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November 1, 2010
Document of the World Bank
Report No. 54242-GT
GuatemalaSME Development in GuatemalaLet 10,000 Firms Bloom(In Two Volumes) Volume II: Complete Analysis
Finance & Private SectorPoverty Reduction and Economic Management DepartmentLatin America and Caribbean
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ABBREVIATIONS AND ACRONYMS
AGEXPORT Guatemalan Association of Exporters AGIL Apoyo a la Generación de Ingresos Locales AMM Wholesale Market Administrator (Administrador del Mercado Mayorista) ANACAFE Guatemala National Coffee Association ASIES Research and Social Studies Association (Asociación de Investigación y Estudios Sociales) ASPARAGUA Association of the Producers of Rambutan in Guatemala BANGUAT Central Bank of Guatemala BF Board-foot CA Central America CADA Central America Discussion Agreement CATS Comites de Autogestion Turística CENAME National Metrology Center (Centro Nacional de Metrología) CI Conservation International CIAT International Center for Tropical Agriculture CIEN Center for National Economic Studies (Centro de Investigaciones Economicas Nacionales) CITES Technology innovation centers (centros de innovación tecnológica) CNEE National Electric Energy Commission (Comisión Nacional de Energía Electrica) COCATRAM Central America Maritime Transport Commission (Comisión Centroamericana de Transporte
Marítimo) COGUANOR Guatemalan Standards Commission (Comisión Guatemalteca de Normas) CONCYT National Science and Technology Council (Consejo Nacional de Ciencia y Tecnología) CORFO Production Development Corporation (Corporación De Fomento de la Producción de Chile) COVIAL Road Conservation Executing Unit (Unidad Ejecutora de Conservación Vial) CPN National Port Commission (Comision Portuaria Nacional) DR-CAFTA Dominican Republic-Central American Free Trade Agreement ENCOVI National Living Conditions Survey (Encuesta Nacional Sobre Condiciones de Vida) EPA US Environmental Protection Agency EU European Union EUROSTAT Statistics of the European Union FACYT Science and Technology Support Fund (Fondo de Apoyo a la Ciencia y Tecnología) FAO US Food and Agriculture Organization FDA US Food and Drug Administration FDI Foreign direct investment FENACOAC National Federation of Savings and Loans FFV Fresh Fruit and Vegetables FODECYT Fund for Scientific and Technological Development (Fondo para el Desarrollo Científico y
Tecnológico) FONACYT National Science and Technology Fund (Fondo Nacional de Ciencia y Tecnología) FONTIERRAS Guatemalan Land Fund GAP Good Agricultural Practices GBP Good Business Practices GDP Gross domestic product GIS Geographic information system GPP Good Processing Practices HACCP Hazard Analysis and Critical Control Point (HACCP) ICA Invest Climate Assessment IFAD International Fund for Agricultural Development IFC International Finance Corporation IFES Feminine Institute of Higher Studies IMO International Maritime Organization INDE National Electrification Institute
FOR OFFICIAL USE ONLY
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.
INGUAT Guatemala Tourism Institute (Instituto Guatemalteco de Turismo) INTECAP Technical Institute for Training and Productivity (Instituto Técnico de Capacitación y Productividad) ISO International Organization for Standardization LAC Latin America and the Caribbean LPI Logistics Performance Index LRF Lumber recovery factor LSCI Liner Shipping Connectivity Index MAGA Ministry of Agriculture and Livestock (Ministerio de Agricultura, Ganadería y Alimentación) MEM Ministry of Energy and Mines MIX Microfinance Information Exchange MFI Microfinance institution MRGC Metropolitan Region of Guatemala City MRL Maximum Residue Limit MSME Micro, Small, and Medium Enterprises MT Metric Tons NGO Non-Government Organization NTAE Non-Traditional Agricultural Exports OGA Guatemalan Accreditation Office (Oficina Guatemalteca de Acreditación) PIPAA Integral Program for Agricultural and Environmental Protection PPIAF Public-Private Infrastructure Advisory Facility PPP Public Private Partnership PRONACOM National Competitiveness Program (Programa Nacional de Competitividad) QI Quality infrastructure R&D Research and development REDIMIF Network of Microfinance Institutions (Red de Instituciones de Microfinanzas) RIA Regulatory Impact Analysis RICAM Mesoamerican International Highway Network (Red Internacional de Carreteras Mesoamericanas) RICYT Red de Indicadores de Ciencia y Tecnología RTGS Real Time Gross Settlement SENACYT National Science and Technology Secretariat (Secretaria Nacional de Ciencia y Tecnología) SIECA Central American Secretariat for Economic Integration SME Small and medium enterprise SPS Sanitary and Phytosanitary Standards SSFI Specialized State Financial Institution TFP Total factor productivity TIES The International Ecotourism Society TIMSS Trends in International Mathematics and Science Study TPC Third Party Certification USAID US Agency for International Development USDA United States Department of Agriculture WEF World Economic Forum WHCRI Western Hemisphere Credit and Loan Reporting Initiative WOCCU World Council of Credit Unions YOY Year-on-year
Vice President Country Director Sector Director Sector Manager Task Manager Co-Task Manager
: Pamela Cox : Laura Frigenti : Marcelo Giugale : Lily L. Chu : Thomas Haven : Jose Luis Guasch
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TABLE OF CONTENTS
Chapter 1. Introduction and Diagnostic...............................................................................8 1.1. Country Context ..........................................................................................................8 1.2. Recent Developments and Outlook ..............................................................................8 1.3. Small and Medium Enterprise Performance .................................................................9 1.4. Growth and Competitiveness Diagnostics .................................................................. 10
Chapter 2. Electricity ......................................................................................................... 28 2.1. Background............................................................................................................... 28 2.2. Supply ...................................................................................................................... 28 2.3. Demand .................................................................................................................... 31 2.4. Recommendations ..................................................................................................... 35
Chapter 3. Transportation and Logistics ........................................................................... 36 3.1. Motivation and Organization ..................................................................................... 36 3.2. Guatemala Trade Flows ............................................................................................ 37 3.3. Logistics Performance: Problems and Challenges ...................................................... 41 3.4. Trade Logistics Policy Priorities for SMEs ................................................................ 48
Chapter 4. Human Capital ................................................................................................. 53 4.1. Introduction .............................................................................................................. 53 4.2. The Educational System in Guatemala ....................................................................... 53 4.3. Performance Indicators .............................................................................................. 55 4.4. Human Capital and the Needs of SMEs ..................................................................... 59 4.5. Policy Recommendations .......................................................................................... 62
Chapter 5. Innovation ........................................................................................................ 65 5.1. Introduction .............................................................................................................. 65 5.2. How Guatemala Performs.......................................................................................... 65 5.3. What Might be Creating Obstacles to Innovation? ...................................................... 71 5.4. Policies to Address Lack of Innovation ...................................................................... 75
Chapter 6. Access to Finance.............................................................................................. 79 6.1. Introduction .............................................................................................................. 79 6.2. Evolution of the Supply of MSME finance and the Global Financial Crisis................. 79 6.3. Demand for financial services.................................................................................... 86 6.4. Doing Business and Financial Infrastructure .............................................................. 89 6.5. Proposals for strengthening financial access ............................................................... 91
Chapter 7. Business Regulations and Addressing Informality .......................................... 93 7.1. Introduction .............................................................................................................. 93 7.2. Informality ................................................................................................................ 93 7.3. Methods for Addressing Informality .......................................................................... 94 7.4. Business Regulation Reforms .................................................................................... 94
