Private Sector Baseline Study

Transcription

1 Investment Climate Survey Letter of Contract No.: FWC BENEF/Lot 10/No 2009/ Framework Contract EuropeAid: /C/SV/multi Lot 10 - Support to Industry / Commerce / Services Private Sector Baseline Study St. Lucia Investment Climate Survey (Report 2) August 2009 This Project is funded by the European Union A project implemented by Wiener Börse AG (Consortium POHL CONSULTING & ASSOCIATES) Page 1

2 Investment Climate Survey Executive Summary The objective of the St. Lucia Investment Climate Assessment (ICA) is to evaluate the investment climate in St. Lucia in all its operational dimensions and promote policies to strengthen the private sector. The investment climate is made up of the many location-specific factors that shape the opportunities and incentives for firms to invest productively, create jobs, and expand. These factors include macroeconomic and regulatory policies; the security of property rights and the rule of law; and the quality of supporting institutions such as physical and financial infrastructure. The main source of information for the ICA is a survey of 102 formal private enterprises. The survey includes data on the firm productivity, the cost of doing business, the regulatory environment, the labour market, the financial sector, the trade regime and levels of investment. In the analysis, we link business environment constraints to firm-level costs and productivity. Because Investment Climate Surveys have already been completed in over 70 low and middle income countries, we are able to benchmark firm performance and the quality of the Investment Climate in St. Lucia with other countries around the world. For the purpose of this study, we focus on Central America and Caribbean countries and middle income countries. The main source of information for the ICA is a survey of over 102 formal private enterprises. The survey includes data on the regulatory environment, the labour market, the financial sector, the trade regime and levels of investment. THE SURVEY About 102 firms were surveyed between 11 th and 31st July. About 43% (44) of the sample were in the manufacturing sector, the remaining 57% (58) percent in the tourism sector. Within these sectors, firms were randomly selected from lists of firms recorded in the Enterprise Register maintained by the Central Statistics Office. MACROECONOMIC BACKGROUND St. Lucia s macroeconomic performance has been solid but not spectacular. Between 2004 and 2008, annual GDP growth averaged about 2.6 percent, While GDP growth has fluctuated over this period, it has nor exceeded 4.7 percent in any calendar year since In this respect, St. Lucia appears locked into a path of sustained but moderate growth. Figure 1: Growth and Investment have been lower in St. Lucia than in the best performing Middle-income economies. Page 1

3 Figure 2: Investment has also been modest especially when compared to the fast growing economies. THE INVESTMENT CLIMATE The investment climate assessment asks enterprise managers to rate how great an obstacle various areas of the investment climate were to their enterprise s operations and growth. For each area, we calculate the percent of firms that rated each area as a very severe or major obstacle. One interesting feature of the St. Lucian data is that relatively few firms rated the constraints as major or very severe obstacles. Only about 33 percent of firms rated the biggest constraint, crime, as a serious problem and most obstacles were rated as a serious concern by less than one in five enterprises. This is far lower than in most countries. Although it is difficult to compare perception based measures across countries, this suggests that enterprise managers are not overly concerned about any area of the investment climate. Another feature of the data is that six areas of the investment climate: crime, theft and disorder, tax rates, cost of financing (interest rate), custom and trade regulations, skills and education of the available workers, and tax administration,, stand out as particular problems. Between 20 and 33 percent of enterprises rated each of these areas as major problems compared to less than 20 percent of all other areas. Other Areas of the Investment Climate Firms had few complaints about most other areas of the investment climate. Few firms rated infrastructure, regulation, taxation, corruption or the court system as serious obstacles. The objective indicators are generally consistent with these perception-based measures. Most firms believe that courts are able to enforce property rights and court cases appear to be resolved relatively quickly. Losses due to power outages are modest. Tax rates are low and have been declining over time. Burden of regulation is not particularly low, is comparable to most middle income countries. In summary, the objective indicators are consistent with firm perceptions on most other areas of the investment climate; St. Lucia appears to perform relatively well. Page 2

4 SUMMARY Why has investment and growth been low over the past decade? The investment climate is mostly favourable - the burden of regulation is not excessive, corruption is low, the ports function relatively well, access to finance does not seem to be a major problem for most enterprises, and most people trust the court system. The puzzle simply stated is the following if firms are relatively productive and the investment climate is favourable, why has private investment been so modest? The analysis suggests several possible answers to this question. One factor is that although most areas of the investment climate are favourable, some are not. The cost of labour is high, especially for skilled workers, labour regulation is burdensome; and the cost of crime is high. All these factors discourage investment, despite the generally favourable climate in other areas. Another important factor might be that the investment climate has improved along a numbers of dimensions in recent years interest rates and inflation have fallen and corporate tax rates have been reduced. Moreover, this improvement has occurred within the context of generally increasing profits. Thus, as we would expect, investment rates, although lower would have been expected given the broadly favourable investment climate, have begun to increase. Finally, other areas of the investment climate not captured well in the firm survey might also deter investment. In particular, firm performance and investment is likely to be affected by both market concentration and systemic risk two factors that are difficult to pick up in firm level surveys. Page 3

