The private sector must push for meaningful reforms in the investment framework Business Page Stabroek News April 9, 2000 BUSINESS PAGE is dedicated to providing objective information an opinion on issued of interests to the business community and the public at large. The articles in Business page are prepared and contributed by CHRISTOPHER RAM. Christopher Ram is the Managing Partner of Ram & McRae, Chartered Accountants, Professional Services Firm. Introduction Last week Business Page dealt with the difficulties in attracting and controlling foreign investment in Guyana. As was pointed out, many difficulties have been encountered and it has not been easy ensuring the suitability of investors desirous of coming into the country. International investors tend to go for the larger types of investments but in any case, as experience in the more developed countries has shown, each large-size company requires the support of scores of smaller companies to provide them with services and supplies which those companies can invariably offer at a lower cost than the larger companies. We must therefore accept that foreign investment cannot be the sole source of growth in the economy and that local capital has an extremely important role to play. The need to encourage the mobilization of local capital resources is one that has so far not attracted the attention of the country's policy makers. Local entrepreneurs have long complained with considerable justification that they are often placed at a disadvantage because of the concessions and incentives offered to the foreign investor. Investment usually flourishes in a fiscally stable and growing economy because such an environment enables adequate returns to be made in the long term. Guyana is a long way from providing any level of reassurance of stability and this uncertainty has spooked both local and foreign investors and indeed has led to capital flight with consequences for the exchange rate, interest rate, inflation and the real return on investments. The situation has been exacerbated by the sad lack of creativity among our policy makers who have provided very little tangible evidence that they understand business or have clearly defined investment goals and policies. The experience of many countries has proven that reliance on foreign investment does not necessarily yield the desired results because of the incongruence of alien investor goals with the development needs of the country. In many instances the benefits accruing to the country are minuscule when compared to the profits exported and Guyana has certainly had its share of these experiences as a review of the various sectors of the economy will show. It is therefore extremely necessary even at this late stage for the Government to play a decisive role in determining the efficiency and effectiveness of the capital allocation structure. Negative factors The macroeconomic environment, the market for mobilising resources, the investment opportunities in the domestic economy, the allocation mechanism by which capital is channelled to projects and the conditions surrounding specific investments influence investment flows. Specifically, in an unstable economy, a risk premium is assigned which raises the cost of capital and therefore may have the effect of contracting investment. In Guyana the perception of instability combined with the relatively high interest rates and a tax system that is due for real conceptual reform continue to be a major drag on investment flows. Taxation It is hoped that with the introduction of the Revenue Authority the tax regime in Guyana will be made more responsive to a changing economy and will be overhauled. The tax structure distorts resource allocation decisions in several ways: First, it is complicated which discriminates against small entrepreneurs who do not have the knowledge or resources to take advantage of the various concessions and incentives that are available. Second, areas of real potential such as tourism and information technology are largely ignored. Third, many of the tax exemptions are discretionary, which invites political favouritism and favours more powerful entities or investors who are in a position to lobby. Tax systems are most successful when they are neutral with regard to resource allocation, transparent, easy to understand, and easy to administer. Business Page continues to advocate tax reform that reduces overall rates and broadens the tax net. Debilitating policies While the stimulation of private sector investment is the focus of Business Page, it cannot be achieved in a vacuum and public sector investment is equally important. Investment, whether local or foreign, can only be attracted if an adequate infrastructure is in place and manifests itself through efficient delivery of basic services such as transportation, healthcare, water, electricity and communication as well as a growing pool of educated workers. Unfortunately our policies as a country have not addressed these issues for decades and catastrophically have led to a brain drain further depleting our already limited resources. As a result even the efforts to plow money at the problems have been at best slow to produce the desired results and the problems persist at great cost to any employer who has to tolerate an expensive and frustrating level of sub-standard performance. Infrastructure Basic infrastructure services such as irrigation, transportation, and even electric power are inadequate. Irrigation systems are in disrepair. The transportation system does not allow goods to be efficiently moved around the country and it would be particularly instructive if a study could be done to measure the cost of moving goods and produce from the land to the markets. Companies operating in the interior still have great difficulty moving products and obtaining supplies in a manner that is cost effective. The result is that buying and selling is considered far more profitable than manufacturing or the provision of services despite their greater value to the economy. Steps to improve the transportation network are essential if there is to be increased investment in the productive sectors of the country. Improvements in the transportation infrastructure must include the neglected waterways which provide a natural transportation system. Simple steps such as building and maintaining bridges and improving port facilities would go a long way to addressing the efficient movement of goods. Reforms Government borrowing in Guyana is too high and policies must be modified to stimulate growth in the internal pool of private and public sector savings which would then be available for private sector investment. Incentives that would promote long-term investments must be the foundation of broad-based reform. The aim must be to ensure that owners of capital have an incentive to align their objectives with those of the country. Spending in the areas of research and development and training must also be encouraged since businesses can only be competitive through continued innovation and employee development. Credit The financial system in Guyana is underdeveloped and this has impacted negatively on the accessibility to credit for business investment. The absence of credit reporting is a major concern for potential lenders or investors and the establishment of some form of service that collects and distributes credit information is now necessary. Collection of information on creditworthiness and its availability to lenders should have the effect of making more credit available since it would provide them with an increased level of comfort that loans will be serviced Labour pool Companies are faced with a shortage of skilled labour and the continuing high rate of migration that has resulted in Guyana losing many of its talented people. The current high levels of migration must not only be arrested but remigration must occur if Guyana is to quickly add to the human capital that will be necessary to support continued growth. All sectors of the economy are in dire need of skilled workers and the shortage of skills in the public sector inhibits the ability of government to implement new policies, including measures to encourage the growth. Disincentives Guyanese living outside the country point to the dilapidated state of infrastructure, poor government services in the areas of education and health as inhibitors to remigration. Public goods such as education, health care, public hygiene, secure property rights, adequate dispute resolution mechanisms, and a well functioning legal system are not efficiently provided. The erosion of Guyana's educational system is one of the more alarming aspects of the overall decline in government services. The quality of education in Guyana was among the best in the Caribbean in the 1960s. Today, it is among the worst resulting in the erosion of human capital, the most important ingredient in competing in an increasingly globalized world. Despite low dollar value wages, Guyana is not attractive to investors who must be assured that there is a pool of talent available for them. Conclusion As the Budget Speech indicated Guyana grew at a much slower rate than most of our trading partners and competitors in 1999. With elections looming on the horizon it may seem wishful thinking to speak of investments when most Guyanese are concerned about continuing and worsening political divisions. Yet the irony is that if we can put all those who want to work in jobs that are rewarding, create laws and incentives that give the worker a vested stake in the business, truly open up the country to investors under a code that is as clear as it is fair, reduce red tape and provide the firm foundations of macro-economic stability we may very well avert the doom which has engulfed so many Guyanese. Time is certainly not on our side nor are the signs encouraging. The private sector and civil society must continue to push for meaningful reforms in the investment framework of the country. One that recognises that the Guyanese investor has more than just a financial interest in his country.