report no. 47193-gt guatemala investment...
TRANSCRIPT
June 26, 2008
Document of the World Bank
Report N
o. 47193-GT
Guatem
ala Investm
ent Clim
ate Assessm
ent Vol. I
Report No. 47193-GT
GuatemalaInvestment Climate Assessment
Finance and Private Sector UnitPoverty Reduction and Economic Management UnitLatin America and the Caribbean Region
(In Two Volumes) Volume I
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FSAP
FUNDESA
GDP GE GSP GWh
HACCP
ICA
I C A O
I C T
IGS S
IMF
I N A T E C
INDE INE INFOM INTECAP INVEST I S 0
ITC
kWh LAC
MAGA
MCIV
M S M E
Mw NGO
OECD
OPDFs
PPA
PRONACOM
Programa de Evaluacidn del Sector Financiero Financial Sector Assessment Program
Foundation for Guatemalan Development Gross Domestic Product General Electric General System o f Preferences Gigawatt Hour Hazardous Analysis Critical Control Points Investment Climate Assessment International Civil Aviation Organization Information and Communications Technologies
Guatemalan Social Security Institute
International Monetary Fund National Institute for Technical Training National Electrification Institute National Statistics Institute Municipal Development Institute Technical Training Institute Invest in Guatemala International Standards United States International Trade Commission Ki lowatt Hour Lat in America and the Caribbean Ministry of Agriculture, Livestock, and Food Ministry o f Communications, Infrastructure, and Housing Micro, Small, and Medium Enterprise Megawatt Non-Governmental Organization Organization for Economic Cooperation and Development Financial Private Development Organizations Power Purchase Agreement Office o f National Competitiveness Promotion
Fundaci6n para el Desarrollo de Guatemala Product0 Nacional Bruto General Electric Sistema Generalizado de Preferencias Hora Gigavit io Peligrosos Anilisis de Puntos Criticos de Control Evaluacion de Clima de Inversiones Organizaci6n de Aviaci6n C iv i l Internacional Tecnologias de Informaci6n y Comunicaci6n Instituto Guatemalteco de Seguridad Social Fondo Monetario Internacional
Instituto Nacional Tecnol6gico
Instituto Nacional de Electrificacibn Instituto Nacional de Estadistica Instituto de Foment0 Municipal Instituto TCcnico de Capacitacidn Invertir en Guatemala Estindares Internacionales Comisi6n de Comercio Internacional de Estados Unidos Hora Kilovatio America Latina y el Caribe Ministerio de Agricultura, Ganaderia, y Al imentac ih Ministerio de Comunicaciones, Infraestructura, y Vivienda
Micro, Pequefia, y Mediana Empresa
Megavatios Organizaciones N o Gubermentales Organizacih de Desarrollo y Cooperacih Econ6mica Organizaciones Privadas de Desarrollo Financiero Acuerdo de Compra de Energia
Programa Nacional de Competitividad
R&D Research and Development Invest igacih y Desarrollo
SAT Tax Administration Superintendency
SME Small and Medium Enterprise TEU Twenty-foot Equivalent Unit TFP Total Factor Productivity
UNCTAD and Development WEF Wor ld Economic Forum WTO World Trade Organization
United Nations Conference on Trade
Superintendencia de Administracibn Tributaria Pequefia y Mediana Empresa Unidad Equivalente de Veinte-pies Productividad Total de Factores Conferencia de Naciones Unidas de Comercio y Desarrollo Foro Econ6mico Mundial Organizacih Mundial de Comercio
Country Director : Laura Frigenti Sector Director : M a r c e l 0 Giugale Sector Manager Task Manager : Stefka Slavova
: Lily L. Chu
... lll
GUATEMALA INVESTMENT CLIMATE ASSESSMENT
ACKNOWLEDGMENTS ........................................................................................................ V EXECUTIVE SUMMARY ..................................................................................................... V I CHAPTER 1 . OVERALL INVESTMENT CLIMATE FINDINGS ................................... 1
1 . INTRODUCTION ................................................................................................................................ 1 2 . MACROECONOMIC PERFORMANCE ............................................................................................... 3
4 . INFRASTRUCTURE .......................................................................................................................... 12 3 . GOVERNANCE AND REGULATION ................................................................................................ 8
5 . 6 .
SKILLS AND TECHNOLOGY .......................................................................................................... 14 ACCESS TO FINANCE ..................................................................................................................... 16
6 . FIRM PRODUCTIVITY ..................................................................................................................... 17 7 . CONCLUSIONS ................................................................................................................................ 18
TRADE AND THE EARLY IMPACT OF CAFTA O N FIRMS ............... 19 1 . INTRODUCTION .............................................................................................................................. 19
3 . EARLY EXPERIENCE WITH CAFTA ............................................................................................ 21
5 . RECO~LMENDATIONS: IMPROVING COMPETITIVENESS IN THE AGE OF CAFTA ................ 34
FIRMS’ ACCESS TO INFRASTRUCTURE SERVICES ........................... 36 1 . INTRODUCTION .............................................................................................................................. 36
3 . TRANSPORT RELATED SERVICES ................................................................................................. 41 4 . TRADE FACILITATION ................................................................................................................... 44
6 . ELECTRICITY .................................................................................................................................. 46
GOVERNANCE IN GUATEMALA ........................................................... 57
CHAPTER 2 . 2 . WHAT FREE TRADE OFFERS GUATE IZ.WL;I ................................................................................ 19
4 . THE PERSPECTIVE OF GUATEMALAN EXPORTERS ................................................................... 31
CHAPTER 3 . 2 . PHYSICAL INFRASTRUCTURE FOR TRADE AND TRANSPORT .................................................... 37
5 . POLICY RECOMMENDATIONS ON TRANSPORT AND LOGISTICS ............................................. 45
7 . POLICY RECOhLVENDATIONS ON ELECTRICITY ....................................................................... 56
CHAPTER 4 . 1 . INTRODUCTION .............................................................................................................................. 57 2 . RED TAPE AND CORRUPTION ...................................................................................................... 58 3 . LAND ............................................................................................................................................... 62 4 . 5 . 6 .
COURTS AND CONTRACT ENFORCEMENT .................................................................................. 63 CRIME AND INSECURITY ............................................................................................................... 64 POLICY RECOMMENDATIONS ON GOVERNANCE ..................................................................... 68
CHAPTER 5 . FIRMS’ ACCESS TO FINANCIAL SERVICES ......................................... 71 1 . INTRODUCTION .............................................................................................................................. 71 2 . 3 .
ACCESS TO FINANCE ..................................................................................................................... 76 OBSTACLES AND POLICY RECOMMENDATIONS ........................................................................ 80
RECOMMENDATIONS SUMMARY TABLE ..................................................................... 84
BIBLIOGRAPHY .................................................................................................................... 89
iv
Acknowledgments
The Second Guatemala Investment Climate Assessment was written by a team led by Stefka Slavova. The team comprised Veronica Alaimo, Michael Goldberg, Paola Granata, Tatsuji Hayakawa, Fernando Lecaros, Y i ra Mascar6, Ana Maria Oviedo, Thomas Haven, Bujana Perolli, Susana Shchez, Naotaka Sawada and Jordan Schwartz. Jorge Pefia did the productivity analysis. Wolfgang Mostert prepared a background paper on the energy sector in Guatemala. Otto Samayoa prepared a background paper on the early effects o f DR-CAFTA. Jorge Meza was in charge o f survey implementation. Monica Rivero, M i c k y Ananth, Patricia Melo, Eric Palladini and Jane Hwang provided editorial assistance.
Li ly Chu provided overall guidance and advice throughout the preparation o f the report. Useful comments were also received from Jane Armitage, David Gould, JosC Luis Guasch, Pablo Fajnzylber, Humberto L6pez, Neeta Simr, Mar io Marroquin and Waleska Garcia-Corzo.
A presentation o f preliminary survey findings was delivered to representatives o f the Government and the private sector in July 2007. Feedback was received from the Ministries o f Finance and Economy, FUNDESA, the National Competitiveness Program (PRONACOM), and the National Competitiveness Council. The team i s particularly grateful to the Commissioners for Competitiveness Miguel Ferngndez and Emmanuel Seidner for al l their support and inputs during the preparation o f the report.
Peer reviewers are Mary Hallward-Driemeier and Paulo Correa.
V
Executive Summary
1. Guatemala has achieved substantial progress in improving i ts investment climate since 2004. This has been reflected in improvements in Doing Business indicators (World Bank 2006, 2007) and the 2007-2008 G loba l Competitiveness Repor t (World Economic Forum 2007) rankings. For instance, Guatemala ranked among the top 10 Doing Business reformers in 2005-2006 out o f 175 countries wor ldwide and it was the top reformer in Central America in 2006-2007. Firm perceptions about major obstacles also improved substantially in recent years. Compared with 2003, far fewer f i r m s considered corruption, macroeconomic instability, crime, i n fo rma l competition, tax rates, access to finance, and courts to b e major or severe obstacles according to the World Bank's 2007 Enterprise Survey.
2. Despite these achievements, Guatemala continues to face significant challenges. Guatemala's overall Ease o f Doing Business ranking i s s t i l l relatively low-1 14* out of 178 countries-and it falls w e l l behind the rankings o f comparator countries such as El Salvador (69), Nicaragua (93), a n d Panama (65). Economic growth in Guatemala over the past 25 years has been very modest, even by L a t i n American standards. Per capita GDP growth between 1980 and 2005 averaged only 0.2 percent per year, compared with between 1.2 and 2.2 percent for Costa Rica and Panama.
3. Productivity and export growth has been disappointing. Guatemala h a d negative growth in output per worker between 1980 and 2003. In large measure, t h i s was caused by a decrease in total factor product iv i ty (TFP), although a reduct ion in physical capital also made a small negative contribution. Educat ion levels-the third determinant o f output per worker-improved, partially offsetting the negative changes in TFP and physical capital. Export performance has not kept up with comparator countries such as El Salvador, Costa Rica, and Chile. During the 1960s, Guatemalan exports o f goods and services averaged 15 percent of GDP, and t h i s percentage has barely changed since (it averaged 16 percent in 2006). In contrast, Chilean exports grew from a n average o f 14 percent of GDP in the 1960s to an average o f 36 percent during the 2000s. Moreover, Guatemalan exports are dominated by basic commodities such as coffee, sugar and bananas, making them m o r e vulnerable to external demand and price shocks.
4. The Central America Free Trade Agreement (CAFTA) brings new opportunities as well as competitive pressures. With i t s export mix, tourism, service sector, and potential for foreign direct investment, Guatemala has a lot to offer-and a lot to lose i f it fails to invest in the systems, technology and worker s k d s required in the n e w world o f free trade. T h e f i r s t twelve months o f CAFTA have begun to yield encouraging results as w e l l as some structural weaknesses that need to b e addressed. M a n y Guatemalan f i r m s have begun to adapt to the major changes represented by CAFTA, both in terms of finding export market niches and investing in I S 0 and other certifications, but they lag far beh ind many regional competitors. Wh i le FDI and exports have increased, the trade gap persists, with imports jumping significantly. T h e easy access to markets in the U n i t e d States, Central America, and the Domin i can Republic i s balanced by an increase in foreign penetration of
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the national market. T h e benefits to the country could include employment, worker training, management know-how, and access to n e w technologies. T h e r i sks to the country are clear: as some sectors and regions lose their share o f the national markets, unemployment may grow.
5. To be competitive, Guatemala needs to aggressively tackle reforms in 3 main areas: infrastructure, governance, and access to finance. These areas have been identif ied through analysis of a variety o f data sources, including Doing Business in&cators, the G loba l Competitiveness Report, and Enterprise Surveys. Besides data on firm perceptions, the Enterprise Surveys were used for cross-country benchmarking and a n econometric analysis o f the drivers of firm productivity. For instance, the econometric analysis found that r e d tape, corrupt ion and crime variables have the highest relative effect on average firm product iv i ty (5 1 percent). Infrastructure-related variables h a d a cumulative contr ibut ion o f 17 percent-the second highest (see Figure 1.7). Skills, technology adoption, and innovat ion are also significant areas for improvement, but they are not covered in depth in t h i s repor t (see instead World B a n k 2008).
6. Reforms in these areas, as well as other targeted initiatives, will better position Guatemala to take advantage of CAFTA. Investments in roads, ports, and airports would facilitate access to overseas markets. Reductions in corrupt ion and crime and improved electricity service would reduce costs for exporters and make them m o r e competit ive internationally. Reducing r e d tape for imports and exports-e.g., through a one- stop shop for required licenses-would help as well. Developing the nat ional quality system would make it easier for f i r m s to attain the product quality levels required by export markets. Quality system improvements relate to standards, firm certifications (e.g. I S 0 and HACCP), laboratory accreditation, metrology, and outreach to specific sectors with a n export record or export potential. Strengthening rura l competitiveness and outreach programs to small and med ium f i r m s can also b e an effective way to build export capacity and encourage internet use, foreign licensing, n e w product and service development, etc.
7. The Government should also build on what has been working in trade promotion. CAFTA guides for SMEs, the alliance with INTECAP for worker training, the increasingly effective investment promotion approach, and investments in the development o f Guatemala’s impor tant tourism assets al l contribute to a n improved outlook. T h e leadership role o f the Commissioner of Investment and Competitiveness a n d the M i n i s t r y o f Economy should b e maintained, as we l l as the strong operational leadership o f the of f ice of the Nat ional Competitiveness Promotion (Pronacom). A f inal recommendat ion related to trade i s to review the effects o f the whi te co rn exclusion in CAFTA in light of the growing food price surge locally and internationally. O p e n trade in whi te c o r n could he lp the major i ty o f low income households, especially indigenous communities.
Infrastructure
8. Road, port, and airport quality could all be improved, with private sector participation playing a key role. Despite the progress made in road density, road quality has declined. Investments are needed to rehabilitate existing roads and to build n e w roads to h k remote areas. Port capacity and efficiency need to anticipate the increasing demand from importers and exporters and cont inued investment in software and port staf f training i s needed. For both ports and airports, the legal/institutional f ramework a n d private sector participation could b e improved. Publ ic expenditure levels have not been enough to keep up
with infrastructure needs, therefore possible ways to attract private investment should b e explored.
9. Electricity subsidies should be targeted in a more efficient manner and the social tariff system should be reconsidered. El iminat ing the social tar i f f altogether and replacing it with social support pa id to low-income families by municipalities would make socio-economic sense. I t would improve targeting (reducing the number o f beneficiaries) and also improve the financial situation o f the nat ional electricity company (INDE), thereby enabling i t to accelerate planned investments in transmission and hydropower.
10. More effective mechanisms to promote investments in renewable energy should be adopted. T h e impact of the Incentive L a w on N e w Investments in Renewable Energy and i t s regulation has been limited: most investments are very attractive without the added benefits. A local community tax on hydropower that provides local communities with improved financial benefits would serve as a n effective instrument to accelerate investments in hydropower.
Governance
1 1. Guatemala should continue reforming i ts regulation of private business activity-especially in firm registration, construction permits, and tax and customs administration. A c t i o n plans that have already been developed by the country’s Credi t R i s k Task Force (Mesa de Riesgo delPais) should b e implemented in the short term. T h e one-stop shop for firm registration should b e replicated to municipalities outside of Guatemala City. In t roducing onl ine submission o f tax declarations and making it possible to pay taxes online could improve tax administration. Customs could b e improved by streamhung documentation and introducing performance incentives for customs officials.
12. The government should attack corruption directly. Building on current efforts could go a long way to further reducing the incidence of corruption. O n e example i s the Publ ic Sector Modernizat ion and Management Project, w h i c h works to improve government procurement practices, c iv i l service performance and incentives as w e l l as fiscal management. Strengthening institutions such as the judiciary and the police could also help reinforce contro l mechanisms at the national and municipal levels.
13. A concerted, long-term effort i s needed to strengthen contract enforcement and the judiciary. T h e Justice Sector Modernizat ion Project underway with World B a n k assistance should help with cour t case management, training o f judges, improving cour t infrastructure and performance and incentive schemes for judges. To reduce times to case disposition, backlogs should b e dealt with. O the r areas o f judicial r e f o r m would include a review of the Civil Procedure Code and alternative dispute resolution mechanisms, such as media tion.
14. T o lower crime, the strategy should be to emphasize preventive measures and support greater police enforcement. T h e quality of the pol ice and the cr iminal justice system could b e improved, with targeted interventions to reduce cr ime in high-risk communities in the short run, and work toward a h u m a n development strategy w h i c h aims to lower the under ly ing tendency for criminality in the m e h u m - to long run. M a n y of the targeted short-term interventions invo lve working with youth-at-risk groups, gang members and strengthening self-policing by communities. A number o f Guatemalan NGOs have programs workmg with gang members to disarm a n d find employment.
V i i i
Finance
15. Creditor rights and insolvency proceedings should be strengthened. Enhancing the institutional f ramework for the enforcement o f creditor rights and insolvency proceedings would foster credit growth, decrease i t s cost and increase the efficiency o f collateral by increasing the probabi l i ty o f recovering funds in the event o f default.
16. Sources of financing that can address the specific needs of MSMEs should be promoted. Currently external f inancing i s coming almost exclusively from companies (through trade credit) and private banks. Promoting access for MSMEs would require encouraging the development of non-banking sectors, including micro-finance inst i tu t ions, capital markets, and leasing and factoring f i r m s . Specialized legal-regulatory frameworks would have to b e developed for both leasing and factoring to grow.
17. T h e growth of commercially oriented microfinance institutions (MFIs) should be promoted through an adequate regulatory and supervisory framework. Larger MFIs are already mature enough to b e m o v e d into a regulated environment to preserve and reinforce their development. T h i s would encourage prudent accounting and risk management practices among larger institutions and enhance their access to long-term commercially pr iced funding.
18. Accounting and auditing practices, financial information infrastructure, and regulatory norms for movable collateral should be strengthened. Currently, there i s insufficient financial in format ion about f i r m s due to weaknesses in accounting and auditing practices and incomplete databases o f credit registries and credit bureaus. Adherence to credit bureaus i s typically voluntary-except for the system o f the Superintendency o f Banks (S1RC)-and, therefore, in format ion tends to b e partial. To increase the availability of accurate financial in format ion on debtors it would b e convenient, among other things, to prov ide legal backing to the adopt ion o f international financial standards. This would increase transparency and ensure systematic report ing of debtors’ financials to the Superintendency o f Banks. Greater acceptance o f movable collateral by financial i n s t i t u t i o n s would help un lock access to credit for enterprises, especially MSMEs. To increase the viabil ity o f their c r e d t proposals i t i s impor tant to have the appropriate legal-regulatory f ramework for movable collateral and a n efficient judicial system to execute it.
Chapter 1. Overall Investment Climate Findings
1. INTRODUCTION
1.1 This chapter reviews the investment climate in Guatemala using data from the Enterprise surveys of 2003 and 2007 and complementary sources such as the World Bank Doing Business reports, World Economic Forum (WEF) data, and other sources. I t compares the results o f the two Enterprise surveys on investment climate in the country. I t further provides a benchmark for Guatemala’s investment climate indicators- governance and regulation, finance, infrastructure (energy, transport, and telecommunications) and s k i l l s and technology-compared to the relevant comparator countries in L a t i n America (Costa Rica, El Salvador, Honduras, Nicaragua, Panama, Bolivia, Chile). In addition, Guatemala i s compared with Maurit ius (with trade and tourism-based growth) and S r i Lanka (with manufacturing-led growth). Finally t h i s and the following chapters present selected variations o f the investment climate indicators within Guatemala accordmg to firm size, economic sector and region.
1.2 One of the main findings of the 2004 Guatemala Investment Climate Assessment (which was based on the 2003 Survey) was the failure to continue with the business climate reforms initiated in the 1990s. In particular, the repor t ident i f ied unnecessary regulations that were causing delays and increasing f i r m s ’ costs, harassment of the private sector through in fo rma l payments, inefficient courts, and a high incidence o f crime. T h e recommendations made at that t ime included: (1) to continue efforts to modernize the judicial system; (2) to review business operating regulations; and (3) to streamline administrative processes by eliminating unnecessary regulations.
1.3 Since 2004, Guatemala has achieved substantial progress in improving i t s environment for private business. This has been captured by different international benchmarking publications. Over the past few years, Guatemala recorded a notable improvement in i t s ranking on the Doing Business indicators (World Bank 2006, 2007) and the 2007-2008 G loba l Competitiveness Report (World Economic Forum 2007). For instance, Guatemala ranked among the top 10 reformers in 2005-2006 out o f 175 countries wor ldwide (and among the top 3 reformers in L a t i n America and the Caribbean) according to the Doing Business 2007 report. Although it was not a top-10 reformer in the Doing Business 2008 report, the repor t shows that between M a y 2006 and June 2007 Guatemala introduced 5 new reforms, becoming the top reformer in Central America’. Similarly, on the
In addition to the usual Central American comparator countries (Honduras, El Salvador, Nicaragua, Costa Rica and Panama) Chile, Mauritius and Sri Lanka were chosen because: (1) Chile has been a leader in economic development in Latin America for the past 25 years; (2) Mauritius serves as an example o f how trade and openness can contribute to growth; and (3) Sri Lanka doubled i t s per capita income between 1980 and 2005 by growing manufacturing exports. 2 In recognition o f the Government o f Guatemala’s commitment to reform, former hlinister o f Finance, Hugo Beteta, was invi ted to the inaugural D o i n g Business Reformers’ Club meeting in Washington D C in April 2007.
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WEF’s G loba l Competitiveness Index, Guatemala improved in the past two years. T h e 2007-2008 index ranks the country 87* out of 131 countries ~ o r l d w i d e . ~
1.4 Despite these achievements, Guatemala continues to face significant challenges. For instance, i t ranks only 114* out of 178 countries on the overall Ease of Doing Business index, w h i c h i s better than Costa Rica (115), Honduras (121), and Bol iv ia (140), but substantially worse than the rest o f the comparator countries included in Table 1- 1. A similar pattern i s observed in the G loba l Competit ive Index 2007-2008. In that index, Guatemala outperforms only Bol iv ia (105) and Nicaragua (1 11) among the same comparator countries.
Table 1.1: International Investment Climate Rankings
Number of positive Ease of Doing Global Competitiveness (negative) reforms Business 2008 Index 2007-2008 (rank
2006-2007 (rank out of 178) out of 113)
Guatemala 5 114 87 Bol iv ia 0 140 105 Chile 0 33 26 Costa Rica 1 115 63 El Salvador 1 69 67 Honduras 4 121 83 Mauritius 6 27 60
Panama 0 65 59 Sr i Lanka 2 (1) 101 70 Source: Wor ld Bank Do ing Business in 2008; Wor ld Economic Forum, Global competitiveness Report 2007-2008
Nicaragua 0 93 111
1.5 This report utilizes newly-available data from f i r m s collected in 2007 through the Guatemala Enterprise Survey. T h e Enterprise Surveys reflect both the subjective
,perceptions of entrepreneurs and objective assessments of the importance of various investment climate constraints-for example, in terms of the monetary costs that they represent for f i r m s . This complements the Doing Business indicators, w h i c h measure the time, cost and procedures associated with different areas o f government regulation of businesses as per laws and regulations in effect. T h e survey presents f i r m s ’ perceptions, wh ich may b e biased by recent events reported in the media, by recent macroeconomic performance, or by other cultural factors. T h e perceptions may also reflect specific cultural and socioeconomic backgrounds of firm managers. For instance, managers o f f i r m s that concentrate on local as opposed to national or international markets may lack the necessary
3 The number o f countries covered by the Globa l Competitiveness Index varies f r o m year to year, so comparisons across times are not straightforward. T h e WEF provides a comparison between the last t w o years available. Considering the same countries included in the 2006 report, Guatemala improved f r o m 91St to 81st position.
2
benchmarks to judge the severity o f the problems existing in their cities or provinces, and compare them to national or international best practices. Bearing these caveats in mind, firm managers’ perceptions provide an impor tant assessment o f the importance o f different obstacles to business activity. These are then weighted against more objective measures wh ich derive from the Enterprise Surveys themselves.
1.6 Overall perceptions of the business environment improved substantially between 2003 and 2007. For example, corruption, the top constraint in both years, fe l l from 81 percent to 61 percent of f i r m s that found it to b e a major obstacle (see Figure 1.1). Cr ime showed an even more impressive improvement-from 80 percent in 2003 to 37 percent in 2007. Macroeconomic instability, i n fo rma l competition, and access to finance also improved substantially. Of the 15 measurements used, only electricity, transport, and access to land worsened between 2003 and 2007. Electricity was not a major concern in 2003, but now appears as the second major obstacle. T h e rest of t h i s chapter reviews the perceptions in m o r e detail and seeks to establish whether the general improvement i s matched by improvements in more objective, quantitative measures.
Figure 1.1: Guatemala: Perceptions of firms have improved in nearly all areas (percent of firms that consider each area to be a major or severe obstacle)
Corruption
Electricity
Macroeconomic instabihty
Crime
Informal competition
Tax rates
Inadequate education of wor!dorce
Tax administration
Transport
Access to Finance
Access to land
Customs & Trade Regulations
Licensing & Permits
Courts
Labor regulations
61
80
0 30 60
Source: Enterprise Surveys 2003 and 2007
2. MACROECONOMIC PERFORMANCE
1.7 Guatemala’s economic growth performance over the past 25 years has been very modest, even by Latin American standards. Per capita GDP growth between 1980 and 2005 averaged only 0.2 percent pe r year-a very low rate compared to the 0.7 percent for the region as a whole, and the 1.2 to 2.2 percent for Costa Rica, Panama and the Domin i can Republic, and the 4.2 and 3.0 percent in Maurit ius and Sr i Lanka, respectively. Average per capita GDP in Guatemala i s we l l be low the Central American average and the overall L a t i n American regional average. Indeed, the gap between Guatemala’s per capita GDP and that of the rest o f Central America widened between 1980 and 2005 (from
3
US$375 in 1980 to US$821 in 2005). Likewise, whi le in 1980 Maurit ius h a d about the same level of per capita GDP as Guatemala, by 2005 i t s income had triple, and Guatemala's h a d stayed practically the same. Sirmlarly, S r i Lanka's per capita GDP, although less than Guatemala's, more than doubled in the same per iod (see Figure 1-2).