5 Table of Contents Executive Summary...1i List of Abbreviations Background and Introduction Country Background Population Fiscal and Monetary Performance Sector Profile of St. Lucia Tourism Agriculture Manufacturing Construction Investment Climate Investment Climate Survey Study Introduction Objective Methodology Scope and Coverage Activity Classification Basic Concepts and Definitions Unit of enquiry Organization of the Survey Sampling Publicity Staffing and Recruitment Training Data Collection Activities Quality Control Operations Timetable: Schedule of Operations/Activities Data Processing Enterprise Survey Indicator Descriptions Characteristics of Establishment Sector Distribution Age of Establishments Gender Employment Trend The Investment Climate Crime, Theft and Disorder Tax and Tax Administration Finance Trade and Customs Regulations Skills and Education of the Available Worker Macroeconomic Instability Infrastructure Other Areas of the Investment Climate Comparision of Enterprises by Size of Employment Conclusion and Recommendations...34 Annex: Investment Climate Questionnaire...36 Page 4

6 List of Figures Figure 1: Growth and Investment have been lower in St. Lucia than in the best performing Middle-income economies....1i Figure 2: Investment has also been modest especially when compared to the fast growing economies...2 Figure 3: Female Participation in the Ownership and Female Workers...19 Figure 4: Employment Trend by Sector...20 Figure 5: Legal Status of the Establishments...21 Figure 6: Percent of firms saying area is a major obstacle to growth...24 Figure 7: Percentage of Enterprises Identifying Crime, Theft and Disorder as Major Constraint and Identifying Legal System as a Major Constraint...24 Figure 8: Percentage Losses due to Theft Robbery & Security Costs (% of Annual Sale)...25 Figure 9: Percentage of Firms Identifying Tax Rates & Tax Administration as Major Constraint...26 Figure 10: Percentage of Firms Identifying Cost of Finance & Access to Finance as Major Constraint...26 Figure 11: Percentage Source for Working Capital...27 Figure 12: Percentage of Firms with Annual Statement Reviewed by External Auditor...27 Figure 13: Percentage of Firms Identifying Custom and Trade Regulation as Major Constraint 28 Figure 14: Percentage of Firms Identifying Skills and Education of Available Workers as Major Constraint and Offering Formal Education...28 Figure 15: Percentage Firms Identifying Macroeconomic Instability as Major Constraint...30 Figure 16: Percentage Firms Identifying Electricity and Transport as Major Constraint...31 Figure 17: Percentage Losses Due to Number of Power Outages and Incidents of Water Insufficient in a Typical Month...31 Figure 18: Percentage of Firms Using Own Web-Site...31 Figure 20: Percentage of Firms Identifying the Problem as the Main Obstacle by Employment Size List of Tables Table 1: Gross Domestic Product By Economic Activity At Factor Cost Constant Prices 1990 EC$ Millions...10 Table 2: Percentage Employee by the Nationality...20 Table 3: Percentage Legal Status of the Establishments...20 Table 4: Percent Tenure of Building...21 Table 5: Investment Constrains of the Enterprises (2009)...23 Table 6: Percentage of respondents that considered either major or critical...23 Table 7: Percentage of Workers Receiving Firm-based Training...29 Table 8: Reasons for firms not providing training...29 Page 5

7 List of Abbreviations ACP African, Caribbean and Pacific States BMPU Banana Management Production Unit CARICOM Caribbean Community and Common Market CDB - Caribbean Development Bank CPI Consumer Price Index CSO Central Statistics Office ECB European Central Bank ECCB Eastern Caribbean Central Bank ECCU Eastern Caribbean Currency Union ECFH - East Caribbean Financial Holdings EDF - European Development Fund EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product ICS Investment Climate Survey IMF International Monetary Found LUCELEC St. Lucia Electricity Services Limited NDC - National Development Corporation NIC National Insurance Corporation OPSR Office of Private Sector Relations OECS - Organization of Eastern Caribbean States SLASPA St. Lucia Air and Sea Ports Authority WB World Bank WIBDECO Windward Island Banana Development Co-operation WTO World Trade Organization Page 6

8 1. Background and Introduction 1.1 Country Background St Lucia is located midway down the Eastern Caribbean chain, and is part of the West Indian archipelago. It is one of the four Windward Islands. Administratively the country is divided into ten districts and its capital city is Castries. The country became independent in 1979 and is a member of the Commonwealth with a government structure following parliamentary democracy based on the British model. St. Lucia is a member of the Organization of Eastern Caribbean States (OECS); as such it participates in the Eastern Caribbean Currency Union (ECCU). The currency of the country is EC Dollar (EC$). Established in 1976, the Eastern Caribbean Central Bank (ECCB), based in St. Kitts has been responsible for monetary and foreign exchange policy for the OECS, keeping the EC dollar pegged to the U.S. dollar. St. Lucia is a small, open, tourism-based economy that is vulnerable to exogenous shocks. Tourism accounts for over three-quarters of exports, and the import content of both consumption and foreign direct investment is high. While the share of value added from the traditionally dominant agriculture sector has declined sharply in recent decades, crop exports (particularly bananas) support the incomes of much of the country s large rural population. Recent developments in international trade including the changes in the EU import preference regime and the increased competition from Latin American bananas have made economic diversification increasingly important in Saint Lucia. The island nation has been able to attract foreign business and investment, especially in its offshore banking and tourism industries. The manufacturing sector is the most diverse in the Eastern Caribbean area, and the government of St. Lucia like the other governments is trying to revitalize the banana industry. Page 7

