the NDS recommendations, the GTA was establishedby an Act of Parliament in 2002. Its main function i s to assist in the formulation and implementation of government policies for the tourism sector, and to liaise with stakeholders. Specifically, the GTA has responsibility for research and statistics, marketing, product development, and sector-related information technology.165 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. However, a comprehensive review of the tourism sector i s limited by the lack of complete statistical information. 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 andhistoric attractions and create a complete andtruly 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. The proposal, though not dramatically new, illustrates the comprehensive planning that should accompany the development of a tourism development plan, including, incorporating local communities and providing them with training for the roles they can play. It includes providing tourists with good interpretative materials that can be distributed as marketing materials and also to educateGuyaneseincoastal areas about the rest of the country. 6.3 At present employment in the tourism sector of Guyana is still low. The World Travel and Tourism Council (WTTC) estimated direct employment from travel and tourism in Guyana in 2003 as 6,849 jobs, and direct and indirect employment at 21,307 jobs, or 6.9 percent of total employment. With only 1,133 rooms or 2,623 beds in visitor accommodation in the whole country and even with the indirect employment that tourism generates, this estimate appears to be rather high, even allowing for the inclusion of the "travel" sector with the tourism sector. However, a large segment of this employment could be part-time either becausethe level of demand i s insufficient to employ aperson full-time andlor because of seasonality of demand - the low season in Guyana can last for 8 months. Indirect employment from tourism i s likely to be high in Guyana since much of the daily food inputs into hotels and lodges are grown locally. `?See the GTA website: http://www.p.uvana-tourism.com/ 172 Among the sub-sectors attracting investments are: fresh and processed fruits and vegetables, poultry, fish farming and seafood processing; the south of the country i s famous for its cattle ranches. The local furniture-manufacturing sector exports its products and many hotels buy local furniture. 6.4 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 i s 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. 6.5 Guyana's tourism assets are its people, its history, geography and its rich variety of flora and fauna. Guyana's people, with their racial and cultural mix, are the country's major asset. Guyana's rich variety of cultural and historical resources reflects the planting traditions of Dutch, British, African and West Indian settlers. The capital, Georgetown, contains several colonial-era wooden buildings, a lively cultural and night life, and a variety of restaurants that serve international and local cuisines. Some indigenous groups in the forested and savannah areas provide guides for adventure and community-based tourism. Good shopping opportunities are available in Georgetown and in the Amerindian villages. Products include local crafts and jewelry created by artisans from locally mined gold and diamonds. Georgetown i s the main focus of heritage tourism. Most tours begin or end with a visit to the city. Guyana's several forts, dykes, petroglyphs, and archaeological remains throughout the country are of considerable interest. Another focus of tourist interest is Amerindian villages and customs. These Amerindianvillages are also amajor tourist attraction. 6.6 Guyana's natural resources include four ecological zones: a coastal belt comprising silt beaches and mangroves; large tracts of savannah; a small sandy zone; and the rainforest, which covers between 80 and 90 percent of the country. The rainforest is part of the Guiana Shield, one of the largest surviving "frontier forests" in the world, stretching across Venezuela, Guyana, Suriname and French Guiana.166 There are several mountain ranges, with elevations of up to 9,300 feet. The country's four major rivers andtheir tributaries contain over 600 miles of navigable river and several waterfalls. The width of the Essequibo River, at its widest point, i s between 20 and 21 k m s wide. Kaieteur Falls, at 741 feet, i s the world's highest single drop waterfall, and home to a unique cloud forest micro climate and ecosystem. It i s located in one of the largest and most bio-diverse rainforests in the world. Kaieteur is the only national park in Guyana and i s accessible by either a one-hour flight or a three-to-five day wilderness trek from Georgetown. Other destinations include: the Zwokrumu field station, which combines ecological research, a canopy walk, and reception facilities for tourists; the Kanuku 166Bryant, Dirk, DavidNielsenandLauraTingley (1997), TheLast Frontier Forests: Ecosystemsand Economieson the Edge; World ResourcesInstitute.See also: http://www.euianashield.ore/ie/index.htm 173 and Marudi Mountains, and the savannahs of the Rupununi. Most of the tours to these parts are organized by Guyanese tour operators who work with international tour operators to market personally designed trips. Guyana's wildlife i s also a major tourism asset. There are around 786 known species of birds. The country's flora and fauna are varied and its distinct ecosystems are particularly interesting to visitors. The climate is tropical: hot and humid, but cooled by northeast trade winds. The average annual temperature i s 81.5 degrees, ranging from 68 to 93 degrees incoastal area to 64 to 104degreesinthe hinterland. 6.7 Guyana's port and river system lend themselves to tourists and exploration of the country's naturalbeauty. Guyana's abundantrivers are navigable by oceangoing freighters for between 60 to 100 miles inland. The rivers are usedextensively in transport to and from tourist destinations within the country and, of course, for fishing and rafting. Sand beaches on some stretches of river lend themselves to the construction of hotels and their promotion as "resort" areas. Georgetown is a potential port of call for some small cruise lines. The largest cruise ship to visit, the Swan Hellenic, has a 600-passengercapacity and specializes incultural cruises. The tour operator was able to distribute the passengers to all the major resorts within easy reach of Georgetown, including those on the Essequibo River, Kaieteur, and on tours of Georgetown. Another tour operator brought in the MS Bremen, with a passenger capacity of up to 160, specializing in non-traditional cruise ports of call. Passengers were taken on day trips. Other small cruise ships called at Georgetown in 2005, and continue doing so. Larger cruise ships (passenger capacities of over 2,000) have port requirements that Guyana cannot meet. (Le., a deep-sea port). Futureimprovements to the port in Georgetown should include plans to improve facilities for the smaller cruise ships that are looking for new and "exotic" ports of call, rather than trying to create infrastructure for the megaships. 6.8 The sense of isolation and discovery in Guyana's interior is a major tourist asset. Guyana's natural beauty lends itself mainly to "adventure" travel and activities, partly because they entail exploration of a natural wilderness and partly because Guyana does not yet have the transport or accommodation infrastructure to offer easier access and greater comfort on most circuits. At the moment, the lack of standard tourism infrastructure i s part of Guyana's major selling point as an unexplored destination in today's much traveled world. Visitors, who travel to Guyana, even if they do not go to the most remote areas, have a sense that they are entering relatively unexplored territory. The very low population density, combined with the small numbersof tourists, addto this sense. 6.9 Niche markets are among the fastest growing segments of the tourism sector and Guyana's assets lend themselves to adventure and eco tourism, birding and angling (sport fishing). Niche markets are valuable because these tourists are relatively easy to target and their needs are known. Specialized associations, magazines and websites cater to these interests. Tour operators have begun listing Guyana among their offerings in adventure tourism and ecotourism, both of which are the fastest growing segments of the tourism sector. Most adventure tourism and ecotourism takes place outdoors and, for both types of tourists, the lesser known the destination, the more attractive it is. Guyana's offerings for these niche markets tend to be for the hardy. For some people the conditions may be arduous. Lodges range from: "very basic but comfortable" to "superb as each bedroom has an air conditioner, private bathroom with hot water and flush toilet." The food receives high marks, as does the expert guidance of local boatswains. The river experience is made easier becausethe guides speak English. 174 6.10 Guyana's variety of total and exotic bird species and plentiful fishing supplies compares favorably with neighborin countries making it an attractive destination for the niche birding and fishing tourists.'69 The Guyana Amazon Tropical Birdwatchers (GATB) was founded to preserve the country's avifauna and natural heritage by stimulating interest inthe natural environment and encouraging its protection. The GATB is also a birding tour operator and provides guides for tour operators. Guides are also drawn from the Amerindian communities living in the Rupununi and elsewhere. Although most fishing takes place in the Rupununu river and its tributaries in the south, many rivers have plentiful fish populations. Guyana's potential as an attractive yachting destination has also been recognized by tour operators. This i s an interesting niche market for Guyana, given that the yachts anchor for severaldays at a time and needprovisioning. 