Figure 1.2: Per Capita GDP Comparisons, 1980-2005 I 5000
4500
4000
3500
3000 8 2500 2 2 2000 6
1500
64 VI
.d
1 I 1 I -
l+Central America +Guatemala +LAC +Mauritius * S r i Lankal
Source: World Bank World Development Indicators 2006
1.8 Guatemala-like most of LAC-recorded negative growth rates of output per worker between 1980 and 2003. T h e annual average was negative 0.5 percent pe r year. Only Costa Rica and Panama registered positive average growth o f output per worker during the same period. In contrast, Guatemala, El Salvador and Honduras al l h a d negative growth per worker of about 0.5-0.6 percent, and Nicaragua's average rate was a negative 2.2 p e r ~ e n t . ~
1.9 In large measure, the negative growth in output per worker in Guatemala was caused by an average decrease in total factor productivity (TFP) of 0.7 percent between 1980 and 2003. Changes in physical capital made a small negative contr ibut ion of 0.1 percent, whi le improvements in education levels partially offset the negative effects of TFP and physical capital-with a 0.3 percent positive average annual contr ibut ion to growth in output per worker over the same period. By comparison, positive growth in output per worker in Costa Rica and Panama was largely due to higher growth in physical capital, whi le the high growth rates of output per worker in Mauritius, S r i Lanka and Chile, resulted in great par t from increases in TFP (e.g., a 3.4 annual average growth in output per worker in Maurit ius over the same per iod can b e decomposed into a 2.3 percent average growth in TFP, 0.8 percent o f growth in physical capital, and 0.3 growth in education). In Chile, TFP increases explained about ha l f o f the growth in output per worker. In Sr i Lanka the driving factor was growth in physical capital (explaining about two-thirds o f growth in output per worker) (Figure 1.3).
4 Based on data from Bosworth and Collins (2003).
4
Figure 1.3: Components of Growth in Output per Worker 1980-2003
I Physical Capital
Source: Author's calculations using an updated database from Bosworth and Collins (2003). The data show the average annual percentage point contribution o f total factor productivity (TIT), education and physical capital to growth in output per worker. The numbers i n white squares next to the circle icons denote the compound annual growth rate o f output per worker between 1980 and 2003.
1.10 Export performance in Guatemala has been disappointing-with lower growth in exports between 1980 and 2005 than in El Salvador, Costa Rica, Chile, Mauritius or Sri Lanka. During the 1960s Guatemalan exports of goods and services averaged 15 percent o f GDP. During the next decade, exports grew to 21 percent o f GDP. Since 1980 t h i s share has fallen to 16-18 percent of GDP. In contrast, Chilean exports averaged 14 percent of GDP in the 1 9 6 0 ~ ~ but doubled within the nex t three decades, and averaged 36 percent of GDP between 2000 and 2005 (as opposed to 18 percent in Guatemala during the same period. In Mauritius, exports of goods and services also increased the share o f GDP, from 46 percent in the 1970s to 60 percent in the 1990s and between 2000 and 2005. Figure 1-4 shows that Guatemalan export growth was very modest in the 1990s, and has stagnated since 2000. Apar t from disappointing export growth, the vo lume of realized exports in real terms i s low. Indeed, countries with substantially lower populations and economies, such as El Salvador and Mauritius, generated about the same volume of exports in 2005 (in real terms) as Guatemala.
1.11 Basic commodities such as coffee, sugar and bananas. These constituted roughly 30 percent o f to ta l merchandise exports in 2005 (Figure 1-4). They of fer less value added and are susceptible to external demand and price shocks. Since the mid-1990s maqzda exports (based on apparel assembly in the Free Trade Zones) have increased, and gross maqada exports accounted for US$2.5 billion o f exports in 20045, but dropped to US$2.2 billion in 2005. T h e major i ty o f these are bound for the U S market, but it has been di f f icul t
In 2003 the Bank o f Guatemala changed the methodology for registering external trade to standard IhIF practice. Since then it includes gross maquila flows in total exports (and not n e t flows as previously done). Thus, in 2005 net maquila exports (value-added) were only US3543.3 million, while their gross value was US$2.2 billion. 95 percent o f maquila exports are for the US market.
5
to increase market share in the face of growing compet i t ion from China. Whi le coffee and sugar have recently recovered from the crisis o f the late 1990s as a result of strong demand and high international prices, and exports o f non-traditional agricultural products and manufacturing goods have risen, there i s s t i l l too strong a dependence on agricultural commodt ies for foreign revenue earnings.
Figure 1.4: Exports of Goods and Services, 1980-2005 (in billions of constant 2000 US$)
+Guatemala
+Costa Rica +El Salvador
1.12 Since the signing of the 1994-1996 Peace Accords, Guatemala has enjoyed considerable improvements in macroeconomic stability. T h e WEF World Executive Opinion Survey for 2006 found that macroeconomic factors such as in f la t ion or foreign currency regulations were not considered a p rob lem by interviewed domestic and foreign f i r m s (with less than 1 percent expressing concern over them, Figure 1-5). T h e challenge now-which confronts many La t i n American countries-is to create the micro-foundations for economic growth, such as the climate for investing and doing business. Investors were not concerned with government instability or tax rates. However, investors perceived cr ime and theft, pol icy instability, the inefficient government bureaucracy, the inadequate supply o f infrastructure and the inadequate education of the workforce as major obstacles. N e x t on the l i s t were corrupt ion and access to financing. Therefore, there i s a strong sense from these data that growth i s stif led by investment climate issues, but not by macroeconomic factors.
6
F
5 0 -
40-
a -
m -
nure 1.5: PerceDtions of Doing. Business in Guatemala
6 7
Cnme and theft
Policy instability
Inefficient government bureaucracy
Inadequate supply of infrastructure
Inadequately educated worldorce
Comptlon
Access to financmp
Resmcuve labor regulations
Tax regulations
Poor work e b c m nauonal labor force
Tax rates
Gavernmeni mstabilitylcoups
Innatlon
Foreign currency regulations
0 2 4 6 8 10 12 14 16 18 percent o f responses (weighted)
iurce: World Economic Forum, Executive Opinion Survey 2006 Global Competitiveness Report 2006-2007, World Economic Forum, 2006
1.13 A productivity analysis carried out with the new Guatemala data found that red tape, corruption and crime variables have the highest relative effect on average firm productivity (51.4 percent). Infrastructure-related variables had a cumulative contribution o f 16.7 percent-the second highest (Figure 1.6). Finance-related and quality, innovation and sk i l ls variables have a far lower contribution to average productivity (13.1 and 8.7 percent respectively).
Figure 1. 6: Relative ICA effects on average productivity (Mixed Olley and Pakes decomposition)
hfrastructures M tap, cornpticn &crime Finance &cap. gw. Qlality irrmation Cths contrd &labor skills Variables Yo
242
n
1 T.l 11 12 13 14 15 16 T2 2.1 22 23 2.4 25 2.6 2.7 T.3 3 1 32 3.3 3.4 35 T.4 4.1 42 4.3 T.5 5.1 52 5.3 5.4 1 1.4 Total quality, innov. and labor skills
42 S&f - femsleworkers 4.3 Trainirg to m r y x o M i o n workers
T.l Total infrastructures
1lD;gsto cisarcustonstoeqort-interaction 2.4Dumyforsecurityeq~ees 4.1 Dumyfor Wqualitycatification rJthfimthatcb q u r t 2.5 Dumyforcrlme 12 OEctr lc i ty fmmagor 13 Durmyfor 'Eifts' to obtain dectrlcitys@y
15W8r from pkiic sources 16Sip-& losses, inports
T.2 Total red tape corruption and crime 3,3\hborking~alfi~eddmnorrbanWngfirancial 5,491areof qurts 2.lSalesrqmrtedto taQs institutions 22 Durmyforconfiictsvjthclients 3.4 Dvnmyfor c h k i r g or savi- ~ccount
3ADumyforcrdt line
23Dumyforconfiicts in courts
2.6Ma~-a#s timespent in bur. issues 2.7 P-s to s p d Lpbureaucracy
1.3 Total finance and corporate governance :,fc:"d, 3,Ilnitialinvestment:pivadetanks
14MBtHOUtagaS variables
32\hbork ing~al fi-edbinromalsources 52p~entageof mionidworkforce 5.3Dufmyfor FDi
Source: Background analysis and paper on productivity, 2008
7
3. GOVERNANCE AND REGULATION
1.14 The quality of governance and regulation of business activity can be addressed from several perspectives. O n e perspective looks at the prevalence of the rule of law, wh ich includes issues such as corruption, crime and in fo rma l activities. Ano the r perspective refers to the efficiency o f the legal and regulatory framework, as reflected in the quality of the services prov ided or regulated by the government and the burden that f i r m s face in complying with regulations in taxation, entry and exit, labor relations, and other legitimate publ ic interests. Previous studies suggest that to improve firm performance in L a t i n America, policies should b e oriented toward both strengthening the rule of the l aw and improving government i n s t i t u t i o n s and regulatory frameworks.6
1.15 Evidence from the Enterprise Surveys and other cross-country data sources point to shortcomings in corruption, crime, and informality. Although the proportion of f i r m s perceiving these issues as major constraints has fallen between 2003 and 2007, those areas s t i l l remain among the top obstacles for Guatemalan entrepreneurs. Accordmg to Kau fmann et al. (2007), Guatemala did not make progress between 2003 and 2006 in the rule of law and contro l o f corrupt ion indexes.’ Compared to the selected comparator countries, Guatemala i s in the worst position in the rule of law; and i s only better than Honduras and Nicaragua in con t ro l of corrupt ion (Figure 1-7).
Figure 1.7: Governance Indicators, 2003 versus 2006 a. Rule of Law b. Control of Corruption
Chde
Mauntius
Costa Wca
Sri h k a
Panama
El Salvador
Nicaragua
-O ?o -0 d 5
Honduras 1 Guatemala I
-2.w -1.50 -1.00 4.50 0.00 0.50 l.w 1.50 2.w
pGiiiG
Chile
Costa R i a
MBYIltlUS
El Salvador
Panma
Sri Lanka
Gua!eUlalB
NlCXagW
Hondwas
.zoo - 1 5 0 - 1 0 0 - 0 5 0 0 0 0 0 5 0 I O 0 1 5 0 2 0 0
Source: Kaufmann et al. (2007)
1.16 Guatemalan f i r m s continue to suffer more from crime than their counterparts in other countries. There are several costs associated with crime, such as the direct cost o f security to protect the f i r m s ’ private property or losses due to theft, robbery or vandalism. On average, Guatemalan f i r m s lose 4 percent o f their annual sales in security expenses or theft, and t h i s percentage increases to 8 percent when the sample i s restricted to those f i r m s that were victims of cr ime in the period. This figure i s the highest among comparator countries. Depending on their size, region o f operation or exporter status, cr ime affects f i r m s differently (see Chapter 4 for m o r e details).
See Lopez et al. (2007). Kaufmann et al. (2007) produce indicators known as “Governance Matters” indicators. These are indexes that
go f r o m -2.5 to 2.5 (the higher the index, the better the outcome), wh ich can b e transformed in to a percentile measure (0-100) for an easier interpretation.
8
1.17 The proportion of firms that pay bribes to “get things done” or to obtain public services fell dramatically between 2003 and 2007-from 35 percent to 16 percent.’ Despite t h i s impressive decline (see Chapter 4), corrupt ion remains a concern for Guatemalan f i r m s . Moreover, the 2007 figure i s s t i l l higher than in Panama, El Salvador, S r i Lanka, Chi le and Maurit ius (Figure 1-8). Corruption should b e addressed in conjunct ion with other problems such as regulatory compliance and the judicial system, as various studies have l inked these to corruption. On the judiciary front, the 1997 World Development Repor t focused on the quality of the judiciary and found that, control l ing for other factors, the p re l c tab i l i t y o f the judiciary appears to lower the level o f corruption. Ades and Di Tella (1996) present a similar correlation between corrupt ion and the independence of the judicial system. O the r studies have found that corrupt ion i s negatively correlated with both regulatory compliance (proxied by the percentage of sales that f i r m s report for tax purposes) and t r u s t in the courts’ enforcement power.
4 0 a 34.4 .
Figure 1. 8: Bribe payments in Guatemala and comparator countries (to get public contracts and/or “get things done”)
’ 35 30
LFI 20 k3 15
10 5 0
2 25
Note: Bribe payments are measured as a variable that equals 1 if the firm’s manager answers with a percentage greater than zero to the following question: “When establishments like this one do business with the government, what percent o f the contract value would be typically paid in additional or informal payments or gifts to secure the contract?”, or if the firm answers affirmatively to any o f the questions “Was an informal gif t or payment expected or requested to obtain the [service]?” in reference to a telephone, water, or electricity connection; an import, or operating license; or a construction permit. Source: Enterprise Survey.
1.18 Practices of competitors in the informal sector are a major concern among Guatemalan f i rms. Enterprise surveys interview only fo rma l f i r m s . On average, formal ly registered f m s repor t 73 percent o f their sales for tax purposes. This figure i s not significantly different from the regional average (71 percent). However, t h i s figure can b e improved; within Central America t h i s average i s lower only in Nicaragua (59 percent) and Panama (63 percent). T h e other comparator countries repor t a higher proportion o f their sales for tax purposes. Firms are also asked about the proportion o f workers reported for tax and social security purposes. Guatemalan f i r m s report, on average, 76 percent of their
8 T h e difference increases when we compare the same (panel) f i r m s wh ich were interviewed in b o t h 2003 and 20007: 42% paid bribes “to get things done” in 2003 and 18% -- in 2007.
9
workforce, slightly higher than the Central America average o f 74 percent, but far be low Chi le (82 percent). There are no available data on t h i s issue for Maurit ius or Sr i Lanka.
1.19 In 2003 Guatemala had the highest share of informal workers among Central American countries. Gasparini and Tornaro l l i (2007) use household surveys to measure the share of i n fo rma l workers in L a t i n America and the Caribbean. They define as “productive informality” the share o f workers that be long to any o f the following categories: (1) unskil led self-employed; (2) salaried workers in a small private firm; and (3) zero-income workers. Table 1-2 summarizes their estimations for Guatemala and the avadable comparator countries. Guatemala has the highest share in Central America (69.5 percent), and i s only surpassed by Bol iv ia (76.9 percent) among the comparator countries used in t h i s report. This i s also in l ine with a study by the Center for Nat ional Economic Research of Guatemala (CIEN), wh ich estimated that in 2004,75 percent of the economically active populat ion was engaged in in fo rma l a ~ t i v i t y . ~
Table 1.2: Share of informal workers, 2003 Bolivia 76.9 El Salvador 57.0 Guatemala 69.5 Panama 50.2 Nicaragua 64.7 Costa Rica 41.4 Honduras 63.8 Chile 37.0
Source: Gasparini and Tornarolli (2007)
1.20 Informality i s not an isolated problem. Schneider (2005) points out that heavy tax and social security burdens are one of the m a i n causes for the existence of a n i n fo rma l economy. In addition, the intensity of regulation and the complexity of the tax system are also found to b e impor tant determinants of the shadow economy.
Figure 1. 9: Regulation Indicators, 2003 versus 2006 Regulatory Quality Government Effectiveness
Chile
Mauntius
Costa Rca
Panama ElSalvador
Guatemala
Sn Lanka
Honduras
Nicaragua
-200 150 -100 -050 000 050 100 150 2 0 0
/zEGz
Source: Kaufmann et al. (2007)
Chile
Mauntius
Costakca
Panama
El Salvador
Sn Lanka
Honduras
Guatemala
Nicaragua
-200 -150 -100 -050 000 050 100 I 5 0 2 0 0
1.21 Guatemala has made a significant improvement in terms of regulatory quality during the past four years. Accord ing to Doing Business 2007, Guatemala was a top 10 reformer in 2005-2006, w h e n it introduced reforms to facilitate starting a business, dealing with licenses, and registering property. In addition, the Doing Business 2008 repor t indicates that during 2006-2007 “Guatemala expedited a number of formalities by mak ing t h e m electronic. By al lowing registrars to submit electronic signatures, the t ime to register proper ty
CIEN 2006.
10
has been reduced from 37 to 30 days. T h e implementat ion o f a n e w Electronic D a t a Interchange (EDI) system for electronic submission of customs declarations and the in t roduct ion of risk-based inspection regime decreased the t ime for export ing procedures by one day. With the full implementat ion of the one-stop shop, t ime for new company registration was cut from 30 to 26 days, and 13 procedures were reduced to 11. Guatemala focused on increasing efficiency across the board, expediting the decision processes for construction, reducing the t ime from 286 to 235 days, as we l l as re forming the courts: increasing the number of cases to b e decided by justices o f peace hereby expandmg their small claims
1.22 Alternative measures of regulation, such as those used by Kaufmann et al., indicate improvements but not along all dimensions of the regulatory regime. As Figure 1-9 shows, Guatemala’s improvement in the Regulatory Quality indicator from -0.24 to -0.09 implies a movement from the 44’ to the 5 l S t percentile in the entire distribution. However, the index of Government Effectiveness has worsened for Guatemala during the same period. Accord ing to the Enterprise Survey, Guatemalan firms repor t tax rates as major obstacle for the operations of their business. O the r issues as tax administration, access to land, customs and trade regulations, permits and licensing, courts, and labor regulations are not among the top 5 obstacles, but combined, regulatory issues remain a major concern for the private sector.
1.23 The proportion of Guatemalan f i r m s that perceive the functioning of the courts as a major or severe obstacle for business has significantly declined-from 31 percent to 13 percent. Perhaps f i r m s do not perceive the courts as m u c h of a p rob lem because very few o f them use the courts-only 49.6 percent-the lowest percentage among the comparator countries. T h e percentage o f commercial disputes that are taken to court, less than 50 percent, i s the lowest among comparator countries. Furthermore, only 24 percent o f f i r m s consider the cour t system to b e fair, impartial, and uncorrupted (Figure 1- 10).
Figure 1.10: Courts in Guatemala and comparator countries A. Percentage of firms that Consider the Court System to
Be Fair, Impartial, & Uncorrupted B. Percentageof Firms that Consider that Courts are
Quick
Chlle
Panama
Guatemala 2007
El Salvador
Nicaragua
Bolivia
Honduras
I 1744 I
0 I O 20 30 40 50 60
% fim
Guatemala 2007
El Salvador
Bohvia
Honduras
0 10 20 30
I f i i
l o Doing Business 2008.
11
C. Percentage o f disputes that use courts
Bohvia
Nlcaragua
Panama
Honduras
Salvador
Guatemala
0 10 20 30 40 50 60 70 80
'*o dlsputes
Source: Enterprise Survey
1.24 Guatemala has the lowest number of procedures required to enforce contracts among comparator countries, but the longest time to do so-an average of 208 weeks (Table 1-3). Overall, Guatemala performs slightly better than the Central Amer ican average, and i s even better than Chile in terms of the number of procedures and enforcement costs (as a percentage o f the amount disputed), but trails the other countries as far as the t ime to enforce a contract, probably the most impor tant measure o f contract enforcement.
Table 1.3: Contract enforcement Enforcing Contracts
Procedures T ime cos t Rank (number) (days) (% o f debt)
El Salvador Chi le Nicaragua Mauri t ius Guatemala CA Bol iv ia Panama Honduras Costa R ica
54 64 69 78 98 99 112 116 124 130
30 36 35 37 28 36 37 31 45 40
786 480 540 750 1459 674 59 1 686 480 877
19.2 28.6 26.8 17.4 26.5 30.1 33.2 50.0 30.4 24.3
Sri Lanka 133 40 1318 22.8 Source: D o i n g Business 2008. Sorted by country 's rank o n the index o f En fo rc ing Contracts
4. INFRASTRUCTURE
1.25 Accord ing to the G loba l Competitiveness Repor t 2007-2008, infrastructure i s perceived as the s i x t h most problematic factor for doing business in Guatemala." Thus, foreign investors thought that Guatemala had a n overall competit ive disadvantage due to i t s inadequate infrastructure. Overal l infrastructure quality was ranked 63rd among 131
11 F r o m a l i s t o f 15 factors, respondents were asked to select the five most problematic for do ing business and to rank them between 1 (most problematic) and 5 (least problematic. T h e responses are weighted according t o the rankings and summarized in a f inal ranking. According to the Globa l Competit ive Repor t 2007-2008, the five most problematic factors are cr ime and theft, pol icy instability, corruption, inefficient government bureaucracy, and inadequately educated workforce.
12
countries in 2006, better than the regional average, S r i Lanka, and Bolivia, but worse than Chile and Maurit ius (Table 1-4)."
Table 1.4: Infrastructure indicators in Central America Notable Competitive Advantages and Disadvantages (RanW131 countries) (*)
Bolivia Chile Costa Rica Salvador Guatemala Honduras Mauritius Nicaragua Panama SriLanka E l
Overall infrastructure quality 123 30 110 40 63 72 44 108 51 74 Roads quality 125 22 121 31 56 62 43 102 52 77 Railroad infrastructure quality 102 66 115 117 120 114 101 129 63 60 Port infrastructure quality 87 34 125 81 73 40 41 124 15 62 Air transport infrastructure quality 11 8 31 66 34 67 69 39 80 38 70
Telephone lines (hard data) 94 59 37 74 88 95 42 105 76 98 Electricity supply quality 87 39 40 57 63 86 45 117 56 81
Source: World Economic Forum, Global Competitiveness Report 2007-2008. (*) The rankings in bold and italics are considered notable competitive advantages, while the rest are notable competitive disadvantages.
1.26 According to the survey data, manufacturing f i r m s in Guatemala rely on the country's system of roads to transport their main product to i t s primary destination (see Chapter 3, Figures 3-6 and 3-7 for m o r e details). Firms use transportation to buy inputs and sell their outputs. T h e vast major i ty o f interviewed Guatemalan f i r m s use l and transport for getting their main product to the market, w h c h i s similar to elsewhere in Central America, with the exception o f Panama (where mari t ime transport has a very high share). In the context of CAFTA and regional integration with other countries in Central America, improvements in roads and logistics can generate a n impor tant boost for the private sector. Only 9 percent o f interviewed Guatemalan f i r m s repor t another country as their m a i n market destination. Of those, the average percentage of shipment lost due to breakage or spoilage i s about 0.3 percent, wh ich puts Guatemala in a better position relative to the rest of the comparator countries, with the exception o f Chile.
1.27 Access to reliable electricity supply i s a major concern for f i r m s in Guatemala. A lower share o f f i r m s suffered power outages in 2007 than in 2003 (34 versus 73 percent respectively). But for the affected f i rms, outages lasted longer (17 hours per month in 2007 compared to seven hours per month in 2003). In l ine with the longer duration, losses associated with power cuts were higher in 2007 than in 2003 across f i r m s that suffered from them.
1.28 Guatemala has been a net exporter of electricity to other Central American countries, although increased domestic demand has decreased the exportable surplus recently. In the last three years there have been problems satisfying peak demand lasting up to four hours-and the p rob lem may b e even m o r e severe i f current economic growth forecasts are fulfil led. This issue should b e addressed promptly, since the addi t ion of n e w generation plants requires at least four years (four to f ive years for a coal plant, and f ive or s i x years for a hydroelectric p lant with a seasonal dam).
l2 However, there i s a relative improvement in the Guatemalan infrastructure rankings with respect to the previous report. The 2006-2007 report ranked 117 countries, while the 2007-2008 report ranked 13 1 countries. Table 1-6 reports the ranking among 131 countries. I t i s possible to compare rankings across years by computing the percentile position o f Guatemala in each report. Guatemala moved from the 23rd percentile in 2005 to the 52"d percentile in 2006.
13
1.29 Competit ion in the telecommunications industry has increased over the past eight years. T h e privatization of Guatel in 1998 and the aggressive expansion of mobi le networks have led to a n increase in penetration from 5.8 telephones per 100 inhabitants in 1998 to 45.7 in 2005. Broadband internet access i s available in al l major municipal towns through the incumbent's DSL service, and alternative broadband providers in Guatemala City are expanding to other cities in the country. At the firm level, the proportion o f f i r m s that use own email or own web pages to communicate with suppliers and clients has grown from 67 percent in 2003 to 75 percent between in 2007. However, there i s s t i l l room for further expansion, since these figures are below the levels observed in most comparator countries.
5. SKILLS AND TECHNOLOGY
1.30 Overall Guatemalan education performance is poor. T h e country has a high rate o f ill iteracy (the highest in La t in America), and the g r o s s enrollment rates at both the pr imary and the secondary levels are low (the lowest in L a t i n America). In addt ion, the level of publ ic expenditure in education i s low, and it i s not compensated by a larger presence of the private sector (relative to other L a t i n American countries). There are three ways that the investment in education can contribute to economic growth: (i) demand for skilled labor to use m o d e m technology, (ii) the creation o f stronger government and private sector institutions, and (ii) improved efficiency of the education system.13
1.31 Despite the relatively l o w level o f education, f i r m s seem less incl ined to absorb additional worker t ra in ing costs than before. Accord ing to the survey, the percentage of manufacturing f i r m s providing training to their employees has decreased from 58 percent in 2003 to only 42 percent in 2007. T h e 2007 level i s lower than the percentage o f f i r m s providing training in the comparator countries, with the exceptions of Nicaragua and S r i Lanka (Table 1-5). T h e share o f f i r m s providmg training i s unevenly dst r ibuted across d f fe ren t types of f i r m s (by size, region, and exporter status). Small f i r m s prov ide significantly less training than m e d i u m and large h s . Firms are m o r e l ikely to provide worker training w h e n they are located in the capital c i ty or are export ing products.
Table 1.5: Percentage of manufacturing f i rms providing training Mauritius 62.4 Honduras 43.6 Guatemala 2003 57.8 Panama 42.3 Bolivia 57.0 Guatemala 2007 41.5 Chile 53.4 SriLanka 32.6 El Salvador 48.5 Nicaragua 30.5 CostaRica 46.4 Source: Enterprise Survey. The difference between Guatemala 2003 and 2007 s t i l l persists if we restrict the sample to firms interviewed in both years (panel sample).
1.32 Guatemala has room to improve in innovation and technology. Figure 1-11 shows that 34 percent o f Guatemalan firms invest in research and development (R&D), wh ich i s significantly higher than the Central American regional average of 26 percent. In
13 Enterprise surveys do n o t provide enough in fo rmat ion to analyze human capital performance. T h i s analysis relies o n Artana, et al. 2007.