Chapter 8. Prioritizing Rural Investments....................................................................... 105 8.1. Introduction ............................................................................................................ 105 8.2. The Data ................................................................................................................. 106 8.3. Market Accessibility Analysis ................................................................................. 107 8.4. Results .................................................................................................................... 109 8.5. Conclusions ............................................................................................................ 118
Chapter 9. Analysis of Selected Value Chains / Clusters ................................................. 119
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9.1. Introduction ............................................................................................................ 119 9.2. Forestry / Wood Processing ..................................................................................... 119 9.3. Agro-industry.......................................................................................................... 127 9.4. Tourism .................................................................................................................. 130
Annex 1: Human Capital SME Interview Details............................................................... 135 Annex 2: Commercial Bank Lending for Microfinance ..................................................... 142 Annex 3: Doing Business Reform Memo ............................................................................ 143 Annex 4: Prioritizing Rural Investments Methodology ...................................................... 154 Annex 5: Forest-to-Furniture Integrated Value Chain Analysis ........................................ 172 Annex 6: Guatemala’s Fruit and Vegetable Sector ............................................................ 203 Annex 7: Tourism and SMEs .............................................................................................. 222 References ........................................................................................................................... 235
LIST OF FIGURES
Figure 1: Investment Climate Constraint rated as “Major” or “Very severe,” percent of SMEs .. 13 Figure 2: Investment Climate Constraint Cited as Greatest Obstacle to Operation ..................... 14 Figure 3: Percent of Sales Lost due to Crime and Spent on Private Security .............................. 14 Figure 4: Electricity as a Severe Obstacle to Operation, percent of all firms .............................. 15 Figure 5: Doing Business Rank, 2010 ...................................................................................... 16 Figure 6: Cost of Obtaining Construction Permit (% income per capita) ................................... 17 Figure 7: Decision Tree for Growth Diagnostics ...................................................................... 20 Figure 8: Mincer Regression Results ....................................................................................... 22 Figure 9: Installed Capacity and Maximum Demand ................................................................ 29 Figure 10: Coverage per Country ............................................................................................. 29 Figure 11: Peak Demand / Firm Capacity Ratio (%) ................................................................. 31 Figure 12: Peak Demand vs. Supply (MW) .............................................................................. 31 Figure 13: Electricity as a severe obstacle for enterprise operation............................................ 32 Figure 14: Enterprises that suffered outages (%) ...................................................................... 32 Figure 15: Evolution of Residential Prices ............................................................................... 33 Figure 16: Electricity Prices, Residential Sector 2007 (USCents/kWh) ..................................... 33 Figure 17: Number of Days to get Electricity, 2009.................................................................. 34 Figure 18: Logistics indicators comparing OECD and LAC countries....................................... 37 Figure 19: Modal participation in Guatemala’s international trade ............................................ 39 Figure 20: Port freight volume - 2008 ...................................................................................... 40 Figure 21: Major trade circuits in Guatemala ........................................................................... 41 Figure 22: Factors conditioning logistics chain performance .................................................... 42 Figure 23: Average Years of Schooling for Population Aged 25-65 (2005/2007) ...................... 56 Figure 24: Educational Achievement in Guatemala by Age (25-59 years) ................................. 57 Figure 25: Distribution of Educational Level in the Labor Force .............................................. 57 Figure 26: Science Enrollment Ratio (2007) ............................................................................ 58 Figure 27: Technical and Professional Workers as Percentage of the Labor Force ..................... 58 Figure 28: % of Companies that Identified Inadequate Education as a Constraint, 2006 ........... 60 Figure 29: Percentage of Firms Offering Formal Training, 2006 ............................................... 61 Figure 30: Patents Granted to Residents Per Million Labor Force (2002-2007 Average) ........... 66 Figure 31: Scientific Publications / GDP (US$ billions), 2007 .................................................. 66
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Figure 32: Expenditure on R&D as a % of GDP, latest year available ....................................... 67 Figure 33: Researchers in R&D per Million People, latest year available .................................. 67 Figure 34: Predicted and Observed R&D Based on GDP per capita .......................................... 68 Figure 35: Royalty and License Fee Payments as % of GDP, 2007 ........................................... 69 Figure 36: Technology Transfer Indicators—Ranking out of 133 Countries .............................. 69 Figure 37: ISO 9001:2000 Certifications per US$ Billion Industry Value Added, 2006 ............. 69 Figure 38: Innovation Involves an Entire Production System .................................................... 71 Figure 39: Venture Capital Availability and Financing Through Local Equity Markets, 2008/2009 ............................................................................................................................... 74 Figure 40: Evolution of MSME Finance in the Guatemalan Banking Sector ............................. 81 Figure 41: Applications for credit and reasons for not applying (%).......................................... 87 Figure 42: Sources of Financing, 2007 ..................................................................................... 87 Figure 43: ASIES Survey Results ............................................................................................ 89 Figure 44: Accessibility to Markets of 50,000 Inhabitants (in time of access) ......................... 108 Figure 45: Accessibility to Markets of 50,000 Inhabitants (in terms of cost of transportation) . 109 Figure 46: Frontier profits (potential) for rural households in rural Guatemala ........................ 111 Figure 47: Technical efficiency for rural households in Guatemala ......................................... 112 Figure 48: Poverty Map for Guatemala .................................................................................. 112 Figure 49: Combining profit frontiers, efficiency and poverty into a typology of micro-regions ............................................................................................................................................. 113 Figure 50: 7-groups typology ................................................................................................ 114 Figure 51: 7-groups typology and accessibility costs .............................................................. 115 Figure 52: Examples of 4 groups from the typology ........................................................... 117 Figure 53: Forest-to-Furniture Supply Chain, Guatemala....................................................... 122 Figure 54: Value Chain for Natural Forest Timber Extraction, Chimaltenango ....................... 123 Figure 55: Forest-to-Sawmill Value Chain Analysis, Pine Lumber ........................................ 125 Figure 56: Grade Lumber and Non-Grade Lumber Recovery Rates ....................................... 126 Figure 57: Friction surface betweens points A and B .............................................................. 159 Figure 58: Values indicating the difficulty of crossing a “cell” ............................................... 160 Figure 59: Guatemalan Forest Cover..................................................................................... 172 Figure 60: Forest-to-Furniture Supply Chain, Guatemala....................................................... 