6.11 Guyana is seeking to attract more sporting and meetings events to the country but inorder to compete with longestablished destinationsinthe Caribbean, it mustimprove its information and logistical infrastructure. In late 2004, Guyana hosted the Central American and Caribbean (CAC) Body-Building and Fitness Championships, which brought in nearly 400 athletes, officials and spectators. In May 2005 it hosted the Caribbean Development Bank meeting. Guyana will also host at least one of the quarter-final matches for the 2007 World Cricket Cup. However, in the long term, Guyana will continue to face strong competition from long-established convention, resort and sporting destinations in the Caribbean. To increase its share of sporting events and conventions, Guyana will need to ensure that its capacities in hotel rooms, meeting management, energy, telecommunication and transport are adequate to meet the demands of the international organizations. This will include Customs and Immigration procedures that are adapted to the special needs of these events. Organizers will not return if they face too much red tape and impediments to the entry of essential equipment for the event. To that end, the Government has been encouraging investment in new hotels in Georgetown, partly to cater to the 2007 World Cricket Cup. In preparation for the World Cricket Cup, a new stadium is under construction, with the assistance of the Government of India. 6.12 Growth in the demand for tourism to Guyana has been erratic with no discernible pattern. A statistical series for monthly tourist arrivals between 1992 and 2005 (April) i s available, however, its reliability for comparative purposes i s questionable. Data collection was sporadic in some years; with one break in the data (three months of 1999 are blank). Visitors numbered 75,000 in 1992, rose to 113,000 in 1994, and then declined steadily until 1998 to 66,000. A new series, beginning in 2000, started with 105,000 visitors and then declined to 99,000 in 2001, as travel dipped worldwide inthe aftermath of the events of September 11, 2001. Visitor arrivals since then, with the countries of tourist origin, are shown in Table 6-1. These and other data suggest that growth has been erratic with no discernible pattern, except for annual fluctuations.'68 The one exception is in 2004 when visitors from all regions, except South and 16'The SmithsonianInstitutionidentifiedover 12 knownspecies and 736 sub-speciesof birds.The list may grow as more local experts document birds and as more observationsare madeby visiting birders. See A Field Checklist of the Birds of Guyana (2000), SmithsonianInstitution,Washington DC 168 The data for 2002 to 2005 do not include arrivals at Molsen Creek, the main entry point from Suriname, nor from Lethem -- the main entry point from Brazil. This may have contributed to an apparent decline in arrivals in - - 2004. 175 Central America, showed an overall increase in arrivals over 2003 of 21 percent, for a total increase of some 21,078 visitors. Visitor arrivals in the first four months of 2005 at 32,647 were 4,330 visitors less than in 2004; the floods of January and February 2005 and consequent travel advisories, undoubtedly deterred visitors.'69 Table 6-1: Tourist ArrivalsinGuyana,2002-2005 2002 2003 2004 2005 Annual Total 104,341 100,911 121,989 Countriesof Origin USA 50,058 49,625 64,948 Caribbean 28,211 24,779 28,091 Canada 14,190 14,144 15,900 Europe 8,190 8,136 9,056 South & Central 2,161 2,474 2,140 America Jan-Apr Arrivals 34,793 28,947 36,977 32,647 Source: Guyana Tourism Authority 6.13 Guyana receives about half its foreign visitors from the United States. Only the Eastern Caribbean states, Cuba, the French and Dutch speaking territories (except for Aruba and Haiti), have a lower dependency on the US. market. Dependency rates reach over 85 percent for Bahamas, Puerto Rico and the Cayman Islands, while Belize and Costa Rica, direct competitors to Guyana, had rates of 61 and 56 percent, respectively. Canada, with a large Guyanese immigrant population, provides about 15 percent of visitors. The United Kingdom, the Netherlands and Germany are the main tourist supplier countries from the European market, which contributes about eight percent of total tourists. Of the 122,000 tourists recorded in 2004, 10 percent were foreign visitors (tourists, business people and others), 25 percent were from other Caribbean countries, and 65 percent were Guyanese resident abroad. Guyana also received nearly 2,500 visitors from all of Central and South America in2003. 6.14 Table 6-2 provides some comparison with Belize, Costa Rica and Dominica in the nature and eco-tourism market. The most striking feature of the data i s the depth and variety Guyana from the NorthAmerican, European and South American markets. of the demand for nature andecotourism. This suggests the potential for ex170ansion of tourism to 169CTO regional publications make evident the lack of tourist data for Guyana in several of the standard tables: sometimes there are no data in the Guyana country line, in others the country is just not listed in certain tables. Exactly how the estimate of foreign visitors is arrived at, shown above, is something of a mystery, derived as they are from an unsatisfactory landing card. ''OCruise visits were also significant in Belize, Costa Rica and Dominica, but there are no data for Guyana. 176 Table6-2: Number of NatureandEco-touristsin2003 (thousand) Belize Costa Rica Dominica (Jan-Nov) Overnight visitors 221 1239 66 Tourists (non business) 208 908 Arrivals by Region North America 175 1018 USA 157 511 15 Canada 10 55 2 Mexico 6 46 South America L f annrnx.\ Argentina 14 Colombia 27 Venezuela 14 Europe 34 198 10 UK 9 23 Spain 2 34 Germany 4 29 Netherlands 4 25 France 3 24 Italy 4 18 Source: CaribbeanTourism Organization 6.15 Guyana's visitors fall into four groups: businesstravelers, travelers from the rest of the Caribbean, returning expatriate Guyanese, and "true" tourists. Tourists and business people share similar characteristics in that they both use hotels, restaurants, and ground, air and river transportation, though tourists are likely to travel more widely within the country. There i s no basis for estimating how many of these visitors use commercial tourist facilities. However, an indication of the small share of foreign tourists in the overall total of visitors to Guyana i s the use of hotels. Of the 28 member countries of the Caribbean Tourism Organization (CTO), only Montserrat (8.7 percent) and Suriname (11.0 percent) have a lower hotel usage. Similarly, Guyanahad the highest share of all countries inuse of private accommodation (Table 6-3). Table6-3: TouristArrivalsinGuyana by Placeof Stay (percent) Hotel Guest Private Other Total House/ Accommodation Apartment 17.2 0.6 82 0.2 100 Source: CaribbeanTourismOrganization 6.16 Few individual tourists arrive in Guyana and travel around the country on their own. This is largely because of the lack of tourism infrastructure. Several tour operators, however, offer special tours for couples or small groups. For the immediate future there are unlikely to be significant structural changes to permit more individual travel or larger group 177 travel. The GuyanaTourismAuthority (GTA) reportsthat Caribbeanvisitors came mainly from Antigua, Barbados, St. Lucia and Trinidad & Tobago, all with the largest resident Guyanese populations. Individuals and groups from the Caribbean region travel to Guyana for meetings, sporting and religious events, but it is not known how many visit purely for sightseeing. The ability to estimate the general profile of visitors to Guyana is hampered by a lack of data. Anecdotal evidence suggests that most foreign visitors are young and male, which is to be expected since they include business and adventure travelers. The only hard information about the income levels of visitors comes from birders and anglers. These tourists, who arrive from North America or Europe, are probably relatively wealthy as there are no cheap packages or charter flights to Guyana, and air fares from Europe and NorthAmerica to Guyanaare a sizeable upfront cost. CHARACTERISTICS OF TOURISTS 6.17 The average length of stay is a major factor in the success of a tourist destination in Guyana's case, because the volume of tourists is tiny by international standards and costs of access are considerable, the sector's profitability depends on inducing the tourist to stay as long as possible. Few destinations can profit with short lengths of stay unless there i s a very large volume of visitors. Some sense of the typical length of visitor stays can be derived from discussionswith tour operators. The shortest trips are structuredfor people already in Guyana, like business travelers, who want to see the interior by visiting any one of a number of resorts that are within easy reach of Georgetown, or for foreign tourists who want to see as much of Guyana as possible, so they visit more than one area, spending a short time in each. The short circuits are also usedby tourists onmulti-country visits. 