9 1.2 Population The population of St. Lucia in 2008 was 170,331 indicating a growth rate of 1.2 over the previous year. The island has a relatively young population, with 28.4 per cent under the age of 14 and only 7 per cent over the age of 65. The density increased to 316 persons per square kilometre in Today the majority, about 90 per cent of the population is of African descent, with 6 per cent being of mixed origin, 3 per cent East Indian, and 1 per cent of white population. 1.3 Fiscal and Monetary Performance Developments in the monetary and financial sector mirrored the slower pace of economic growth in the review period. Preliminary national accounts data suggest that the sector, measured by activity in banking and insurance, grew by 4.5 percent in 2008, compared to more robust growth in the previous two years. However, the sector s contribution to GDP, led by the banking sub sector, increased to 14.7 percent of GDP from 14.1 percent in Sector Profile of St. Lucia The economy of Saint Lucia is highly open and heavily dependent on foreign trade. Tourism and Agriculture are the two main economic activities. More recently there have been efforts to establish financial services. Agriculture provides 4 % contribution to GDP and 25% of employment. In recent times, tourism has overtaken agriculture as the main contributor to GDP and this trend continues with growing visitor arrivals on the island. The manufacturing sector is under developed. During 2008, economic activity in St. Lucia intensified, driven by the performance of the construction, hotel/ restaurants, banking/insurance, communications and distributive trade sectors. Despite external pressures from increasing international petroleum prices and other factors the economy registered real GDP growth of 5.4 percent. After contracting by 4.1 percent in 2001, the economy has posted cumulative growth of 13.6 percent over the five year period 2001 to The outturn for real GDP growth was influenced by increases in output of 10.4 percent in the construction sector, 9.2 percent in distributive trade, 8.7 percent in banking and insurance, 7.3 percent in communications and 6.3 percent in the hotel and restaurant sub-sector. 1.5 Tourism The tourism sector continued along its path of steady growth in the review period, despite the emergence of several factors that posed a threat to prospects for the sector. Tourism counted for 11.7 percent of real GDP in 2008, retaining its position as the principal engine of economic growth in St. Lucia. Moreover, real growth in the sector, reflected by the value added in the hotel and restaurant sub-sectors, expanded by 6.3 percent. 1.6 Agriculture The overall performance of the agriculture sector was characterized by double-digit growth in all sub-sectors. Real output in the sector expanded at a solid pace of 20.5 percent in 2008, compared with growth of 2.3 percent in This was primarily occasioned by the strong performance of the banana industry as indicated by a 30.0 percent increase in value-added in this sub-sector in Value added in the non-traditional crops and fisheries sub-sectors continued to expand, recording growth of 21.3 percent and 11.0 percent respectively. The livestock sub sector grew by 12.0 percent, after posting growth of 5.6 percent in Accordingly, agriculture s contribution to real GDP increased to 3.9 percent, with bananas accounting for 1.7 percent of GDP. Page 8

10 1.7 Manufacturing During 2008, the manufacturing sector was challenged by further increases in input costs alongside lower external demand for some products. While manufacturing output, dominated by food & beverages, electrical and paper products, was characterized by a general decline, mixed performances were recorded in the various sub-sectors. Value-added in the sector is estimated to have contracted by 5.4 percent in 2008, following three consecutive years of positive but decelerated growth. The sector s share of GDP moved from 6.3 percent in 2007 to 5.9 percent in Construction The construction sector which had benefited from an intensified road rehabilitation programme and several tourism developments in the lead-up to CWC 2007 contracted in the review period. Real growth in the construction sector is estimated to have declined by 14.4 percent in 2008, after recording a contraction of 10.3 percent in 2007 and double-digit growth in 2006 and In keeping with the relative lull in construction activity in the past two years, the sector s contribution to GDP moved from 8.8 percent in 2006 to 6.6 percent in This performance was influenced by a significant contraction in public sector construction activity and lower private sector investments including in the tourism sector, housing and other real estate developments (Refer Table 1). Page 9

11 Table 1: Gross Domestic Product By Economic Activity At Factor Cost Constant Prices 1990 EC$ Millions SECTORS p 2008pj Agriculture, Livestock, Forestry, Fishing Mining and Quarrying Manufacturing Construction Electricity and Water Wholesale and Retail Trade Hotels and Restaurants Transport Communications Banking and Insurance Real Estate and Owner Occupied Dwellings Producers of Government Services Other Services Less Imputed Bank Service Charge (112.4) (123.8) (107.1) (162.3) (124.8) TOTAL 1,277 1,377 1,397 1,277 1,428 Growth Rate 1.48% 4.39% 4.79% 1.48% 0.72% p=provisional. pj=projected r=revised Source: Central Statistics Office (St. Lucia) 1.9 Investment Climate St. Lucia continues to be ranked first among Caribbean countries in the World Bank s Doing Business Indicators. St. Lucia has a reputation for excellent macroeconomic management, modest inflation, and moderate rapid growth. Others aspects of the Investment Climate also appear favourable. Firms complain little about many areas of the investment climate, such as regulation and infrastructure, and objective indicators usually confirm that St. Lucia compares favourably with other middle income economies in these respects. Although firms have concerns in other areas such as corruption, taxation, and macroeconomic instability, St. Lucia often compares favourably with other OECS (Organization of Eastern Caribbean States) economies and high performing middle income economies in these areas as well. Despite having a relatively attractive investment climate, firms in St. Lucia are not highly competitive. Both labour productivity and total factor productivity are low compared to the best performing middle-income economies, few firms export, and domestic firms sell a large share of their output to the Government. Given that with a few exceptions most notable worker skills and education the investment climate appears favourable, this suggests that structural problems (e.g., the small size and remoteness of the economy and the macroeconomic effects of tourism on the rest of the economy) probably play an important role in affecting the firm competitiveness. The St. Lucia Investment Climate Assessment evaluates the investment climate in St. Lucia in all its operational dimensions to promote policies which will strengthen the private sector. Page 10