176 Figure 61: Forest Cover by Type, Guatemala (INAB) ........................................................... 183 Figure 62: Value Chain for Natural Forest Timber Extraction, Chimaltenango ....................... 185 Figure 63: Forest-to-Sawmill Value Chin Analysis, Pine Lumber .......................................... 192 Figure 64: Grade Lumber and Non-Grade Lumber Recovery Rates ....................................... 193 Figure 65: Upholstered Furniture Value Chain Analysis, Local Market, San Juan .................. 197 Figure 66: MDF Door Value Chain Analysis ........................................................................ 199 Figure 67: Local Pine Door Value Chain vs. Imported Chilean Pine Door ............................. 201 Figure 68: Guatemalan FFV Supply Chain Map .................................................................... 211 Figure 69: Tourists (in millions of tourists) ............................................................................ 223 Figure 70: Tourism foreign exchange earnings ....................................................................... 223 Figure 71: Bottlenecks affecting tourism in Guatemala .......................................................... 223 Figure 72: Growth in Number of Tourist Visits in Central America (2008) ............................. 224 Figure 73: WEF Security Ranking (out of 133 countries) ....................................................... 228 Figure 74: Marketing Tools Preferred by Tourism Enterprises in Guatemala .......................... 232
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LIST OF TABLES Table 1: Results from Diagnostics ........................................................................................... 12 Table 2: Summary of Doing Business 2009 and 2010 rankings................................................. 16 Table 3: Starting a Business Indicators .................................................................................... 17 Table 4: Global Competitiveness Index Pillar Rankings (out of 133 countries) ......................... 18 Table 5: Human Capital and Innovation Rankings.................................................................... 18 Table 6: Infrastructure Rankings (out of 133 countries) ............................................................ 22 Table 7: Short-Term Generation Expansion Plan (2009-2014) .................................................. 30 Table 8: Evolution of Guatemala exports and imports ............................................................. 38 Table 9: Logistics Performance Index overall results................................................................ 43 Table 10: Guatemala LPI sub-indexes...................................................................................... 43 Table 11: Enabling Trade Index 2008 results ........................................................................... 44 Table 12: UNCTAD´s Liner Shipping Connectivity Index ....................................................... 44 Table 13: Summary of Guatemala logistics factors problems .................................................... 48 Table 14: Flow of Potential Researchers—Graduates by Scientific Discipline, 2006 ................. 67 Table 15: Financing Sources of Firms (%) ............................................................................... 82 Table 16: Composition of Microfinance Supply ....................................................................... 83 Table 17: Comparison of Leading Latin America MFIs (Outreach and Loan Size) .................... 84 Table 18: Comparing Cooperative Coverage in Central America .............................................. 84 Table 19: Growth in FENACOAC Credit Unions from Dec. 2004 to March 2008..................... 85 Table 20: Supervision in Central America ................................................................................ 86 Table 21: MSME Access to Credit based on the 2006 National Household Survey ................... 88 Table 22: Doing Business Getting Credit Rankings for Central America (2010)........................ 90 Table 23: Guatemala’s Doing Business Performance in 2009 and 2010 reports ......................... 95 Table 24 : Key Features of Selected Regulatory Reform Tools and Approaches ..................... 102 Table 25: Pine Stumpage Price Variations, 2009 ................................................................... 122 Table 26: Pine Stumpage Price Variations, Coban and Chimaltenango, 2009 ......................... 124 Table 27: Commercial bank lending (Microfinance clients) .................................................... 142 Table 28: Commercial bank lending (Microfinance loan portfolio) ......................................... 142 Table 29: Guatemala’s Ease of Doing Business: Ongoing Progress and Suggested Reforms ... 143 Table 30: Frontier estimation ................................................................................................. 162 Table 31: Inefficiency determinants ....................................................................................... 163 Table 32: Summary of Barriers to Competitiveness ............................................................... 172 Table 33: Guatemalan Forestry Sector Profile ....................................................................... 174 Table 34: INAB Profile ........................................................................................................ 178 Table 35: PINFOR Approval Process ................................................................................... 179 Table 36: PINFOR Budget, 2009 .......................................................................................... 180 Table 37: Forestry Service Prices, Guatemala 2009 ............................................................... 180 Table 38: Key Forest Sector Associations, Wood Processing Sector ...................................... 181 Table 39: Timber Product Class Comparison, Guatemala and Southeast USA........................ 183 Table 40: Pine Stumpage Price Variations, 2009 ................................................................... 184 Table 41: Pine Stumpage Price Variations, Coban and Chimaltenango, 2009 ......................... 186 Table 42: Plantation Management Practices and Tree/Lumber Quality .................................. 188 Table 43: Pruning and Weeding Cost, Pine Plantations, Coban .............................................. 189 Table 44: Sample Profit Margins, Pine Plantations, Coban .................................................... 189
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Table 45: Road Construction Costs, Private Plantation, Coban .............................................. 194 Table 46: Comparative Electricity Tariffs ............................................................................. 195 Table 47: Public Electricity Grid Connection Costs, El Rancho ............................................. 196 Table 48: Comparison of Unit Profitability, Furniture Firm, San Juan.................................... 198 Table 49: Guatemala’s Main Agricultural Exports (2007) ..................................................... 203 Table 50: US Fresh Fruit and Vegetable Imports .................................................................... 208 Table 51: Average Import Prices of Selected Fresh Produce into the US ................................ 208 Table 52: Import volumes of Selected Fresh Produce into the US .......................................... 209 Table 53: Income Distribution along the French Bean Chain Cuatro Pinos –Costco ............... 212 Table 54: Foreign Exchange Earnings.................................................................................... 223
LIST OF BOXES
Box 1: Logistics centers: basic concept and expected benefits .................................................. 52 Box 2: Lessons and Recommendations on Training Reforms................................................... 64 Box 3: The Mexican Regulatory Experience .......................................................................... 103 Box 4: Community Tourism in Bolivia .................................................................................. 131 Box 5: Case Study - San Juan la Laguna ............................................................................... 225 Box 6: Belize Tourism Security Task Force ........................................................................... 229
ACKNOWLEDGEMENTS
This report was prepared by a team led by Thomas Haven (TTL) and José Luis Guasch (Co-TTL). The principal chapter authors were Sunita Varada (diagnostic and business regulations); Thomas Haven (innovation); José Barbero (transportation and logistics); Jorge Lavarreda (human capital); Ilias Skamnelos (SME finance); Michael Goldberg (microfinance); Monica Rivero (tourism); Pierre Werbrouck (agro-industry); Global Development Solutions (forestry/ wood processing); and Eduardo Maruyama, Maximo Torero, and Alberto Pasco Font (prioritizing rural investments). Valuable contributions were also made by Leyla Castillo (human capital); Jaume Rivera Jornet (energy and others); Juan Miguel Cayo (energy); Javier Luque and Ana Maria Oviedo (human capital); Jane Hwang (finance); Eneida Fernandes (tourism); and Maribel Elias, Camila Alva and Ledda Macera (prioritizing rural investments). The team benefitted from the guidance of Lily Chu and J. Humberto Lopez and peer reviewers Vincent Palmade, David Gould, and Paulo Correa. Note: Volume 1 contains the Executive Summary of this report.