6.18 Diversification of source tourist markets could well be a means of achieving increasedlengthsof visits. A comparisonof recent average lengthsof stay in the top Caribbean destinations, using mainly data from the World Trade Organization, shows the following (in nights): Cuba 10.5, Dominican Republic 9.5, Jamaica 6.4, Bahamas 4.6, and Puerto Rico 2.6. The average lengthsof stay of non-residentvisitors to two of Guyana's maincompetitors in2003 were: 11nights inCostaRicaand6.8 nights inB e 1 i ~ e . lThe ~ ~ weighted average of the lengthsof stay of visitors i s heavily dependent on the characteristics of the predominant supplier country. The three islands in the Caribbeanthat are most heavily dependent on the U.S. market have the lowest average lengthof stay. The DominicanRepublic andCubasell manypackagetours to the European and Canadian markets, which tend to have longer lengths of stay than U.S. visitors. By diversifying its source markets, Guyana could well increase the average lengthof stay of its visitors. Nevertheless, average length of stay is declining worldwide following the developed world's trendof morefrequent annualholidays andshorter stays oneach trip. 17'Average length of stay data may be based on different definitions in each country and, consequently, may not be comparable. In Jamaica the data refer to average length of stay in hotels of 6.4 nights, while the average length of stay on the island, whatever the accommodation used-including non-commercial-is 10.2 nights. The estimate for Cuba i s from CTO data, which does not distinguish between average length o f stay in commercial accommodation and average length of stay on the island. The distinction i s important where there are large groups o f visitors who are nationals living abroad and who return to stay with family and friends. In Cuba's case it could well accurately reflect the tourists' average length of stay. 178 6.19 The peak months for visitor arrivals are: MarcldApril (depending on when Easter falls), July, August, and December. In 2004, Guyana received between 45 and 50 percent of its visitor arrivals in those four months. The rainy season in late November through January -- and May and June-does not prevent Guyanese residing abroad from visiting to celebrate the holidays (Table 6-4). Table 6-4: Tourist Arrivals in Guyana by Month, 2002-2004 (percent) Month 2002 2003 2004 January 6.0 6.1 5.8 February 7.1 6.2 6.8 March 11.6 6.9 6.9 April 8.7 9.5 10.8 May 6.5 6.1 6.3 June 7.8 7.3 7.3 July 13.3 10.7 14.3 August 12.2 11.1 11.4 September 5.9 7.2 6.1 October 5.2 7.5 6.1 November 5.2 7.8 6.4 December 10.6 13.5 11.8 Source: GuyanaTourism Authority 6.20 Guyana's primary advantage for adventure, nature and ecotourism is the remoteness of its destinations. Given the low level of Guyana's tourism and the minimal promotion of the product in the past, the prospects for modest growth in these sectors look promising. The very many destinations offering sun, sea and sand means that competition within this tourist sector is very strong. Adventure, nature and eco-tourism are much smaller segments than resort tourism but they are precisely the segments in which Guyana possess natural advantages. These are each expected to grow by 20 percent per year. Other segments from which Guyana benefits, such as cultural tourism, meetings and conferences are all expected to grow globally by 10percent per year, which i s muchhigher than the rate for resort tourism. 6.21 Guyana's history of immigration provides a further potential market for tourism. Because more Guyanese live outside the country, Guyana has the potential to attract Guyanese living abroad to its tourism assets. As such, the Minister of Tourism launched a marketing campaign in June 2005 primarily targeting the media, the industry and expatriates. In the process general concerns were raised about the security in the country, crime rates, improved facilities at the Cheddi Jagan International Airport, and about comfortable hotels and inns for visitors. Given the contacts that many Guyanese retain with their homeland and the size of their remittances home, Guyaneseexpatriates appear to be an obvious untapped market. Therefore, an upgrading of tourism facilities should by itself attract Guyanese expatriates to wilderness areas and not just to Georgetown. While there are cultural and economic benefits to attracting expatriates back to the homeland, these travelers are only of value to the tourism sector if they use tourist facilities. 179 SUPPLYOFACCOMMODATION AND TOURISM RELATED SERVICES 6.22 The ultimate success of Guyana's tourism programs depends on the quality and quantity of the country's tourism assets and of the accommodation and services that are available for sale. Industry insiders say no more than about 400 rooms of the hotel stock in Georgetown are marketable to foreign visitors. In a personal communication, the Minister of Tourism stated that about 586 rooms "could be classified as three stars and above" in the entire country. The current low density of tourist rooms in Guyana has two effects: it creates a real sense of being in a wilderness area that has not been explored and, on the other hand, it also raises internal transport costs compared to other destinations. 6.23 The lack of a direct reporting system to allow hotels to inform the GTA of changes to their accommodation profiles means that much of the information received by the GTA i s not up-to-date. The incomplete and undated accommodation list on which the following table i s based was provided by the GTA. The list omits at least one hotel in Georgetown that serves tourists and one resort hotel, with 13 cabins and 26 beds. It includes one hotel under a previous name. Ongoing approved additions to room capacity are not yet shown. This i s an extremely important list for marketing and license control purposes that GTA should keep up-to-date. For this purpose, adirect reporting system shouldbe established. 6.24 The GTA is just beginning to license tourist facilities and there is as yet no classificationof hotels by category. The total stock in all types of accommodation inGuyana is 1,133 rooms and 2,623 beds distributed in 60 hotels-defined as hotels and guest houses, with some of the accommodation incabins, hammocks and tents (Table 6-5). O f these, 598 rooms are inGeorgetown, and 136 on the East Bank of the Demerara (a combined total of 65 percent of all rooms in Guyana), and 117 rooms (10 percent of total accommodation) are in resorts around the country, which are mainly used by tourists. The remaining hotels and guest houses, with 282 rooms (25 percent of total) are located mainly in Berbice near Suriname, in Linden, a commercial centre, and in Lethem near the Brazilian border. These are mainly commercial hotels that cater to travelers crossing the Brazil and Suriname borders, and to local business people. Table 6-5: Supply of Hotel and Resort Accommodation inGuyana AccommodationinHotel, Apartmentsand Guesthouses Georgetown EastBank Demerara Roomsper No. of No. of No. of Beds No. of No. of No. of Beds Hotel Hotels Rooms Hotels Rooms 1oo+ 1 132 260 75-99 1 75 160 15-19 8 126 298 1 19 38 10-14 3 35 84 1 14 31 0-9 4 34 94 1 7 28 Total 25 598 1289 5 136 359 180 Resort Accommodations Rooms per No. of No. of No. of Beds Resort Resorts Rooms 25-49 1 40 140 15-19 1 17 40 ~. 10-14 - 2 22 60 ~ 0-9 9 38 170 Total 13 117 410 Non-resort Accommodations inthe rest of Guyana Rooms per No. of No. of No. of Beds Hotel/ Hotels/ Rooms Guest Guest House House 25-49 5 144 261 20-24 2 40 76 15-19 2 30 78 10-14 3 34 82 0-9 5 34 68 Total 17 282 565 GrandTotal All Guyana No. of No. of No. of Beds Hotels Rooms 60 1133 2623 Source: GuyanaTourismAuthority with author's amendments 6.25 Guyana trails regional eco- and nature tourism markets such as Belize, Dominica and Costa Rica. Table 6-6 reveals the number of accommodations in Guyana, compared to competitors in the region. Belize, Dominica and Costa Rica have all been marketing nature/ecotourism assets for several years. As an indication of the density o f the tourism product within the economy, the surface area and the ratio o f rooms to area are shown. Guyana i s the least densely populated in terms of tourist accommodation by far. By contrast, the high density in Costa Rica leads some industry analysts to view the country as no longer "remote" or 66exotic.99'72 172Zweig, Miguel, "Cluster Market Assessments of Guyana", CARANA Corporation, USAID GTIS Project November2004. 181 Table6-6: Supply of TouristAccommodationsinGuyanaand CompetitorDestinations Belize Dominica Costa Rica Guyana No. of RoomsinHotels and Similar Accommodations 5,050 889 35,003 1,133 (2003) Surface Area (sq. km) 22,960 750 57,100 215,000 Roomper sq. km. 1:4.5 1:0.8 1:1.5 1:190 Source: CaribbeanTourism Organization Note: Datafor Dominicaare for 2002 OCCUPANCY RATESAND PROFITABILITY 6.26 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 (Figure 6-1). Conclusions about profitability cannot be drawn from average occupancy rates. Profitability will vary with category and location, andbetween new andfully amortized hotels andwith 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. The manager of one well known resort stated that occupancy rates can reach 30 percent in the peak season but are at 10 - 15 percent in the eight months of the low season. Remarkably, these low occupancy rates occur in hotels whose average size is around nine rooms. Clearly, resorts where the accommodation i s mainly hammocks andtents, will have much lower fixed costs than built accommodation and, therefore, higher rates of profitability. S /1 70 60 50 40 30 20 10 0 Annual average rate High-seasonrate Low-seasonrate 1 Ei 2003 Occupancy rates 1 Source: World BankGuyanaICs 2005, hotelmodule 182 6.27 Almost all of Guyana's resort hotels at the high and low end survive because they are not run as truly commercial operations but rather as family retreats rented out part- time. They are either family retreats that are rented part-time or they are subsidized by other ventures in an integrated business structure, while others are community-based initiatives usedto diversify the source of income in the community. The fact that the majority are not run as commercial operations has meant that when the owner's age and heirs are not interested in using the resort, or if the other businesses in the conglomerate become less profitable, or if better income earning opportunities arise elsewhere, money for maintenance and refurbishingcan stop suddenly and the number and quality of services can decline. Reduced standards and services create a poor image and, if widespread, lead to a loss of competitiveness of the sector as a whole. 