12 2. Investment Climate Survey Study 2.1 Introduction The Investment Climate Survey provides firm level evidence on the impact of a wide range of policy reforms on business performance and the state of investment climate in the country. A country s economic growth in today s global environment depends to a large extent on its levels of productivity and competitive ability, derived from harnessing and adding value to natural and human resources One of the key tools to aid the public and private sectors in this reversal is a quantified analysis of the microeconomic and structural dimensions of a country s business environment, viewed in an international perspective. ICS will provide a standardized way of measuring and comparing investment climate conditions in a country, replacing a number of varying and ad hoc methodologies of the past. To be envisaged as a systematic means to allow: 1) Better identification of the features of the investment climate that matter most for productivity and hence income growth for poor men and women. 2) Tracking of changes of the investment climate within a country 3) Comparisons of countries or regions within countries 2.2 Objective The goal of the investment climate study (ICS) is to help improve the environment for doing business in the St. Lucia, thereby fostering private sector development that contributes to sustained poverty reduction. To this end, the ICS will: (i) (ii) (iii) (iv) To provide statistically significant investment climate indicators that are comparable across all of the world s economies; To assess the constraints to private sector growth and enterprise performance; To build a panel of establishment-level data that will make it possible to track changes in the business environment over time, thus allowing, for example, impact assessments of reforms and policy changes; and To stimulate policy dialogue on the business environment and to help shape the agenda for reform. 2.3 Methodology Scope and Coverage Fieldwork for the first phase of the Enterprise Census started in July 2009, covering enterprises in the manufacturing and tourism sectors with employment size more than 20. All type of enterprise activities was listed according to the International Standard Industrial Classification (ISIC) Revision 4, except Government Departments and Embassies. Also the following have been excluded for reasons stated below: Page 11

13 The Core instrument is comprised of eight sections. The first group deals with the characteristics of the business and the investment climate in which it operates including: Section 1 Control Information Section 2 General information: ownership, start-up. Section 3 Investment Climate Constraints: evaluation of general obstacles Section 4 Infrastructure and Services: power, water, transport, and communication technologies Section 5 Business-Government Relations: quality of public services, consistency of policy, regulatory compliance costs (management time, bribes); Section 6 Crime: extent and losses due to crime. Section 7 Labour: worker skills training, skill availability, employment, education levels of workers; Section 8 Finance: sources of finance, terms of finance, financial services. The questionnaire was designed after discussion with the Ministry of Commerce and Trade and the CSO and OPSR Activity Classification Classification of industries is according to the United Nations International Standard Industrial Classification of the enterprise activities (ISIC), Revision 4. However to be able to indicate the importance of certain key Enterprise activities in St. Lucia, which would otherwise be impossible to scrutinize under the general ISIC, it was deemed necessary to assign special local codes to such activities. This was done within the framework of ISIC Basic Concepts and Definitions The basic concepts and definitions used in the Investment Climate Survey were developed as best suited to the situation in St. Lucian situation and the more important ones included: An enterprise A technical unit in which production is carried out. It is an observation unit, which engages in one or predominantly one kind the of enterprise activity at or from one location or within one geographic area for which data are available or can meaningfully be compiled. Industry: A category of enterprises producing a similar type of goods and/or services Location: A physical place where an enterprise or enterprise engages in production. It could be a city or a town or a district comprising of several villages. Page 12

14 An enterprise engages in production under a single ownership or control, at a single physical location, and may be part of an enterprise that engages in more than one kind of enterprise activity An employer is a person who operates his or her enterprise or engages independently in a profession or trade, and hires one or more employees. An employee is a person who works for a public or private employer and receives remuneration in wages, salary, commission, tips, piece-rates or pay in kind. An own account worker is a person who operates his or her own enterprise or engages independently in a profession or trade, and hires no employees. An apprentice is a person who is being trained for a job or trade and does not receive pay. He may, however, receive some pocket money. An unpaid family worker is a person who works without pay in an enterprise operated by a related person usually living in the same household. Gross output is the value on the market of goods and services produced, including work in progress and products for own use. For distributive trade, output is measured by the trade margin, which is obtained as the difference between sales value and cost of goods sold. Gross Output is valued at basic prices Unit of enquiry The unit of enquiry, known as the production unit, was the enterprise 2.4 Organization of the Survey Sampling The sample of 102 was selected from the universe of 356 registered businesses in the manufacture and tourism follow a stratified random sampling methodology. A small number of sectoral sub-samples were included to provide measures of productivity that can be compared to the same sectors in other countries. Following the stratification of the sample frame, firms were selected randomly in each cluster. A total sample of 102 firms was drawn, with an overall sampling rate of 28.7 percent. The response rate was 64 percent as 36 percent refused to be interviewed Publicity For an exercise of this nature, the co-operation of all actors in the field was essential to ensure success of the implementation of the activities at the field level. This is necessary to enhance the acquisition of accurate and reliable information. The objective of adequate publicity in this census was first, to allay any anxiety regarding the purposes of the census concerning, for example, taxation, forced expulsion of foreigners etc. Secondly, I would like to explain the reasons for the various questions to be asked. The publicity mounted entailed the widest possible coverage at the national, divisional, district and local area levels. Page 13

15 The main publicity campaign relied mostly on radio, television and press. The field staff were also rehearsed to adequately to convey the Enterprise Census message to their respondents and the general public to obtain the response, confident and support Page 14