14
contrast, there i s no significant difference between Guatemala and the rest o f Central America in terms of I S 0 certifications. I t i s impor tant to note that the latter has significantly increased in Guatemala between 2003 and 2007, from 3 percent to 16 percent, even w h e n w e restrict the sample to the f i r m s surveyed in both years. Nevertheless, Guatemala s t t l l has room for improvement in t h i s area w h e n compared to Chi le (26 percent) and Maurit ius (28 percent).
Figure 1.11: Innovation in Guatemala and comparator countries Percentage of Firms that invest in R&D Percentage o f Firms that have I S 0 certifications
SnLanka COStaRlCa
Honduras Nicaragua
Panam Chde
ElSalvador Guatemla 2037 Guaiewla 2003
Bohvia M8""tL"S
0 10 20 30 40 50
ck frm
4
0 5 10 15 20 25 30 sr fum;
bource: Enterprise Survey
1.33 Guatemala st i l l faces challenges with respect to i t s technological readiness and innovation capacity. I t s only competit ive advantage (Table 1.6) i s foreign direct investment and technology transfer, where it ranks 40* out of 131 countries. Among the Central American countries, it also comes second only to Costa Rica in terms o f capacity for innovat ion (59* compared to Costa Rica's 37* rank).
Table 1. 6: Technological Readiness and Innovation Indicators Notable Competitive Advantages and Disadvantages (RanW131 countries) ( * J
El Costa Rita Salvador Guatemala Honduras Nkaragua Panama
Technological readiness Availnbiliry of latest technologies 1 2 75 62 96 118 18 Firm-level technology absorption 56 86 60 IO0 126 19 Laws relating to ICT 60 7 4 91 86 106 5 1 FDI and technology transfer 7 88 40 52 111 29 Innovation Capacity for innovation 37 87 5 9 85 107 104 QuaIi1) of scienrifrc research in3titutions 34 I21 103 I20 125 95
CN! ersit) -industr) research collaborarion 35 1 I 5 51 94 I I? 83
Availability of scientists and engineers 39 I19 99 107 115 97
Company spending on R&D 30 loa 64 101 121 19
Government procurement of advanced technology pro 61 90 85 88 I I 2 19
Bolivia Chile hlauritius Sri Lmka Technological readiness A i ailability of latest technologies I24 34 5 1 68 Firm-le! e l technolog) absorption 131 38 7 3 6 1 Laus relating to ICT 122 25 44 6.5 FDI and technolog) transfer I O 1 30 68 55 Innolation Capacity for innovation I I7 50 96 36 Quality of scientific research institutions I26 S I 69 41 Company spending on R&D 122 60 83 39 L'ni! ersity-industr) research collaboration 122 1 3 7 1 39 Go\ernment procurement of advanced technology pro 130 40 6 1 5 1 Aiailability of scientists and engineers 124 31 I06 44
Source: World Economic Forum, Global Competitiveness Report 2007-2008. "The rankings in italics are considered notable competitive advantages, while the rest are considered notable competiti\,e disadvantages.
15
6. ACCESS TO FINANCE
1.34 Domestic credit to the private sector has increased in the past few years- from 19.8 percent of GDP in 2000 to 26.8 percent in 2006. However, i t remains we l l be low the Central American average (almost 47 percent in 2006). In addt ion, interest rate spreads are relatively high w h e n compared to other countries in the region-an average of 10 percentage points in Guatemala during 2001 -2005, only surpassed by the average o f Costa Rica (almost 14 percentage points between 2001-2006) (Table 1.7).
Chile Costa Rica El Salvador Guatemala Honduras Mauritius Nicaragua Panama
71.16 24.01 45.24 19.79 40.70 60.66 33.18 101.89
78.41 31.17 43.52 22.57 40.92 16.49 22.94 91.81
82.40 39.29 43.66 26.78 48.99 78.01 33.35 88.56
5.64 11.51 4.64 10.71 10.89 11.16 7.34 3.41
3.45 15.17
10.20 9.32 11.48 10.00 5.95
2.89 12.42
8.26 8.10 11.53 6.71 4.56
Sri Lanka 28.83 29.93 6.99 4.34 CA 44.13 42.15 46.77 8.08 10.13 8.01
Source: World Bank, World Development Indicators
1.35 A similar picture arises from the survey data, which quantify the demand for credit by interviewed firms. T h e percentage o f f i r m s with checking or savings accounts in Guatemala i s significantly lower than the regional average. T h e same i s observed for the percentage of f i r m s with c r e d t lines or loans, but there are no significant differences in the percentage of firms with overdraft facilities. In terms o f the demand for credit, only 32 percent o f Guatemalan f i r m s applied for a l oan and t h i s percentage i s sigmficantly lower than the regional average (Table 1-8). T h e major i ty of loans require collateral, but collateral- to-loan values have declined since 2003 (Figure 1.12).
Table 1.8: Access to Finance in Central America % fiims with % rejected
Overdraft Credit linedloans applied for loans applications checkinglsavings
accounts Costa Rica 43.15 47.81 12.85 El Salvador 92.34 54.21 62.12 43.54 12.53 Guatemala 84.36 52.90 43.99 31.98 10.29 Honduras 91.49 51.88 54.27 42.43 10.49
Panama 97.68 63.65 57.29 32.76 3.86 Nicaragua 73.32 30.03 40.93 36.69 12.1 1
Source: Enterprise Survey
16
Figure 1.12: Access to Finance 2003-2007 I
120
100
80
60
40
20
0
8
% Loans requiring Collateral as % loan collateral value
Source: Enterprise Survey
6. FIRM PRODUCTIVITY
1.36 An econometric model was estimated to yield concrete details about the effects of the investment climate on firm performance and other economic performance variables such as workers’ earnings, following the econometric methodology o f Escribano and Guasch (2006), and using survey data for Guatemala only.l4 T h e results were consistent with other findings indicat ing that governance issues and cr ime negatively correlated with productivity. Firm product iv i ty i s also higher w h e n there i s access to financial services and a well-functioning legal system. This result i s captured by the positive effect of having a credit line and using non-bank financial sources to finance working capital, and the negative effect between using in fo rma l sources to finance working capital. As far as other contro l variables are concerned, f i r m s that chose to b e incorporated are m o r e productive. This i s impor tant because, as Demirguc-Kunt, Love, and Maksimovic (2006) point out, firms are m o r e l ikely to b e incorporated in countries with a wel l - funct ioning legal system. Therefore, an improvement in the judiciary may improve f i r m s ’ product iv i ty indirectly through t h i s channel. Finally, exporters have higher product iv i ty than non-exporters, w h c h i s consistent with the literature on exporter premiums (see Olarreaga et al., 2007).
1.37 By solving a system of simultaneous equations, i t i s possible to estimate the contr ibut ion of each area o f the investment climate toward di f ferent measures of economic firm performance, such as productivity, employment, real wages, exports a n d foreign direct investment (FDI). Figure 1-13 confirms the regressions in background note; the largest contr ibut ion to firm product iv i ty i s g iven by improvements in r e d tape, corrupt ion and cr ime (51 percent). This area i s also impor tant to attracting FDI (34 percent), increasing employment (13 percent), and increasing exports (9 percent). T h e gains in productivity, in turn, have a large positive effect on real wages, exports and FDI, t h u s fur ther increasing the importance o f governance and infrastructure inhcators for the economic performance o f Guatemalan firms.
1‘ T h e m e t h o d o l o g y a n d deta i led tables are avai lable in a b a c k g r o u n d paper (World Bank, 2008b)
17
Figure 1.13: Contribution of investment climate variables to economic performance measures
Prcductidty Real wages rn lnfrast ructures
Finance and corporate gownance Other control variables
Source: Background paper, Pena (2008)
Red tape, corruption and crime Quality, innovation and labor skils
7. CONCLUSIONS
1.38 T h e analysis of firm level data and intemtional benchmarks confirms the importance of the investment climate for productivity in Guatemala. T h e impact vanes according to the investment c h a t e factor. Since the f i r s t ICA based on 2003 data, Guatemala has acheved significant progress in the regulatory front, but it needs to persist with the regulatory reforms of the past four years. In addition, corrupt ion and crime s t i l l remain major bottlenecks for firm productivity. There i s a substantial scope for improvement in infrastructure, especially in the energy sector, and the country needs to invest further in i t s h u m a n capital. Addressing these challenges will b e crucial to promote sustainable growth and create the conditions for Guatemala’s integration in the global economy and take advantage of trade agreements, such as CAFTA.
18
Chapter 2. Trade and the Early Impact o f CAFTA on Firms
1. INTRODUCTION
2.1 I t i s too early to attr ibute recent gains in foreign direct investment, exports a n d sectoral development to CAFTA, but in i t i a l indications reveal some concrete benefits. A review of trade trends, enterprise survey results, a commissioned background paper based on Central Bank o f Guatemala data, and available research finds that significant benefits have already been generated. M o r e than n e w incentives, CAFTA offers permanent favorable access to the U.S. market along the lines o f the 1993 Caribbean Basin In i t iat ive and the General System o f Preferences. T h e value-added effects o f CAFTA are tempered by already low tariffs, and the success of efforts to integrate the Central American economies that pre-date CAFTA. CAFTA benefits can also b e swamped by volatihty in the U.S. demand for Guatemalan exports, high levels o f cr ime and corrupt ion that can affect national and international investment decisions, and the relatively slow adopt ion o f new technologies by f i r m s .
2.2 With i t s diversif ied export mix, tour ism a n d services potent ia l for foreign direct investment, Guatemala has a lot to offer-and a l o t to lose i f i t fails t o invest in the systems, technology a n d worker ski l ls required in the n e w world of free trade. To fully understand recent trends in international commerce for the country, t h i s chapter provides (i) a n assessment o f the promise and early results of Guatemala’s participation in CAFTA, (ii) the perspective o f Guatemalan exporters on the business environment (from ICA surveys), and (iii) recommendations for using CAFTA as a way to increase employment, p romote regionally balanced growth, and improve private sector competitiveness.
2.3 T h e government a n d the private sector face dif ferent challenges, i f they are to take full advantage of the CAFTA opportunity. T h e government must build on strong competit ive advantages (includmg the new Aurora airport, a large domestic market, and attractive tourism assets)-and b d d confidence w i t h the private sector and in international markets that macroeconomic stability and fiscally responsible behavior will b e continued. An efficient productive infrastructure system i s necessary to take advantage of CAFTA, attract foreign direct investment, and increase exports, including transportation infrastructure, availability o f energy, and communications. Finally, government efforts to contro l crime and corrupt ion will need to bear fruit to take advantage o f the CAFTA window. For i t s part, the private sector must increase investments in labor training, quality, market research and international product and process certifications, i f it i s to prosper from CAFTA’s opportunities.
2. WHAT FREE TRADE OFFERS GUATEMALA
2.4 T h e empir ical l i terature shows that expor t ing f i rms are more productive, innovative, grow faster, a n d create employment with higher wages, especially for
19
skilled ~ 0 r k e r s . l ~ T h e benefits can b e even more pronounced in small domestic economies l ike that of Guatemala, thanks to the export ing f i r m s ' greater capacity utilization, economies of scale, worker training, and technological know-how. T h e literature states that free trade agreements should create addt ional economic activity by encouragmg specialization, rather than merely redistributing wealth. In fact, for a sample o f 16 L a t i n American countries, enterprise survey results con f i rm that there i s a p remium for exporter f i r m s as measured by a positive total factor product iv i ty contribution."
2.5 There are two possible links between productivity and exporting firms. Higher product iv i ty could b e a result of exporting, with f i r m s learning how to improve product ive processes and resource use by interacting with foreign markets. T h e second causation chain could b e that, as f i r m s become more productive, it i s natural for them to increase product ion and begin to export. T h e data in the enterprise survey shows that firms that export are m o r e productive in terms o f to ta l factor productivity, but t h i s data does not prov ide the basis for understandmg the causal link between product iv i ty and f i n n s that are exporters.
2.6 When free trade agreements lead to increased investment in equipment and human capital, there can be improvements in total factor productivity (TFP). TFP has been ident i f ied as one o f the leading contributors to economic growth, proving to b e m o r e impor tant than capital accumulation.17 Structural policies, including trade openness, are also identif ied as an impor tant determinant of growth. A calculation o f Guatemala's to ta l factor product iv i ty based on the Enterprise Survey shows that there i s a positive correlation between the share of exports and TFP, but does not answer the question of causality." (For m o r e detailed analysis, see Chapter 1 on Guatemala's total factor product iv i ty calculations.)
2.7 However, the benefits from free trade agreements are not automatic. Experience also shows that there are winners and losers in free trade agreements, o f ten based on the sector, geographic location, firm size and income strata. I f CAFTA i s going to contribute to faster growth, greater productivity, and jobs creation, Guatemalan f i r m s must adopt new technologies and product ion processes, obtain certifications, and invest in worker training. T h e benefits o f free trade in terms o f faster economic growth, technology transfers, and capital inflows derive from countries' ability to s h i f t labor and other resources toward the sectors that are most productive and reflect their economies' comparative advantage.
2.8 CAFTA reduces barriers to imports, exports and financial flows on a permanent basis. Under CAFTA, tariffs on about 80 percent o f U S exports to the participating countries will b e eliminated immediately, and the rest will b e phased out over the next decade. U S trade barriers also fall, but because the vast major i ty of goods produced in the participating countries already entered the U S duty-free under the Caribbean Basin
l j Bernard and Jensen, 1995,1999,2004; Clerides, Lach, and Tybout, 1998. l6 Chapter 7, BOOK, Carlos Casacuberta, Nestor Gandelman, Marcelo Olarreaga, Guido Porto, and Eliana Rubiano, 2007. l7 Loayza, Fajnzylber, and Calderbn, Economic Growth in Lat in America and the Caribbean, The World Bank, 2005, pages 91-94.
D i f fe ren t policy implications would arise from a causality assumption. I f exporting causes higher productivity, the government should consider additional incentives to stimulate first-time exporters. I f higher productivity causes greater export potential, incentives could be linked to productivity-enhancing investments b y firms.
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Init iative (CBI) o f 1983, U S barriers h a d less to decline. T h e CBI was a unilateral trade preference subject to p e r i o l c review and approval by the U.S. Congress. CAFTA builds on the General System of Preferences and CBI, making duty free access to the giant U.S. market permanent. This should facilitate long-term investments in the region. Wh i le t h i s i s excellent news €or Guatemalan exporters, the effects on non-exporting nat ional producers could b e negative over time, since U.S. and Central American f i r m s gain improved access to the domestic market (See the l s c u s s i o n below for additional analysis). In addition, g iven the economic slowdown o f the U.S. economy and the inroads o f Chmese and other low-cost exporters to both the US. and Central American markets, CAFTA’s short te rm effects may b e limited.
2.9 CAFTA requires changes in a w ide range of business topics a n d government regulations. These include practices and policies in market access, agriculture, intellectual property rights, ant idumping regulations and practices, cross-border trade, financial services, investment, government procurement, dispute resolution, environmental protections, labor standards, and transparency requirements.
2.10 Finally, there are impor tan t poverty repercussions f r o m CAFTA membersh ip that should make up p a r t of the “complementary agenda” of programs t o he lp the mos t vulnerable producers a n d households. Accord ing to specific research carried out as par t o f the World Bank study on CAFTA, “84 percent in Guatemala.. .are net consumers of sensitive agricultural commodities, and as such can b e expected to benef i t from the decrease in food prices.. . (while only) 16 percent (of households) in Guatemala.. .are ne t producers o f sensitive c ~ m m o d i t i e s . ” ’ ~
2.11 At ten t ion should b e focused on ne t producer low income households, since they are the mos t vulnerable to changing trade a n d investment patterns in the l o n g term. Specifically, cond t iona l cash transfers, technical assistance to improve product iv i ty and adjust the household’s investment strategies and product mix would b e beneficial. Investments in rura l infrastructure and well-designed rura l credit could also help such households to make the necessary changes.
2.12 There are also impor tan t regional a n d socioeconomic effects that can arise f r o m free trade agreements. T h e CAFTA opening could help m o r e product ive rura l areas to develop rapidly. Guatemalan has emphasized the development of n o n - t r a l t i o n a l exports, such as artisan products, cardamom, and a variety o f agricultural outputs. Non-tradi t ional exports in Guatemala tend to b e m o r e labor-intensive, creating local employment opportunities and lessening the pressure for out-migration (to Guatemala City and to other countries).
3. EARLY EXPERIENCE WITH CAFTA
2.13 CAFTA has only been in effect for Guatemala since July 1, 2006, so it i s not possible to measure the direct effects in terms o f productivi ty, jobs creation, a n d contr ibutions to economic growth. I f CAFTA opens export opportunities to large markets, i t seems reasonable to expect that existing and new Guatemalan exporters would
J a r a d o , et. al. 2005
21
become engines of growth and innovation. However, to take full advantage o f the n e w trade regime, there are many requirements for the government - including improved institutional efficiency, simplif ication of business registration and licensing processes, effective support for labor mobhty, and macroeconomic stabihty. T h e B a n k of Guatemala has developed a simulation o f the impact o f CAFTA on the gross domestic product (GDP) in 2006, w h i c h shows that 0.62 points would b e added to the GDP for the twelve months that CAFTA i s in effect. T h i s growth would b e caused by the combinat ion o f increased exports, increased imports, foreign duect investment and a decrease in tax income?’
2.14 CAFTA comes at an important time for the country. Guatemalan economic growth was stagnant from 1990 to 2002, averaging only 3.8 percent per year compared to a robust 5.5 percent recorded from 1960 to 1979. As the Guatemala ICA of 2003 revealed, “structural reforms have improved economic growth in Guatemala, [but] they have h a d a l imi ted impact on per capita income. Contributing to t h i s lower per capita growth trajectory were low investment levels and relatively lower levels o f integration with the world economy.’’21 Therefore, Guatemalan pol icy makers have high expectations for CAFTA as a means o f attracting investment and improving regional economic integration.
2.15 Based on economic advantages reinforced by CAFTA, foreign direct investment has increased dramatically since 2002, and represents an increasing share of GDP (Table 2-1). Chapter 10 o f the CAFTA agreement guarantees that foreign investors will b e treated equally to their domestic counterparts, in terms o f expropriation and indemnity. But the real attraction for investing in Guatemala in the past f ive years has been the economic factors-sugar for the candy industry, affordable labor for the clothing assembly industry (maqzlih), a range o f vegetables and spices produced year-round, and a combinat ion o f m o d e m and historic tourism assets. Investments in some sectors have increased value added content, as shown by a $45 million a luminum factory investment l inked to a n $86 million investment in fruit juice and canned vegetable processing. N e w sectors have also sprung up in recent years, and are l ikely to grow rapidly as CAFTA takes hold. These include call centers and business process outsourcing.
2.16 An econometric model developed by the Bank of Guatemala determined that the trade effects of CAFTA were largely positive. Without CAFTA, the repor t estimated that foreign direct investment would have been US$200.6 million, a n increase of only US$7.4 million (representing negative growth in real terms). However, with CAFTA, the actual investment was US$325.0 million, almost 60 percent higher than without the free trade treaty’s incentives (Table 2.2).
2O Bank o f Guatemala calculations, presented in S$o XXI, June 12,2007 and at a conference on CAFTA, in July, 2007. I t i s worth noting that the tax effects o f CAFTA are projected to be min ima l (-0.10 percent)), given the already low level o f customs duties. 21 Guatemala ICA, page 7, World Bank, 2004
22
Year
2002
Foreign direct Annual Percentage Share of investment increase increase GDP 110.6 5.1 4.8 0.47
2003 2004 2005 2006 (estimated with CAFTA) 2006 (estimated without CAFTA)
2.1 7 Even before CAFTA, Guatemala offered incentives to international investors through the services of the public/private investment promotion agency (INVEST). Incentives included assistance with visa requirements, arrangements with municipal governments, and a special training fund. The National Competitiveness Program (Pronacom) and I N V E S T established a special fund to provide a training subsidy on a per worker basis to international investors establishing plants in the country. I N V E S T management directly attributes recent large investments by GE Money, Envases Mexico, and Parras Textiles to t h i s innovative worker training fund. Together, these investments represent 2,980 new jobs. In addition, the CAFTA Tours init iat ive of I N V E S T brings private sector leaders from Guatemala to niche markets with potential investors. T h i s outreach approach has begun to bear fruit, with new investments from Indiana and Illinois under development.
131.0 20.4 18.4 0.53 154.7 23.7 18.1 0.57 208.0 53.3 34.5 0.66 325.0 117.0 56.3 0.92
200.6 7.4 (-3.5) 0.57
2.1 8 Guatemala has implemented a number of free-trade agreements. These agreements have contributed to an expansion in Guatemala's level of total exports over t ime and a gradual diversification of i t s export markets. The four free trade agreements, in addition to CAFTA, include those with Taiwan, Mexico (northern triangle), t he Dominican Republic, and Chile.
~
2007 estimate I 507.0 I 182.0 I 56.0"
Table 2.2: Importance of Foreign Direct Investment on GDP in 2006 (US$ millions) I Investment without I A c t u a l Investment I Increase attributable I Increase attributable
---
CAFTA (estimated) 200.6
2.19 Investment opportunities and specific incentives are attracting a diversified group of investors from Taiwan, Colombia, India, Canada and Europe, in addition to traditional investors from Central America, Mexico and the United States (Table 2-3). Guatemala's free-trade agreement with Taiwan came into effect on July 1, 2006, and the country i s expected to pursue other bilateral trade agreements in the near future. I t should be
with CAFTA to CAFTA to CAFTA (in %) 325.0 124.2 59.7%
23
no ted that these figures do not capture reinvestment by foreign companies and their nat ional subsidiaries. T h e Bank o f Guatemala i s developing a system to capture t h i s additional Investment.
Sector Manufacturing Call Centers and BPO Agro-industrial production
Source: * 2007 statistics are for the period January-June.
Jobs created 2,540 3,850 1,750
2.20 The rewards to capturing an increased share of FDI are most notable in terms of jobs creation, but there i s no central monitoring of such gains. There i s no central registry o f al l foreign direct investment, or the jobs created by such investments, so data i s only partial. In 2006, FDI registered with INVEST in Guatemala directly created 14,685 jobs, not including jobs from reinvestment and indirect jobs created through links to national suppliers. Cal l centers and business process outsourcing (BPO) offer the least expensive investment per job created, building on a large pool o f English-speaking university students to prov ide services to overseas f i r m s . An example of a call center i s a n alliance between GE M o n e y o f General Electric and Banco de America Central (BAC). T h e call center wdl provide services to Spanish-speaking clients o f GE M o n e y in the U n i t e d States and Mexico, as wel l as BAC clients in Guatemala. In addi t ion to t h i s n e w entrant, there are around 50 Cal l Centers of m e d i u m and large companies, employing 3,000 workers. To satisfy the increased demand for f luent English language speakers, the government has signed a n agreement with the government’s Institat0 Tecnico de Capacitarion (INTECAP) to deliver a bil ingual technical training program. (Table 2.4).
Others Total all sectors
Table 2.4: Tobs created bv Fore im Direct Investment in 2006
6,390 14,685
2.21 Despite these gains, Guatemala still lags far behind other Central American countries in FDI as a share of GDP. Except for 1998, w h e n a large privatization affected
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the trend, Guatemala has steadily under-performed in percentage terms, with foreign direct investment we l l under 1.0 percent o f GDP. At the same time, Costa Rica, El Salvador, Honduras and Nicaragua are in the 3 to 6 percent range (Figure 2.1).
Figure 2.1: FDI as a share of GDP Net Inflows of FDI as a Percent of GDP in Guatemala and Comparator
Countries, 1995-2005 (Source: WDI)
-Costa Rica --e El Salvador
Guatemala ~ Honduras -Nicaragua
Source: World Development Indicators
2.22 Whether caused by opportunities, investment promotion strategies or market changes, investment in various sectors of the economy has shifted. Investors seem to b e moving out of clothing assembly (mapila) and other manufacturing to services, such as call centers and business processing (Table 2-3). Wh i le c lothing manufacturing represented 52.2 percent o f the new foreign direct investment in 2005, i t had dropped to only 45.6 percent by June of 2007. E v e n taking into account that investment i s “lumpy,” there are impor tant short te rm employment challenges. Wh i le exports have grown remarkably, up 24 percent year-on-year for January and February of 2007, there are sectoral changes.
2.23 There are labor dislocation issues caused by such changes in sectoral participation in international trade. For instance, the employment level o f workers in clothing assembly fe l l from a peak of 113,200 in 2004 to jus t 88,250 in early 2007 (a decline o f 22 percent). T h e maqzdu industry’s changing fortunes are l inked to increased Asian competition, tempered partially by improved access to the U.S. market through CAFTA and greater vertical integration (using the complete package product ion model).’’ Except for i t s employment benefits and foreign exchange earnings, t h i s sector does not of fer many advantages: i t uses known technologies and has few backward linkages to local producers. Exporters in other sectors have made m o r e rap id adjustments. For instance, changes in coffee may reflect a gradual s h i f t from low value b lend coffees to greater export of organic and certified “free trade” coffee.
2.24 Such shifts have direct implications for the education system, technical training, and infrastructure investments. In addition, a key question for policymakers would b e to assess whether the “winners” under CAFTA are export ing products with higher value added content, or more extractive in nature (such as i s the case with mining). Ano the r
22 The entry o f Vietnam into the WTO poses a specific challenge to the Guatemalan maquila industry.
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issue would b e how to develop a safety net, private and publ ic sector retraining capacity, and a n improved labor market to help f i r m s and workers in adversely affected, less competit ive sectors and regions to adjust to the new realities under the free trade regme. T h e increased demand for local labor has begun to translate into higher salaries, as product iv i ty increases over time.23
Sector Agro-industry
Coffee Banana Other products
Manufacturing Clothing mfg.
Other products Sugarlcandies
2005 2006 2007 24.6 23.7 30.5 7.4 7.1 8.5 8.7 7.2 7.8 8.5 9.4 14.2 66.4 65.9 58.5 52.2 51.6 45.6 2.8 1.9 1.2 11.4 12.4 11.7
Mining sector Total
2.25 These regional gains are most evident in the Central and Southwestern parts of the country. K e y reasons for these gains include investments in n e w transportation infrastructure, the in t roduct ion o f electricity a n d communications, strong local leadership, irrigation, and interest in adopt ing new technologies. With the signing of CAFTA, n e w programs were launched in the Western Highlands, includmg the departments of QuichC, A l ta Verapaz, Huehuetenango and San Marcos. N ine ty percent of the vulnerable populat ion lives in these departments, and the poverty alleviation effects of new programs to improve product iv i ty and commercial viabil ity o f local producers could b e enormous.