6.28 At this stage of its tourist development Guyana cannot support very large hotels (250 to 600 rooms), which at present characterize the Caribbean tourism industry - and certainly not outside of Georgetown. Hotel size reflects the growing capacity of airplanes and marketing strategies by major tour operators. In a recent analysis of the costs of package holidays to resort destinations, the `average first-class hotel size in all-inclusive hotels used by KUONI and Thomas Cook ranged from 280 to 363 rooms in Jamaica, and 400 to 661 in CancddRiviera Maya, Cuba andthe Dominican Republic. New hotel construction in Jamaica i s increasing the average hotel size in that island. Sizes range from a low of 250 rooms to 850 rooms with a cluster of hotels in the 400-plus size. In Georgetown, there i s only one hotel with more than 100 rooms. However, a 190-room hotel i s under construction near the new CARICOM Headquarters building, and two 150-room hotels are at the planning stage. A number of smaller hotels are also expanding their capacity. According to the Ministry of Tourism, about 104rooms were addedinthe last three years. 6.29 As the tourism sector expands, the GTA should consider the needs of the small hotels sector and decide whether to request donor assistance for training and establishing systems for joint purchasing, marketing and reservations, which could reduce costs and introduce efficiencies. Many small hotels do not have the funds to maintain and improve their properties, nor deal with cash flow shortfalls. Owners have little management and marketing know-how. They also have difficulty raising commercial loans for their needs. Many owners runtheir hotel as a family business, often living on the premises, without imputing full costs to family labor. When these hotels cater to low-income commercial travelers, no harm is done. If they are located in newly developing tourism areas they can damage the sector's image. The CHA and donors have offered technical assistance and training programs to small hotels in the wider Caribbean for many years. 6.30 Despite numerous obstacles to doing business in the country, reviewed in detail in later, Guyanese tourism entrepreneurs are continuing to make investments and are expanding. Guyana's tourism business community i s dynamic, enterprising, and eager to move ahead with expanding the activities of the sector. It is perhaps a sign of the difficulties of doing business in Guyana that many entrepreneurs have set up businesses in the related sectors on which their original businessdepends. A number of entrepreneursthat have a hotel or lodge also operate an internal airline and sometimes river transportation, as well as a travel agency or inbound tour operator. Any one of these may have been the original investment and the rest were added over time. This diversification reduces the entrepreneur's dependence on others. It i s also a tribute to the ability of Guyanese entrepreneurs to identify weaknesses in their own 183 operations, to take the risk of moving into a different venture and to makea success of a business inwhich they haveno direct experience. It also means that local entrepreneurs make substantial investments inGuyana and are expanding their holdings inthe country. INVESTMENTINCENTIVESAND RECENT INVESTMENTSINTOURISM 6.31 The Guyana Tourism Incentive Package was launched in 1995 and is being implemented by Go-Invest. It was designed to encourage "an increase in the number of hotel rooms in Guyana and improvements in existing plant and other facilities in the tourism sector." Selected companies are eligible for these incentives once in a period of five years. The essence of the incentive package i s duty-free and consumption tax concessions for basic furnishings, plant, equipment and building materials. No difference i s made between local and foreign investors, except for a provision that requires foreigners to obtain permission from the Ministry of Finance to borrow over G$2 million from local Guyanese lenders. This acts as an inducement to foreigners to bring in capital from abroad. Import duty and consumption tax concessions are given for 17 items comprising basic furnishings, plant, equipment, and building materials. An additional seven items are eligible for concessions in interior locations (for example 4 x 4 vehicles, boats and engines, and lifejackets). Duty free concessions are limited to 25 percent of the value of the investment. Any items that are locally manufactured and available would not be entitled to the exemption from duties if imported. A waiver of consumption tax would be granted on eligible locally manufactured items. 6.32 At a time when the tourism sector seems poised to play a stronger role in the Guyanese economy, the Government may wish to review the existing tax and incentive system applied to the tourism sector. Although the concessions are valued by investors, they are, by Caribbean standards, quite modest. InGuyana, tourism investors are subject to the same tax rates as other producers of goods and services. The Government may wish to consider whether tourism should be classified as an export industry, as is the case in some countries, and what benefits might accrue to the sector under this classification. 6.33 It has been recognized that the Tourism Incentive Package has certain deficiencies which are being addressed by the Government. According to some investors, government decision makers have discretionary powers that enable them to approve or not each application for benefits under the Tourism Incentive Package. Others complain of the delays in the decision making process to grant incentive^'^^. A separate issue for the Government to consider is whether incentives should be used as a policy tool to attract investments to those areas of the country where there i s a need to create new accommodation. This would be a useful tool if a tourism strategy is formulated to select "specially designated tourism areas" or "specially designated types of tourism" (for example, community-based tourism) to enhance the attractiveness of particular areas in Guyana where facilities can be upgraded and tourism successfully expanded. Currently, the Inter-AmericanDevelopment Bank (IADB) i s responding 173In an interview inMay 2005, the Minister stated that it had recently become clear that some language in the Act was ambiguous and it was being clarified, and that this had caused some confusion for investors. 184 to a request for a study of the concessions and incentives presently offered in Guyana. Concessions and incentives for the tourism sector should be reviewed separately. Table 6-7: RecentInvestmentsunder the Incentives Regime 2002 2003 2004 2005 Investments TourismG$"OOO 1,300,000 4,900,000 204,000 4,615,000 US$ equivalentmillion (lUS$=G$200) 6.5 24.5 1.o 23.1 No. of Projects 21 20 60 8 Jobs Created 156 333 23 228 All SectorsG$"OOO 9,796,300 15,756,000 9,356,000 36,246,000 US$ equivalent (lUS=G$200) 49.0 78.8 46.8 181.2 No of Projects 104 128 75 72 Jobs Created 1,349 2,283 1,686 2,353 Tourismas percentof Total Investment 13 31 2 13 TourismJobs as percentof TotalJobs 12 15 1 10 Created Source: Guyana Office for Investments GUYANA ITSCOMPETITORS AND 6.34 Guyana's tourism business sector must provide high value to tourists in order to justify the higher price of its product incomparison to competitors. Within reason, travelers will accept higher prices charged by one destination over another if the quality or value of the experience i s high. Table 6-8 compares the costs o f travel to Guyana with those to other nature tourism destinations inthe region and gives a sense of the breadth of the c~mpetition.'~~ Table6-8: Comparative Costsof NatureTourism Country Visited No. of Days DepartureCity Cost From (GBP) (US$) Belize 9 Belize (excl. airfare) $1,995 Belize-Guatemala 15 London GBP 1,399.00 $2,429 Belize-Guatemala-Mexico 16 London GBP 1,299.00 $2,255 Costa Rica 9 Costa Rica (excl. airfare) $1,498 Costa Rica 16 London GBP 1,375.00 $2,387 Costa Rica (upgraded) 16 London GBP 1,649.00 $2,863 Costa Rica-Nicaragua 16 London GBP 1,275.00 $2,214 Guatemala 8 Guatemala (excl. airfare) $1,395 Panama 14 London GBP 1,968.00 $3,427 Panama 10 Panama (excl. airfare) $2,305 Venezuela(Angel Falls) 14 Caracas (excl. airfare) $4,325 174 A significant difficulty in doing this exercise is that the packages and prices are drawn from a variety of tour operators that advertise on the web, so that complete comparability i s not guaranteed among them. A further difficulty i s that the samples are very small becauseit is not at all easy to find quotes for Guyana. 