16 2.4.3 Staffing and Recruitment The survey personnel composed of staff of the Central Statistics Office, some collaborating agencies as well as other hired personnel. At the field level they included; - 2 Supervisors - 5 Enumerators Data processing and Editing - 2 Verifiers and Coders - 2 Data entry Manager and Supervisors - 2 Data entry Clerks, All these staff was mobilized to work in the collection and processing of the data for the census Training A one day training workshop for the field staff was organized at the Central Statistics Office. Training programme included classroom instructions and field practices, and enumerator s reference manuals and questionnaires were developed and used during the training sessions. The topics covered included undertaking the Investment Climate Survey, familiarization with the questionnaires and reporting forms, and understanding the importance played by data in the planning process. After the classroom work, enumerators conducted practice interviews under the supervision of experienced interviewers and the consultant. They conducted interviews in the morning and return to the class room to provide feedback, discussed results and answer questions in the afternoon. After the training, the enumerators were dispatched to their respective areas of assignment for commencement of the survey Data Collection Activities After the training course for enumerators/supervisors, they were provided with the list of selected enterprises, ID (Identification Document) and introduction letter to explain the purpose of the survey. They made arrangements for face-to-face interviews with managing directors, accountants, human resource managers and other relevant company staff. Once an interview is completed, the supervisor immediately checked to ensure that the questionnaire is filled out in accordance with the instructions in the Questionnaire Note. The supervisor checked to make sure that all blanks are filled and all critical data has been collected Quality Control Operations A monitoring and controlling field operation was done through a chain of agents ranging from the controller through the last supervisor who directly deals with the enumerator. Supervisors observed the enumerators on their day to day operations in the fields in order to ensure reliability and efficiency. Enumerators reported problems encountered to the authorities for appropriate actions. Page 15

17 After listing the entire enterprise in an EA during the listing operation, the enumerators entered the enterprise in the listing forms provided and submitted the completed listing booklets to their respective supervisors for review and certification. The supervisors checked the work for completeness and accuracy, signed the Listing Booklet, and submitted them to the head quarters. However, unsatisfactory questionnaires were return to the enumerators for correction. The Supervisors kept records which showed the number of forms they expected to receive, the expected date of receipt, and the number actually received from each supervisory area and EA. By this procedure, a strict check and control was kept on the rate of progress of the work, and any unnecessary delays were quickly investigated and corrected. On arrival in the CSO office, each questionnaire or form was carefully registered and the total number received was counted and recorded in the office receipt and control form. This form also showed the number of forms expected; thus a check was maintained in the office on the flow of completed work from the field to the office. After checking the forms for adequate entry, they were subjected to further verification by trained verifiers and then sent for data entry and processing Timetable: Schedule of Operations/Activities The field and office activities entailed the following major practical operations viz.: Item Activity Commencement Period 1 Implementation of administrative logistics and Acquisition of equipment for the Census Operations 6th July 2 Recruitment of Staff and Other Census Personnel 7th July 3 Preparation of Census/Surveys Instruments (Manuals, Questionnaires, etc.) 8th July 4 Training of Staff 13th July 5 Interviews 14th July 31st Jul 6 Processing of Data received from the field 1st Aug 3rd Aug Data Processing Data Entry Operation consisted of the creation of a Data Table, which involved the structure of the questionnaire layout, was prepared to specify the variables in the fields corresponding to the. 2.5 Enterprise Survey Indicator Descriptions Regulations And Tax 1. % of Firms Identifying Tax Rates as Major Constraint*** Percentage of firms identifying tax rates as a major constraint. The computation of the indicator is based on the rating of the obstacle as a potential constraint to the current operations of the establishment. 2. % of Firms Identifying Tax Administration as Major Constraint*** Percentage of firms identifying tax administration as a major constraint. The computation Page 16

18 of the indicator is based on the rating of the obstacle as a potential constraint to the current operations of the establishment. Permits And Licenses 1. % of Firms Identifying Business Licensing and Permits as Major Constraint*** Percentage of firms identifying business licensing and permits as major constraint. The computation of the indicator is based on the rating of the obstacle as a potential constraint to the current operations of the establishment. Corruption 1. % of Firms Identifying Corruption as a Major Constraint*** Percentage of firms identifying corruption as a major constraint. The computation of the indicator is based on the rating of the obstacle as a potential constraint to the current operations of the establishment. Crime 1. % of Firms Paying for Security "Percentage of firms paying for security, for example equipment, personnel, or professional security services." 2. Losses Due to Theft, Robbery, Vandalism, and Arson Against the Firm (% of Sales) Estimated losses as a result of theft, robbery, vandalism or arson that occurred on establishment s premises calculated as a percentage of annual sales. 3. Security Costs (% of Sales) Average security costs as a percentage of total annual sales. 4. % of Firms Identifying Crime, Theft and Disorder as Major Constraints*** Percentage of firms identifying crime, theft and disorder as a major constraint. The computation of the indicator is based on the rating of the obstacle as a potential constraint to the current operations of the establishment. Gender 1. % of Firms With Female Participation in Ownership Percentage of firms with females among the owners. 2. % of Full Time Female Workers* Percentage of full time female workers. 3. % of Firms With Female Top Manager Percentage of firms with females as top manager Finance 1. % of Firms with Line of Credit or Loans from Financial Institutions Percentage of firms with bank loans or line of credit. 2. % of Firms Identifying Access to Finance as a Major Constraint*** Percentage of firms identifying access/cost of finance as a major constraint. The computation of the indicator is based on the rating of the obstacle as a potential constraint to the current operations of the establishment. Page 17