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CHAPTER 1. INTRODUCTION AND DIAGNOSTIC
1.1. COUNTRY CONTEXT1
1.1. With a multiethnic population of about 13 million and a per-capita GNI of US$2,610, Guatemala is the largest economy in Central America. Since the signing of the Peace Accords in 1996 that ended the 36-year civil war, Guatemala has made significant progress in undergoing the necessary reforms to lead to broad-based growth. Public institutions are stronger and poverty rates have declined. In the last decade, the economy has become more diverse, moving away from its traditional agricultural base. Increased access to foreign markets through regional trade agreements, particularly DR-CAFTA, has assisted economic diversification. Reforms in education and health have also contributed to declines in overall poverty rates.
1.2. Economic growth has been relatively stable compared to the rest of Latin America. Since 1960, average per capita real GDP growth in Guatemala has averaged about 1.4 percent, nearly the same as Latin America’s rate as a whole, but with lower volatility than the rest of the region. Much of Guatemala’s relative stability can be attributed to prudent macroeconomic po licies that have kept inflation and public debt manageable, while avoiding fiscal imbalances that plague much of the region.
1.3. Nonetheless, poverty rates and levels of inequality remain high and social indicators are relatively low. Overall poverty rates have declined from 56 percent in 2000 to 51 percent in 2006, but this rate is higher than many countries of a similar income level. Extreme poverty is high at about 16 percent and concentrated in rural and indigenous regions. The Gini coefficient in Guatemala was estimated at 55.1 in 2007, which is only 0.6 points lower than in 1998 (CIA World Factbook 2009). According to the 2007 UNDP Human Development Report, Guatemala ranks among the bottom four positions in Latin America in the overall human development index, which includes measures of infant mortality, maternal mortality, adult illiteracy, and secondary enrollment.
1.2. RECENT DEVELOPMENTS AND OUTLOOK2
1.4. The administration of President Alvaro Colom entered office in early 2008 committed to addressing growth and poverty levels. This administration has designed an ambitious plan to lead to this growth, including expanding government fiscal resources for priority spending, increasing transparency, and enhancing trade with neighboring countries. The government has made some progress in advancing its plan but several key binding constraints remain.
1.5. The fiscal deficit and public debt to GDP are among the lowest in Latin America. From 2004 to 2007, the Central Government’s deficit averaged 1.7 percent of GDP . However, due to the current economic crisis, the fiscal deficit is expected to grow to 3.6 percent in 2010. To maintain Guatemala’s long-run fiscal sustainability and expand programs to address social needs, fiscal resources will need to grow. The Government is attempting to enact fiscal reform to promote prudent fiscal management to cover additional planned spending.
1 World Bank 2008a 2 Economist Intelligence Unit, December 2009.
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1.6. Although higher, growth faltered in the years after the peace accords, but began to pick up in 2003 and peaked at 6.3 percent in 2007. The current economic slowdown has damaged recent growth rates—growth fell to approximately 4 percent in 2008 and GDP contracted about 1 percent in 2009. The recent economic and financial crisis emphasizes the fact that global conditions will not always be conducive to growth, highlighting the importance of improving competitiveness and increasing productivity.
1.3. SMALL AND MEDIUM ENTERPRISE PERFORMANCE
1.7. In most of Latin America, small, and medium enterprises (SMEs) dominate the economy and the private sector. SMEs are also major providers of jobs in these economies because they frequently operate in labor-intensive sectors. Improving the performance of SMEs and increasing their participation in local and global markets can have enormous and positive economy-wide consequences. For example, the opportunity to increase productivity and access new technology, among other improvements, can increase employment, raise incomes, and reduce poverty. Also, SMEs can act as breeding grounds for entrepreneurial skills and innovative ideas. Furthermore, experiences elsewhere (in Chile for example3) show that interventions can be effective in stimulating growth and productivity of SMEs, justifying a policy focus on SMEs.
1.8. However, several challenges prevent greater SME participation in local and global markets. Although they make up the majority of firms and they frequently work in labor-intensive sectors, SMEs are often not net job creators.4 Moreover, SMEs are less productive and less able to compete in external markets than larger firms. This is in part because SMEs often fail and the job turnover rate is high (Biggs 2002). The reasons for this poor performance are multiple but include: (1) Lack of information on market opportunities, particularly in export markets since information is expensive; (2) Difficulty accessing finance since banks lack information on SME creditworthiness; (3) High risk of lending (real or perceived) to SMEs leads to high interest rates; (4) Difficulty of obtaining quality inputs at competitive prices; (5) Fail ure to adopt modern technologies and meet the quality standards of external markets; and (6) Poor management skills and workplace practices. Problems for SMEs are usually associated with the high fixed costs of gaining information, complying with regulations, and acquiring skills. The underdeveloped nature of many service markets often leads to informal practices, such as borrowing money from friends or accessing information from social networks (Hallberg and Konoshi 2003).