185 Country Visited No. of Days Departure City Cost From (GBP) (US$) ~I Guyana(WildlifeTour) 14 London GBP2,300.00 $4,005 Guyana +Trinidad & Tobago 16 London GBP 2,400.00 $4,179 Guyana (3 nights)+Barbados 10 London GBP 1,724.00 $3,002 Source:Author's compilations based on tour operator quotes 6.35 Guyana's tourism product has a higher unit price compared to other international competitor destinations. Therefore, lower cost structures in other destinations mean that Guyana should provide a high value product to compete successfully. A common denominator for the tour packages can be establishedby dividing the total cost by the number of days on the trip, and excluding those packages where the international airfare is not included. Using only those trips that involve one destination, the resultingranking by daily price is presentedinTable 6-9. Table 6-9:Daily Pricefor PackagedTours: a Comparison CostaRica $149-179 Panama $245 Guyana $286 Source:Author's calculations 6.36 Many indicators, however, point to the low-quality tourism product which Guyana offers at present. A USAID financed report on "Cluster Market Assessment of Guyana's tourist facilities" highlighted several concerns: poor accommodations, high cost, mediocre food, poor service, expensive, inconvenient and time-consuming access and expensive internal travel costs. The Assessment noted that "poor accommodations are not perceived to be, by themselves, a deterrent to the more adventurous travelers, however.. Guyana's hotels and lodges are . significantly less attractive than those,for example, of Alaska, making it difJicult to sell Guyana even to travelers accustomed to some hardship." Most travel operators cited clean accommodations, potable water, private bathrooms, hot water showers and excellent service and food as the minimumconditions acceptableto travelers. 6.37 The cost of marketing Guyana as a tourism destination is high due to the potential small volume of travelers. From a marketing perspective, the above-quoted study concluded that Guyana i s not a commercially attractive market for mass-marketed package tours. Guyana i s potentially attractive only for a small niche market that i s interested in its unspoiled nature and uniqueness, and not even for the larger niche market of adventure travelers. COMPETITIVENESSOFTHE GUYANESE TOURISM SECTOR 6.38 Guyana's tourism sector contains processes and involves various costs that raise prices or act as a constraint on the operations of hotels and other tourist services. The Hotel Module of the World Bank ICs questionnaire revealed serious obstacles to tourism establishment in their daily operations. Figures 6-2 and 6-4 present the number of surveyed hotels and some of the main obstacles perceived by them. An IADB assessment noted that the 186 Internal Revenue Division (IRD)and the Customs and Trade Administration (CTA) systems and procedures need urgent reforms, and that these should focus on simplifying procedures, revamping IT systems, and introducing enforcement measures to increase revenue in the short and mediumterm.175 Figure 6-2: Number of Surveyed Tourism EstablishmentsinGuyana 1 Source: World Bank GuyanaICs 2005, hotel module 6.39 The cost and unreliability of Guyana's electricity supply has been identified as a major obstacle as electricity accounts for about 30 percent of most hotels' operating costs (Figure 6-3). The rate charged to hotels i s G$55.70per KWH (US cents 0.28 KWH). This rate i s 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 rnaintenan~e.'~~ Discussions with hotel managers andor 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 andmore power generated. `I5Earle, J. "More economic growthneededin Guyana IADB representative", StabroekNews, May 3,2005. - Tourism & IndustrialDevelopment Company of Trinidad & Tobago (TIDCO) 187 Figure6-3: PercentofFirmswithOwnGenerator and Number of Power Outages,by Type of Hotel 90 80 70 60 50 40 30 20 10 n Whole sample Small Large Incapital city Outside of capital city Source: World Bank GuyanaICs 2005, hotel module 6.40 The high level of import duties on imported foodstuffs reduces the mark-up that hotelsand restaurantscan 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 expressedconcern with the highrate 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 delayedincustoms. Figure6-4: TourismFirms:Perceptionsof ImportantObstacles, percent of firmssharingview that a givenareais verv imDortantor not imDortant I 7--- 70 60 50 40 'b 30 20 I O n Paying no taxes or import Avoiding government Having unfair access to duties regulations prime land ImVery important mNot important1 Source: World Bank GuyanaICs 2005, hotel module 188 6.41 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 6-4). 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 o f 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, with introduction scheduled for January 1, 2007. 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. Departure taxes on stopover visitors range from a low o f US3.00 in the US Virgin Islands to a high of US35.42 in the Cayman Islands. In 2002, Guyana charged US$l5.00 per passenger but raised that recently to US$20.00. Guyana does not presently charge a tax on cruise passengers and i s one o f six out of 29 Caribbean countries not to do so. Given its needs for port infrastructure, the Government could consider such a tax but should also ensure that it does not deter the fledgling cruise traffic. Given the comparatively low level of port facilities that Georgetown provides compared with some of the more established cruise ports, Guyana may want to keep the level o f its cruise passenger tax at the lower end of the scale. 6.42 Hotels and other tourism enterprises are required to have a number of licenses, and acquiring these can be a lengthy and costly process. The main licenses for hotels are: (i) hotel license, which costs G$7,000 for initial registration and G$5,000 annually subsequently; (ii) business registration fee of G$5,000 initially and G$2,500 annually subsequently; (iii) liquor license of G$5,700 for the initialregistration and G$5,000 annually subsequently; (iv) health and safety inspection license, based on the size of the premises, charged at G$3 per sq. ft; (v) fire inspection certificate at G$260. Interviewed hotel managers and owners commented on the length of time involved inobtaining these licenses, andthis i s also confirmed by the ICs data. 6.43 There are reportedly some delays in applications for import duty concessions on the import of vehicles. Commercial-use vehicles are not subject to import duty. Other vehicles require an application for duty-free concessions, which some transport company owners said they preferred not to apply for because o f the delays this entailed. Imports o f 4 x 4 vehicles are covered under the Tourism Incentive Package legislation for interior locations, where they are an essential means o f transport. 6.44 As discussed in Chapter 4, an ongoing problem for all sectors in Guyana, including tourism, is the brain and skillslost to migrationabroad. According to Docquier andMarfouk (2004) 80 percent o f graduates leave Guyanafor other countries. Once individuals obtain a skill and some experience they become more marketable abroad and their training becomes a loss to Guyana, except, o f course, for the remittances that many send back to fa1ni1y.l~~ As in the rest of the Caribbean, Guyana faces a skills shortage for the positions o f Head Chef and Food and Beverages manager. Guyanese chain hotels often prefer to have an internationally experienced manager trained in the particular business practices and internal culture o f that hotel; otherwise 177In an interview in May 2005, Cathy Hughes, President of THAG, told Stabroek News that the migration of skills plagues the entire Caribbean leaving the region unable to compete in many areas of production and in the provision of certain skilled services. 189 hotel managers are Guyanese. An identified skills shortage in the services sector is marketing expertise, which i s neededthroughout the tourism sector. Most hotels in the country are largely staffed by Guyanesecitizens. 6.45 Training as discussed in Chapter 4 is insufficient and is regarded as a weakness in - the sector's efficiency. A lack of skills among entry-level staff in all segments of the tourism sector i s reported by managers. Instillinghigh standards amongst staff members i s also regarded as an obstacle. Inthe 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 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. Owners of transport companies were concerned with the lack of professionalism of guides in Georgetown. Most guides are free lancers and are not organized into associations. Language skills are in short supply, with an increasing demand for Portuguese. Inthe interior, reports on fishing expeditions and wilderness expeditions normally include complimentary comments about the guides used17*. 6.46 To address insufficient training, a partnership between GTA and THAG could be established. It should lead to the raising of standards and an increase in local expertise. The GTA now has the mandate for education and training of employees in the tourism industry. With so much training needed, particularly if there is to be an expansion in the sector, there would be considerable benefit in developing the relationship between GTA and THAG. The latter's membershipcan identify training needs and ensure that the training provided is adapted to the particular needs of Guyana. The larger hotels and service companies could offer practical internships to complement expert teaching. 