8.9 10.5 11.0 100.0 100.0 100.0
2.26 Several non-traditional products showed increased export value from 2006 to 2007. Among the leaders were rubber (31 percent increase), vegetables (25 percent), f lowers (9 percent), and shrimp (32 percent). Processed products also increased significantly, l e d by traditional foods (“productos nostalgicos”, 32 percent) and electrical machmery (37 percent).
2.27 CAFTA has reinforced a longstanding trend of trade balance deficits with the United States. With the exception of 2003, the trade balance has worsened every year since 2002. T h e gap in 2006 amounted to almost 10 percentage points, and m o r e than US$1.6 billion. Wh i le exports jumped about 7.3 percent during the f i r s t three months of 2007, imports also grew. I t i s unclear whether imports are growing to fuel exporters (with increased supplies of inputs and capital goods, for instance) or are a ref lect ion of increased consumption. O n e analyst estimates that exports would have to grow at a n annual rate of 12 percent (in value) to begin to close the trade deficit.24 As Table 2.6 reveals, Chma has begun
*3 Medici6n del Impact0 Socioecon6mico de las Actividades de Producci6n y Comercializaci6n de Productos Agricolas no tradicionales de Expor tac ih Estud~o preparado por E C O D E S X R R O L L O , bajo convenio AGEXPORT/AID -520-0403. Guatemala, octubre 1997. 24 Samayoa, C A F T A Background study for Guatemala Investment Climate Assessment, June, 2007
26
to eat into Guatemala’s small share o f the U.S. market, while Chile and Brazil have managed to slightly increase the i r participation in the U.S. market over the past five years.25
Year Imports I Exports I Trade balance I Imports I Exports 2003 2004 2005 2006 2007
Fieure 2.2: Guatemala’s Trade Balance Deficit. 2002 to 2007
3372.8 2384.2 -988.6 43.8 29.9 3673.3 2660.4 -1012.9 40.9 29.3 3982.4 2686.4 -1296.0 39.4 30.9 4414.8 2781.8 -1633.0 35.4 26.6 4075.9 3032.2 -1043.7
Guatemala International Trade
15,000
10,000
g 5,000
f o -5,000
-10,000 2002 2003 2004 2005 2006 2007
I Imports rn Exports Trade Balance S O ~ r ~ e B a n k o f GUBIwmIa I
Source: Bank o f Guatemala
2.28 The United States International Trade Commission’s (ITC) figures on imports of consumer goods reveal that China, Brazil and Chile have gained a bigger share of the U.S. market, at the expense of the Central American countries. Chinese exports to t h e United States. (for consumer goods) grew 18 percent in 2006 and 12.6 percent in 2007, while European (OECD 27 Group) exports to the United States jumped by 7.2 percent (2006) and 6.4 percent (2007). These increased trade flows compare to only 3.1 percent for Guatemala in 2006 and 3.0 percent in 2007 (U.S. Census figures on imports). Whi le the value o f exports o f consumer goods was stable (about US$3.0 bitlion per year), t he share for Guatemalan exporters dropped from 0.18 percent of the U.S. market in 2003 to only 0.16 percent by 2007. (Table 2.7)
2.29 CAFTA has substituted for the previous trade preference systems, but not created new opportunities. The ITC’s data for imports from Guatemala confirm that CAFTA has only substituted for GSP and CBI preferential entry for certain goods, and the share of imports covered by these has remained steady at around 40 percent from 2003 to 2007 F a b l e 2.8).
*j O x f o r d Analytica, M a y 1, 2006, “The recent evaluation o f trade and investment relations between L a t i n America and China”.
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Table 2.7: U S Imports from CAFTA, EU and China
T O T A L Percentage Change
16.9 17.7 18.0 18.6 18.8 4.7% 2.1% 3.0% 1.1%
EU 27 GROUP ( In US$ Billon) I I I I I
Country TOTAL Percentage Change
2003 2004 2005 2006 2007 251.6 281.1 308.6 330.9 352.2
11.7% 9.8% 7.2% 6.4%
Countr
Sources: USITC (U.S. Department o f Commerce and the U.S. International Trade Commission)
Table 2. 8: Participation of Guatemalan exporters in U.S. Preferential Duty Programs
I Percentage GT imports under trade preference I 38% I 40% I 42% I 41% I 42% 1
CAFTA’s effects on the Public Sector
2.30 In anticipation of the approval of CAFTA, the pace of reform was so dramatic that Guatemala was listed as one of the Top Ten Reformers by Doing Business 2007. There have been impor tant institutional changes, spearheaded by the Ministry of Economy,
28
Pronacom, the Tax Administrat ion Superintendency (SAT), the Nat ional Statistics Institute (INE) and the Nat ional Institute for Technical Training (INATEC). Private sector leaders, such as chambers of commerce and the Non-T rad t iona l Exports Association (Agexport), have also made impor tant contributions. N e w programs that improve the country's export potent ia l and attractiveness as a n investment locat ion include: (1) a one-stop registration of f ice (Ventunilla Agil"); (2) fairs to encourage investment by the Guatemalan emigrant community; (3) international conferences for sectors ranging from wood./furniture and call centers to corporate social responsibility; (4) practical guides for CAFTA; (5) streamlined import and export services; and (6) special cluster format ion and training programs for SMEs.
2.31 Free trade agreements affect the public sector significantly, in terms of taxes generated, taxes forgone, and trade balance issues. T h e tax burden of CAFTA and increased exports i s relatively low because Guatemala has maintained low customs duties. T h e B a n k o f Guatemala's analysis of CAFTA effects found that the expected gains from value added tax are slightly lower than the expected losses from foregone customs duties. Table 2.9 reveals that the decline in customs duties collection due to CAFTA-related l iberalization i s only a ne t l oss o f 0.1 percent of GDP.
Table 2 .9 : Customs duties from CAFTA
Source: Samayoa, 2007, using data prov ided by the Bank of Guatemala and the hlinistry o f Finance
2.32 The institutional environment for business and investment has improved in many areas over the last several years. T h e Nat ional Agenda for Competitiveness provides a ten year roadmap for a nat ional competitiveness effort, bringing together the private sector, publ ic sector, c iv i l society, and academic leaders in an inclusive approach covering urban and rura l sectors. T h i s ambitious agenda i s coordinated by the Na t iona l Program Of f ice for Competitiveness (PRONACOM), supported by the Bank's Guatemala Competitiveness Project.26 PRONACOM has taken the lead by building alliances with m o r e than forty ministries, private sector chambers and associations. PRONACOM and i t s allies have undertaken a long l i s t o f activities to implement the s i x strategic axes of the Na t iona l Competitiveness Agenda. Topics have included infrastructure (airports, ports, roads, and energy), taxation, business registration and licensing, and rura l competitiveness (in alliance with Agexport, AGER and a number of sector-specific clusters)
26 Guatemala Competitiveness Project, #7044-GU, for US$20.3 mill ion, scheduled t o close on June 30,2008.
29
2.33 Guatemala continues to provide incentives and investment facilitation through i ts investment promotion agency, “INVEST in Guatemala”. T h i s agency assists international investors with visa requirements, coordination with local governments, and worker training. INVEST i s complemented by PRONACOM, the Nat ional Competitiveness Program, in promoting sound competitiveness pol icy and a favorable investment climate. For example, INVEST and PRONACOM partnered to create a special fund o f US$500,000 to support worker training for international investments to establish plants and increased manufacturing in Guatemala. This facility was a decisive factor in the investment choices of GE Money and the Mexican firm Envases Mem’co.
2.34 The Ministry of Economy has undertaken a number of important institutional reforms in support of CAFTA implementation. A major example i s the creation o f the one-stop shop (Ventanilla Agil) for business registration, wh ich reduced the average t ime to register a business by four days and was cited by Doing Business 2007 as a n impor tant reform. T h e M i n i s t r y of Economy has also created a n in format ion center to p romote access to in format ion on best practices for Guatemalan enterprises.”
CAFTA and Poverty Alleviation 2.35 CAFTA has the potential to help alleviate poverty. A study by the World Bank provides a statistical project ion o f consumption, employment, income and welfare benefits for indigenous households, using ENCOVI 2000 data. T h e study concludes that “on average, a typical indigenous household would enjoy gains equivalent to nearly 15 percent of i t s average per capita expenditure”. This i s the result o f lower prices for food (indigenous f a d e s devote 42 percent of household income to food, whi le non-indigenous households only use 31 percent for these purchases). Est imated food pr ice savings ranged from 3 percent to fruit, 20 percent for cereal, 14 percent for fish, and 48 percent for dairy products.28
2.36 Income effects are also likely to be positive, although the magnitude i s not projected to be as large. As exports increase thanks to CAFTA, there should b e a positive effect on employment creation, both directly and indirectly, especially given the low levels o f unemployment in the country (a 2000 estimate was 1.4 percent). On the other hand, increased demand for labor i s a factor in raising wages, more so if the labor product iv i ty also increases. This seems to b e happening relatively m o r e in the Central and Southwestern region of the country. T h e estimated gain for indigenous households would b e about 0.26 percent, using the ENCOVI 2000 survey.
2.37 CAFTA i s generating similar incentives in departments with high levels of poverty, such as Quiche, Alta Verapaz, Huehuetenango, and San Marcos. Recent efforts to strengthen product ive infrastructure in the priority regions are expected to enhance productive activities and export products commercialization, hence leading to poverty reduction.
2.38 The analysis of the positive effects on indigenous and all households masks one important flaw in the CAFTA design-the exclusion of white maize from the
27 Samayoa (2007), p 13; Doing Business 06/07 l i s t o f reforms 28 Porto 2006.
30
tariff liberalization framework. T h e CAFTA exclusion o f whi te co rn was based on a concern that low income producers in Central America would b e adversely affected by trade liberalization, as low costs from subsidized imports drove nat ional prices down. However, as the food crisis has materialized rapidly in the country and the region in 2008, i t i s clear that international prices are spiraling rapidly and open trade would benef i t the country. Additionally, the number of white co rn producers who trade s u r p l u s i s quite small, making i t easy to develop well-targeted transfers during a transitional period.29
4. THE PERSPECTIVE OF GUATEMALAN EXPORTERS
2.39 In 2003, Guatemalan exporters reported that they were more affected by customs and trade regulations, business licensing, transportation, and property rights and the legal system than f i r m s that did not export. With the exception of financing (cost and access to credit), corrupt ion and legal systems, f i r m s with foreign ownership claimed to b e significantly m o r e constrained than domestic f i r m s along most dimensions in the business climate. T h i s was especially true for trade and customs regulations, tax administration and business l i ~ens ing .~ ’
2.40 In 2003, formal barriers to trade were insignificant. With a n average of 7.2 percent in 2002, Guatemala’s tar i f f rates are close to those of El Salvador and Costa Rica, and among the lowest in the region. In addition, the use of non- tar i f f barriers appears to b e l imi ted in Guatemala. No recourse o f anti-dumping, countervail ing or safeguard measures has been made in recent T h e 2003 Guatemala ICA cited direct costs from inadequate infrastructure and indirect costs from corrupt ion as possible causes of low trade levels and poor international integration. However, since 2004, there have been notable improvements in infrastructure, such as ports, airports, and highways.32
2.41 By 2007, Guatemalan exporters were reporting far fewer problems with infrastructure, corruption, and macroeconomic instability. Perceptions o f “major or severe problems” no longer d f f e r significantly from other f i r rns , except in the area of taxes (both tax rates and tax administration). Table 2.10 reveals that barriers for exporters and non-export ing f i r m s face similar constraints. However, export ing f i r m s were m o r e l ikely to cite i n fo rma l payments (corruption) for construction permits and operating permits. Twenty five percent o f exporters cited obtaining these permits as a significant problem, compared to only 8 percent o f non-export ing f i r m s . This was also more o f a p rob lem for firms outside Guatemala City. However, i n fo rma l payments represented a smaller share of sales and percentage o f contracts for exporters than for other f i r m s . Bribes for exporters were reported to b e 9.5 percent o f a contract and 6.2 percent o f sales, whi le other firms reported 15 percent of contract value and 9.4 percent of sales in in fo rma l payments.
29 For a further analysis, see J a r a d o and Lederman, Wor ld Bank, 2006; Also Porto, Wor ld Bank, June, 2006. 30 Guatemala I C A 2003, Appendix C 31 Guatemala Country Economic Memorandum, 2004, cited in Guatemala ICA, Wor ld Bank, 2005. 32 Guatemala I C A 2003.
31
Table 2.10: Concerns of ExDortinn and Non-ExDortinn Firms
Corruption
Electricitv Political Instability
60 61 53 47 50 45
Macroeconomic Instability I 43 43 Taxes
Crime Informality
I I
Source: Enterprise Survey
39 27 38 37 37 37
2.42 The trade environment remains a significant challenge. Guatemala ranks last among CAFTA members in trading across borders in the 2008 Doing Business survey (see Table 2.11). This low rat ing does not appear to b e due to specific trade policies, as Guatemala maintains low average tar i f f rates and the use o f non- tar i f f barriers by the government i s limited.33 Guatemala has also made major investments in i t s trade infrastructure, wh ich have succeeded in reducing import and export costs compared to previous years. Despite t h i s investment, i t continues to have the highest import costs, the second highest. export costs, and among the highest number of documents required for both importing and exporting among CAFTA members. Addi t ional improvements are required in trade infrastructure and customs management to reach regional norms in terms o f the ease of cross-border trade. M o r e details on customs delays are covered in Chapter 3.
across borders in CAFTA countries cost to import
(US$ per (days) container)
Documents Time for to Documents Time for Economy Rank for export export export for import import
Per (number) (days) container) (number)
Dominican Republic 35 6 12 8 15 7 13 1015 Costa Rica 54 7 18 660 8 25 660 El Salvador 68 8 21 540 11 18 540 Nicaragua 87 5 36 1021 5 38 1054 Honduras 103 7 20 1065 11 23 975 Guatemala 116 11 19 1052 11 18 1177 Source: Doing Business 2008. Rankings are out o f 178 countries.
2.43 Perceptions of crime reduce the attractiveness of Guatemala as an investment location. Eighty-five percent o f exporters repor t invest ing in security services a n d systems, compared to only 59 percent of non-export ing firms. Exporters are m o r e l ikely to suffer from theft (41 percent, compared to 34 percent for other f i r m s ) and absenteeism caused by crime (23 percent, versus 15 percent). Security expenses represent 2.1 percent o f sales, compared to only 1.8 percent for other f i r m s . However, exporters repor t losses due to theft are h a l f o f that o f other firms (1.2 percent of sales, compared to 2.5 percent for n o n - exporting firms). Adding another 1.3 percent for thef t during export processes, the total cost
33 World Bank, “Guatemala Country Economic Memorandum,” Washington, D.C., 2005, pg. 144. One exception to the low tar i f f rates i s in the area o f agriculture, where quotas and tar i f fs rates may be higher for certain goods.
32
for al l kinds of crime amounts to 6.1 percent o f sales. (For m o r e details on firm losses from theft and breakage, see Chapter 3.) A recent U n i t e d Nat ions review o f cr ime in Central America estimated m o r e than 6,000 deaths due to violent crime in the country in 2006, c o n f i m i n g t h i s to b e a major issue for the publ ic and for potential investors.
2.44 Infrastructure problems make Guatemala less competitive and less attractive for FDI. Infrastructure affects the cost, timeliness and reliability of delivery of products, making it a critical area for export ing f i r m s . Infrastructure issues reviewed in the sample include electricity, transportation, and telephone lines. In 2007, ha l f of the Guatemalan exporters interviewed stated that a n unreliable supply o f electricity was a n obstacle to their operations. However, one in four exporters overcame t h i s p rob lem by purchasing their own generators (twice as many as non-exporters). Exporters ment ioned that there were an average of 28 outages each year, and each event lasted about 2.8 hours. Non-exporters only suffered about 17 outages, lasting a n average of 3.2 hours. For telecommunications, exporting f i r m s wai ted an average of 46 days for telephone and internet installation, compared to j u s t 27 days for non-export ing f m s . Once they h a d internet service, exporters used it routinely to reach suppliers (96 percent) and through websites (89 percent). For m o r e details on infrastructure, see Chapter 3.
Innovation, Skills Training and Quality Issues
2.45 Few Guatemalan firms possess the necessary quality certifications, compared with other Latin American countries. Quality and process certifications such as International Standards (ISO) and Hazardous Analysis Crit ical Control Points (HACCP) are of ten required to gain access to international markets. Efforts to p romote nat ional quality certification, l ed by AGEXPORT, have not yet yielded significant results. Efforts by the M i n i s t r y of Economy and the Chamber o f Construct ion to develop metrology systems also seem to b e lagging behind the private sector’s needs.34
2.46 More importantly, many Guatemalan f i rms are not expressing interest in I S 0 certification. On the other hand, the private sector, l ed by the export ing f i r m s , i s investing in innovat ion (Table 2-12). Such investments range from purchasing foreign licenses to adding new products and processes and investing in research and development activities. However, the amount invested in research and development i s extremely low as a share o f sales. In fact, non-exporting f i r m s repor t investing m o r e in research and development, both in terms o f their own and subcontracted activities.
Table 2.12: Innovation investments in 2007
Source: Enterprise Survey results
34 I S 0 Survey 2005.
33
2.47 Guatemalan exporters are less l i ke ly to report losses f r o m cr ime a n d transportat ion a n d import delays than exporters in the comparator countries. They are more hkely to cite export delays as barriers to growth. All exporters in the sample ment ioned senior management t ime in dealing with regulations as a constraint. W e businesses in the comparator countries per formed we l l in terms o f internet use, foreign licensing, research and development, and new product/service development, Guatemalan exporters did not show such characteristics. Therefore, i t i s not surprising that Guatemalan exporters lagged behind the comparator countries in key product iv i ty measurements, inc ludmg sales per worker and value added per worker.
5. RECOMMENDATIONS: IMPROVING COMPETITIVENESS IN THE AGE OF C N T A
2.48 With i ts diversif ied export mix, tour ism a n d services potent ia l for foreign direct investment, Guatemala has a lot to offer-and a lot to lose i f it fails to invest in the systems, technology a n d worker sk i l ls required in the n e w world of CAFTA trade. T h e f i r s t twelve months of CAFTA have begun to yield encouraging results-but have revealed some structural weaknesses that need to b e addressed. M a n y Guatemalan f i r m s have begun to adapt to the major changes represented by CAFTA, both in terms of findmg export market niches and investing in I S 0 and other certifications, but they lag far behind many regional competitors. Whi le FDI and exports have increased, the trade gap persists, with imports jumping significantly. T h e easy access to markets in the U n i t e d States, Central America and the Domin i can Republic i s balanced by a n increase in foreign penetration of the national market. T h e benefits to the country could include employment, worker training, management know-how, and access to n e w technologies. T h e r i s k s to the country are clear: as some sectors and regions lose their share of the national markets, unemployment may grow.
2.49 T h e m a i n barriers to growth for expor t ing f i rms are corruption, po l i t i ca l instabil ity, electricity, a n d macroeconomic instabi l i ty. However, whi le the 2003 survey showed 65 percent to 80 percent of the f i r m s shared the top four “major or severe barriers”, the average in 2007 for exporters and non-exporting f i r m s has declined by 20 to 30 percentage points in these areas. In addition, whi le not hghhgh ted by the survey, other sources find that there i s a need for streamlined export-oriented financing mechanisms and improved training for workers (given a lack o f personnel with m o d e m product ion s k i l l s in the national labor market).
2.50 Whi le short t e r m improvements in the business cl imate faced by exporters are encouraging, there i s a r i s k of m e d i u m t e r m dislocations affect ing low income households a n d workers with low ski l ls training. Whi le tourism should continue to grow, other industries are not immune from the demands for greater efficiency, improved quality, and increased scale o f production. Competitors from the reg ion and beyond (notably China and Vietnam) could negatively affect certain sectors, such as magz4iila, leather and furniture and other wood products. There are also structural puzzles that should b e investigated. For instance, although foreign direct investment i s growing rapidly, Guatemala s t i l l lags significantly in terms o f FDI as a share of GDP.
2.51 There are f ive recommendations that promise t o build on the early gains from CAFTA a n d a n improved business cl imate for exporters. First, i t would b e impor tant to
34
make it easier for exporters to obtain I S 0 and HACCP certifications. Lessons can b e learned from the regional leaders in certifications, such as Brazil, Colombia, Argentina, C u e , Ecuador and El Salvador. T h e M i n i s t r y o f Economy should accelerate the development o f a national quality system, with laboratories, metrology, and outreach to specific sectors with a n export record or export potential. Specific recommendations to improve quality systems in Central America can b e found in World Bank (2008). T h e financial sector may hold the key to certifications, since Guatemalan f i r m s need to update product ion technologies to remain competitive. Details on financial sector recommendations are contained in Chapter 5.
2.52 T h e second recommendation i s to prioritize the government's investments in ports, airports, and roads to facilitate access to overseas markets. (A complete discussion of infrastructure shortcomings and recommendations i s contained in Chapter 3). Along with physical infrastructure, the survey finds that import and export times have been increasing in the past four years, despite significant investment by the government in software and port staf f training. Guatemala has created a one-stop shop for company licensing, w h i c h helped to make it one of the top ten reformers according to Doing Business 2007. Exporters would benef i t from a s d a r s t r e a k e d approach for documentation and handl ing of impor ted inputs and products to b e exported. An evaluation o f the systems complemented by a one-stop shop approach to documentation would likely contribute to improved results and less complaints by exporters.
2.53 T h e third recommendation i s to review the effects of the white corn exclusion in CAFTA, in light of the growing food price surge in the country and the region. Available data reveal that the expected effects on producers (caused by cheap food imports) are, in fact, cut t ing in the opposite direction. To improve the welfare o f the great major i ty of low income households, especially indigenous communities, open trade in white c o r n would b e an impor tant short t e r m measure.
2.54 T h e fourth recommendation i s to strengthen rural competitiveness and outreach programs to small and medium f i rms. For rura l areas, existing programs with Non-Tradi t ional Exporters Association (Agexport), the Asoaaaon Guatemalteca de Empresarios hrales (AGER), FUNDESA (with tourism centers), the Nat ional Coffee Producers Association (Anacafk) and other organizations with p roven outreach and attractive products should b e expanded. For SMEs, emphasis should b e placed on outreach programs to small and m e d i u m f i r m s to encourage internet use, foreign licensing, research and development investments, and new product and service development. At the same time, industry specific tracking o f key product iv i ty measurements (sales to worker and value added per worker) would help to measure the success o f such measures.
2.55 Finally, the Government should build on what has been working in trade promotion. CAFTA guides for SMEs, the alliance with INTECAP for worker training, the increasingly effective investment promotion approach, and investments in the development o f Guatemala's impor tant tourism assets al l contr ibute to an improved outlook. Most importantly, the leadership ro le o f the Commissioner of Investment and Competitiveness and the M i n i s t r y o f Economy should b e maintained, as w e l l as the strong operational leadership o f the of f ice of the Nat ional Competitiveness Promotion (Fronacom).
35
Chapter 3. Firms’ Access to Infrastructure Services
1. INTRODUCTION
3.1 This chapter presents an overview of Guatemala’s transport and logistics using available information and the findings of the survey. T h e chapter discusses physical infrastructure for transport (roads, airports, and ports), transport related services, and trade facihtation issues. T h e findings of the chapter ident i fy the areas o f intervent ion needed to make transport and logistics key contributors to growth.
3.2 Infrastructure i s a major contributor to economic growth, particularly for developing countries. T h e approach to understanding t h i s linkage has varied. K r u g m a n (2004), for example, considers the impact of infrastructure on aggregate T o t a l Factor Productivity. Roller and Waverman for telecommunications and Fema ld for roads consider the impact of indmidual sectors on growth. Calder6n and Servkn (2003) review the L a t i n American region-specific impact of infrastructure stocks. Esfahani a n d Ramirez (2002) and Calder6n and Servtn (2004) discuss the separate impact o f service quality on growth. T h e cumulative result o f t h i s growing literature i s a robust demonstration of infrastructure’s role as’a driver of growth. Underly ing the “direct linkage literature” (infrastructure and growth), i s the recognition that infrastructure i s a n impor tant determinant of firm product iv i ty. Tha t is, the supply, quality and price o f infrastructure are def in ing elements of firm competitiveness.
3.3 With the spread of trade liberalization, logistics has become more relevant for developing countries as a strategic source of competitiveness. Firms require moving inputs from providers to their factories and after the product ion process they also need to m o v e their outputs to distributors or the end client. To that end, firms rely on physical infrastructure for transport (e.g., roads and ports), transport related services (e.g., logistic operators, trucking industry), trade facilitation regulation (e.g., customs, border agencies, tariffs), and their inventory processes as we l l as their transport endowments. Logistics costs alone tend to b e higher than duties imposed on imports as we l l as the cost of quotas and other non-tar i f f barriers. (Table 3.1).
3.4 In the context of the implementation of CAFTA, Guatemalan firms are identifling the relevance of transport issues for growth. In 2007, about 20 percent o f surveyed manufacturing f i r m s perceived transport as a major or severe constraint to growth. At the regional level, Guatemalan firms (20 percent) rank among the top 5 countries where transport i s perceived as a major or severe constraint. However, only 7 percent of f i r m s indicate that transport i s one o f the top 3 constraints. Large f i r m s are m o r e l ikely to perceive transport as an obstacle to growth than small and m ic ro f i r m s . Compared to 2003, Guatemalan f m s , as we l l as their counterparts in Central America, perceived that transport i s becoming a m o r e impor tant barrier to growth. In the case o f Guatemala, non-exporters
36
are the ones that repor t an increased worsening o f transport as a n obstacle for I t i s important to note that firms' perception may not coincide with actual changes made in the ti-ansport sector.
Table 3.1: Transport as a Major or Severe Constraint to Growth
Small Medium Large All firms
Source: Enterprise survey
3.5 In addition to the immediate impact on firm competitiveness, Guatemala's ability to attract foreign investment may also be affected by i t s low marks in overall infrastructure quality. As no ted in Table 1.4 (Chapter l), Guatemala ranked below the average o f comparator countries in terms of overall infrastructure quality in the survey o f business executives contained in the World Economic Forum's G loba l Competitiveness Report, even though it improved between 2004 and 2006, but it ranks be low El Salvador and Honduras. In the area of air transport, Guatemala's score was below the peer group average. However, i t showed marked improvements in recent years, partly attributed to technical support to upgrade L a Auro ra airport and improvements in safety standards.