19 Infrastructure 1. Number of Power Outages in a Typical Month Average number of power outages in a typical month. 2. Value Lost Due to Power Outages (% of Sales) Losses as percentage of annual sales that resulted from power outages. 3. Average number of Incidents of Water Insufficiency in a Typical Month* Average number of water shortages in a typical month in the last fiscal year. 4. Delay in Obtaining a Water Connections (days) Average wait, in days, experienced to obtain a water connection from the day this establishment applied for it to the day it received the service. 5. Delay in Obtaining a Mainline Telephone Connection (days) Average wait, in days, experienced to obtain a mainline telephone connection from the day this establishment applied for it to the day it received the service. Innovation and Technology 1. % of Firms with Annual Financial Statement Reviewed by External Auditor Percentage of firms with annual financial statement reviewed by external auditor. 2. % of Firms using its Own Website Percentage of firms using the web for communication with clients or suppliers. Trade 1. % of Firms that Trade Identifying Customs & Trade Regulations as a Major Constraint*** Percentage of firms that trade identifying customs & trade regulations as a major constraint. The computation of the indicator is based on the rating of the obstacle as a potential constraint to the current operations of the establishment. Workforce 1. % of Firms Offering Formal Training* Percentage of firms offering formal training programs for its permanent, full-time employees. 2. % of Firms Identifying Labour Regulations as a Major Constraint*** Percentage of firms identifying labour regulations as a major constraint. The computation of the indicator is based on the rating of the obstacle as a potential constraint to the current operations of the establishment. *** Due to differences in scales used in the ECA countries in 2002 and 2005 (four points) and those used in the 2008 surveys (five points) indicators based on business constraints questions are not fully comparable. End users are encouraged to keep this in mind when analyzing historical trends. Users can download the raw data for additional information. Page 18

20 3. Characteristics of Establishment 3.1. Sector Distribution The sample includes 46 manufacturing firms and 56 tourism-related firms. The tourism sectors are broken down into hotels, including firms with hotel services as the main activity, and other tourism services, which include restaurants, yachting activities, tour guides, diving shops, travel bureaus, and shops catering to tourists (e.g. duty free shops). The classification of enterprises by sector is based on the recording of primary activity Age of Establishments Most of the firms (79 percent) have been in operation for more than 10 years, and just under half of these were established over 20 years ago Gender Overall, very few firms (21 percent) are owned by women, this is lower than compare to 38.7 percent in Latin America and Caribbean countries and 32.2 for middle income countries 32. On the other hand the firms employee about 48.3 female workers which is higher than the region and middle income countries. Figure 3: Female Participation in the Ownership and Female Workers 3.4. Employment Trend There is no significant difference in average number of employee per firm by quarter in the manufacturing and tourism sector (figure). The tourism sector employee average more than the manufacturing sector. Page 19

21 Figure 4: Employment Trend by Sector Table 2: Percentage Employee by the Nationality Activity Group St. Lucian Expatriate Total Male Female Male Female Male Female Manufacturing Tourism Total As has already been illustrated in Table 2, female dominate in the manufacturing sector and accounts for about 53 percent compare to 44 percent in the tourism sector. Only 1.6 percent of the employees are expatriates. 3.5 Legal Status Table 3: Percentage Legal Status of the Establishments Percent Publicity listed company 4.9 Private held, limited company 77.0 Cooperative 1.6 Sole proprietorship 13.1 Other (specify): 3.3 Total Page 20

22 Over 70 percent of enterprises are owned by private held, limited company followed by 13 percent by the Sole Proprietorship and only about 2 percent in the Cooperative. Figure 5: Legal Status of the Establishments. 3.6 Tenure of the Building As illustrated in the following table that about 72 percent of the establishment wholly owned building or promises, only 8.6 are partly rented. Table 4: Percent Tenure of Building Valid Percent Wholly Owned 72.4 Wholly Rented 19.0 Partly Rented 8.6 Total Page 21

23 4. The Investment Climate As a first cut for assessing investment climate problems, the Investment Climate Survey (ICS) asks firms to rate various areas of the investment climate and to say how serious an obstacle they are to enterprise operations and growth. Although perception-based measures suffer from several problems it is difficult to compare them across countries; it is difficult to quantify and aggregate perception-based data across firms; managers might not be aware of the underlying causes of a specific constraint; and managers of existing enterprises might have different views than potential entrepreneurs would enterprise managers probably have a reasonable grasp of the immediate problems facing their businesses. Thus, the perception-based indices provide a useful starting point for the analysis one that we supplement with objective measures of the investment climate throughout the report. The investment climate assessment asks enterprise managers to rate how great an obstacle various areas of the investment climate were to their enterprise s operations and growth. For each area, we calculate the percent of firms that rated each area as a very severe or major Obstacle. Results from this analysis are shown in Figure 6. One interesting feature of the St. Lucia data is that relatively few firms rated the constraints as major or very severe obstacles. Only about 35 percent of firms rated the biggest constraint, worker skills, as a serious problem and most obstacles were rated as a serious concern by less than one in five enterprises. This is far lower than in most countries. For example, close to 85 percent of firms in Brazil said that tax rates were a major problem and 74 percent of firms in Kenya said corruption was a major problem. Although it is difficult to compare reception based measures across countries, this suggests that enterprise managers are not overly concerned about any area of the investment climate. Another feature of the data is that four areas of the investment climate: crime, tax rates, cost of financing, custom and trade regulations, stand out as particular problems. Between 25 and 33 percent of enterprises rated each of these areas as major problems, followed by skills and tax administration less than 25 percent compared to less than 20 percent for all other areas. Page 22