6.47 Construction and financing costs are prime determinants of the profitabilityof hotel projects. It is, therefore, to Guyana's advantage to have relatively low construction costs. At the same time, the quality of Guyana's hotelproduct does not allow managers to charge the same rates as those charged by higher category Caribbean hotels. The average cost to construct a 3- star hotel in Georgetown i s about US$ 25,000 per room, according to the Ministry of Tourism. The National Development Strategy Chapter on Tourism, which was published in 1999 but written three to four years earlier, statedthat "a typical capital investment costper unit at an eco- lodge is about US$35,000 with appropriate fiscal concessions and infrastructure already in place (i.e., roads, air strip, etc.). A similar unit in a Caribbean destination is about US$IOO,OOO." Ifby "unit" the NDS means a cabin or cottage, the construction cost data must have been derived from a high-quality lodge with very good facilities, rather than the lodges that are the target of the criticism in the USAID Cluster Reviews discussed elsewhere in this report. Lodges are generally constructed from local materials and, particularly from Guyana's abundant 178InDecember 2003, the Iwokramamanagementcompleted a training program, funded by CIDA, to train guides to provide an informative tour of the reserve. The THAG, with assistance from CIDA and in collaboration with the CaribbeanRegionalHumanResourceDevelopmentProgramfor EconomicCompetitiveness, undertook a number of training programs using expertise and trainers from the region. Among the areas covered were: tour guiding, hotel training, front desk operations, culinary arts training programs, visitor and security systems, hotel plant and maintenance,and customer care service. The trainingprograms were of considerable benefitto the sector. 190 forests. However, they import all the bathroom, kitchen and major appliances to meet the standards of travelers. 6.48 On the financial side - as with manufacturing firms - cost of finance is a major obstacle to investment. So is access (Le. collateral requirements). Thus, interviewed hotel investors noted that interest rates in nearby CARICOM member states are much lower than in Guyana, for example, 5 percent compared with Guyana's 19 percent. Borrowers are required to put up substantial collateral against any loans from commercial banks. Most investors did not apply for financing for their ventures. Hotel owners noted that even though their lease i s for 99 years (at least originally), commercial banks do not accept the lease as equity inthe property. 6.49 Guyanesetour operators are struggling to cover the substantial cost of the insurance coverage required by EUlegislation. No tourism sub-sector requires this insurance more than adventure and wilderness travel. If Guyana i s to increase its tourist base, ways to comply with this insurancerequirement mustbe found. Only if local tour operators comply with international standards and requirements, can the sector survive, expand and be sustainable. While adventure tourists necessarily take some physical risks in pursuing their interests, they require that their tour operator take no unnecessaryrisks. Inthis regard, the European Union's current legislation holds the tour operator responsible for the health and welfare of the t 0 ~ r i s t . l ~Guyanese tour ~ operators are currently dealing with the requirement by foreign tour operators that they obtain costly insurance coverage (at the cost of GBP 2 million) in order to be able to comply with any liability. The local tour operators complain about the high cost of coverage but failure to obtain this protection could have a highly detrimental impact on Guyana's ability to attract tourists from its main market, the UnitedKingdom. 6.50 Crime is another strong deterrent to investment in any economic activity, including tourism. The recent decline in violent crimes i s attributed to a more aggressive stanceby police to criminal gangs in Georgetown. Nevertheless, tourists are advised to take as many precautions as they would in urban areas in their home countries. A concern i s the possibility of civil unrest during elections. Guyana's fledgling tourism industry will have difficulty weathering reports of unrest. As it grows, the level of investment in the industry will be higher and more will be at stake, not just in investment capital but in the incomes and employment that tourism generates. While political stability and lack of crime are desirable for much more fundamental reasons, they are essential to the success of the tourism industry. 6.51 Increasing the number of airline carriers that serve Guyana and opening direct flights to European airports are critical to the expansion of Guyana's tourism sector. Recent improvements in inter-island service already make Guyana more accessible to European travelers, particularly from the United Kingdom, with more frequent and more reliable access to Barbados. With one of the biggest tourist market in the United Kingdom, Guyana cannot hope for a significant expansion in tourism from that country until it has a direct flight with U.K. airports. In 2002, Guyana was only one of three countries not served by a North American carrier. It was one of 8 countries not served by a European airline and one of 10 not to have received any charters. Guyana did not receive any "private" planes, which flew to some seven islands. It did receive, however, 26,130 passengers (or 27 percent of total arrivals) on "Other 179The EuropeanCommunity Directive on PackageHolidays, 1994 191 Scheduled." No explanation i s provided for this classification but it most likely includes visits from specially chartered scheduledairlines to transport expatriate Guyanese. 6.52 The Government has substantially upgraded the Cheddi Jagan International Airport (CJIA) in the past few years with assistance by the IADB. Furthermore, since 2002 Guyana's air transport capacity has improved with additional service by Caribbean Star Airlines, North American Airlines, Universal Airlines and Suriname Airways. This considerable improvement in air service should be enhanced even more once Air Canada begins its service. In 2002, BWIA and LIAT, both regional airlines, served Guyana's airport. Most travelers from Europe flew to Barbados and from there to Georgetown; similarly, most North Americans, flew to Barbados or Trinidad for a connecting flight to Georgetown. 6.53 The road transport network mainly follows the great rivers and, not surprisingly, forms the backbone for the tourism destinations running from the coast diagonally across the country to the southwest. The construction of a roadfrom Linden to Lethem, which bisects the Iwokrama Research Station, a major tourism resort, has immensely improved access to tourism destinations in the South West and to the Rupununiin particular. The rehabilitation of the New Amsterdam to Molson Creek highway facilitates the incipient tourism travel between Suriname and Guyana. However, roads require regular maintenance and their generally poor condition takes a heavy toll on the suspensions of vehicles and raises maintenance costs greatly. Guyana's roads to remoter areas are impassable in the wet season. Moreover, the licensing system for transport i s not fully computerized and only an estimated one third of drivers are licensed. As a result, competition for taxis and day trips comes from unlicensed vendors. 6.54 The golden rule in tourism is that tourists should not have to travel for more than one hour by any form of transport immediately after their arrival, which is the case with arriving at CJIA. Guyanese airline owners support the upgrading of Ogle airport, their home base, because of its much closer proximity to Georgetown than CJIA. The upgrading of Ogle airport to a regional municipal airport to international standards will facilitate improved air services and will provide a back-up for CJIA in case of an emergency. Since 2001, the Government has leased the management and operation of Ogle aerodrome, on the outskirts of Georgetown, to a private company under a renewable twenty-five year lease. Land around the airport has been zoned for the future expansion of the airport and environmental impact assessments have been completed. Some tour operators currently receive visitors at CJIA and transport them immediately by road, river or air to their final destination, others take guests for an overnight stay in Georgetown before moving on. The former arrivals are the ones who would most benefitfrom arriving at Ogle. 6.55 The country's road network leaves much of the southern part of Guyana inaccessible, except by air. The main domestic airlines serving tourists appear to be well- managed and efficient. However, with a minimumnumber of passengers (at least four) required for each flight, the airlines are regularly unable to accommodate passengers during low season. Three of the main local airlines serve tourists and general passenger and cargo needs. They offer scheduled services on a few routes and charter services on others; these airlines fly to at least 20 destinations within Guyana. Airstrips, belonging to resorts, local communities or major companies in the interior, are estimated to number 200, with about half in frequent use. How profitable they are i s unknown, particularly so as each of the main three companies are parts of a 192 wider business structure and serve the needs of those companies as well as other passenger and cargo demands. Both passenger and cargo traffic from Ogle has increased annually from 2002, but there are no estimates as to how much is attributable to tourism. The Civil Aviation Authority recently received technical assistance from the IADB to strengthen its staffing, regulates airlines, aircraft and airport operators, aviation training schools, fuel companies, freight forwarders and the traveling public. 