2. PHYSICAL INFRASTRUCTURE FOR TRADE AND TRANSPORT
Roads 3.6 Guatemala has made some improvements in increasing i t s road endowment. In road density, measured as the length o f paved roads per worker, Guatemala ranks better than El Salvador and Honduras, but worse than Costa Rica, Panama, and Mexico. Guatemala's paved road density has improved s t e a d y since 1996 part ly attributed to m o r e rapid growth in kilometers o f paved road than in the labor force. Improving road access and quality were considered essential by 1996, after the end of the c iv i l conf l ic t in Guatemala. For rura l areas, the Government carried out a pilot program to integrate poor rura l communities into the m o d e r n economy, through the construction of rura l areas. As such, the share o f rura l roads has been increasing, partly because rura l roads that were previously unclassified (not par t o f the of f ic ia l inventory of roads) have been c l a ~ s i f i e d . ~ ~ T h e quality o f the road network shows significant deterioration in recent years. In 1999, 75 percent or
35 The share o f firms report ing transport as a constraint for growth increased from 12 percent in 2003 to 23 percent in 2007 among Guatemalan non-exporters. However, there was n o t significant change for exporters. T h e same result holds for the set o f firms interviewed in b o t h years. 36 I t i s estimated that unclassified rural roads amount t o around 15,000 kilometers (World Bank, Guatemala - ICR - Rural Roads Project).
37
roads were classified in good condition. By 2003 that number had declined to 45 p e r ~ e n t . ~ ’ Since 2003, there have been some notable gains, inc ludmg the expansion o f the major coastal highway through a concession system. (Figure 3.1)
Figure 3.1: Paved Roads and Rural Roads Paved Roads and Growth in Paved Roads Stock of Classified Paved and Rural Roads, 1985-2006
14.m 40%
35% 12,033
30% 10,033
25%
- 20%
15%
10%
i 8,033
E 8,033
4,m
2,033 5%
0 0% 1985 1990 1995 2033 2035
I-Tafal mad length t% paved mads -A-% ~ R I mads 1
Guatemala’s road system presents some important challenges. First, the system i s vulnerable to natural disasters as illustrated by the substantial damage caused by Hurr icane Stan in October 2005. Second, the road system needs to r e f o r m i t s regulatory and supervisory f ramew01-k.~~ To start, there are several agencies invo lve in road rehabil itation and maintenance, such as Direcridn de Caminos, Fonapaz, FIS, INFOM, and COVIAL, resulting in duplication o f efforts and lack o f coordination. Third, the road network does not integrate many regions o f the country. A recent complet ion repor t o f the pilot project o f rura l roads points out that the decentralized management of the rehabil itation of rura l roads has improved access to roads and reduced travel t ime and transport costs for the rura l populat ion in the Depar tment of San Marcos. T h e government i s replicating t h i s pilot in Huehuetenango. Finally, there are issues of security in domestic shpments, with about 24 percent o f f i r m s report ing theft for domestic cargo.39
3.8 Public expenditure levels for road maintenance seem insufficient, and the private sector has not been allowed to play a compensatory role. Gett ing estimates o f level of publ ic expenditures i s complicated by the fact that several agencies are invo lved in road rehabilitation and maintenance. T h e most recent estimates on road expenditures put it at 1.3 percent of GDP in 2002, w h c h i s substantially lower than in Nicaragua.40 This situation also requires a good level o f coordination that has not materialized, resulting in a deterioration o f the road netw01-k.~~ Government agencies invo lved in road rehabil itation and maintenance have l imi ted resources for investment and face budget challenges. An
37 See Pronacom 2005. 38 Ernst and Young 2005. 39 See section on losses from theft and breakages for more information. Jo Ernst and Young (2005) 11 See Pronacom (2005)
38
example i s COVLAL paying contractors with arrears.42 In terms o f projects with private sector investments, the private participation in infrastructure database indicates that there were two concessions in the late 1990s in Guatemala. A recent study prepared for the Nat ional Competitiveness Program (Pronacom) indicates that Guatemala may need around US$2.3 billion for roads projects.43 G iven the budget constraints of the government, i t i s unlikely that investments o f the amount required will b e forthcoming in the short-term. Thus, creating the conditions for attracting private investment for road infrastructure will become crucial for Guatemala’s road infrastructure network.
Airports
3.9 Guatemala has many airports and heliports distributed around the country, but L a Aurora Airport concentrates most of the traffic volume. L a Aurora operates as an origin and destination airport. Passengers must go through i t w h e n entering or leaving the country or w h e n traveling between inter ior cities. T h e smaller airports do not operate as a network.&
3.10 T h e government has embarked on a modernization process of airport infra~tructure.~~ T h e overall program will invest about $92 million in s i x airports (La Aurora $80 million, San JosC $3 million, T i k a l $2.5 million, Puerto Barrios $2 million, Retalhuleu $0.5 million, and Quetzaltenango $3.5 million). T h e program i s be ing managed and supervised by the Technical Cooperation Bureau o f International Civil Av iat ion Organization (ICAO). T h e modernization process also included meeting LATA’S norms and regulations. In June 2007, Guatemala’s Civil Av iat ion Authority (DGAC) was upgraded from a Category 2 to Category 1 FAA (Federal Av iat ion Administration) rating, opening the skies for Guatemalan air carriers to the Un i ted States. T h e DGAC envisions the creation o f a n autonomous q o r t authority (the l aw i s currently pending in Congress) as we l l as a private concession (pending a concession law). There i s w ide debate regarding concessions in Guatemala, and it i s not clear whether a n agreement will b e reached regarding private sector participation in the form of concessions.
Ports
3.11 Because a significant share of Guatemala’s exports i s directed outside Central America, ports play a strategic role in the logistics system for cargo transport. T h e country’s largest trading partner, the U n i t e d States, provides 39.6 percent o f Guatemala’s imports and receives 28.9 percent of i t s exports.
3.12 Guatemalan ports manage about one-sixth of the containers in Central America (including Panama). Accord ing to data from the American Association Port Authority (AAPA), Guatemalan ports managed 16 percent o f cargo traffic in 2006, slightly
42 See for example, the annual reports o f the Guatemalan association o f construction reports that C O V W L pays with arrears ($http:/ /~~~,c0n~trug~1ate.com/negocios/publicaciones/Web%20113/3.htm). 43 According t o the publication in the Prensa L ib re on November 30,2007, the road projects identif ied by the study were: A d o Metropol i tano PS$l billion), Franja Transversal de l N o r t e (US$300 d o n s ) , ejes troncales CA-2 y CA-9 (US$400 d o n s ) , and ampliation o f existing roads (US$600 d o n ) . a Nathan Associates (2005, p. 80) 45 See World Bank (2006).
39
lower than in 1997 (18 percent). T h e cargo vo lume in TEUs grew at a n average growth rate o f 11 percent per year, higher only than Costa Rica (7 percent) and Honduras (5 percent). Representing an impor tant channel for regional commerce, Puerto Santo Tomis de Castilla on the Caribbean side accounts for the largest share among Guatemalan ports (50 percent). Overall, Guatemalan ports managed 840,367 TEUs in 2006, very similar to Costa Rica (Figure 3.2). In terms o f quality, Guatemalan ports have improved as measured by two indicators: the port infrastructure quality index and the L iner Connectivity Shipping Index (see Figure 3-3).
Figure 3.2: Port Activity in TEUs in Ports in Central America and Guatemala Rate 01 Cpatn laup P
I 20
4
3.13 Guatemalan ports present some striking features and growth prospects. In terms o f ownershp, the Ports o f Puerto Quetzal and Puerto Santo Tomas de Castillas are autonomous government agencies whi le Puerto Barrios i s privately owned. Puerto Quetzal has become the most dynamic port in Guatemala, increasing i t s container traffic by 77 percent between 2003 and 2006. During the same period, Puerto Barrios reduced i t s container traffic (a 12 percent drop) whi le Puerto Santo Tomis de Castilla grew by seven percent. Puerto Quetzal has been for various years a n example o f effective private-public partnership, and it i s known as the most efficient port in Central America for container traffic as wel l as wholesale operations for certain products.46
Figure 3.3: Liner Connectivity Shipping Index for Central America and Panama, 2004-2006
C32004 R2005 02006 HGNI per capita
6,000 8
5,000 5 E 4,000
3,000 5 2,000
1,000 z
- 0
0 c
v)
4 b9
0
El Salvador Nicaragua Honduras Costa Rica Guatemala Panama
The Liner Shipping Connectivity Index is a composite index that includes fleet assignment, liner services, and vessel and fleet sizes. Source: UNCTAD (2006) and WDI
46 Nathan Associates (2005, p. 22)
40
3.14 Forecasts of maritime trade from the ports of Central America (excluding Panama) undertaken by UNCTAD anticipate Guatemala’s leadership in the area of cargo shipment. Indeed, Guatemala i s expected to nearly double Costa Rica’s East Coast shipping movements by the year 2020 whi le even Honduras i s expected to surpass Costa Rica over the same period. At current performance levels, Caldera (Costa Rica) will b e a n even less significant player in Pacific cargo movements w i h 10 years.47 Two o f Guatemala’s key advantages are the declining costs per container (using the standard Doing Business def int ion) and the modernizat ion efforts underway at Puerto Quetzal and Puerto Barrios. (Figure 3.4).
24 - u)
+ 0
18-- .- s
Figure 3.4: Projected Port Output by Country and Coast (million of metric tons)
- - Guatemala
-E Salvador - HOnduraS
Nicaragua / __ -Caldera, CR
, /
/ /
/ /
a. Caribbean Ports b. Pacific Ports - - Guatemala
/ / -
5 ! 2003 201 0 2020
0 1 I 2003 201 0 2020
Note: Pacific ports’ forecasts do not include development of the Port of Cutuco at La Unih, El Salvador. Source: Authors’ calculations based on forecasts of UNCTAD (2006)
3.15 T o meet this increasing demand, Guatemalan ports need to address certain challenges. T h e m a i n challenges for Guatemalan ports include a n obsolete legal framework, high operating costs, restrictions to private sector participation, lack of incentives for investments and efficient port operation, and a lack o f competit ion. Addressing those challenges will determine whether Guatemalan ports will improve their ro le in Central America.48
3. TRANSPORT RELATED SERVICES
Mode of Transport for Exports
3.16 Each mode of Guatemala’s transport endowment-roads, ports and airports-serves as a critical component of the logistics network for exporters. T h e survey provides in format ion about the relative importance of each transport m o d e in terms o f number o f exporters and the value o f the last shipment o f the m a i n product. (Figure 3.5).
3.17 Maritime transportation i s the primary transport mode for exporters. Figure 3.6 below shows use of transport m o d e by number o f f i rms- thus giving equal weight to al l
-17 I m p o r t e d volumes in Caldera were seven t imes export volumes in 2003. This suggests that a l l Asia a n d most West Coast-bound exports must travel to Panama to find a port of exit. .M N a t h a n Associates 2005.
41
f i r m s regardless o f how m u c h they ship or the value of their shipments. I t shows that about 24 percent of f i r m s that exported their m a i n product shipped their ma in products through the At lant ic ports. Surface transportation was reported by 39 percent of f i r m s export ing their m a i n product. T h e data using the value o f the last shipment, wh ich reflects importance in terms o f nat ional trade, also shows that mari t ime transportation i s the pr imary transport mode. T h e fact that the share o f Port Santo Tomas i s three-times higher w h e n measure in terms of value suggests that t h i s port i s used for export ing high-value goods. At the regional level, there i s w ide variation in the transport mode, depending on the geographical locat ion o f the pr imary destination as wel l as the conditions of maritime, surface, and air corridors. Finally, because o f the small share o f f i r m s export ing directly, these transport m o d e shares should b e interpreted with caution.
Figure 3.5: Guatemala - Transport mode for firms exporting their main product Percent of Firmg Percent of Value of Last ShiDment
Airport &other Port Quetzal Airport &other
Port Sto Tomas 21%
Land 40%
port Sto Toma
~
Source: En te rp r i se Survey
Figure 3.6: Latin America - Transport mode for f i r m s exporting their main product Percent ot Firms. Percent 01 Value of Last Shloment
I 3 m L m d # A i r 6 0 t h e r ~ P o r t 6 0 l h . r 0 Land .Air 6 0th 0 Port 6 01 U
g 100.0 f 100
't 75.0 5 75
c 9
m c g 50.0 -6 50 0 2 F L
E 0.0 E o
- I B e 25.0 5 25
Source: En te rp r i se Survey
3.18 AU three modes are important but for different reasons. T h e road network surfaces may b e impor tant for smaller firms w h i c h are trying to export; the ports are v i ta l because they handle the vast major i ty o f Guatemala cargo movements; and the ro le o f international a i rport may increase due to the ongoing upgrade o f the infrastructure. A logistics or transport strategy intended to increase the competitiveness o f Guatemala's exports will t h u s have to pay due respect to al l three modes as we l l as their interconnectivity.
42
Type of Transport
3.19 Guatemalan f i r m s rely on a combination of own and third party transport services. Guatemalan f i r m s transport the equivalent of 57 percent of annual revenue using their own transport-similar to Nicaragua (54 percent) but lower than Panama (70 percent). Honduran and Nicaraguan f i r m s were m o r e l ikely not to use transport w h e n s e h g their pr imary product (24 percent and 19 percent, respectively). A small share o f Guatemalan f i r m s (8 percent) do not use transport services as they produce and sell their goods in the same place. Small Guatemalan f m s tend to rely more on their own transport than m e d i u m or large-sized f i r m s . See Figure 3.7.
Figure 3.7: Type of transport use for main product, all industries
0 lOO%shipped with own transport 0 Tranport main product using third party providers Don't use transport
H Use own and third party transport
- - _ _ _ _ _ _ _ _ - - - _ _ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - _
El Salvador Guatemala Honduras Nicaragua Panama
Source: Enterprise Survey
Losses from Theft and Breakage
3.20 Transport quality and security affect the cost of production and shipment, and thus the competitiveness of Guatemalan f irms. One indication of the costs associated with logistics i s that of theft and breakage for domestic or direct export shipments. At the regional level, Guatemalan f i r m s reported the highest incidence o f thef t w h e n transporting their cargo for either domestic or direct export shipments: 22 percent of direct exported and 24 percent of f i r m s ship domestically. This hghhghts issues o f security in the road network, point o f exit, transport and shipping companies, and/or firm employees. T h e incidence o f breakage for domestic shipments (28 percent of f i r m s that ship domestically) i s roughly sirmlar than other countries in the region (e.g., Mex ico (28 percent) or Panama (30 percent)), but among the lowest for direct export shipments (15 percent of f i r m s that export directly).
3.21 Because of the incidence of theft and breakage, Guatemalan firms incur losses that influence their ability to compete in foreign markets, as well as their costs of production in the domestic market. For domestic shipments, their losses amount to 7.6 percent of domestic cargo value for firms that experience either thef t or breakage, w h i c h i s among t h e highest in Central America (after Nicaragua with 7.9 percent). For duect exports, the losses associated with theft and/or breakage reaches 2.9 percent o f consignment value, substantially lower than for Nicaraguan firms (12 percent) and El Salvador (7.4 percent).
43
3.22 Damage and theft in transit cost Guatemalan direct exporters about 0.8 percent of their total sales. For those exporters that reported breakage (15 percent) or theft (22 percent), losses rose to over 1.8 and 2.6 percent of export value. Losses from breakage were smaller than other countries in Central America as wel l as Mexico for f i r m s report ing breakage.
4. TRADE FACILITATION
Perceptions regarding regulation
3.23 About 15 percent of f i rms reported that custom and trade regulations as a constraint to growth in 2007.4' As shown in Figure 3.8, almost 15 percent of manufacturing f i r m s in Guatemala i ndca ted custom and trade regulations as a major or severe constraint to growth in 2007.
Figure 3. 8: Custom and Trade Regulations as a Constraint
m: ExDorters & NOn-eXDOrlelp !.atin America: 2006
0 Non-exporiera Exporters
Source: Enterprise Survey
3.24 An indication o f the performance o f custom services in Guatemala i s the number o f days it takes to clear customs when either exporting or importing. 50
Guatemalan exporters take an average o f 4.2 days to clear customs, and repor t having taken at most 8 days to pe r fo rm the corresponding procedures during the year precedmg the survey. This i s along the l ine o f other Central American countries. For importers, the average and longest delays reported by importers were about 16 and 32 days. Guatemala continues to have the highest average wait for imports to clear customs among Central America countries. (Figure 3.9).
49 W e did n o t include a comparison with the 2003 survey because the questions are not comparable for both surveys. 50 W e did n o t include a comparison with the 2003 survey because the questions are n o t comparable between the two surveys.
44
Figure 3.9: Custom Delays for Exports and Imports, Guatemala
I Average period. 2006 I Longest period- 2006
35
30 30
25 2 25 - m 2 20 n
f 15 2 15
t 20
z 10 2 10
L L
5 5
0 0 El Salvador Guatemala Honduras Nicaragua
lmMds
HAverage period- 2006 I Longest period-2006
I
I I I
El Salvador Guatemala Honduras Nicaragua
ource: Enterprise survey
5. POLICY REXOMMENDATIONS O N TRANSPORT AND LOGISTICS
3.25 While Guatemala has made some achievements in transport and logistics, it faces some important challenges to remain competitive. Although Guatemala has attained some progress in i t s classified road density, there i s decay in the quality of such roads. Port capacity and efficiency will need to anticipate the increased demand to address the logistics need o f exporting and importing firms. Security issues are also affecting loglstics for domestic and international shipments. T h e administrative burden of exporting and importing will need to b e further reduced to make Guatemalan firms m o r e competit ive vis- h-vis their counterparts in the rest o f Central America.
3.26 To address these logistics challenges, Guatemala will need to explore all possible ways to attract private investment in infrastructure. Publ ic expenditure levels have not been enough to keep up with the infrastructure needs and the private sector has not been allowed to play a compensatory role. To reverse t h i s trend, publ ic resources will have to b e re-dedicated to selective rehabilitation and expansion whi le some reforms that will b e needed to al low private sector participation.
3.27 Various recent studies offer specific recommendations to upgrade Guatemala’s physical infrastructure for trade. All of those studies indicate that the sector with the greatest investment needs i s that o f the roads. T h e m a i n recommendations emerging from the various studies are:
Roads: Investments are needed to rehabilitate existing roads and to build n e w roads to link remote areas. T h e recent mul t i -modal infrastructure transport p lan estimated investment needs o f US!$l.S billions for the road sector alone. Resource allocation can b e improved: (1) strengthening M C W s planning capacity to better coordinate the pr ior i t izat ion o f road construction and maintenance (especially in rura l areas) and improve budget preparation and execution; (2) establishing a proper regulatory and institutional f ramework to promote private sector participation; and (3) in t roducing
45
e
e
a
6.
m o r e efficient road maintenance mechanisms based on results-oriented contracts that combine rehabilitation with maintenance activities over a multi-year period.51
Ports: Improve the legal f ramework for port administration and private sector participation. Prepare master plans for al l ports. Promote competition, and prov ide incentives for investment and efficient port operations. T h e report prepared by Na than Associates (2005) contains detailed recommendations.
Airports: Improve the institutional f ramework and promote a division o f responsibilities for policy, regulation, and operation functions, improve private sector participation to attract investments through the concessions. T h e repor t prepared by Na than Associates (2005) contains detailed recommendations.
Security: Design and implement a strategy to improve security for domestic and international shipments. Guatemalan f i r m s reported the highest incidence o f thef t for domestic and international shipments.
ELECTRICITY
Demand for Electricity
3.28 Access to reliable electricity at a reasonable price i s important for all f i r m s . Poor electricity supply i s costly as f i r m s are forced to self-supply at a higher price, or to suffer damage to their equipment due to voltage fluctuations. Indeed, earlier reports have found that a reliable electricity supply raises f i r m s ' p r o d ~ c t i v i t y . ~ '
3.29 In 2007, Guatemalan f i r m s complained more about access to electricity as an obstacle to business than they did in 2003. In 2007, 47 percent of interviewed f i r m s considered electricity a serious obstacle. In 2003, only 27 percent made the same complaint. This i s a serious deterioration in perceptions, especially given the improvement in entrepreneurs' perceptions on almost al l other investment climate dimensions (Figure 3.10, Panel A). Compared to the rest o f Central America, Guatemala i s only per forming better than Nicaragua (Figure 3.10, Panel B).
3.30 Perceptions have worsened especially among f i r m s located in the Guatemala City metropolitan area. In 2003, 23 percent of f i r m s located in the capital c i ty area considered electricity a serious obstacle. T h a t figure m o r e than doubled in 2007-to 48 percent (Figure 3.11). For firms located in the rest of the country perceptions did not change m u c h (39 versus 41 percent). Since the sample i s made of mostly f i r m s in the Guatemala City area (80 percent in 2003 and 78 percent in 2007) overall perceptions appear to have worsened.
51 See Pronacom (2007). 52 See Chapter 6, World Bank (2004), World Development &port 2005: A Better Investment Climate for Eueyone, World Bank and Oxford University Press: Washington D.C. and New York, N.Y.
46
Figure 3.10: Perceptions of electricity as an obstacle (percent of firms that agree electricity is a major or severe obstacle to doing
business) A. 2003 vs. 2007 B. Central America Eleunaty IS a senous obstade I
cn . 2"
43
30
20
10
0 Guatemala (2003) Guatemala (2007)
Source: Enterprise survey
Nicaragua
Guatemala
Panama
El Salvador
Hondurac
Costa bn
0 10 20 30 $0 50 60 70
Figure 3.11: Perceptions of electricity as an obstacle, by year and location (percent of firms that agree electricity is a major or severe obstacle to doing
business)
I 60 I 1 1
50
40
30
20
10
0
Guatemala City Rest of country
1 2003 W 2007 1 3.31 Out of 15 Latin American countries surveyed in 2007, Guatemala ranks quite favorably in reliability of power supply, measured by the incidence of power outages. In 2006, jus t over a third o f interviewed Guatemalan f i r m s h a d experienced a power outage-considerably less than Nicaragua (68 percent), Panama (66 percent), Honduras (62 percent) and El Salvador (47 percent) (Figure 3.12, Panel A). Furthermore, the incidence o f outages among Guatemalan firms declined between 2003 and 2007. In the 2003 ICA, 73 percent of interviewed firms in Guatemala h a d been through at least one power cut. T h a t share was reduced by m o r e than h a l f in 2007 - to 34 percent, the same as in Mex ico and Chile. In light o f these objective improvements in the reliability o f supply, it i s puzzhng as to why perceptions o f electricity have worsened so sharply. M o r e importantly, the share of f i r m s report ing energy-outage-related losses has fallen since 2003 - from 66 to 26 percent In almost al l cases, f i rms that reported outages reported losses associated with those. (Figure 3.12, Panel B).
47
Figure 3.12: Power Outages
A. Percent of firms that experienced B. Percent of firms that incurred losses power outages due to power outages
Ki,camgua
Paniguay
Panama
Hondunir
Ecuador
El Salvador
hieuco
Guatemala
ClUlC
B O h S
.Lgentma
Colambii
V."CZ"&
P W
Urvguay
0 10 20 30 40 50 60 70
hlC2ragua
Honduras
PW2gudV
Ecuador
P%"2.llU
E l Sahadar
hleuca
Guatemla
Chde
Bolivia
4rgentma
Colombia
V e " e Z d 2
Peru
Lruguay
0 I O 20 30 40 50 60 1 Source: Enterprise Survey
3.32 One of the possible explanations for the deterioration in entrepreneurs' perceptions about the electricity sector, from the Enterprise Survey data, i s that the frequency of power outages has increased since 2003. T h e average number o f outages per month (for those firms that did experience them) increased from 1.5 times a month in 2003 to 5 times a month in 2007 (Figure 3.13). Wh i le the average durat ion o f a single outage actually declined, from 4.6 hours in 2003 to 3 hours in 2007, the increase in the incidence of outages resulted in a greater number o f total hours o f outages. Therefore, whi le the overall share of Guatemalan firms subject to power outages has dropped, the number o f cuts for those who bear outages has actually increased, wh ich perhaps explains why f i r m s are m o r e negative about the power sector as a n obstacle to business.
Figure 3.13: Number and duration of power outages per month
15 10 5 0
N u m b e r o f Average duration
outages p e r o f a single outage month
Total duration of p o w e r outages
(hours p e r month)
Guatemala (2003) Guatemala (2007)
Source: Enterprise Survey
48
3.33 In 2007, generator ownership among Guatemalan f i r m s was comparable to the level of other Central American countries, but self-generation was among the highest in Latin America. Usually, generator ownershp and self-generation (which i s m o r e expensive) signal that energy supply i s unreliable, or expensive, or both. For those f i r m s that owned or shared a generator, 28 percent of their energy needs on average were m e t through that generator, i.e. through self-generation. This i s among the hghes t levels o f self- generation among La t in American f i r m s (Figure 3.14). In addition, in 2007, impor tant hf ferences existed in self-generated energy consumption for firms in the Guatemala City area and the rest of the country-24 percent of energy needs for f i r m s in the capital area were m e t through self-generation as opposed to 39 percent for f i r m s in the inter ior of the country (See Figure 3.14).
Bolivia
\leuco
Guatemala
\1caragda
Pacaguar
Ecuador
Honduras
Panama
C h l e
El Salvador
P e N
Colombia
Argentina
Uruguq
Figure 3.14: Generator Ownership and Self-Generated Energy
47
43
128
21
25
21
21
14
14
14
d
I?
-7
-6
3
A: Percent of Firms with Own or Shared B: Percent of Energy from Own or Shared Generator
Argentsna
Guaremala
P e N
Nlcaragda
Utuguay
P a r a g q
hieuco
Colombia
Ecuador
Panama
Chile
El Salvador 23
Honduras
18
1 I 7
17
15
12
1 I O
1 9
' 8
3.34 T h e impact of power outages are the losses that firms suffer due to lost production opportunities and these losses rose for those f i r m s that suffered outages in 2003 and 2007. Whi le across the whole sample o f interviewed f i rms , average losses have declined since 2003, reflecting that less f i r m s suffer outages in the aggregate, if the sample i s restricted to those that did experience outages in both years, losses have actually increased- from 3.7 to 6.1 percent of annual sales between 2003 and 2007 (Figure 3-15). This finding i s in l ine with the one that total durat ion of outages has increased (again for the subset of f i r m s with power cuts). This could b e another potent ia l explanation about the deterioration in perceptions o f the electricity sector. Also, losses reported by Guatemalan firms are qui te high, compared to the rest o f L a t i n America in 2007.