1.9. In Guatemala, the contribution of the SME sector to GDP and employment are substantial. The Guatemala Federation of Small and Medium Enterprises estimates that SMEs contribute 40 percent of GDP and 85 percent of employment (2009). The State of the Region report estimates that 80 percent of employment is in firms with less than 20 employees (2008). Improving SME performance both through economy-wide interventions and through SME specific programs should lead to significant improvements in Guatemala’s overall competitiveness.
3 The Production Development Corporation (CORFO) in Chile is an oft-cited model of SME assistance. 4 A study by Davis, Haltiwanger, and Schuh used US data over the 1970s and 1980s and found that small firms are disproportionate job creators, but are also major destroyers of jobs, given their instability and higher observed failure rates.
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1.10. Definitions of what constitutes a micro, small, or medium enterprise vary widely, even within Guatemala. For the purposes of this study, we will be using the Guatemalan Ministry of Economy definition – micro is 1-10 employees, small is 11-25 employees, and medium is 26-60 employees. Since the definition of a microenterprise is more encompassing than in many countries of similar income and therefore the majority of firms in Guatemala fall in to this category, this study incorporates their data as well. Given the high number of informal firms, whenever possible, the study also includes their data.
1.4. GROWTH AND COMPETITIVENESS DIAGNOSTICS
1.11. Work to improve country competitiveness is increasingly recognized as a key pillar to promote economic growth and poverty alleviation in developing countries. A dynamic private sector, in which firms compete and seek to improve productivity by investing in human and physical capital as well as technological capacity, is the main propellant of sustained economic growth, a sine qua non condition to fight poverty and improve living standards. A sound business environment is essential to establish the appropriate incentives for firms to be more productive, invest, and create jobs.
1.12. This section uses a variety of tools to assess the competitiveness of Guatemala’s economy and diagnose potential binding constraints. The focus is on microeconomic constraints and reforms, where, according to the recent report from the Commission on Growth and Development, most of the challenges for sustainable growth world-wide are concentrated.5 There is a strong focus on SME performance, given that the vast majority of firms in Guatemala are SMEs and their contribution to GDP and employment is significant. This section uses surveys , benchmarking data, and other diagnostics to identify competitiveness priorities and bottlenecks. The combined analyses serve as the foundation for the priority areas selected for detailed coverage in the following chapters: logistics, energy, human capital, innovation, business regulation, and access to finance. A transversal issue not captured by these areas is the integration of SMEs into value chains. Therefore, the study includes detailed analyses of indicative sectors, including agribusiness, wood processing / forestry, and tourism. These sectoral analyses provide sector-specific recommendations and highlight how the constraints described in the other chapters have tangible affects on specific sectors.
1.13. To the extent possible, indicators for Guatemala are benchmarked against Bolivia, Chile, Costa Rica, El Salvador, Honduras, and Panama throughout the report. These countries are of a similar size, level of development, are geographically close, or have some of these elements but a slightly higher level of development and can serve as targets or role models. In addition, outside of the region, Guatemala is compared against Sri Lanka because of its manufacturing-led growth and Mauritius with its trade and tourism-based growth.
5 “The growth of GDP may be measured up in the macroeconomic treetops, but all the action is in the microeconomic undergrowth, where new limbs sprout, and dead wood is cleared away.” Most growth -oriented policies and reforms are designed to foster this microeconomics of creation and dest ruction, and, crucially, to protect people who are adversely affected by these dynamics. Commission on Growth and Development (2008).
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Getting the priorities right
1.14. How to assess binding constraints in order to devise a strategy of reforms is a constant challenge for policy makers. As discussed by Kikeri, et al. (2006) the process of identifying binding constraints has become much more context-specific, and one-size-fits-all approaches are today much less relevant (although some basic pre-conditions, such as prudent fiscal policies, for instance, remain valid).
1.15. There is a growing body of analytical tools and information to identify priorities with greater precision and in a way that helps deliver results and build momentum for more reform. These tools include:
� Surveys of investors; � Detailed benchmarking data; and � The growth diagnostic methodology, based on market information about prices and return
on investments (Hausmann, Rodrik, and Velasco 2005).
1.16. Business surveys are a direct way of identifying competitiveness constraints. The World Bank Enterprise Surveys include a standard question on what are the main obstacles for growth of firms.6 Business executives are asked to evaluate the severity of some twenty potential obstacles to growth of their businesses. These results can be compared across more than 100 countries and can be compared over time as well. This approach provides valuable information on the priorities that entrepreneurs would select if faced with the task of designing policies to improve the investment climate.
1.17. There are three main limitations to this approach: first, perceptions of the entrepreneurs are volatile and may be biased by recent events reported in the media, and they may also reflect their specific cultural and socioeconomic background. For instance, managers of firms that concentrate on local as opposed to national or international markets may lack the necessary benchmarks to judge the severity of the problems existing in their cities or provinces, and compare them to national or international best practices. Second, the questions tend to focus on obstacles and problems, leaving aside factors that enable growth, such as technology and innovation. Third, they tend to overestimate the impact of factors whose costs are borne privately and benefits for the economy are more diffused – taxes are perhaps the best example.7
1.18. Benchmarking exercises provide a useful and straightforward way to address competitiveness issues. Examples of these exercises are provided by the World Bank Group’s Doing Business indicators, which benchmark and rank the cost and quality of business regulations for key cross-cutting investment climate issues. The Global Competitiveness Index, published annually by the World Economic Forum is another good example of benchmarking.
6 Enterprise Surveys Data are available for more than 100,000 firms in 118 countries. Data cover business perceptions and dozens of indicators on the quality of the business environment. 7 Another oft-cited shortcoming is the fact that these surveys do not cover firms that have not entered the market. This limits their effectiveness to identify barriers to competition. This can be in principle, addressed by the survey sample design.
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1.19. The main shortcoming with this approach is that it is not enough to know a country’s ranking. Rankings are no substitute to a careful evaluation of impact and may be misleading sometimes, as they tend to give equal importance to factors that may influence quite differently firm’s performance and growth. For this reason, benchmarking exercises should be seen as complementary to other approaches that try to assess the relative importance of reform s to the selected outcome, be it growth or competitiveness.
1.20. The growth diagnostic approach (Hausmann, Rodrik and Velasco, 2005) attempts to identify binding constraints to growth by examining a limited number of possible symptoms. For example, high real interest rates could indicate that access to finance is a key constraint, while low returns to education suggest that aggregate skills are not, at least for now. According to this methodology, emerging economies would require a detailed and individualized scrutiny in order to reach a complete diagnostic.