6.56 River travel is a strong tourism asset, and Guyana's extensive river system strongly supplements road and air transport, and provides tourists with a pleasurable mode of travel to destinations in the interior. There are over 450 nautical miles of rivers navigable for vessels and barges drawing no more than 2.00 to 2.50 meters. River transport like air transport i s inthe hands of integrated companies that originally neededboats to transport workers andrelated cargo up river to mines or for logging. The boats were converted to tourism uses as that need became evident.'*' Figure6-5: PercentofTourism FirmsUsingEmailand Internet 90 80 70 60 B 50 40 30 20 10 0 Whole sample Small Large Io capital city Outside of capital city Source:World Bank GuyanaICs 2005, hotelmodule 6.57 Tourists require another type of infrastructure that includes banking, telecommunications and medical facilities. Tourists cannot rely on local ATM machines to withdraw money from their bankingaccounts in their home country or to make cash advances on their credit cards. Many hotels charge a commission to change foreign currency for their guests. Licensed currency exchange houses in Georgetown are open daily, including Saturdays. Banks have short opening hours and are very crowded but are necessary for more complex transfer operations. The U.S. dollar i s accepted almost everywhere, as are, though to a lesser extent, the British pound and the Canadian dollar. Travelers' checks and credit cards, though accepted by most hotels, restaurants, and tourist enterprises, are not universally accepted even in Georgetown. Telecommunications have improved immensely to, from and in Georgetown, as evidenced by the proportion of hotels and tourism establishments reporting to use email and a GOPALE & A Consultants, financed by the European Development Fund Guyana Transport Sector Strategy Study, InterimReport, May 2005. 193 webpage to interact with clients (Figure 6-5). Internet cafes are easy to find in Georgetown and are available in the larger towns in the interior, while most hotels offer internet access and mobile phones are ubiquitous. In remoter areas outside Georgetown communication i s mainly by radio telephone. 6.58 While Georgetownand coastalareas are reported to be malaria-free,there is a risk of contracting malaria in certain parts of the Guyanese interior which requires that tourists take preventiveanti-malarialmedicine. This is not a major constraint to the growth of tourism, because it i s a fairly common condition in countries offering adventure and wilderness tourism, though it does add to operational costs for all businesses supplying accommodation to tourists and is an additional minor cost for tourists. Water in Georgetown i s not potable and most hotels provide some drinking water in bottles in the accommodation. Hotels use introduce purification systems or offer their clients bottled water, with a warning not to drink tap water. Bottled water is widely available. More problematic i s the poor quality of health services throughout Guyana, even in Georgetown. While hospital treatment i s available, the hospital i s not rated very highly. Little medical care i s available in the interior, but some domestic airlines offer Medivac services. This throws a heavy burden of responsibility for the health and welfare of the tourist on the tour operator or travel agent inGuyana. 6.59 In 2005, the GTA, with assistance from the Guyana National Bureauof Standards (GNBS), formulated standards for the tourism sector. These include all types of built accommodation,tour operatorsandtour guides. The GTA has now moved to the secondstep in this process by notification that these establishments must now register with the GTA to obtain a license to operate. The regulations are clear and contain financial penalties for non compliance with the regulations and particularity for the operation of any enterprise without a license. These penalties should certainly raise standards in the tourism sector. The GTA license seems to leave in place the licenses already required from the EPA, the Chief Environmental HealthOfficer, the Chief FireOfficer andthe Central HousingandPlanning Authority. At some stage, the GTA should try to streamline all these licenses into a one-time application by the owner or manager. In time, the GTA should attempt to introduce a classification system by category for hotels, but for the moment this licensing program will be a big step forward for Guyana. 6.60 A public-private partnership is essential in tourism and nowhere is this more necessarythaninpromotionand marketing. The acceptedpractice with tourism promotionis that the private sector is responsible for promoting its particular unit or units of operation and the national tourist organization is responsible for overall promotion of the image of the country. A government agency might take responsibility for promoting its country in a new source market of highpotential. Prior to the establishment of the GTA in2002, the Government was not involved in the promotion of tourism to Guyana. The marketing of Guyana received almost no support from the Government and was in the hands of the private sector. The GTA now has the mandate for promotion, and in addition to its website and several print and audio-visual materials, it also rents a booth at international travel markets, marketing events, exhibitions and conferences at which numerous private sector entities display their promotion materials. A comparison of expenditures by national tourism organizations in the Caribbean in 2003, prepared by the CTO, gives some indicationof the allocations that different countries make for their tourism promotion budgets. Table 6-10 presents a sample of promotion budgets from the behemoth of Puerto Rico 194 to Guyana, which is at the bottom of the list. Even though Guyana has one of the smallest promotion budgets in the Caribbean community, its budget has doubled in the past three years, reflecting the Government's increasing support for the tourism industry. Table6-10: Expendituresof NationalTourismOrganizations Country US$2003 Percent Admin. Tourist Arrivals (000) Puerto Rico 172,999,000 23 3,087 Bahamas 69,409,000 35 1,538 Barbados 22,137,000 24 498 St. Lucia 6,918,000 28 253 Belize 4,576,000 19 200 Dominica 1,568,000 52 67 Bonaire 1,098,000 7 52 Guyana 283,500* 104 Source: Promotion: CTO basedon data provided by National Tourism Organizations; Arrivals: Data are from World Tourism Organization (WTO), generally refer to 2002 and make no distinction between foreign tourists and non-resident nationals, but should exclude cruise visitors. *Note: The budget figure for Guyana refers to 2005 and has been growing annually. The figure of 104,000 arrivals in2003, given by WTO for Guyana, refers to all arrivals: business people, Guyanese resident abroad and foreign tourists, as discussed elsewhere in the report. The CTO figures for other destinations are likely to have similar or other weaknessesjust by the nature of tourism statistics. CONCLUSIONSAND RECOMMENDATIONS 6.61 Given Guyana's potential for expansioninto 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 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 andto 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. With the project unit within the Ministry, this can be done inthe name of the Minister. The project unit would liaise with the GTA Director and staff, who should be included in a weekly briefing for the Minister on the workings of the project unit. 6.62 The Guyana Tourism Development Charrette Report recommended that focal points or tourism development poles be designated for product development; it is expected that this will help refine marketing and promotion activities, concentrate investment and define training needs. The selection of a first group of sites or tourism development poles, should be followed by the selection of another group so that there can be new tourism development poles coming on stream over time. With the GTA's help in setting criteria for standards in each tourist activity, Guyana should soon be able to expand and raise the value of the product that it offers to its tourists and sustain that value. Ideally, when a tourism pole is 195 identified, it will attract investors to any aspect of the tourism product and lead to greater competition and improved standards. 6.63 If Guyana is to attract more visitors from a wider range of market segments and niche markets and is also to combat negative images in the travel market, the GTA will have to be more active inpromotion. One constraint, however, i s that Guyana probably cannot spend as much as other competitors in the market. The GTA's detailed plans illustrate a well thought-out marketing program, with a strong emphasis on niche markets and FAMtrips. These latter are relatively low cost and effective marketing efforts, where the costs of inviting representatives of specialized travel websites, trade publications and tour operators for familiarization trips are shared by the public and private sectors. This has been done with increasing frequency over the past two years or so. Representation at the major travel markets and those specialized inGuyana's niche markets, such as the RutlandBirdFair, at which Guyana was representedfor the first time in 2004 and again in 2005, are a very important means to reach the all-important tour operators who mobilize most tourist travel. Even established wildlife destinations like Kenya and South Africa were spending US$10 and 23 million respectively on tourism promotion a few years ago, and Belize i s spending over US$4.5 million annually. The GTA Marketing proposal for 2005 is a very good one, but it consists of a lot of work for the GTA's very small staff. Clearly, the private sector will continue to promote its own individual products but the combination of GTA's tiny budget for promotion, as already discussed, and its equally tiny staff makes implementation of the marketing proposal a Herculean task. 6.64 T o 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 andwhich are the internal destinations that they visit, ranked in priority order. This information establishes what type of supply i s 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 lendits technical assistance. 