49
Figure 3.15: Losses Incurred due to Power Outages: 2003 vs. 2007
I 7.0 6.1 I 6.0 5 0 4.0 3.0 2.0 1 .o 0.0
Losses due to power outages (across a l l Losses due to power outages (across affected firm s) f i r m s only)
0 Guatemala (2003) Guatemala (2007)
Source: Enterprise Survey
3.35 Obtaining an electricity connection i s s t i l l a problem. T h e t ime to obtain a n electricity connection declined after 2003 by 8 days on average, but s t d l remains high-at 54 days on average in 2007. This i s similar to Honduras and Nicaragua, but we l l above Mexico, Panama and Bol iv ia (Figure 3.16, A). T h e incidence o f br ibe requests to get a n electricity connection shows substantial improvement since 2003 (Figure 3.17, A and B), and in 2007 the share of f i r m s that reported a request for bribes in the process o f gett ing electricity connections was wel l be low that in Honduras, Paraguay and Ecuador.
Figure 3.16: Time to Get an Electricity Connection A. Latin America, 2007
Honduras
Guatemala
fuicaragua
Peru
A r g e n t m
Umgual.
Venezuela
Chde
Ecuador
Paragua)
El Sahador
Colombia
Bohr la
Panama
Mexico
0 10 20 30 40 50 60
Source: Enterprise Survey
B: Guatemala: 2003 vs. 2007
62 70
Guatemala (2003) Guatemala (2007)
3.36 Disparities in terms of access to electricity, incidence of outages and losses due to outages exists among different locations within Guatemala. Two-thirds o f firms outside of the Guatemala City area suffered power cuts in 2007; less than h a l f experienced the same in Guatemala City and i t s surroundmg area (Figure 3.18). F i r m s in rura l areas h a d
50
to also wai t longer to get connected to the gnd, as we l l as h a d m o r e frequent and longer lasting power interruptions.
Figure 3.17: Bribes Requested for Electricity Connections, % of firms that applied - A. Latin America; 2007 B. Guatemala: 2003 vs. 2007 -
Honduras 17
Paraguay
Ecuador
Nicaragua
Guatemala
Meuco
Bolivia
Colombia
Peru
Umguay
El Salvador
Panama
Chile
Argentina
kenezuela , , , ,
0 2 4 6 8 10 12 14 16
Source: Enterprise Survey
20 1
Guatemala (2003) Guatemala (2007)
Figure 3.18: Access to Electricity and Incidence of Outages: Guatemala City vs. Rest of Country
70 1
60
50
40 37
30
20
i n
0 \Vat to o b t a n
electrical connecuon
(days)
Share o f firms N u m b e r o f with power power outages ougges, O/o p e r m o n t h
Average durauon o f a single outage
(In hours)
D u r a u o n o f p o w e r outages
(hours p e r mon th )
FA Metropolitan Area Rest of Coun t ry
Source: Enterprise Survey
3.37 This also helps explain why f i r m s outside of Guatemala City suffered higher losses due to power interruptions and received a greater share of their energy supply from own generators. Across the subset o f affected f i r m s , losses were nearly twice as high in the rura l areas than in the Guatemala City area (9.1 vs. 4.9 percent of sales). G iven the
51
higher frequency and losses associated with power supply interruptions in rura l areas, i t i s also not surprising that a larger portion of their energy consumption was from own or shared sources, that is, generators. (Figures 3.19).
Figure 3.19: Losses D u e to Power Supply Interruptions I
40 35 30 25 20 15 10 5 0
Losses due to power outages (across affected h s only), Yo
of sales
Share o f F i r m s with Own
Generator, Yo
Permt o f power mming
from own generator (for
f i r m s with generators)
Source: Enterprise Survey
Supply of Electricity
3.38 Until the beginning of the 1990s, the electricity sector in Guatemala was state- owned and vertically integrated (generation, transmission, distribution). Constant growth from the demand side and stagnant generation with h t e d financing options for new investments, gave a clear signal that the state-run m o d e l needed a structural reform. T h e Government reoriented the electricity sector development pol icy towards a m i x e d system with private sector participation. T h e Electricity L a w o f 1993 and i t s regulatory f ramework introduced a market with low barriers to entry into generation, transmission and supply/sales, emphasis on incentives for operational efficiency, and free access to the trans6mission and distribution grids. Both system operation and wholesale power market administration being in the hands of the same private organization.
3.39 T h e reforms led to the establishment of the Wholesale Market Administrator (AMM), (Admritistrador del Mercado Mayorhta), which i s the core of the present energy market structure. I t i s also the system operator for transmission, distribution a n d international connections. T h e AMM determines the hourly spot market prices and i s responsible fo r the reliability and availability o f energy provision. All market agents fulfilling minimum size requirements have a right to participate in the AMM and select i t s Board.53
j3 Changes introduced in 2007 lowered the size requirement for: generators (> 5 hfiv?, transmission (contracts > lOhfiW), distribution (> 15,000 customers), suppliers (“cornerciakpdore?”, > 2 hTW), large consumers (> lOOk\v, importers and exporters (contracts > 10 h1w).
52
3.40 In 2007, the agents operating on the wholesale market included 31 generators, 3 transmission companies, 3 private and 17 municipal dstribution companies, 21 suppliers (“comer~a~i~adores”of wh ich 14 are members o f the AMM) and 800 large consumers, most o f wh ich get their power through a contract with a supplier. T h e distribution companies have 2.3 million regulated “captive” consumers. T h e M i n i s t r y of Energy and Mines, MEM (ibfinisterio de Energia y Minas) has f inal oversight responsibility, issues authorizations to generators, transmission and distribution companies, prepares national energy plans and indicative generation plans and the ten-year national transmission p lan that i s to b e prepared bi-annually .
3.41 T h e national power sector regulator CNEE (Comkidn Nacional de Energia Elkctn’ca) receives and processes requests for authorization of projects (including expansion of plants) for final approval by MEM. I t also supervises compliance with the l aw on the AMM, defines the formulas for the adjustment o f regulated dstribution and transmission tariffs, approves tariffs, monitors service quality and issues norms for these.
3.42 T h e Government owns INDE (Znstituto Nacionaf de Electn’ficacidn), which has two subsidiaries: INDE-Generation and INDE-Transmission. Prior to 1998, consumers in Guatemala were served by two publicly-owned distribution companies. Consumers in the Guatemala City area were served by Empresa Elktrica de Ggatemala S A . (EEGSA). EEGSA was privatized in 1998. In the rest of the country, the mostly rura l consumers were served by INDE. In 1998, INDE’s distribution business was split into two companies covering the eastern (Distn’baidora Ekctrica de Oriente, DEORSA) and the westem (Distrihidora Ekctrica de Occzdente, DEOCSA) parts o f the country. DEORSA a n d DEOCSA were privatized through a 50-year concession to Uni6n Fenosa Intemacional, S.A., w h i c h owns a n 80 percent stake in the two companies.54
3.43 T h e Guatemalan Government subsidizes electricity consumption through the so-called “social tariff.” In t roduced in 1999 as support for power purchases o f low-income families (families with monthly electricity consumption o f 30-40 kwh per month), the tar i f f expanded in 2000 to include residential consumers with consumption under 300kWh per month and 1OOkwh for businesses. In 2004, 94 percent of residential consumers were beneficiaries o f t h i s scheme.
3.44 T h e consumer response to this artificial distortion of the market led to a cascade of repercussions. Households split their h o m e consumption into several meters to qualify for the social tariff; it i s estimated that t h i s f raud amounts to 31 MW. Small businesses switched to joint meter ing to qualify for the 100 kW lirmt. INDE saw i t s fmancial situation undermined by the low tariffs on i t s supply contracts for social-tariff customers; and was forced to postpone investments in maintenance of sub-stations and in the expansion o f i t s transmission system. INDE’s subsidies during 2004-2006 are estimated at 1.3 billion quetzal (US$173 million); of these INDE’s subsidies to the social tar i f f amounted to 554 million quetzal (US$73 million), or 42 percent of total subsidies.55
54 For a full descript ion o f t h e energy m a r k e t structure, see Moster t , W o l f g a n g (2007), B a c k g r o u n d Paper for the Guatemala ICA. jj Source: Tab le 18, I11 Infome Presidential al Congreso de la Rtptrblica
53
3.45 These developments forced the Government to change the implementing regulations for the Social Tariff L a w in 2007. Changing the L a w was considered unrealistic, not the least because of the Presidential elections during the second ha l f o f 2007. A key change was the re-interpretation o f the 300 kWh per month eligibility criterion: consumers in the 300 kWh/month consumption category get the f i r s t 100 kWh-not as previously 300 kWh-at the social tar i f f price. As a result o f t h i s and other developments, the prices of power to industry in the free contract market witnessed an increase of 40 percent from the year before. T h e difference in price between the price o f comerrialiqadora and a bstribution company was almost eliminated in 2007. T h e increase in the prices on the free-contract market made self-generation m o r e competit ive and led companies to increase investments in own generation capacity. In general, industrialists now prefer to set up their own generation plants.
Generation Technology Hydropower Diesel engines Steam turbines
Geothermal Co-generation
3.46 By 2008, the peak demand for capacity i s expected to reach around 1600 MW. Accord ing to data from INDE energy demand i s expected to grow by 7 4 % per year. By year 2020, peak demand for generation should grow to 3,125 MW. 100 MW of new capacity per year will b e required to cover the growth in demand. In addition, approximately 50 MW of n e w capacity per year will b e needed to replace existing generating capacity wh ich i s becoming obsolete and inefficient.
GWh % 3,246 43.6% 2,226 29.9% 1,013 13.6% 804 10.8% 142 1.9%
3.47 Guatemala has important renewable energy resources, such as wind, geothermal and biomass In 2007, installed generation capacity was 1,837 MW, of w h c h 654 MW came from hydropower plants that during the dry season have a m u c h lower generation capacity due to water shortages. To lessen t h i s effect, the establishment of wind energy farms that reach better power factors in the dry season should b e considered. Hydro power and geothermal have med ium to long te rm lead times and capital requirements per installed MW. 56
Imports TOTAL
Table 3.2: Composition of Generation 2006
8 0.1% 7,445 100%
3.48 Guatemala has the highest power tariffs in Central America. Whereas in Guatemala the tariffs charged by comerrialiqadores h a d m o v e d in 2007 to 16 U S cents/kWh (versus 12 U S cents in 2006), the tariffs charged to corresponding consumers in Honduras were 9 U S cents/kWh and in El Salvador 11.5-12 U S cents/kWh. T h e causal factors for the high tariffs include: (i) Polit ical interference in the tar i f f setting in the form of a “social
56 T h i s i s the case o f the Costa Rica generation matrix, where wind farms (62.25 LEV) compensate for the low energy output o f hydro projects during t h e dry months o f November t o May.
54
tar i f f ’ that sets higher prices for regulated users such as large consumers, and the social tar i f f itself;57 (ii) inherited problems in the form of hgh-cost power-purchase agreements (PPAs) negotiated in the early 1990s, (iii) weaknesses in sector governance, (iv) the absence o f complementary initiatives to facilitate private investments in renewable energy, and (v) inherent vulnerabilities in the regulatory m o d e l applied in Guatemala.
3.49 T h e textiles and plastics industries are “electricity intensive” and heavily exposed to foreign competition either on the export markets, or by impor ted goods on the nat ional market. For some specific products in these industries, the cost o f electricity can amount to 20 percent and m o r e o f value-added.
3.50 T h e relatively electricity-intensive manufacturing sector i s hit by the high power prices in two ways. T h e most electricity-intensive industries resort to self- generation. To the extent that the capacity to invest of these industries i s restrained by their debt-sustaining capacity, investments in product expansion suffer. All relatively electricity intensive industries are affected by having to pay tariffs that are higher than the tariffs pa id by their competitors. For instance, the textile industry in Guatemala i s mainly a processing industry o f products under foreign b rand names; independent national brands - where the price elasticity of demand i s lower - have a lower share in total national value added. T h e textile industry i s in cut-throat compet i t ion with manufacturers in China and Bangladesh, where electricity tariffs charged to industry are m u c h lower. There is, therefore, no doubt that the growth prospects o f the Guatemalan textile industry are impaired by the high power tariffs.
3.51 Options to reduce the high energy prices in the short run are limited. This means that there i s l i tt le interest in Guatemala to change the power market m o d e l as such. Agents prefer stability in the market. T h e possibilities of the current government-at least in the in i t ia l years of i t s mandate-to revoke the Social T a r i f f L a w are l imited. T h e option for replacing the social tar i f f by social support to low-income f a d e s by municipalities could make socio-economic sense, and the benef i t i s two-fold: improve the targeting (reducing the number o f beneficiaries), and improve the financial situation of INDE, providing resources for planned investments in transmission and hydropower.
3.52 Various studies of Guatemala’s energy sector conclude that the risk of energy shortage i s likely to increase considerably over the next two years. I t i s necessary to consolidate the implement ing regulation o f the Incent ive L a w for Renewable Energy Investment. T h e in t roduct ion of long-term PPA-tenders i s o f paramount importance. This should secure competit ive financing models for a n impor tant number of projects. T h e government should set forth an indicative generation investment p lan with i t s corresponding physical investment p lan for the expansion o f the nat ional transmission system.
3.53 In the short to medium term, it i s important to reassess the State subsidy mechanisms towards an appropriate target population5’. In the m e d i u m to long term, the pol i t ical agenda for Central American integration should include the topics of the
57 T h e social ta r i f f law of 2000, liberated users with a consumption o f be low 300 k W h / m o n t h (94% o f regulated market) from co-paying the high PPAs and fo r purchase o f capacity by obliging the distr ibut ion companies to organize tenders for the satisfaction o f their consumption 58 O n e option wou ld b e t o target consumers o f less than 150 kWh/mon th .
55
regional energy market and propose the approval of the correspondmg protocols that would make regional transactions feasible.
7. POLICY RECOMMENDATIONS O N ELECTRICITY
3.54 In 2007, the Government imp lemented a number of reforms a imed a t accelerating investments in n e w generation. T h e p lan for accelerated investments in transmission i s likely to have the greatest impact on the market.
3.55 T h e Government shou ld re-consider the Social Tariff, a n d at tempt to target subsidies in a more eff icient manner. El i rmnat ing the social tar i f f altogether a n d replacing i t by social support paid to low-income f a d e s by municipalities would make socio- economic sense: it would improve the targeting (reducing the number of beneficiaries) and also improve the financial situation of INDE, thereby enabling i t to accelerate planned investments in transmission and hydropower. Yet, there are presumably no prospects for a repeal o f the Social Ta r i f f L a w in the in i t ia l years o f the current Government.
3.56 T h e Government cou ld consider more effective mechanisms to promote investments in renewable energy. T h e impact of the Incentive L a w on N e w Investments in Renewable Energy and i t s regulation i s limited: most investments are very attractive without the added benefits. A m o r e effective instrument to accelerate investments in hydropower would b e to introduce by law a local community tax on hydropower producers that provides local communities with m o r e financial benefits than i s the case now.
3.57 Accelerated investments in hydropower, geothermal energy a n d in wind- farms are expected to not only reduce generation costs, but also p u s h out of the market high-cost generation units. Estimates show that the cost of n e w generation for all types of p lant - peak, shoulder and base load - would b e lower than the present cost of generation on the market in Guatemala estimated at 11.6 U S cents/kWh. An additional effect i s that new renewable energy generation will push out o f the market extraordinarily high cost generation u n i t s that at present determine the hourly price.
3.58 In add i t ion the Government m a y introduce a cap on how m u c h addi t ional payment a generator can receive from the spot marke t on top of i t s stated variable cost o f production. T h e present high hourly tariffs are caused by structural factors - such as the unexpected loss o f pet-coal - that cannot b e solved in the nearest years. T h e situation creates extra-high profits for market participants without giving reliable pr ice signals for investors in new plants.
56
Chapter 4. Governance in Guatemala
1. INTRODUCTION
4.1 Guatemala’s governance system-its institutions regulating private business, i t s courts and the elements of i ts security environment-has shown improvements over the past four years. Whi le the 2003 ICA revealed serious deficiencies in the area o f governance, especially r e d tape and corruption, several impor tant aspects of the governance environment have begun to show s igns o f improvement. For example, the malung o f i n fo rma l payments to government officials in relation to business services has declined dramatically. Fewer f m s found it necessary in 2007 to br ibe officials in order to get awarded a government contract, or to obtain licenses, permits or other business-related government services. This i s good news, no doubt reflecting the Government’s efforts to make business regulations simpler and easier to comply with.
4.2 An important and well-documented success with respect to easing business regulations was the Government’s effort to reform several areas captured by international benchmarking reports, such as Doing Business, the World Competitiveness Report, Transparency International’s rankings and several others. T h e country won i t s 2007 Doing Business designation as one o f the world’s top ten reformers through reforms in three areas: (1) easing starting a business through the creation of a one-stop shop for firm registration; (2) easing the process of obtaining a construction permi t through introducing statutory t ime h t s for issuance of permits; and (3) easing the process of property registration by simplifying registration procedures and hiring m o r e staff at the Registry Office. These reforms-effected between June 2005 and M a y 2006-reduced significantly the time, costs and procedures in the three areas, and af forded Guatemala an impressive jump in i t s Overa l l Ease o f Doing Business index.
4.3 More importantly, the impetus of the above reforms was sustained and Doing Business-related reforms were even farther-reaching in 2006-2007. For example, the government continued pushing further reforms in regulations of entry, construction permit t ing and property registration, but also added reforms in two n e w areas-cross-border trade and contract enforcement. Mak ing firm and property registration procedures electronic has reduced times to register, and cut procedures even further. Allowing electronic signatures in the transfer of real property has cut the t ime from 37 to 30 days, and on the Registering Property indicator Guatemala ranked 23 out o f 178 countries wor ldwide in 2008, a significant achievement.
4.4 Progress has also been made since 2003 in the area of security and crime, although concerns remain as to increasing violence in some parts of the country. Crime was perceived by Guatemalan businesses as less o f a p rob lem in 2007 than in 2003. Fewer f i r m s were victims o f cr iminal action in 2007 than in 2003. Losses due to crime were also lower, compared to 2003. This i s good news. But challenges in t h i s crit ical area remain, as shown in section 4.5.
57
4.5 T h e courts-as a venue to resolve business disputes-are also perceived to be functioning better than in 2003. T h i s i s a ma jo r result g iven the notoriously lengthy times to deliver a judgment and enforce a judgment wh ich both the 2003 survey data and the Doing Business reports from recent years point to. T h e improvement in perception i s in l ine with reforms captured by the En fo rc ing Contracts indicator of the Doing Business in 2008 repor t (with data as o f June 2007). This was one o f the areas where Guatemala was cited as having reformed-by expanding the jurisdiction of Justices of the Peace to small claims.
4.6 Nevertheless, governance challenges remain. Despite re forming aggressively for two years in a row, Guatemala s t i l l ranks quite low on the global Ease o f Doing Business index (114 out o f 178 countries in 2007). In some areas-such as construction licenses and starting a business, Guatemala ranks very low-167 and 128 in 2007 respectively. Several successes o f the past two years - such as the establishment of the one-stop shop for business registration (the Ventanilla Agid, the in t roduct ion into operation of a n electronic property transfer system, the advances in tax administration - could b e further strengthened and also expanded to areas outside of Guatemala City. With trade as a n impor tant source o f income (see Chapter 2), Guatemala has begun improving i t s customs administration- implementat ion o f a new Electronic D a t a Interchange (EDI) system for electronic submission of customs declarations and the in t roduct ion o f a risk-based inspection regime decreased the t ime for exporting and importing, and also the associated costs.
2. RED TAPE AND CORRUPTION
4.7 Guatemala lags behind most of the other Central American countries in overall governance indicators. I t i s particularly weak in the area o f confidence in the government’s interpretation o f business laws and regulations. Two-thirds of Guatemalan f i r m s do not believe that business laws wdl b e applied in a predictable and consistent manner (Figure 4.1). In the area of bribery, 23 percent o f f i r m s in Guatemala believe that bribes are c o m m o n in order to do business, which, whi le less than in Honduras (43 percent), i s m o r e than the other countries in the region. Of the subset o f f i r m s who say that bribes to get things done are common, 58 percent report that they are aware of the amount needed to pay we l l in advance (Figure 4.2). This i s similar to El Salvador and less than in Honduras and Nicaragua (over 65 percent in both cases). W h e n it comes to actual incidence o f i n fo rma l payments, however, Guatemalan f i r m s repor t a rate o f incidence sirmlar to the other Central American countries, with the exception o f El Salvador where the incidence i s lower (Figure 4.3). 9 percent of interviewed firms in Guatemala who h a d applied for an operating license h a d been asked for a bribe. 6 percent o f f i r m s w h i c h h a d tax inspections h a d been asked for a n in fo rma l payment.
58
Figure 4.1: Perceptions o f Governance across Central America I 1 7 0 1 I
Panama Costa %m El Salvador Hondum Niaragua Guatemala
E Govt lnterpretatianr oflaws and regulations are mmns~tent &unprediaable
Source: Enterprise survey
Figure 4.2: Perceptions o f Bribery across Central America (percent o f firms that consider bribes common and percent o f those that say bribes
are common who know the exDected bribe size) 80 , l
60 ' O i 2 j0 E a E 30
20
10
0 Panama Nimagr
66
1 El Salvador Guatemala Honduras
~ I t~smmmontopa~~nformdpa~ments to"ge t th~ngsdone"
0 People h o w m advance how mu& to pay to "get thing done"
Source: Enterprise Survey. Comparable data for Costa Rica are not available (questions not included in the Costa Rican survey)
Figure 4.3: Percent o f F i r m s Asked to Make Informal Payments
14
12
10
8 6
4
2
0 Panama El Salvador Honduras Nicaragua Guatemala
dunng tay mspeaions to o b t m unpoa h m s e to o b t m opmnng I i m s e
Source: Enterprise Survey
4.8 Since 2003, the overall cost o f bribes in Guatemala has fallen. Average br ibe size has not changed much: the average reported br ibe to obtain a publ ic contract dropped from 13 to 11 percent o f the contract value, but bribes "to get things done" has slightly
59
increased since 2003: from 7.3 to 8.4 percent o f annual sales59. However, the incidence of bribes has dropped dramatically. In 2003, 33 percent of interviewed f i r m s reported paying bribes to get a government contract; in 2007, t h i s had fallen to 15 percent (Figure 4.4, Panel A). Even more striking was tha t while in 2003 nearly ha l f of interviewed f i r m s reported paying bribes to "get things done"; in 2007 that number had dropped to 12 percent. The lower incidence of bribes has resulted in a lower average cost of bribes across a l l f i r m s (Figure 4.4, Panel B).
Figure 4.4: Costs of Corruption: 2003 vs. 2007 A. Incidence of informal payments payments
B. Average costs of informal
Percentoffimspayngfor PemtofGmspayngto public mntraas "get things done"
Source: Enterprise Survey
Guatemala (2003) Guatemala (2007)
I % mntraa value forproarement
4.9 While the number of tax inspections in 2007 was similar to the number reported in 2003, there was a substantial reduction in the incidence of bribe-seeking by tax officials. In 2002, 19 percent of large f i r rns had to pay tax inspectors something extra; t h i s went down to 6 percent in 2006. These results are in l ine with the generally observed trend of lower incidence of informal payments in 2007 (Figure 4.5, Panels A and B) *
Figure 4.5: Average Number of T a x Inspections in Previous Year / Informal payments requested
Source: Enterprise Survey
59 B o t h averages are calculated for the subset o f firms that report bribes for publ ic contracts and for "getting things done".
60
4.10 For the panel of f i r m s (227 manufacturing f irms) interviewed in both the 2003 and 2007 surveys, the improvements on the governance indicators are striking. For example, in the 2003 survey these f i r m s reported, on average, 9 v i s i t s by tax officials in the preceding tax year; in 2007-this number h a d dropped to 3. Not surprisingly, tax administration was seen as less of a p rob lem in 2007. In 2003, 16 percent of the panel f i r m s saw tax administration as a very serious problem. T h a t number fell to 7 percent &d s o in 2007. Improvements in perceptions across t h i s subset of firms interviewed in both surveys were no ted across al l indicators. 72 percent of them viewed corrupt ion as a very grave issue in 2003, and only 44 percent of the same l d so in 2007. T h e objective measures do support t h i s perception: in 2003 38 percent of the same f i r m s pa id to get a publ ic contract; in 2007- only 13 percent did so. In the same vein, in 2003 m o r e than ha l f o f the same group of 227 f m s (52 percent) reported paying in general for publ ic services; only 10 percent of the same group reported so in 2007. This i s power fu l evidence that the governance arena, broadly speaking, has been improving at a fast pace since then - something largely evident in the progress in the different Doing Business indicators w h i c h measure government regulations o f entry, permits, l and registration, and trade, among others."
4.11 By definition, the Enterprise Surveys cover only formal, registered f irms. Informality, however, i s a serious issue in Guatemala, with estimates that 75 percent of the economically active population (about 5 million in 2004) i s engaged in informal and unregistered activity In rura l areas t h i s number i s even higher - 90 percent of the labor force. Informal i ty affects m o r e Guatemala's indigenous peoples: whi le 67 percent of non-indigenous citizens are engaged in in fo rma l businesses, the number goes up to 89 percent for the indigenous populat ion and higher for geographic areas of the country where indigenous communities are concentrated. In formal i ty i s usually associated with m o r e burdensome government regulations and m o r e corrupt practices in business regulations."
4.12 The share of sales that f i r m s report for tax purposes and the share of the labor force reported for social security purposes gauge the level of tax evasion and under- reporting by formal firms. T h e survey results i ndca te that in 2007 Guatemalan f i r m s reported on average 73 percent o f their income to the tax authorities, and 76 percent of their workforce62. These numbers are not l s s i m i l a r to the rest o f Central America. There are, however, impor tant regional differences within Guatemala. For firms located in the Guatemala City area the share o f reported sales i s 76 percent; f i r m s located in the rest of the country (where informal i ty i s higher) reported 64 percent o f their sales income. Similarly, f i r m s in the Guatemala City area reported 79 percent o f their workforce for tax and social security purposes compared to 68 percent for f i r m s elsewhere in the country.