1.21. As discussed by Aghion and Durlauf (2007), this methodology also faces some difficulties. First, equilibrium prices do not necessarily reflect a constraint on growth. Consider first interest rates. A low interest rate does not mean that the local credit market is not constrained. In fact, low interest rates may reflect a high degree of credit rationing. The same happens with returns on education.
1.22. In the next section, using the several sources of information on the basis of the tools discussed, we will attempt to identify reform priorities in Guatemala. Evaluating all of the aforementioned instruments provides for a more nuanced overall picture of the country context and constraints – both by finding recurring themes and by examining problems from a variety of perspectives.
Assessing the binding constraints for Guatemala
1.23. We start by looking at what business surveys tell us, we then move to benchmarking exercises, and we end with a heuristic attempt to use a growth diagnostic exercise for the country. A summary of the results of the different analyses and their specific sources are listed in Table 1. Most of these challenges are discussed individually in the chapters that follow.
Table 1: Results from Diagnostics Analytical Tool Source Priority Areas
Surveys Enterprise Surveys Informal practices, crime, political and macroeconomic stability, infrastructure (electricity), corruption
Benchmarking
Doing Business Starting a business, dealing with construction permits, trading across borders (logistics), protecting investors
Global Competitiveness
Report
Institutions, infrastructure, macroeconomic stability, education, finance, innovation
Growth Diagnostic Hausmann/Rodrick/ Velasco Methodology
Human capital, innovation, micro risks (property rights, taxes, etc.)
Business Surveys 1.24. One of the most comprehensive and recent surveys in Guatemala was the Enterprise Survey, carried out in 2006 covering 500 firms. For the purposes of this study, which is only
13
concerned with SMEs, the data was filtered to include firms with 60 or fewer formal employees. SMEs surveyed identified corruption, political instability, and electricity as major obstacles to the operations of their businesses. A five-point scale was used, ranging from “extremely severe” to “not important”. Figure 1 displays the results from firms that indicated which constraints were “major” or “very severe.”
Figure 1: Investment Climate Constraint rated as “Major” or “Very severe,” percent of SMEs
6.711.512.313.4
20.720.9
22.526.026.5
35.937.337.8
44.047.549.1
59.8
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0
Labor RegulationsCourts
CustomsLicensing and permits
Land AccessTransport
FinanceInadequately educated workforce
Tax AdministrationTaxes
Informal competitorsCrime
Macroeconomic instabilityElectricity
Political instabilityCorruption
Source: Guatemala Enterprise Survey 2006 1.25. When firms were asked to name their principle obstacle to operation, the resul ts were slightly different. The most cited response from small and medium firms was the practices of competitors in the informal sector, followed by crime and insecurity and then macroeconomic instability (Figure 2).
1.26. Based on these, the top obstacles to operation of SMEs appear to be practices of competitors in the informal sector, crime, corruption, political instability, macroeconomic instability, and electricity. Political and macroeconomic instability are often symptoms of underlying governance, microeconomic, or external problems. Informal competition, crime, and corruption are all associated with governance issues.
1.27. When SMEs were asked what their greatest obstacle to operation was, the most common response was the practices of competitors in the informal sector. Enterprise surveys only interview formal firms. Informal firms generally benefit from avoiding tax and social security burdens. As the Investment Climate Assessment (ICA) of 2008 notes, high levels of informality even among formal firms exists, as many do not pay their full tax debt and do not report all employees. The ICA identifies heavy and complex tax and social security burdens as major reasons for informality.
14
Figure 2: Investment Climate Constraint Cited as Greatest Obstacle to Operation (% of SMEs)
1.11.11.61.91.91.9
2.73.2
4.85.1
7.88.0
10.510.7
15.622.3
0.0 5.0 10.0 15.0 20.0 25.0
CourtsCustoms and trade regulations
Tax administrationAccess to Land
Labor regulationsTransport
Business Licensing and PermitsTax rates
Inadequately educated workforceAccess to Finance
ElectricityCorruption
Political instabilityMacroeconomic instability
CrimePractices of competitors in informal …
Source: Guatemala Enterprise Survey 2006 1.28. Almost 16 percent of SMEs cited crime and insecurity as their top obstacle to operating their business. In contrast, less than 10 percent of all firms (all sizes) cited this in all of Latin America and the Caribbean. However, crime is less an obstacle to business than it was during the 2003 Enterprise Survey – about 80 percent of all firms cited it as a major or severe obstacle to business then, while about 37 percent did in 2006. Also in 2003, more than half of all firms interviewed stated they had been a victim of a crime and incurred business losses, while only 36 percent of all firms did so in 2006.
1.29. In comparison with other countries in the region, the costs of crime affect Guatemalan firms more severely than in most other countries. On average a typical Guatemalan firm lost 2 percent in annual sales due to the costs of crime. In contrast, the cost for firms in Panama was only 0.4 percent of annual sales. When considering both preventative measures and losses due to theft, the costs of crime in Guatemala were the highest in Central America (Figure 3).
Figure 3: Percent of Sales Lost due to Crime and Spent on Private Security
0
1
2
3
4
5
Guatemala El Salvador Nicaragua Honduras Panama Costa Rica
Source: Guatemala Enterprise Survey, 2006.
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1.30. Almost 60 percent of SMEs identified corruption as a major or severe obstacle to doing business in 2006. Still the costs and cited incidents of corruption declined between 2003 and 2006. In 2003, 33 percent of firms reported paying bribes to get a government contract. In 2006, that number dropped to 15 percent. Over half the firms cited paying a bribe “to get things done” in 2003 while only 12 percent stated this in 2006. Reported rates of incidence of bribery are similar to other countries in Central America.
1.31. Electricity is one of the few factors whose perception worsened between 2003 and 2006. In 2006, 47 percent of all firms considered electricity to be a serious obstacle, while only 27 percent thought so in 2003. The quality of electricity services actually appears to have improved between 2003 and 2006, with 73 percent of firms citing a power outage in 2003 and only 34 percent citing this in 2006. However, for firms that did experience a power outage, the frequency grew from 1.5 times per month to five times a month. Also, the losses due to power outages grew from 3.7 to 6.1 percent of annual sales between 2003 and 2006.
Figure 4: Electricity as a Severe Obstacle to Operation, percent of all firms
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37
42
45
47
60
0 20 40 60 80
Costa Rica
Honduras
El Salvador
Panama
Guatemala
Nicaragua
Source: Guatemala Enterprise Survey, 2006
Benchmarking
1.32. The World Bank’s Doing Business rankings identified shortcomings for Guatemala’s business regulation, a key element of its competitiveness. Of 183 economies included, Guatemala ranked 110 in the Doing Business 2010 report, while in comparison, El Salvador ranked 84 and Chile ranked 49. As seen in Figure 5, its ranking is worse than the average for Latin America and better than only three of its comparator countries – Bolivia, Costa Rica, and Honduras.