24 Table 5: Investment Constrains of the Enterprises (2009) Constraints No Minor Moderate Major Severe Obstacle Obstacle Percentages Telecommunications Electricity Transportation Access to Land Tax rates Tax administration Customs and Trade Regulations Labour Regulations Skills and Education of Available Workers Business Licensing and Operating Permits Access to Financing (e.g. collateral) Cost of Financing (e.g. interest rates) Economic and Regulatory Policy Uncertainty Macroeconomic Instability (inflation, exchange rate) Corruption Crime, theft and disorder Anti-competitive or informal practices Legal system/conflict resolution Table 6: Percentage of respondents that considered either major or critical Constraints St. Lucia Central America Major Critical Both & Caribbean Crime, theft and disorder Tax rates Cost of Financing (e.g. interest rates) Customs and Trade Regulations Skills and Education of Available Workers Tax administration Economic and Regulatory Policy Uncertainty Macroeconomic Instability (inflation, exchange rate) Electricity Access to Financing (e.g. collateral) Corruption Anti-competitive or informal practices Access to Land Legal system/conflict resolution Telecommunications Transportation Labour Regulations Business Licensing and Operating Permits Page 23

25 Figure 6: Percent of firms saying area is a major obstacle to growth 4.1. Crime, Theft and Disorder About 33.4 percent of enterprises in the Investment Climate Survey rated crime as a major or very severe problem. Although there were a few differences, complaints about crime were common among most types of enterprise. This section looks at the impact of crime on businesses in St. Lucia and compares St. Lucia to other countries where Investment Climate Surveys have been completed. The results show that about 84 percent of the firms paying for security costs compared to 64 percent in Latin America and Caribbean countries. It is similar to other middle income countries like Botswana, Argentina and South Africa. Figure 7: Percentage of Enterprises Identifying Crime, Theft and Disorder as Major Constraint and Identifying Legal System as a Major Constraint Page 24

26 Results from the Investment Climate Survey suggest that St. Lucia is representative of countries where crime and security may be considered an important, though not critical, problem. In Jamaica and many Latin American countries particularly in Central America the Security situation is probably the largest bottleneck to competitiveness and economic growth. St. Lucia s situation is not this dire. But when compared to other middle-income countries, such as Lithuania, Poland, and China, the security environment will make St. Lucia look less attractive for foreign investment and will put firms at a competitive disadvantage. Figure 8: Percentage Losses due to Theft Robbery & Security Costs (% of Annual Sale) The evidence from the Investment Climate Survey suggests that crime is also a serious concern for business. The enterprises reported that the direct losses due to crime and the cost of security were equal to about 1.1 percent of sales. This is slight higher than Latin America and Caribbean countries reporting 0.93 percent of sales. This is higher than in many middle-income Countries costs were lower in Lithuania, India, and Poland. But it is lower than in the very worst countries costs were equal to about 3.8 percent of sales in Dominican Republic and about 8 percent of sales in Kosovo Tax and Tax Administration Tax rates were rated as a serious obstacle to enterprise making it the second greatest constraint asked about in the Investment Climate Survey. About 27 percent of enterprises saw tax rates as a serious problem and only 20 percent saw tax administration as a serious problem. Moreover, tax rates are typically seen as a serious obstacle enterprises were less likely to say tax rates were a serious obstacle in only three of the 52 countries where investment climate surveys have been completed by mid Page 25

27 Figure 9: Percentage of Firms Identifying Tax Rates & Tax Administration as Major Constraint 4.3 Finance Enterprise managers often see access to and the cost of financing as serious obstacles to their enterprise operations and growth. This is especially true in Central America and Caribbean, where access and cost of financing typically rank among the top five constraints. In contrast, firms in St. Lucia were generally more concerned about access to and the cost of financing fewer than 27 percent rated either as a major or very severe obstacle, placing them at third and thirteenth of twenty one constraints. Objective data generally support the perception-based data particularly with respect to the cost of financing. The real interest rates that firms report paying for their most recent loan was lower than in most of the comparator countries for which data were available. The next question is whether objective data on access to finance supports the view that access is also relatively good in St. Lucia. With respect to this question, although St. Lucia s performance seems similar to other middle income countries, it is harder to argue that it outperforms them on this dimension. Figure 10: Percentage of Firms Identifying Cost of Finance & Access to Finance as Major Constraint The important source for working capital is through commercial and foreign banks. St. Lucian firms rely upon banks to finance close to 46 percent of their working capital needs (see Figure 11), the next source is through retained earnings (42 percent) and remaining 12 percent is through informal and other sources. Page 26

28 Figure 11: Percentage Source for Working Capital Why are St. Lucian firms less likely to rate access to finance as a serious a problem than firms in the comparator countries? In addition to asking firms whether they have loans and overdrafts, the surveys also ask firms that do not have loans why they do not (see Figure 10). As noted above, about 82 percent of St. Lucia firms currently had a bank loan. These firms were unlikely to rate either access to finance or the cost of financing to be a serious problem. The firms who applied for loan about 55 percent applied for over draft and line of credit and remaining 45 applied for loan. About 18 percent of firms reported that they had never applied for a loan. These firms were even less likely to rate either access or cost of financing to be a serious obstacle. When asked why they had not applied for a loan, most of these firms reported either than they did not need a loan (68 percent), that they did not want to incur debt (8 percent), 6 percent feel that they do not qualify, 5 percent reported they have inadequate collateral and remaining are very small. This suggests that many of the firms that have never applied for a loan do not see themselves as credit constrained. About 87 percent of enterprises reported that their annual financial statement reviewed by an external auditor. This percentage is closed to Egypt (83.2), El Salvador (89.9), Jamaica (90.7) and Malaysia (91.7). Figure 12: Percentage of Firms with Annual Statement Reviewed by External Auditor Page 27