4.13 The quality of business services provided by the government varies between the Guatemala City metropolitan area and the remainder of the country. Firms around the capital city wai ted longer to get a construction permi t in 2007 than their counterparts in the rest o f the country (Figure 4.6). On the other hand, f i r m s in the inter ior wai ted considerably longer for a n operating license (close to 3 months on average) and for a n
6o Corrupt ion was not covered by D o i n g Business reports t h u s far, but i s a new topic area for the fo r thcoming report Doing Btlsiness in 2009.
62 Since all surveyed firms are formal, actual compliance i s m u c h lower. CIEN 2006.
61
import license. Aside from this, utility connections (electricity, telephone and water) also take longer in the interior than in the Guatemala City area (see Chapter 3). On balance, f i r m s in the inter ior are facing m o r e challenges with respect to the investment climate, especially where infrastructure and r e d tape are concerned.
Figure 4.6: Regional Differences in T ime to Get Licenses and Permits 2007
I 87 I
Days to obtain import liosnse Days to obtain operatinglianse Days to get amnnstmction permit
0 Guatemala aty Rest of m u n q
Source: Enterprise Survey
3. LAND
4.14 Land i s an important factor of production. Secure land titles guarantee rights of ownership and allow a land market to develop. In 2007, interviewed Guatemalan f i r m s owned slightly m o r e than ha l f o f the l and they occupied, and leased the rest. This i s less than the average for Central America, where the percentage o f l and ownership was 65 percent on average in 2007. Firm land ownership i s higher in rura l areas compared to Guatemala City (66 percent vs. 54 percent).
4.15 Access to land has begun to be perceived as more of a problem. Along with electricity it was one of the few areas in which there was a worsening of perception since 2003. This i s in h e with a n increase in the average t ime i t took to get a construction permi t between 2003 and 2007 (Figure 4.7). Access to land (as measured by the Enterprise Survey) could potentially reflect perceptions of both titling and transfer o f ownership, as w e l l as matters related to construction on owner-occupied land. Easing access to and transfer of l and ownership i s impor tant as l and ownership i s associated with a higher l ikel ihood that a fm will get a bank loan. For instance, in 2007, one ha l f of Guatemalan f i r m s who owned at least some portion of the l and where their business operated h a d a bank loan; in contrast, only a h d of non-owners h a d an existing l oan or credit l ine by a formal financial institution (Figure 4.8). Therefore, secure l and titling and ownership i s a way to secure bank loans and increase access to finance. L o a n applications were also m o r e l ikely to b e rejected among f i r m s with no land ownership.
4.16 Given improvements in the land registration and real property transfer (as captured by the Doing Business report) it i s puzzling why perceptions of access to land have worsened. A regional decomposition o f these perceptions yields interesting results. Whi le in 2003 14 percent o f interviewed f i r m s in Guatemala City and 19 percent o f those in the inter ior considered land a ma jo r or severe problem, the proportions were reversed in the 2007 survey, that is . 20 percent o f firms in the Guatemala City metropol i tan
62
area considered access to land a serious issue as opposed to 15 percent o f those in the rest of the country. As major economic activity i s concentrated in and around the capital city area, f i r m s located there might indeed find it more di f f icul t to acquire suitable land for their establishments’ operation and potent ia l expansion.
Figure 4.7: Land and Construction Permits: 2007 vs. 2003
Amss to land i s a problem, O h o f h s Days to get a mnstrudon permit
@I Guatemala (2003) H Guatemala (2007)
Source: Enterprise Survey
Figure 4. 8: Land Ownership and Access to Finance: Guatemala, 2007 66 I 71) ,
60 ; 50 2 40 c 30
20 10 0
Li
Percent of fms with a loan Percent o f f i r m s with loans Percent o f films with rejected
or credit h e that used land and buildings loan applications to guarantee the loan
Source: Enterprise Survey
4. COURTS AND CONTRACT ENFORCEMENT
4.17 Guatemalan courts are routinely rated as among the slowest in the world. For example, according to the Doing Business 2008, a standard debt collection case involving a claim of 200 percent o f income per capita, would take 1459 days to resolve, one of the longest in the world. This measure has not changed since Doing Business began publishing i t s annual reports and gathering data on contract enforcement in 2003. T h e Enterprise Survey data, however, are not so clear. Although on average, the t ime to obtain a cour t judgment was reported as 50 weeks in 2007, closer review o f the data shows that the average i s skewed by one outlier. T h e minimum reported t ime was 3 weeks; the m a x i m u m reported t ime was 313 weeks. Dropping the observation o f 313 weeks lowers the average t ime in
63
Guatemala to 33 weeks. Similarly, the simple average for t ime to execute a judgment was 40 weeks; removal of one outlier (the same fm) drops the average to 12 weeks. Guatemala therefore would rank slightly better than i t s Central Amer ican comparators.
4.18 Perceptions of the court system have improved substantially since 2003. For example, 31 percent o f interviewed f i r m s in the 2003 survey ident i f ied the courts as a ma jo r problem; only 13 percent did so in 2007. However, t r u s t in the courts measured along several dimensions, such as fairness of process, speediness, affordabil ity and ability to enforce judgments, i s not unl ike that of other Central Amer ican neighbors (Figure 4.9). Only Panamanian f i r m s have consistently higher confidence in the judicial system.
Figure 4. 9: Trust in the Judiciary, 2007
5.
4.19
A 7 50 I f , " C ._
40
8
G 1 30 b 20
s 10
0
El Salvador Guatemala Honduras Nicaragua Panama
Source: Enterprise Survey
CRIME AND INSECURITY
Guatemala's crime problem affects the business community and the citizenry. Building a strong judiciary a i d police becomes a n even m o r e urgent &k. A 2007 United Nat ions study on crime in Central America reveals the severity o f the problem. T h e 2007 survey data demonstrate that perceptions of cr ime as a n obstacle to business have improved considerably and that, in l ine with them, fewer f i r m s have experienced crimes against their businesses in the year preceding the survey. In 2003, 80 percent o f interviewed firms h a d ident i f ied crime as a serious obstacle to business, in 2007-this share h a d shrunk by m o r e than a ha l f - 37 percent. Similarly, in 2003 m o r e than h a l f of interviewees reported hav ing suffered losses as a result o f cr iminal activity directed at their businesses; in 2007-only 36 percent o f f i r m s h a d been victims o f crime and incurred business losses in the process. (Figure 4.10). These are remarkable improvements in both subjective perceptions and objective measures, such as crime incidence.
64
Figure 4.10: Perception and Incidence of Crime 2003,2007
~ 100 j 80
2 60 I L
s 40
20
0 Percent of respondents that see cnme as a
malor or severe obstacle Percentage of tims that erpenenced losses as a
result of theft, robbev, vandalism or anon
Source: Enterprise Survey
Figure 4 . 1 1 Crime Incidence in Latin America (Percent of firms reporting losses as a result
of theft, robbers, vandalism or arson)
4.20 Despite the reduction in crime reported by f i rms, Guatemala st i l l ranks among the countries where private f i r m s are worst affected by crime. Only El Salvador and Honduras in Central America do worse in terms o f cr ime incidence (Figure 4.11). Overall, Guatemala ranks among the worst hit countries in L a t i n America. Guatemalan f i r m s incurred the hghes t costs associated with cr ime among their Central American counterparts (Figure 4.12). On average, a typical Guatemalan firm registered losses due to cr ime equal to 2.23 percent o f annual sales. In Panama, the same firm reported losses o f 0.4 percent of annual sales. T h e difference i s enormous. Ano the r 1.9 percent o f sales was spent on preventive measures, such as private security personnel, cameras and equipment, and others. In Costa Rica, costs spent on private security averaged only 1 percent of annual sales, nearly h a l f of what was being spent in Guatemala, Panama and Nicaragua F i g u r e 4-12).
65
Figure 4.12: Costs of Crime (Percent of Sales Lost due to Crime and Spent on Private Security)
4.0
3.0
2.0
1 .O
0.0 Guatemala El Salvador Nicatagua Honduras Panama CostaRia
I ?b sales spent in semrity I YO sales lost due to theft I
Source: Enterprise Survey
4.21 Criminal activity such as theft of cargo being shipped within or out of the country, also affects Guatemalan f i r m s more than most of their Latin American peers. Only El Salvador and Bol iv ia (for domestic shipments) record similar losses of consignment cargo as Guatemala does (Figure 4.13). In direct exporting, losses related to theft in Guatemala are 10 times higher on average than those for exporters in Chile, Argentina, Uruguay, Paraguay and Colombia. These losses are impor tant as they impede the international competitiveness o f Guatemalan exporters.
Figure 4.13: Theft-Related Losses in Transit of Goods (for exports and domestic shipments)
El Salvador
Guaterna la
Nicaragua
C o s t a R ~ c a
P a n a m a
P e r u
Mexim
H o n d u r a s
E o l a d o r
B o l i v i a
C h i l e
A r g e n t i n a
Paraguay
C o l o m b i a
U r u g u a y
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6
0 % m n s i g n m e n t va lue o f d o m e s t i c s h i p m e n t l o s t d u e to t h e f t
I m n s i g n m e n t va lue o f direct expor ts l o s t d u e to t h e f t
Source: Enterprise Survey
4.22 Crime also induces worker absenteeism due to security concerns-and this reduces productivity. In Guatemala, a larger share o f firms (17 percent in 2007) reported
66
suffering from crime-related worker absenteeism, m o r e than the average for Central America (15 percent) and L a t i n America overall (10 percent). Only interviewed Honduran and Salvadoran f i r m s reported a higher level o f crime- and security-related worker absenteeism (Figure 4.14). For the subset o f Guatemalan f i r m s , w h i c h reported experiencing cr iminal activity against their businesses, worker absenteeism was even higher-27 percent.
Figure 4.14: Share of Firms reporting increases in worker absenteeism due to crime and lack of security
Honduras
El Salvador
Guatemala
Paragu*"
ACgRlClnC,
BoLvla
Nleragu*
Emador
Umguay
Chde
MCWm
Colombia
PR-U
Pallama
0 5 10 15 20 25
Source: Enterprise Survey
4.23 In 2007, medium-sized and large f i r m s were more likely to be victims of criminal activity, and spend more on security and crime prevention. T h e hghes t crime-related costs, however, were borne by small f i r m s (3 percent of sales as opposed to 0.9 percent of sales for large f i rms) . Firms in Guatemala City and i t s surrounding metropol i tan area were more l ikely to experience crime than f i r m s elsewhere in the country (39 percent vs. 25 percent). There were no significant differences, however, between cr ime losses incurred, and only marginal ones in terms o f security expenditures for f i r m s in and outside of the capital city area.(Figure 4.15).
Figure 4.15: Crime incidence and cost by Size A. Percent of firms, victims of crime B. Costs of Crime, by size
50
4c
30
20
10
0 Small (<19) .\lediurn (20.99) la rge (>100)
Q O'o f inns reporting m e
Source: Enterprise Survey
4
3.0
Small (<19) hledium (20-99) Lvge (>loo)
0 9.0 sales spent on seolnty
I ?,o sales lost due to theft, r o b b q nmdalism orarson
67
4.24 At present, firms of all sizes are spending significantly less than in 2003 on preventive security measures (Figure 4-16). Across the whole sample, costs of cr ime prevent ion declined from 5 to 1.7 percent o f sales income between 2003 and 2007 - a statistically significant difference. Crime-related costs, however, declined only for large f i r m s (from 1.4 to 0.7 percent o f sales), and actually increased for small and med ium f i rms . At 2.2 percent of annual sales, these costs remained practically the same. A possible explanation i s that in 2003, w h e n a new wave o f rising cr ime started in Guatemala (especially related to drug-trafficking and gang violence), many f i r m s h a d been forced to invest in security measures that are fured costs (reinforcing walls, windows, cameras and other equipment). Once incurred, these costs need not b e repeated, except for the variable costs of salaries of security personnel. In other words, what the survey i s capturing could potentially b e that f i r m s have already “walled themselves o f f ’ and are therefore spending less on security compared to 2003, but are by no means suffering less from crime as the losses incurred indicate (even with lower incidence of crime).
I
Figure 4.16: Costs of Crime by Size and Year
7.0
6.0
5.0
4.0
3.0
2.0
1 .o
0.0
H Small (<19) 0 Medium (20-99) H Large (>loo)
Source: Enterprise Survey
3.0
2003 I 2007 I 2003 I 2007
96 sales spent on s m r i t y I ‘10 sales lost due to theft I I
6. POLICY RECOMMENDATIONS O N GOVERNANCE
4.25 Guatemala should continue reforming i t s regulations of private business activity--especially in firm registration and issuing construction permits, where there i s huge potential for moving up the rankings of the Doing Business report. Analyses and action plans developed by the country’s Credi t Risk Task Force (Mesa de Riesgo delpais), with participation from the think tank FUNDESA and other government and private sector organizations, should b e put into action.
4.26 T h e country’s National Competitiveness Program can continue to play an important coordinating and supporting role. T h e one-stop shop for firm registration should b e replicated to municipalities outside of Guatemala City. This would take some t ime and resources but i s necessary to make services available to f i r m s in the interior. T h e same applies to the Property Registry.
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4.27 There i s also potential for further improving customs administration. Customs could b e improved, for example, by reducing redundant documentation or by consolidating in format ion onto one customs declaration form. T h e steps adopted last year to introduce risk-based cargo inspections and a n Electronic Da ta Transfer system for export ing or transiting cargo are steps in the right direction. But more remains to b e done, includmg introducing performance incentives and performance monitoring o f customs officials.
4.28 T a x administration could also be further strengthened. For example, currently a standard l imi ted l iabil i ty medium-sized company must make 39 separate payments o f corporate income taxes and social security contributions due over one fiscal year. This i s high relative to other countries such as Mexico (27 payments) or reformers worldwide. In t roducing online submission o f tax declarations and making it possible to also make tax payments online could improve tax administration. W e l l done tax administration reforms lead to higher compliance rates and m o r e revenue (especially i f taxes rates are lowered to broaden the base). Such reforms can also reduce opportunities for bribery.
4.29 The 2007 survey points to a dramatic shift in both perceptions and incidence of corrupt practices in regulation of business activity. Nevertheless, corrupt ion continues to b e a major concern. Current efforts can go a long way to further reduce the incidence of corrupt acts. O n e example i s the Publ ic Sector Modernizat ion and Management Project, wh ich works to improve government procurement practices, c iv i l service performance and incentives as we l l as fiscal management. Strengthening institutions such as the judiciary and the police could also help put a check on the Executive, at the national government, and municipal levels.
4.30 Guatemala has started some reforms in contract enforcement and the judiciary, but a more concerted, longer-term effort will be needed, possibly with support from donors. T h e Justice Sector Modernizat ion Project underway with World Bank assistance should help with cour t case management, training o f judges, improving court infrastructure and performance and incentive schemes for judges. To reduce times to case disposition, backlogs should b e dealt with. For example, Colombia adopted a law allowing the dismissal o f c iv i l cases that have been inactive (with no action by either plaintiff or defendant) for 6 months or longer. This i s expected to reduce backlogs in half.
4.31 More sweeping reforms of the justice system would require time, sustained effort and resources. O n e r e f o r m i s the review of the Civil Procedure Code to see where innovations aimed at faster resolution o f disputes could b e made. Alternative dispute resolution, especially mediation, could also serve to alleviate c iv i l courts from certain claims, such as over small amounts.
4.32 Finally, in the crime area, the strategy advocated i s to accompany preventive measures with active police enforcement, especially since a lot of crime i s linked to alleged drug trafficking of cocaine from South America to the U S and European markets63. Accord ing to a recent World Bank Policy N o t e on Cr ime and Violence in Guatemala, the best approach would b e for the new administration to focus on improving
63 United Nations, Office on Drugs and Crime (2007), Cthe and Development in CentralAmerica: Caught in the Crossjre, New York, NY.
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the quality of the police and the cr iminal justice system, with targeted interventions to reduce crime in high-risk communities in the short run, and work toward a human development strategy w h i c h aims to lower the underlying tendency for criminality in the medium- to long run. 64
4.33 Many of the targeted short-term interventions involve working with youth-at- risk groups, gang members and strengthening self-policing by communities. Dif ferent Guatemalan NGOs have already ongoing programs tacking gang members and working with them to help them find employment, as w e l l as working toward disarmament.
rj4 D r a f t Policy N o t e on Crime and Violence in Guatemala, prepared as a background no te for the Central America ICA, 2008.
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Chapter 5. Firms’ Access to Financial Services
1. INTRODUCTION
5.1 Satisfaction with access to financial services has improved in Guatemala in the last few years. In the 2003 survey, 47 percent of surveyed f i r m s indicate that they thought access to finance was a major or severe obstacle; in 2007, the number h a d dropped to 19 percent. Whi le only 44 percent of surveyed f i r m s have loans, 84 percent have a checking or savings account. Of the f i r m s that did not have loans, most reported that they h a d not applied for a loan because they &d not need it. Ths higher level of satisfaction with access to finance, however, does not mean that access problems are resolved. Guatemala has the lowest financial depth in Central America and one o f the lowest in L a t i n America, even w h e n considering the level of income. Guatemalan f i r m s finance most o f their needs with internal sources and there i s l i tt le diversification of external sources of financing. T h e financial system shows deficiencies in terms o f outreach, with cre&t be ing concentrated in larger enterprises and urban areas. T h e system i s dominated by commercial banks that operate at the center of financial conglomerates. Non-banking sectors, w h i c h could address the specific need of underserved f i r m s (including micro-finance institutions, factoring and leasing companies) are l itt le developed. Nevertheless, microfinance institutions have been growing fast and of fer ing a wide set o f financial products and services to underserved sectors. Overall, the diversity of financial products in the system i s l imi ted though, with banks providing most lending, largely in dollars and short term.
5.2 There have been considerable advances in the financial system and i t s enabling environment recently, but some weaknesses s t i l l hmder the development o f the financial system. Stability and solvency have improved considerably and now leave m o r e room to tackle access to finance issues and the remaining agenda to consolidate improvements. Weaknesses o f the infornational framework include, for instance, problems with auditing and accounting standards that affect the quality of enterprises’ financial statements and low coverage o f private credit bureaus. Within the contractaal framework, problems with collateral and bankruptcy laws, judicial independence and protect ion of minority shareholder’s interests restrict financial development. T h e regzllation and sapemision of the financial system also faces challenges, the largest be ing related to banking and consolidated supervision laws (even w h e n they are currently under continuous improvement) and the development of regulation to foster non-banking sectors.
5.3 Bank efficiency st i l l remains low. Interest rate spreads have decreased from 10.2 percent in 2003 to 8.26 percent in 2007, but that spread i s one of the highest in Central America, and substantially higher than m o r e developed financial systems such as Chi le (interest rate spread of 2.9 percent).
5.4 In this context, measures to increase the size of the financial system while benefiting smaller f i rms seem a priority. Ths includes: (i) strengthening creditor rights and insolvency proceedings to foster credit growth a n d increase the efficiency o f collateral,
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wh ich i s m o r e scarce at smaller f i r m s ; (ii) promoting the development of the non-banking sector and sources of financing that are better able to address the specific needs o f MSMEs, l ike microfinance institutions, factoring and leasing; and (iii) promoting a business environment that increases the chances o f approval o f MSMEs loan applications by encouraging formality, and improving accounting and auditing practices and financial in format ion infrastructure.
5.5 T h e most important issues on access to finance at the firm level in Guatemala are reviewed in this chapter, with a discussion of the most important obstacles and suggested policy recommendations to address them. Section I1 reviews the m a i n features and structure o f the financial sector in Guatemala, based on publ ic financial market in format ion and the International Monetary Fund and World Bank's 2006 Guatemala Financial Sector Assessment Program (FSAP) Update. Section I11 presents the m a i n findings o f the on access to finance that can b e derived from the 2006 World Bank's Enterprise Survey. Based on the background set by Sections I1 and 111, Section IV derives the main obstacles for access to finance in the real sector a n d relevant pol icy re'commendations to address them.
5.6 Guatemala's financial system i s small compared with other countries in the region, it has outreach problems and lack of diversity. Guatemala compares unfavorably with other countries in the region in terms ,of domestic f inancing to the private sector (see Figure 5.1). Problems of size and outreach are accompanied with lack of diversity of financial institutions, markets and products. T h e development of non-banking sectors and the range of available products and services are limited, with most financing being short-term and in dollars.
Figure 5.1: Bank lending to the Private Sector as percent of GDP
0.8 0.7 0.6
p 0.5 5 0.4
0.3 0.2 0.1
0
a -
Bank Lending to Private Sector/ GDP
Costa &a E Salvador Guatemla Honduras Nicaragua Panama Central America average
5.7 Although the financial system includes several types of supervised and unsupervised institutions, it i s dominated by banks. T h e supervised system comprises banks (onshore and offshore); finance, insurance and bonding companies; foreign exchange houses; warehouses; and leasing, factoring and credit card companies. As of M a r c h 2008, the banking sector accounted for 89 percent o f the assets o f the financial system. Supervised non-banking sectors are al l small. Finance and insurance companies account
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only for 6.7 percent of the system’s assets and the participation o f bonding companies, warehouses and exchange houses does not reach 1 percent. T h e insurance and pension sectors are s t i l l underdeveloped and a proper securities market barely exists. As of M a r c h 2008 credit card companies accounted for 2.7 percent of the financial system’s assets (US$0.5 bil l~on).~~ In the unregulated sector, microfinance i n s t i t u t i o n s have grown in recent years reaching a total lending portfolio o f about US$770 million or 4.3 percent o f the banking system’s credit portfolio (based on rough estimates as o f M a r c h 2008).
5.8 The banking sector i s mainly domestic and privately owned. As o f M a r c h 2008, 20 onshore banks operated in the system, with three banks holding about 60 percent of the system’s assets. In addition, 9 banks operated offshore and belonged to financial conglomerates associated with onshore banks. In terms o f ownership, n ine onshore banks h a d foreign capital, and there i s one fully-owned state bank (plus another with a minority participation o f the state). T h e most notable foreign participation i s in the Cit ibank Group, wh ich now includes Citibank, Banco Cuscatlhn and Banco Uno. In combined assets, the group represents 6.0 percent o f bankmg sector assets. There are now no major i ty state- owned banks in the system. T h e government holds a minority position in Banrural, a n institution with about 17 percent o f the financial sector’s assets.
5.9 Lending in foreign currency i s declining, but sti l l high. As o f 2005, 42 percent o f loans and 35 percent for deposits were in foreign currency; as of M a r c h 2008, 30 percent o f loans and 15.6 percent o f deposits were in foreign currency. T h e product ive sector, particularly agriculture and manufacturing, i s mostly financed by short-term loans o f up to one year. Bank credit remains concentrated in Guatemala City, w h i c h accounted for 79 percent o f loans as of February 2008. Bank lending i s also concentrated in larger enterprises but as o f June 2005 some banks (largely Banrural but also Bancafe)66 prov ided micro-credit (for about US$130 million). Interest rate spreads have fallen from 10.71 percent in 2000 to 8.26 percent in 2007, but s t i l l remain among the highest in the region (Table 1.9). Surprisingly, the share of consumer lending has dropped from 52 percent o f total lending in 2005 to 25.4 percent in M a r c h 2008). T h e share o f agriculture and commerce loans 6 percent in 2005 to 26% in M a r c h 2008.
5.10 Finance companies represent a small and declining share of the system and tend to b e par t o f financial conglomerates or economic groups. As o f M a r c h 2008 there were 17 active finance companies with a lending portfolio o f about US$172 million (2 percent o f total bank lending). Twelve finance companies were related to financial conglomerates and the other seven were dedicated to support their control l ing economic group. They take deposits from individuals, of fer savings products as “pension funds” (not permit ted to banks) and manage approximately US$700 million in guarantee t r u s t funds and wealth from high income individuals. In terms of assets, finance companies tend to invest in non-rated securities (e.g. government debt, mortgages, notes from non-regulated financial entities and project finance) and also extend loans to their bank‘s large debtors.
65 Superintendency o f Banks o f Guatemala, h iay 2008 database.
66 Banrural i s a med ium size bank with the largest branch ne twork (and minority government shares). Bancaf.4, was the 4” largest bank in Guatemala but i t failed in 2006, with i t s assets being bought by three local banks, including Banrural (See B o x 1).
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5.11 T h e insurance sector i s small (although increasing) and heavily oriented toward non-life insurance and the pensions sector i s small and largely public. I n s u r a n c e p e n e t r a t i o n (total p r e m i u m to GDP) s t o o d only at 1 p e r c e n t in 2004 and t h e sector has l i m i t e d scope to grow d u e to legal, technical, and e n v i r o n m e n t a l constraints." Within i t s o p e r a t i o n a l l i m i t s t h e sec to r i s highly c o m p e t i t i v e . T h e n u m b e r of i n s u r a n c e c o m p a n i e s has r e m a i n e d stable, dropping from 18 in 2005 to 17 in 2008, with m o s t o p e r a t i n g in both l i f e a n d n o n - l i f e i n s u r a n c e bus iness l ines. T h e p e n s i o n sec to r has a mix of pay-as-you-go, pa r t i a l l y p r e - f u n d e d mandatory schemes and s o m e smal ler f u n d e d plans.68
Box 5-1. Resolution of Bancafk and Banco de Comercio- October 2006 and January 2007
As o f September 2006, Banco del Cafe. SA (Bancafk) was p a r t o f the fourth largest f inancial group in the country, with a very large n e t w o r k of branches focusing on both retai l and corporate segments. In particular, it p rov ided financial services to a b r o a d set of clients through the country, i nc ludmg S M E s , microenterprises, and lower i ncome individuals.
Bancafk was p a r t of the Grupo Financier0 de l Pais, w h i c h inc luded an of fshore b a n k in Barbados (BIB). BIB h a d investments securities for abou t US$196.3 d o n h e l d at Re fco Capital Markets (Refco), a N e w York based financial services company pr imardy known for commodit ies a n d fu ture contracts. T h e financial statements of BIB also indicated cash assets h e l d in Re fco for US$4.9 d o n , w h i c h resulted in total BIB assets in Refco for US$201.2 million. T h e assets repo r ted were eventually found to b e part ly pledged against o ther l iabhties, w h i c h became known after Re fco f i led for Chapter 11 in the US. T h e bankruptcy process froze R e f c o assets, inc lud ing those of BIB. G i v e n the extent o f exposure to the domestic bank, rhrough i t s ownership linkages with BIB, the Guatemalan authorit ies took a series o f supervisory measures that l e d to the request of suspension of the Bancafk license in October 19*, 2006.