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Figure 5: Doing Business Rank, 2010
Source: World Bank Doing Business 2010
1.33. Guatemala’s overall ranking improved seven places (from 117 to 110) between the Doing Business 2009 and 2010 reports. The main impetus for the improvement in its ranking was improvements in the underlying indicators for getting credit and paying taxes. However, the country’s ranking in several key categories dropped over the last year and it continues to receive low ranks in other categories (See Table 2). Among the processes where Guatemala ranked poorly overall were starting a business (156), dealing with construction permits (150), protecting investors (132), employing workers (127), and trading across borders (119). Particularly concerning are its poor performance in starting a business and dealing with construction permits.
Table 2: Summary of Doing Business 2009 and 2010 rankings
2009 2010 Overall Ranking 117 110 1. Starting a business 147 156 2. Dealing with construction permits 163 150 3. Employing workers 126 1274. Protecting Investors 127 132 5. Paying Taxes 133 108 6. Enforcing Contracts 106 103 7. Registering Property 25 24 8. Getting Credit 27 4 9. Trading Across Borders 119 119 10. Closing a Business 93 93
Note: Ranks are out of 183 countries. 2009 numbers are updated to include the 2 new countries for 2010 and changes in the methodology. Source: World Bank (2010), Doing Business database
1.34. Despite making some important reforms in recent years to simplify procedures related to Starting a Business, lack of support for said efforts has meant the reforms have not been sustainable. Guatemala’s rank in this indicator dropped from 110 to 117 between the 2009 and 2010 reports. Guatemala’s statistics for starting a business are close to regional averages on number of procedures and cost, but the duration is much shorter (29 versus 62 days) and the paid-in minimum capital is much higher (23.5 versus 3 percent). Guatemala’s statistics are
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relatively far behind OECD numbers in all four categories (See Table 3). Compared to similar economies, the cost in Guatemala is higher in every country except Bolivia and Honduras. For the minimum capital requirement, Guatemala’s statistics are worse than all comparator countries.
Table 3: Starting a Business Indicators Indicator Guatemala Region OECD
Procedures (number) 11 9 5.7 Duration (days) 29 62 13 Cost (% GNI per capita) 45.4 37 4.7 Paid in Min. Capital (% of GNI per capita) 23.5 3 15.5
Source: World Bank Doing Business 2010 1.35. In the Doing Business Dealing with Construction Permits indicator, Guatemala’s rank improved 13 places between the 2009 and 2010 reports. However, its rank is worse than all its comparator countries, except Sri Lanka. Guatemala has made progress in recent years in reducing the number of days and cost of obtaining permits, but the cost is still prohibitive when compared against similar economies (Figure 8).
Figure 6: Cost of Obtaining Construction Permit (% income per capita)
Source: World Bank Doing Business 2010 1.36. It is worth noting Guatemala’s performance in the Getting Credit indicator is superior to most other countries, with a rank of 4. Between the 2009 and 2010 report, Guatemala enacted several reforms. The credit information system was strengthened with the adoption of a decree on access to public information that guarantees the right of borrowers to inspect their own data in any public institution. Access to credit and the regime for secured transactions were strengthened with a new collateral registry for movable assets that applies to all such assets and all types of creditors and debtors, and is searchable by debtor name.
1.37. Guatemala’s ranking in the Global Competitiveness Report has improved modestly over the last few years. Guatemala gained 4 places between the 2008-2009 report and the 2009-2010 report. However, its current ranking of 80 out of 134 economies is still low and the report classifies Guatemala as being in transition between a factor-driven economy to an efficiency-driven one. The report identifies the main bottlenecks as institutions, infrastructure, macroeconomic stability, education, access to finance, and innovation. Using hard data and
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business executive opinions, the report ranks Guatemala in 12 pillars that are important to competitiveness. Table 4 shows Guatemala’s rankings.
Table 4: Global Competitiveness Index Pillar Rankings (out of 133 countries) Global Competitiveness Ranking 80 Basic Requirements 82 Efficiency enhancers 81 Institutions 108 Higher education and training 101 Infrastructure 68 Goods market efficiency 52 Macroeconomic stability 88 Labor market efficiency 88 Health and primary education 95 Financial market sophistication 67 Innovation and sophistication factors 63 Technological readiness 70 Business sophistication 47 Market size 71 Innovation 77
Source: Global Competitiveness Report, 2009-2010
1.38. Guatemala ranks in the lower half of all pillars, except goods market efficiency and business sophistication. Each pillar’s ranking is determined by a set of indicators and the Global Competitiveness Report determines whether each indicator is a competitive disadvantage or advantage. Guatemala had the most competitive disadvantages in institutions, education and training, innovation, infrastructure, and financial market sophistication.
1.39. Within institutions, which encompasses crime and corruption, the worst performing indicators were on property rights, intellectual property protection, diversion of public funds, public trust of politicians, judicial independence, favoritism in decisions of government officials, wastefulness of government spending, business costs of crime and violence, and reliability of police services. Out of 133 economies, Guatemala ranked 132 in the business costs of crime and violence and 126 in the reliability of police services.
1.40. Guatemala displayed competitive disadvantages in factors that drive product and export offerings – human capital and innovative capacity. As seen in Table 5, when evaluated against its comparator countries that are considered more competitive, Guatemala ranks worse in almost all indicators that determine human capital and innovation – quality of higher education system, quality of math and science, quality of scientific research institutions, and availability of scientists and engineers.
Table 5: Human Capital and Innovation Rankings
Country Quality of higher education system
Quality of math & science education
Quality of scientific research institutions
Availability of scientists and
engineers Guatemala 125 126 96 86 Costa Rica 26 55 30 29 Chile 107 116 57 23 Mauritius 51 65 85 107 Sri Lanka 41 44 45 44
Note: Ranking out of 133 economies Source: Global Competitiveness Report (2009-2010), Executive Opinion Survey
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1.41. Other measures in which Guatemala displays a competitive disadvantage are within the financial markets sophistication measure, including ease of access to loans, venture capital availability, and financing through local equity markets.
Growth Diagnostic
1.42. The growth diagnostic approach developed by Hausmann, Rodrik, and Velasco (2005) proposes that reform policies that focus on one or two binding constraints are more effective at improving an economy’s performance than completing a laundry list of reforms to address all of a country’s woes. Historically the blanket approach of reform has had mixed success and this approach theorizes that a variety of reforms can interact poorly and create unintended distortions. Therefore, the authors proposed a diagnostic for identifying the largest obstacles, which in turn will help formulate more effective reform. The diagnostic framework they developed is based on the theory that income is a function of savings and investment effort, appropriability and productivity.
