By Louis Holder
Manufacture is the process of adding value to inputs of raw materials by changing their form and utility to consumers. Both form and utility are essential to the definition. So a vendor who buys a product in Georgetown and sells it in New Amsterdam would have given utility to the product in New Amsterdam but since there was no change in form, the vendor is not a manufacturer. However, if the vendor repackaged the product into smaller containers, and sold the new product in New Amsterdam or anywhere else, the vendor is technical a manufacturer. Repackaging into smaller containers is what adds value to the product.
Further, manufacturing can be classified into two groups – adding value to local raw materials and to foreign inputs. Most manufacturing done in Guyana are of the latter category. For example, the Country’s large manufacturers rely on foreign syrups and sweeteners to produce soft drinks, foreign grain and hops to make beer, and foreign-grown wheat to manufacture breads and pastries. Admittedly, any value added to a process is beneficial but to obtain maximum benefit, value should be added to local inputs.
Another categorization of manufacturing is by large and small. This is a useful way to examine manufacturing as these two don’t share the same challenges. Small companies have difficulty raising capital and the cost is humongous. Interest rates for these companies on secured loans, depending on the liquidity of the security, range from 8% to 14%. Large manufacturing companies rarely have this problem as they have access to shareholders retained earnings at zero cost. The other major stumbling block for small businesses is the cost of electric energy. They have few options but to take their electrical needs from the local utility at over US$0.30/kWh. Large manufacturers tend to self-generate at about 2/3 the cost of the Utility, which is still not competitive with electricity costs in the US, with its mix of hydro and nuclear, at under US$0.11/kWh.
The discussion so far has demonstrated that some manufacturers add more value to the process by using local raw materials and thus should be encouraged, and small businesses need concessions and support from government to survive. Worldwide, tax policy is utilized to incentivize behavior that grows the economy and discourage those harmful to it. In the US, the average effective federal corporate tax rate is around 20% compared to a 35% statutory tax rate. That’s due to tax concessions granted corporations by the taxing authorities. Recently, US President-elect Trump arranged for United Technologies, owners of Carrier of Indiana, several tax concessions to save 800 jobs from moving to Mexico. This was done despite its already low effective tax rate of 10.3% for the period 2000 to 2014. Some large Corporations have effective tax rates in the single digit.
Besides tax policies, foreign governments give their corporations a competitive edge in other ways. For example the US manipulates its money supply to keep interest rates low. Secured loans there could be had for 3% to 3.5% compared to the 8% to 14% pertaining in Guyana. The EU charges member banks to park cash at its Central Bank, in effect creating a disincentive to savings and encouragement of consumption. China is accused of influencing its currency exchange rate to reduce costs of its exports and thus increase the amount produced and workers employed. And the US EXIM Bank finances and insures foreign purchases which would not have taken place due to credit or political risks of the buyer. All these measures taken by foreign governments are intended to support their manufacturing base and to produce and distribute more for the sole purpose of growing their economies.
This support to their businesses by foreign nations is totally at odds with the recent statement by Guyana’s Minister of Finance, admonishing the Private Sector for seeking concessions to stay viable. Surely, the Minister recognizes that small businesses are a significant part of any economy and will cease to exist if forced to compete with foreign companies receiving support from their governments. The call by the Minister’s Boss, President Granger, for members of the Diaspora to return to Guyana and invest will be meaningless if the right conditions for investments are not in place.
What should the Minister and government be doing? First, he should give a strong incentive to manufacturers utilizing local raw materials in their manufacturing processes. This could be accomplished with a bifurcated corporate tax rate. It could be say, a 15% corporate tax rate for manufacturers utilizing local raw materials and a 25% rate for those adding value to foreign inputs. Those doing both would have a prorated tax rate. The differential in rates is a strong encouragement, not only to new manufacturing processes, but to existing large ones to substitute local raw materials for the foreign inputs in use. In addition, the 15% rate is more in line with effective tax rates in other countries.
Second, the Guyana government has to engage in a strong and effective by-local campaign to convince consumers that their best interest is served when they select a locally produced good over a foreign one. That campaign would also internalize the procurement decisions of government, the largest consumer of goods and services in the economy. The last debate between US Presidential contenders, Clinton and Trump, was instructive for both advocating that US consumers buy “made in the USA”. If a developed country can engage in this type of promotion, can a country like Guyana refrain? The Small Business Act of Guyana has a section requiring the Government to use its best efforts to ensure that annually, at least twenty per cent of the procurement of its goods and services is obtained from small businesses. This would represent a tremendous boost to local manufacturing. The Private Sector needs to hold the government’s feet to the fire on this and have the Minister report, during every budget presentation, progress made in achieving this legal requirement.
Third, the Government has to use its foreign missions to promote locally-made products similar to foreign countries in Guyana. Foreign Countries maintain diplomatic missions at great costs for the sole purpose of advancing their national interests. This often results in their use of Commercial Officers to facilitate trade with their businesses entities. Success of Guyana’s foreign missions should be measured in terms of the exports to those countries in which they operate.
So it is not enough for the government to pontificate about investments in the country without setting the environment for this to be realized. As it stands, manufacturing in Guyana is not practical because of high finance and utility costs and lack of government/consumer support. The government has the power and resources to turn this around. Does it have the vision and will?
Louis Holder is the CEO of
Amy’s Pomeroon Foods Inc.