In January 2007, Banco de Comercio, a small b a n k that was also subject to suspension o f license due to problems with i t s previously undsc losed of fshore af fhate.
T h e resolut ion o f Bancafk was successfully implemented with the transfer of a l l deposits a n d a n equivalent amoun t o f assets to three other domestic banks (Banrural, Agromercanti l , Reformador), with deposits available within 3-4 working days. T h e resolut ion also preserved the ma jo r i t y o f banking jobs. T h e resolut ion o f Banco de Comerc io was successfully implemented with the transfer o f al l deposits a n d an equivalent amoun t of assets to the largest domestic b a n k (Industrial), also preserving the major i ty of banking jobs. These are the f E s t resolut ion cases ever implemented with the n e w legal a n d regulatory f ramework (2002) without going through liquidation. There were some bank runs, but no ma jo r systemic effects.
5.12 T h e capital market barely exists. T h e r e i s no e q u i t y m a r k e t a n d t h e p r i v a t e d e b t m a r k e t cons is ts m a i n l y o f s h o r t - t e r m p r o m i s s o r y notes, m o s t l y i ssued by c r e d l t c a r d c o m p a n i e s and a f e w enterprises. T h e g o v e r n m e n t and t h e B a n k of G u a t e m a l a (Banguat,
68 This includes a d e h e d benefit pay-as-you-go scheme for civil servants, about 12 separate defined benefit pension schemes for autonomous public institutions and members o f the military, a mandatory scheme for private sector workers, and some products offered to the high-end market by finance companies and banks. Among these, the pay-as-you-go public scheme and the mandatory private scheme present serious imbalances and products offered by banks and f inance companies resemble savings more than ret i rement products.
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the central bank) are the pr imary bond issuers. There i s no reference curve or mark-to- market by any investor class -includmg funds managed by brokerage houses. Companies repor t l i tt le interest in raising debt or equity in local capital markets as bigger firms obtain financing from financial conglomerates.
5.13 The universe of microfinance institutions comprises a wide range of mostly non-regulated entities. This includes Savings and Credit Cooperatives, NGOs, Private Development Finance Organizations, banks and producer cooperatives. Savings and CreQt Cooperatives are the most relevant microfinance institutions in terms of lending and prov ide a wide range o f financial services l ike micro-savings, remittances payments, micro-insurance, and housing loans to mostly un-banked, moderate-income Guatemalan~. ‘~ There are close to 300 registered Savings and Credit Cooperatives organized under federations but there i s considerable variability in size, with the top 30 representing about 85 percent of to ta l assets. Private Development Finance Organizations are mostly NGOs and include 40 organizations, of wh ich the top five supply m o r e than ha l f of their lending. Producers’ Cooperatives comprise 1,200 registered entities and are also organized in federations, some of w h i c h have been key to channel subsidized funds from MAGA (Ministeno de Agricultara, Ganaden’a y Alimentacidn). Thei r lending portfolio was estimated at $770 d o n as 2007.
5.14 Although small, leasing and factoring could be important channels for improving access to credit for S M E s . In 2005 there were eight unregulated leasing f i r m s that served meQum to large f i rms , but they represented less than 1 percent of the financial sector’s total assets. Factor ing i s also under-developed, representing US$170 million on banks’ balance sheets. Both financial instruments have h a d success in other countries but they need a favorable legal-regulatory framework, wh ich i s lacking in Guatemala. Leasing i s a potentially significant f inancing tool for SME capital expenditure. International experience shows leasing can of fer competit ive financing to SMEs for the acquisition o f machinery and equipment, but i t s development requires, inter alia, having the ability to seize assets extra- judicially in the event of default, hav ing a clear priority ranking, and the existence of secondary markets. Factoring has h a d notable success in the region (e.g., Brazil, Chile, Mexico) providing working capital for SMEs, but it also needs an adequate legal-regulatory framework to grow; the framework in Guatemala s t d l i s deficient, as it has a k t e d def in i t ion of receivables and lack o f clarity on the i t s tax txeatment. See section on obstacles and policy recommendations for m o r e details.
5.15 In recent years there have been notable improvements in some areas of the financial system and i t s enabling environment. Reported ratios of performance and solvency o f onshore banks have improved after the banking sector crises of 2001. Macroeconomic stability, a key pdlar for financial development, has increased considerably based on prudent macroeconomic policies, with higher economic growth, low inf la t ion and a su rp lus o f the balance of payments (IMF 2007). Other improvements include the strengthening of the legal and regulatory f r a m e ~ o r k , ’ ~ in i t ia l supervision o f off-shore banks and payment systems and liquidity management among others.
69 They have more than US$300 mi l l ion in lending, compared with Private Development Finance Organizations’ U S $ l O O mi l l ion and Producers Cooperatives’ US$170 d o n . 70 In fact, according to the latest Doing Business Report, the regulation affecting access to crecht i s one o f the areas where Guatemala performs better in terms o f the regulatory framework fo r do ing business. Get t ing
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5.16 financial sector development. contractual frameworks, regulation and supervision, and informal i ty among f i r m s :
Nevertheless, some weaknesses of the enabling environment sti l l hinder These include problems with the informat ional and
0 Within the informat ional framework, there are weaknesses in auditing and accounting standards that affect the quality of financial statements of enterprises71 and, low coverage o f private credit bureaus that typically have incomplete and segmented in format ion on enterprise^.^'
0 T h e contractual f ramework includes problems with the regulation o f collateral (particularly movable collateral), the bankruptcy law? judicial independence and protect ion o f minority shareholder’s interests.74
.
Notwithstanding ongoing improvements, regulation and supervision (particularly banking and consolidated supervision laws) s t i l l need to b e strengthened. Additionally, non-bank financing could b e fostered through regulatory changes, including the development of factoring and leasing laws and the regulation and supervision o f larger micro-finance institutions (MFIs).
High informality, particularly among smaller enterprises, hinders their access to credit by both increasing the risk they represent to lenders and mak ing it m o r e di f f icul t to estimate it.
2. ACCESS TO FINANCE
5.17 This section presents the main findings on access to finance derived from the 2007 Enterprise Survey. T h e survey collected data from 524 formal enterprises in Guatemala and included enterprises with different size, locat ion and economic sector. Thus, the analysis presented in t h i s chapter does not apply to in fo rma l enterprises (which are numerous and relevant in Guatemala) but it provides a general picture of access to finance issues and disparities across size, locat ion and industry. Differences are reported only when
Credit, wh ich measures the legal rights of borrowers and lenders and the sharing o f c r e h t information, i s the second highest ranking index fo r Guatemala in the 2007-2008 D o i n g Business Report. Guatemala compares favorably with L A C on some of the Get t ing Credit components (credit in fo rmat ion sub-index and the coverage o f the public credit bureau) but unfavorably on others (the legal rights index and the coverage o f the private credit bureaus). 71 T h i s encompasses divergence from the International Financial Report ing Standards (IFRS), tax oriented financial statements, lack o f publ ic ly available a u l t e d financial statements and the non-existence of a regulatory agency t o enforce financial report ing 72 T h e D o i n g Business Repor t (World Bank 2007) calculates that the coverage o f private credit bureaus in Guatemala (measured as a percentage o f individuals or f i r m s l isted in the credit bureau and expressed relative t o total adult population) i s 13 percent compared with 32 percent in L A C . 73 D o i n g Business (World Bank 2007) finds that collateral and bankruptcy regulation in Guatemala has the fol lowing drawbacks in Guatemala: a nar row (specific) description o f assets and debt permit ted in collateral agreements, lack o f a uni f ied reg i s tq fo r a l l security rights on movable collateral, lack o f absolute priority to secured creditors in bankruptcy proceedhgs, lack o f suspension o f management cont ro l on assets during a reorganization, lack o f legal authorization to parties to agree on out o f cour t enforcement, lack o f legal authorization t o creditors to seize and sell collateral out o f court w i thout restrictions. 74 The Globa l Competitiveness Repor t (Porter et. al. 2006) includes the protect ion o f minority shareholders and judicial independence as two notable competit ive disadvantages in Guatemala.
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they are statistically signif icant (with certainty of 5 percent or more). Covered topics inc lude f i r m s ’ access to saving a n d c red i t products, the i r percept ions on access to financing, sources of f inanc ing a n d the m a i n features of credtt a n d i t s demand.75 In Guatemala, f i r m s have greater access to savings t h a n to cred i t products, with micro-enterprises b e i n g t h e most restr icted in terms o f access to credit. Approx ima te l y 84 percent o f Guatemalan f i r m s r e p o r t to have check ing or saving accounts but only 44 percent repo r t to have loans from financial institutions (Figure 5.2). Access to saving p roduc ts i s widespread across d i f fe ren t firm types but i s h igher in Guatemala City.76 Access to cred i t vanes considerably across enterprise size, with large enterprises be ing considerably m o r e l i ke ly also to have credi t p roduc ts from financial institutions versus smaller enterprises (see F igu re 5-2). 77
Figure 5.2: Proportion of f i r m s with finance products in Guatemala, Latin America and Central America ( O h )
I I P A 88 90 I 100 7
80 60 40 20 0
Checkingkavings Overdraft facilities Credi thoans
H Guatemala (2007) H LAC CA
Source: Enterprise Survey
75 Firm categories have been defined based on the sample composition o f the enterprise survey, which provides greater weight to firms that are small, located in Guatemala City and belong to the manufacturing sector. Micro-enterprises (MIS), which are usually defined as firms with 5 or less employees, are estimated to be the most numerous in Guatemala and employ the most people in Nevertheless, probably due to their higher level o f informality, they have a smaller participation in the sample. To cope with the small number o f micro-enterprises (MI), the scope o f the definition was enlarged to include firms with up to 10 employees. Thus, the findings that are presented in this chapter for MI are also applicable to small enterprises (SEs) o f lower scale. In turn, small and medium enterprises (SMEs) are presented as a single category including enterprises with 11 to 100 employees and large enterprises are considered be those with more than 100 employees. Following the distribution o f economic activity (particularly formal economic activity) in the country, the sample provides greater weight to firms in Guatemala City. All the other firms were categorized as “Other Cities. Finally, and following the categorization o f the enterprise survey, the chapter w i l l differentiate between three industry-categories: manufacturing, services and other (the latter including construction and transport industries). Please note that the description-analysis o f the features o f credit from the financial system are based on 44 percent o f surveyed Guatemalan firms which currently report to have credit from financial institutions. 76 Approximately 73 percent o f firms in Other Cities have checking or saving products versus 88 percent in Guatemala. 77 Access to credit i s varies across different locations and economic sectors. Service firms receive relatively less credit than manufacturing firms (38 percent o f service firms have credit versus 47 percent o f manufacturing firms). 46 percent o f firms in Guatemala City have loans, versus 36 percent o f firms in other cities.
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Figure 5.3: Proportion of f i r m s with finance products by size (%)
C heckinghavings Overdraft facilit ies Creditfloans
0 Mic ro 0 SME 0 Large -
100 80 60 40 20 0
5.18 Although access to finance lags other countries, firm perceptions have improved. T h e proportion of surveyed f i r m s w h i c h viewed access to finance as a major or severe obstacle to the current operation of their establishments dropped considerably, from 47 percent in 2003 to 19 percent in 2007. In the last fiscal year m o r e than two thirds o f f i r m s did not apply for creht, and most of those f i r m s reported they did not need credit (which i s also the case in L a t i n America). All other reasons that are traditionally thought to play an impor tant role in credit demand, l ike high interest rates, insufficient collateral, complex application procedures and insufficient matur i ty appear as largely irrelevant in comparison (see Figure 5.4). MSMEs and f m s located outside of Guatemala City demanded less credit and also reported lack o f need as the main reason for not applying for credit.78
Figure 5.4: Applications for credit and reasons for not applying (YO) la Applied creditfloan No need for loan
0 Application procedires are complex 0 Interest rates not favorable
Collateral requirements are unattainable Bl Size o f loan and maturity are inssuficient
W D i d not think i t would be approved 0 Other
32%
I
Source: Enterprise Survey
5.19 Rejection of credit applications by financial institutions i s a less relevant explanatory variable for lack of access to financing, but i t i s more important for smaller firms. About 12 percent o f l oan applications were rejected during the last fiscal
78 During the last fiscal year 21 percent o f MI and 29 percent o f SMEs applied for credit compared with 52 percent o f large enterprises and 25 percent o f firms located out o f the capital applied for credit compared with 34 percent in Guatemala. From those which did not apply, most report not to need it.
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year in Guatemala, wh ich i s l ine with the regon . Unfortunately, g iven the small number of responses, i t i s not possible to determine why financial institutions are rejecting credit applications with any degree o f confidence. For illustrative purposes, among the few firms that provided data, problems with collateral and insufficient profitabil ity appeared as the two most c o m m o n reasons for r e j e ~ t i o n . ' ~ High debt levels, problems with credit history, and incomplete loan applications were less relevant. Credit applications of smaller enterprises were more likely to b e rejected. During the last fiscal year preceding the survey, no credit application from a large enterprise was rejected, whi le a third of applications from MIS and almost 15 percent o f SMEs' applications were t u m e d down by financial institutions.
5.20 Guatemalan f i r m s finance most of their working capital and investment needs with internal funds. During the last fiscal year, the most relevant sources o f financing were internal funds, fol lowed by private commercial banks (more relevant for investment financing), and trade credit (more relevant for working capital financing) Other sources of financing, l ike non-bank financial institutions and family and friends were largely irrelevant in comparison. T h e structure o f financing of Guatemalan f i r m s does not vary m u c h across firm size, locat ion or economic sector, with a few exceptions (Figure 5.5)."
Figure 5.5: Sources of Financing 2007 Fixed Assets Investments
Internal funddretained earning
rn New debt I
Working capital
1% 3%
Source: Enterprise survey
5.21 The use of trade credit i s widespread in Guatemala but there are some differences across enterprise size (most important), location and industry. Firms receive trade credlt mainly by buying inputs on c r e d t (on average, 50 percent o f inputs are bought on credit) and prov ide financing mostly by al lowing their customers to pay after delivery (on average, 49 percent o f total annual sales are on credit). In contrast, paying for inputs or receiving payment for sales in advance (i.e. before delivery) i s less common." Larger enterprises and those located in Guatemala City engage to a greater extent in trade financing, receiving m o r e financing by their suppliers and providmg m o r e fmancing to their
79 T h e importance o f collateral seems plausible given the high level o f collateralized lending in the country. ' O Private banks play a relatively larger role in the structure o f financing o f large enterprises (vs. MSMEs) and Construction & Transport firms (vs. other industry-categories). Construction and transport firms also rely relatively more on trade credit and less on internal financing than the manufacturing and service industries.
81 Approximately 10 percent o f total annual sales and 14 percent o f total annual purchases are pa id in advance.
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clients.82 Construct ion and transport f i r m s prov ided m o r e financing to their clients (63 percent of their annual sales are on credit) than service and manufacturing f i r m s (41 percent and 50 percent correspondingly). In general, f i r m s providing m o r e trade credit also received m o r e trade credit, reducing the changes of mismatches. Moreover, those providing m o r e trade credit (larger enterprises) should b e better able to handle liquidity problems emerging from delays in payments. Nevertheless, the importance of accounts receivable highlights the need to develop factoring to a greater extent.
5.22 Almost all credit coming from the financial system i s provided by private banks, highlighting the underdevelopment of non-banking sectors. Private banks represent 91 percent of outstanding loans in Guatemala, compared with non-bank ins t i t u t i ons ’ 5 percent and state banks’ 3 percent. This disparity i s also observed in L a t i n America and i s to b e expected to some extent from bank-based financial systems but it reflects the low level of diversity in the financial system and presents access problems for f i r m s that do not constitute the target clientele of private banks, particularly M I s . ~ ~
5.23 Loans in Guatemala are relatively small, even when considering the size of the economy.84 As expected, the average value of loans increases considerably with enterprise size.85 Accord ing to the Superintendency of Banks, as of M a r c h 2008, 64 percent o f the amount o f loans outstanding and 85 percent of the number of loans h a d te rm of loan of 3 years or less. This compares to an average matur i ty o f 3.2 years in La t in America and 4.8 in Central America (but the latter difference i s statistically irrelevant). Most loans (69 percent) are collateralized in Guatemala (less than in Central America) and collateral value matches loan value on average, wh ich i s lower than the regional average. T h e most used types of collateral are land and buildings (the most relevant one), machinery and equipment and personal assets of the owner. Large enterprises and manufacturing industries, w h i c h generally are in a better position to provide collateral, use collateralized lending m o r e of tenB6
3. OBSTACLES AND POLICY RECOMMENDATIONS
5.24 The previous sections have argued that the domestic financial system provides relatively little credit to firms and tends to be concentrated on larger
82 Large enterprises buy 65 percent o f their total annual purchases on credit and sell 57 percent o f their annual sales on credit. In contrast, MIS buy 37 percent o f their inputs on credit and sell 37 percent o f their annual sales on credit, whi le S h i E s l ie in-between large and m ic ro enterprises. In terms o f location, f i r m s in Guatemala City buy roughly ha l f o f their total annual purchases on credit and also sell approximately ha l f o f their annual sales on credit. In contrast, firms located in other cities pay 41 percent o f their annual purchases after delivery and receive payments fo r 36 percent of their sales after delivery. 83 Private banks finance 97 percent o f outstanding loans o f large enterprises and 91 percent o f S 5 E s ’ versus 77 percent of MI’S.
Average value o f loans granted during 2000-2006 in Guatemala was approximately US$ 336,000 versus US$ 500,000 in Central America (excluding Costa Rica). 83 During 2006-2006 the average value o f loans (at the t ime o f approval) was USD 22,465 for MI, USD 112,210 f o r S X E s and USD 925,120 fo r large enterprises. In terms o f differences among economic sectors, even when there are differences on the average size o f loans, these are not statistically significant. 86 While 56 percent o f loans for MIS are collateralized, the equivalent percentage for large enterprises i s 78. In the manufacturing industry 75 percent o f loans have collateral versus 61 percent in the service industry and 44 percent in construction & transport.
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enterprises. This emerges from the low depth of the financial system (;.e. size o f the “pie”) and the way credit i s being distributed among di f ferent groups of enterprises (or “sliced” among the dtfferent players). Be low are the most relevant initiatives that would foster financial depth, with a n emphasis on measures that would benefit MSMEs, given that they appear as the most underserved by the financial system. They emerge from the findings of the previous sections, and are also based on the Background N o t e on Developmental Issues for Corporate Sector and Non-bank Financing from the Guatemala FSAP, wh ich provides a n analysis on the potential causes for the low level of bank credit to the private sector, small participation of micro-finance inst i tut ions and incipient development of alternative financing instnxments @e leasing and factoring) and capital markets.
5.25 Creditor rights and insolvency proceedings should be strengthened. Problems with creditors’ rights and insolvency proceedings have a negative effect on the cost and availabllity o f credit in Guatemala, particularly for MSMEs. T h e framework for credttor rights shows deficiencies related to the creation, regstration, and enforcement o f secured and unsecured rights. Liquidat ion proceedings invo lve lengthy and of ten costly judicial proceedings with a low prospect for recovery for creditors. T h e legal f ramework for insolvency has scarcely been used and i s perceived as ineffective as courts in charge of insolvency proceedings lack expertise and specialization and are overloaded with cases. Enhancing the institutional f ramework for the enforcement o f creditor rights and insolvency proceedmgs would foster credit growth, decrease i t s cost and increase the efficiency o f collateral by increasing the probabil ity o f recovering funds in the event o f default.
5.26 Promote the growth of commercially oriented microfinance institutions. G i v e n that micro-enterprises are the most restricted, the development o f microfinance institutions that target smaller enterprises should b e encouraged.. Microf inance ins t i tu t ions have loan technology and products tailored to the needs and characteristics o f MIS and can cope with the typical problems these f i r m s represent for tradttional banks, &e informality, lack o f collateral and financial illiteracy.
5.27 In Guatemala, the largest microfinance institutions (Savings and Credi t Cooperatives, CACs, and OPDFs) play a meaningful ro le in serving micro-enterprises. But, their future growth and financial stability would require an adequate regulatory and supervisory framework. Larger MFIs are mature enough to b e transformed into a regulated environment to preserve and reinforce their development.” This would encourage prudent accounting and r i s k management practices among larger institutions and enhance their access to funding.
5.28 Framework issues remain related to cooperatives and to the credtt i n fo rma t ion system for micro-enterprises. T h e 1978 General L a w of Cooperatives has become a n ineffective framework for regulating CAC. I t provides a registry (Inacop) and a surveillance body (Ingecop) that are not equipped to support a l l registered entities and does not al low the orderly resolution of inoperative cooperatives. T h e latest two draf t laws on micro-finance entities (the Micro-Finance Companies L a w and the Non-Profit Micro-Credi t Ent i t ies draf t laws) may yield l imi ted impact. Additionally, i t would b e convenient to create a comprehensive credit in format ion system on micro-enterprises (Central de Riesgos) to mitigate
8’ T h e r e are ongoing efforts to regulate M F I s , with relevant d ra f t laws under review.
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the risk o f over-indebtedness as the number o f bank and non-bank entities supplying micro- credit grows.
5.29 Promote the development of financial instruments adjusted to the needs of SMEs. Currently, there i s l i t t le diversification of financial services tailored to SMEs, l ike leasing and factoring, wh ich can b e of fered by specialized f i r m s . Although factoring and leasing are currently small in Guatemala, they would have good growth potent ia l with the right legal framework. Further development o f leasing would imply, primarily, sanctioning a specialized leasing l aw to eliminate the uncertainties created by the legal void. Reforms to the legal-regulatory f ramework should include: (i) adopting accounting practices in l ine with L 4 S and approved by tax authorities, with clear distinctions between operational and financial leasing, (ii) granting the capacity to repossess the leased goods extra-judicially in case of default; (iii) establishing the transferability o f ownership rights in case o f collateralization o f leasing contracts; and (iv) conferring clear priority rights in case o f bankruptcy. Additionally, leasing could also b e p romoted by decreasing informal i ty so that f i r m s can take advantage o f tax breaks and count ing with a n efficient registry system and propitious jurisprudence.
5.30 On the other hand, and in the context o f wide use of trade financing, factoring could become a power fu l tool for financing SMEs’ working capital needs by using accounts- receivable as liquidity generating assets. T h e development of factoring would mainly require establishing an adequate legal f ramework to: (i) adopt a wider def in i t ion o f receivables to include services, credit cards, leasing contracts and international documents; (ii) clarify that factoring does not consist on the transfer of credit and give judicial strength to the ‘ffuct~ru”; (iii) clarity that factoring o f receivables should not b e subject to VAT since it i s not an additional sale for the supplier; and (iv) adopt electronic signature a n d security for the development o f e-factoring among others.
5.31 Promote the development of the capital market. Guatemala has a very h t e d domestic capital market. This emerges from lack o f demand from economic conglomerates that obtain financing from financial conglomerates and an incipient universe of institutional investors (derived from small issuers’ demand and an inadequate legal and regulatory framework for asset managers). T h e main investors in issued promissory notes are finance companies and investment funds. T h e latter are unregulated entities, w h i c h may limit their growth as investors can perceive them as r i s k y vehicles. On the pension side, the social security institute (IGSS) i s not authorized to invest in private papers. As for insurance companies, they only buy publ ic domestic debt.
5.32 Given the right framework there could be potential for the development of debt instruments to improve MSMEs access to credit. This would include mortgage- backed securities, debt issuance by large companies, and leasing, factoring a n d cre&t card companies. T h e development of capital markets would require: improving the regulatory and supervisory f ramework for financial conglomerates, the existing exchange, brokers and contractual saving vehicles.
5.33 Reduce informality by improving the cost-benefit decision for unregistered f i rms. I t i s estimated than m o r e than 80 percent of Guatemalan firms are i n fo rma l and h s affects micro-enterprises m o r e sharply. In formal i ty harms enterprises’ access to cre&t by
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increasing the risk they represent for financial i n s t i t u t i o n s as debtors, having the effect of lock ing them out of creQt (as financial i n s t i t u t i o n s can decide to avoid riskier segments) or increasing their risk adjusted interest rate. I n f o r m a l f i r m s face uncertain liabilities (e.g. tax debts) and financial in format ion i s less transparent. Decreasing informal i ty implies tackling both the costs and benefits that f i r m s take into account w h e n deciding i f they should become fo rma l or not. In Guatemala, the costs of being formal are high. According to the World Bank‘s 2007 Doing Business database, the country s t i l l has a relatively low ranking in L a t i n America (23 out of 31 LAC countries) on the Ease of Doing Business. T h e most problematic areas for doing business are dealing with licenses and starting a business.@
5.34 Improve the regulatory norms for movable collateral. Guarantees on bank loans are mostly fiduciary. Greater acceptance of movable collateral by financial i n s t i t u t i o n s would help un lock access to credit for enterprises, especially MSMEs. Smaller enterprises, particularly micro-enterprises, have less acceptable collateral than larger companies. Wh i le the latter can generally of fer real estate as collateral, smaller companies not only have less collateral (as a percentage o f loan value) but it consists m o r e commonly on movable collateral. To increase the viabil ity o f their credit proposals i t i s impor tant to have the appropriate legal-regulatory framework for movable collateral and a n efficient judicial system to execute it. O n e positive step was the passage of the l aw on movable collateral (Ley de Garantias Real’es MobiLiari6s) to develop other types o f collateral and improve the availability o f lower cost credit for MSMEs by correcting current deficiencies in the regulatory framework.
5.35 Improve accounting and auditing practices and financial information infrastructure. Currently, there i s insufficient financial i n fo rma t ion from f i r m s emerging from weaknesses in accounting and auditing practices and incomplete databases of creQt registries and creQt bureaus. Adherence to credit bureaus i s typically voluntary-except for the system of the Superintendence o f Banks called the Sistema de Inzma&n de Riesgos Creditici;os, SIRC- and, therefore, in format ion tends to b e partial. To increase the availabhty o f accurate financial in format ion on debtors i t would b e convenient, among other things, to provide legal backing to the adopt ion o f international financial standards to increase transparency and count with systematic report ing o f m o r e accurate debtors’ financials to the Superintendency of Banks.
88 Starting a business requires 11 procedures and 26 days and costs 47 percent of income per capita. Dealing with licenses i s requires 22 procedures, 235 days and 1142 percent of income per capita.
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