6.65 The costs of a visit to Guyana are already high enough, so other sources of income for promotion should be sought, if possible. Some francophone countries in Africa include a small charge or tax for promotion on the roomrates of visitors. According to the USAID Cluster Market Assessments report, Venezuela's tourism promotion agency, the Znstituto Nacional de Turismo (INATUR), receives one per cent of all tourism revenues to fund international marketing activities to promote the country. 6.66 At its current level of tourist development Guyana needs to increase the amount of external advertisingit receives. The main sources are wilderness and adventure tour operators' websites, which i s where demand for Guyana's tourism is greatest. Local hotels and tour operators have developed relationships with tour operators, mainly in the United States and Europe, and each has a website. Currently, Guyana is served mainly by regional airlines and by only one large chain hotel. BWIA was mentioned frequently as a good marketing partner for Guyana. As more international airlines and chain hotels serve the country, marketing will grow. 196 6.67 Although the GTA, THAG and individualwebsites are of a very high standard, they should be updated frequently and should be specifically designed to attract potential new market segments. The importance of websites is shown by the fact that in 2004 the number of Americans buying travel online rose by 14 percent to 40 million'81. Half of all online combination purchases consist of air and hotel. In2005 alone, nearly one-third of U.S. travel was bookedonline, with online agencies accounting for nearly half of that total. Europeantrends are in the same direction. Explore, a major U.K. adventure tour operator, reports that online sales are continuing to rise andthat 18 percent of its business now comes through the Internet. 6.68 The role of Guyana's Embassyand Consular offices intourism promotion should be enhanced. The staff should be prepared to provide information to those seeking information about the country and should themselves be knowledgeable about Guyana's tourism assets. This may entail nothing more than making sure that each office has a copy of the video promoted at the Tourism Fair inNew York in2005. 6.69 To allow it to focus its urgent responsibilitieson standards and licensing, marketing, statistics and research, the GTA should transfer training responsibilities to, for example, a strengthened Carnegie School. Another option would transfer the responsibility to THAG, at least temporarily. In either case, the goal should be to raise the level of training and worker skills in the tourism industry. 6.70 Data collection systems and methodologies need to be developed and improved further in Guyana. There is a lack of good tourism statistics in Guyana. The most immediate problem in data collection is with the arrivals data. Currently, arrivals data are taken directly from the Entrymeparture card that passengers present at the airport. This card makes no distinction between Guyanese resident in Guyana and Guyaneseresident abroad, nor does it have any line on it for "Purpose of Visit-Business or Pleasure." The CTO i s providing some training, which should improve the management of the statistics. The management, however, will only be as good as the statistics collected, so the GTA may need to discuss improved data collection with the immigrationauthorities, as outlined above. 6.71 The Ministry of Tourism, in consultation with the tourism industry and with the Guyana Environmental Protection Agency, should begin to draw up guidelines for the industry to ensure the sustainability and prevention of damage to the country's tourist assets. The National Trust has already drawn up some basic guidelines for visitors to heritage sites.'82 This i s most urgent for Kaieteur, the most visited asset and the flagship destination, which has been reported to be showing damage. The greatest protection for Kaieteur would come from its inclusion inthe system of National Parks and ProtectedAreas. 6.72 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 presentedto the visitor to Kaieteur as a means of supporting local communities and conserving lB1PhoCusWright Survey, 2004 lB2NationalTrust of Guyana, HeritageSite Visitor Rules 197 the park, it should bepossible to raisethe fees from US$12.00. Differential entrancefees (higher for tourists than for resident Guyanese) should be introduced as soon as the public and private sectors can agree on a fee that will not deter travelers, yet provides some revenues for maintenance of the Falls and for the local communities. The method of collection of that entrance fee also needs to be discussed between the public and private sectors so that administrative costs are not excessive. 6.73 The EPA, possibly supported by international funding, should establish environmental standards for lodge construction, as well as for tourism activities such as trekking and rafting, and attractions, particularly on lakes and rivers. Zoning laws should be established for the area surrounding tourist lodges to avoid the existing problem for at least one lodge of having commercial activities in the near vicinity that run counter to the tourists' enjoyment of the natural surroundings. By establishing physical planning, including zoning, and architectural standards for construction on or for the use of natural resources, natural resources can be conserved. An Environmental Impact Assessment (EM) should always be required for any construction on or use of natural resources, and the Environmental Protection Agency (EPA) should monitor EIAs to ensure that conditions are fulfilled. These "green" regulations for developers should be included in an original package given by Go-Invest to potential investors, whether for lodges or other activities, otherwise the latter may not discover their existence until after preparing the mandatory EIA for the project. Guyana should follow the example of a number of countries, including Belize, which provides investors at the outset with two booklets: A Developer's Handbook, which includes the principal environmental regulations that Belize enforces, and A Compendium on Environmental Protection and Natural Resource Management Legislation, which i s a more complete version for use by all investors and local residents. These are low-cost projects to prepare and can be updated regularly on the web. Their success depends on the capacity andwill of the Guyaneseauthorities to enforce the laws. 6.74 Guyana presently has no recycling programs at all. This is an area in which a donor might be willing to assist the Government to do an initial assessment in Georgetown to evaluate the commercial possibilities of a recycling program there, together with the possibility of establishing collection centers elsewhere inGuyana. 6.75 To enhance Guyana's image, as well as help preserve the natural resource base, the larger accommodation units and, particularly those in sensitive ecological areas, should begin to aim for hotel accreditation that signifies that the unit has met clearly defined environmental standards. Most large hotels seek international accreditation, either from the non-profit International Standards Organization (ISO) for a 14,OO1accreditation, or Green Globe status, which was launched by the World Travel and Tourism Council (WTTC) and has now become independent. Some regions of the world are preparing their own accreditation system. Itis neverthelessimportant that the accreditation systembe seen to be independent andobjective. The CTO has a special agency, the Caribbean Sustainable Tourism (CAST), which can provide guidance to Guyana on this topic. The process of acquiring green accreditation improves waste disposal and sets up recycling and utility monitoring programs and, as a result, after an initial capital investment that i s generally recouped within the first year, hotels have recorded considerable savings in both energy and water consumption and they have greatly reduced their waste. For example, thanks to an accreditation program supported by USAID in Jamaica, hotels have improved profitability, enhanced guest relations, built bridges to local communities and 198 helpedto preservethe island's beauty. There has also been a significant externality inimproving health and sanitation inemployees' homes and intheir communities. 6.76 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 Dominicai s even working towards attaining Green Globe destination status for the entire island. The fact that Guyana, whose main attraction i s 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 usingenvironmentally 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 i s 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 CHNAmerican Express Green Hotel of the Year award inlarge and small hotel categories. 199 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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