Govt's incentive regime comes in for heavy flak
--in USAID investment study
By Gitanjali Singh
July 25, 1999
A 1997 study on the need for an investment strategy in Guyana, which was extremely critical of the government's incentive regime, has finally been released to the private sector for comments.
"The current incentives regime is inadequate, non-competitive, non-transparent, discretionary, and discriminatory," the study said, and found itself on the government's shelves for almost two years.
The study said most countries competing for private investment offer far more generous incentives than Guyana, where investors do not know in advance whether they will qualify for accelerated depreciation or reduction in consumption tax.
The study by USAID consultants, 'GUYANA: Proposal for an investment strategy', was part of the Building Equity and Economic participation (BEEP) project and was conducted by Siegfried Marks, David E. Lewis and Arnold McIntyre of IGI International Inc of the US.
The study said that to stimulate private investment, Guyana has to consider implementing an investment incentive law when its commitment to the IMF expires next year.
"Such a law should clearly state its purpose and objectives and offer investors specific guarantees designed to raise the confidence to invest in Guyana," the consultants said.
This law, they also said, should offer accelerated depreciation allowances from taxable income and exemption from import duties and consumption tax on machinery and equipment which is part of a new investment or upgrading of an existing investment.
Tax holidays for a defined period should be offered on profits generated by new investments from exports, including assembly operations for re-export. The consultants also say that write-offs from taxable income should be allowed for expenses incurred to train a company's work force in order to improve productivity and worker skills to operate and maintain increasingly sophisticated machinery. A tax deduction, the study said, would be a greater incentive than a payroll tax to finance general technical education.
Since the study was submitted, Finance Minister, Bharrat Jagdeo, announced the reintroduction of tax holidays for pioneering industries in 1998. The tax break is for five years but it is not clear whether any company has benefited from it to date.
In the 1999 budget, Jagdeo announced that he would amend the Income Tax (Depreciation Rates) regulation to increase the depreciation rate for electrical equipment, including computers from 20% to 50%. He also said that to continue to attract non-traditional investments for new industries, the government will move to grant favourable accelerated allowances in accordance with the In Aid of Industry Act.
And Jagdeo promised that a sector by sector review of the incentive regime to determine their attractiveness will be carried out, working with the private sector.
The investment strategy study comprises a detailed analysis of sector specific investment opportunities, constraints and recommendations to remove these.
While acknowledging the significant progress made by Guyana in macro-economic reforms and restructuring of the economy, the study said that more needs to be done to improve the investment climate for private domestic and foreign investors.
"Guyana needs to complete the process of trade liberalisation by eliminating the remaining quantitative trade restrictions, by completing the reductions of the CET (excluding agriculture), by improving access to credit at international lending rates for exporting companies and by providing tax and duty relief to exporters and investors in priority areas," said the study.
The consultants argued that duties of up to 50% and consumption taxes of up to 30% plus other indirect taxes and fees on imports present a heavy burden to importers, consumers, producers and even exporters who require imported inputs.
"Competitiveness is adversely affected. Arbitrarily differentiated consumption tax rates that distort the cost structure in the economy should be replaced by a uniform consumption tax or ad valorem tax," the study stated.
The consultants found the 45% corporate tax on profits of banks, telecommunication firms and companies in commerce to be discriminatory because other firms only pay 35%. They said that in most countries the service sectors create more jobs and contribute more to economic growth than the industrial sectors.
"Equal, non-discriminatory treatment should be part of an improved investment climate for Guyana competing to attract more private foreign and domestic investment not only in production but also in the service sectors," the study contended. It argued that fiscal incentives to attract investments, particularly those for exporting and infrastructure development, should be reintroduced.
And tax policy reform, the study said, should seek to enhance the transparency and simplicity of the tax system and broaden the tax base and make collection more effective. The aim would be for tax revenue to grow even after fiscal incentives are implemented.
The consultants reiterated that the limited access to credit for many domestic firms and high nominal (19%) and real (15%) interest rates are major impediments for many companies, especially those exporting and smaller firms.
The cause of this and the wide ten percent intermediation spread needs to be examined, the consultants stated, adding that various options adopted by other countries should be explored, including government loan guarantees, expanding private land ownership to improve loan collateral, reductions in the volume of treasury emission and easier access to foreign borrowing by qualified private companies.
But while macro-economic policy reforms can be designed to help improve the investment climate and stimulate private investment, the consultants said that more needs to be done by Guyana as part of a successful investment strategy.
They spoke of the lack of a legislative and regulatory policy framework which clearly stipulates the procedural, administrative and decision-making channels for investment incentives approval in Guyana. This weakness, the consultants said, affect promoting Guyana as a competitive site for investment.
Noting that the investment approval process and incentives granting have evolved on a case-by-case basis, the consultants highlighted the need to provide executive authority to the Guyana Office for Investment (Go-Invest), the lack of which is its major weakness, and to provide it with resources to get the work done. The study said that a major challenge for Go-Invest is to engage the private sector to assist it in advancing an investment strategy without succumbing to contradictions and opposing views.
"While the private sector should play a role in the formulation of investment reform legislation, it should not be involved in the incentive approval process and in a position to bar new investment for Guyana," the consultants argued.
Referring to the investment incentives law, the consultants said that there are several options on how to administer this. An investment commission can be composed of all representatives from all ministries and government agencies involved in private investment activities; a small group of public administrators reporting to one minister or a group operating independently of all ministries, reporting to the President or Prime Minister. Or as an alternative, each ministry can be empowered to approve incentives for investments in its economic sector without an investment commission.
"The entire process of approving investment incentives should be simplified, speeded up, made transparent, standardized and less bureaucratic," said the study. To approve incentives, an investment commission would be required to follow procedures outlined in regulations and should not burden itself or investors to request information about feasibility studies, future production programmes, expected cash flow, capital sources, prices or profits. The consultants say a simple, single standard application form can be developed for all companies in all sectors applying for incentives for new investments.
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