29 4.4 Trade and Customs Regulations Customs and trade regulations were seen as a serious obstacle by most enterprise 25 percent rated it as a major or very severe problem exporters were more concerned than other enterprises. Majority of exporters rated customs and trade regulations as a serious obstacle. As compared to Latin America & Caribbean and Middle Income Group it is higher. Figure 13: Percentage of Firms Identifying Custom and Trade Regulation as Major Constraint 4.5 Skills and Education of the Available Worker The shortage of skills is one of the leading constraints reported by manufacturing firms in St. Lucia. Training represents one way to address the scarcity of skilled labour and is crucial to maintaining a competitive labour force. This is especially crucial in St. Lucia where a significant fraction of the population has very low levels of schooling. For this group of individuals, on-thefirm training represents the single most important channel of augmenting human capital. Firms in each of the comparator countries were asked to report whether they provide training to workers and what fraction of skilled and unskilled workers were offered training. It is important to note that the quality of this training might differ both within and between countries. Figure 14: Percentage of Firms Identifying Skills and Education of Available Workers as Major Constraint and Offering Formal Education Page 28

30 More than 80% of all workers receive firm based training in Poland. Firm-based training is provided to 68% of unskilled workers in Brazil and 63% in China. Less than one third of skilled and unskilled workers in St. Lucia have access to firm-based training (see Table 22). This is the lowest level of training provided among the comparator countries. Table 7: Percentage of Workers Receiving Firm-based Training Country % Skilled Workers % Unskilled Workers St. Lucia Poland Brazil China An examination of the length of training offered by firms in each of the comparator countries suggests that St. Lucia does not lag behind in the amount of training offered. Median training time in St. Lucia is 3.4 weeks compared to only about 3 days in Brazil and 2 days in India. We next examine the reasons that firms report for not providing training. Table 24 suggests that demand, cost and access are the most important reasons for not providing training. 80 % of the firms that do not provide training report that there is no need for training: workers can learn on the job or firms can acquire the relevant skills in the labour market. 25 % of firms report that workers are uninterested in acquiring training. 25 % of non-training firms cannot afford training and 50 % of firms report that government incentives are insufficient to induce firm-based training. 45 % of firms report that there is a lack of appropriate training facilities and 9% of firms cannot identify competent trainers to provide internal training. Table 8: Reasons for firms not providing training Variable % Firms Reporting Reason for Not Providing Training Cannot define/priorities training needs 23.8 Lack of training institutions for external needs 55.0 Lack of training by chambers of industry, business associations for external training 45.0 Cannot identify competent trainers for internal training 25.0 Cannot afford formal internal or external training 25.0 Lack of government incentives for training 50.0 Staff are uninterested in learning new skills 25.0 Too risky - trained staff may leave 25.0 Too risky - unsure of continuing demand for new skills 25.0 No need - staff can train on the job 80.0 No need - can hire staff from other firms 15.0 Page 29

31 4.6 Macroeconomic Instability Macroeconomic instability was rated by about 13 percent as a serious obstacle to enterprise operations making it the eighth constraint asked about in the Investment Climate Survey. This seems that growth has been positive for over a decade and inflation has been modest. Figure 15: Percentage Firms Identifying Macroeconomic Instability as Major Constraint Exchange rates, however, have been very stable especially against the U.S. dollar between 2007 and 2009, there was little change in the term structure of nominal interest rates within the commercial banking system. The rates on demand deposits and savings deposits remained fixed, ranging from 0.0 to 3.0 percent and 3.0 to 4.25 percent respectively. Interest paid on time deposits with various maturities remained the same as in The prime lending rate was kept in the range of 9.5 to 10.0 percent while other lending rates attracted an additional 200 basis points in the maximum interest rate. The nominal interest rate on add-on loans remained unchanged throughout 2008 while the effective interest rates on these loans ranged from 10.5 percent to 24.0 percent. 4.7 Infrastructure A strong infrastructure enhances the competitiveness of an economy and improves the quality of life of the population. Good infrastructure connects firms to their customers and suppliers, and enables the use of modern production technologies. Conversely, deficiencies in infrastructure create barriers to productive opportunities and increase costs for all firms, from micro enterprises to large multinational corporations. Enterprise Surveys capture the dual challenge of providing strong infrastructure: the physical construction of roads, power lines, water systems, etc., and the development of institutions that effectively provide and maintain public services. The first set of indicators shows the extent to which firms perceive two components of infrastructure as constraints: transportation and electricity. Inadequate transportation and problems with electricity increase costs disrupt production, and lower revenue. Page 30

32 Figure 16: Percentage Firms Identifying Electricity and Transport as Major Constraint The second set of indicators measures the quality of infrastructure: the number of power outages and insufficiencies in water supply per month and losses due to power outages. Figure 17: Percentage Losses Due to Number of Power Outages and Incidents of Water Insufficient in a Typical Month Figure 18: Percentage of Firms Using Own Web-Site Page 31