1.43. The growth diagnostic approach is a useful tool for identifying major distortions in an economy. Using this framework as a guideline, the analysis that follows finds that low human capital, information externalities hampering “self discovery”, and micro risks are the major obstacles to growth in Guatemala. These three constraints are not the only areas in need of improvement, but improvements to these categories could yield the greatest returns to growth. The decision tree on the next page illustrates the distortions to consider when identifying the binding constraints and highlights the results (in boldface text) for Guatemala.
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1.44. Return on capital is a function of several factors including: savings, human capital, and infrastructure. Defects of each factor are detected through specific symptoms evident in the economy.
Savings 1.45. High savings rates are expected to facilitate the accumulation of assets and therefore contribute to a higher level of income. If domestic savings are low, we would assume there would be high returns to this scarce resource (Penn World Tables 2009). In Guatemala, between 1980 and 2007, the average savings rate was 10.8 percent, which is slightly below the average for its comparator countries of 13 percent. Also because savings are relatively low, we would expect to see a high foreign debt or a high current account deficit, since the country should be using foreign savings to finance investment and compensate for the low domestic savings. However, both of these measures are relatively low compared to other countries in the region; external foreign debt was about 16.5 percent of GDP in 2007 and the current account deficit in 2007 was estimated at 4.4 percent of GDP (Economist Intelligence Unit Country Profile). Similarly, we should observe high interest rates offered on deposits to encourage domestic savings. Over the last few years, nominal deposit interest rates have grown but are not very high. In 2007, they were 4.7 percent, 5.1 percent in 2008, and 5.6 percent in October 2009 (IMF 2009). These factors suggest that Guatemala is not savings constrained and has not depleted its capacity to borrow abroad.
Human Capital 1.46. Similarly, if the lack of human capital is a major binding constraint preventing growth, we should observe a high return to educational investment. A Mincer regression (Figure 8) can determine income returns to education. Guatemala’s returns to primary education are lower than its comparator countries. The average regional return to secondary education was 47 percent and 113 percent for tertiary education. Guatemala’s return for secondary education is 73 percent which is considerably higher than the regional average. Its return for tertiary education is 120 percent, which is slightly higher than the regional average. The higher returns for these levels of education indicate that there is a scarcity of highly educated labor. The implication is that a human capital constraint, particularly for higher education, could hamper further growth.
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Figure 8: Mincer Regression Results
27% 26% 15% 11% 7%25% 16%
34% 26% 26%38%50% 46%
73%
40%
75%
39% 37% 36% 33%
98%
129% 132%120% 129%
153%
98% 105%
62%
108%
% In
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se i
n H
ourl
y S
alar
y
Primary Complete Secondary Complete Tertiary Complete
Source: SEDLAC 2008 Infrastructure 1.47. Another complementary factor of production that can hurt returns to investment is poor infrastructure. Poor infrastructure associated with roads, ports, electricity, and telecommunications are particularly damaging to firms. When compared against similar but more competitive countries (Table 6), Guatemala’s rankings on infrastructure indicators are comparable (with the exception of Chile’s). Although there is vast room for improvement, the rankings suggest that infrastructure may not be the most binding constraint to competitiveness.
Table 6: Infrastructure Rankings (out of 133 countries)
Overall infrastructure Quality of roads Quality of ports Quality of electricity supply
Guatemala 59 55 59 65 Costa Rica 85 107 128 40 Chile 23 15 27 37 Mauritius 53 51 60 59 Sri Lanka 63 60 43 72 Source: Global Competitiveness Report 2009-2010
1.48. Besides savings, other factors that reduce the fruits of investment can inhibit investment efforts. The factors Hausmann, Rodrick, and Velasco cite that reduce appropriability are high taxation rates, macroeconomic instability, poorly defined property rights, and political stability. Market failures, such as information externalities, can also deter investment, particularly in innovation.
Government Failures 1.49. Guatemala’s tax take is among the lowest in the region, at about 12 percent of GDP. The Government has avoided imposing extraordinary tax burdens on firms to encourage foreign investment. Businesses can choose between paying a 31 percent tax on profits or 5 percent of gross revenues. Firms which opt for the 31 percent tax are subject to an additional 1 percent solidarity tax (Economist Intelligence Unit Country Finance 2008). The 5 percent option is primarily for SMEs, whose annual sales are less than Q.60,000 (SAT, 2009). The current rates
23
are comparable to regional standards. High taxation does not seem to be an impediment to private investment.
1.50. Macroeconomic instability discourages businesses from making productive investments for fear that the country’s path could destroy potential returns. The 2009-10 Global Competitiveness Report ranked Guatemala 88th out of 133 economies in terms of macroeconomic stability. The main reasons behind this low ranking are its low national savings rate, high inflation, and large interest rate spread. Besides these impediments to macroeconomic stability, the low tax collection rate hurts public financing. Successive governments have been unable to increase intake of taxes and evasion is rampant. Without adequate fiscal space, the Government is unable to increase public savings or social spending, which restricts growth potential. However, Guatemala has one of the lowest government deficit to GDP ratios in the region, averaging only 1.7 percent between 2004 and 2007, meaning the macroeconomic environment is not likely the major binding constraint.
1.51. If citizens are concerned about contract enforcement and property rights, they will be unwilling to engage in much productive investment for fear of appropriability. In terms of economic freedom, the Heritage Foundation ranked Guatemala 87th out of 183 in 2009 behind comparator countries Chile, El Salvador, Mauritius, and Panama. On property rights, the Global Competitiveness Report ranked Guatemala at 92 and identified this as a competitive disadvantage. Guatemala ranks poorly on intellectual property protection (115), diversion of public funds (107), judicial independence (100), and favoritism in decisions of government officials (100). The efficiency of the legal framework in settling disputes and in challenging regulations were also poorly ranked. Given the high numbers of informal firms, contract enforcement becomes especially difficult. Concerns are high about appropriability from poor contract enforcement and property rights in Guatemala.
1.52. Crime, security, corruption, and political instability are also important concerns. In the Global Competitiveness Report, 23.4 percent of entrepreneurs listed crime and theft as the number one obstacle for doing business. Another 16 percent cited corruption and 7 specifically cited political instability. Political instability was also considered a major obstacle in the World Bank enterprise surveys. According to the World Bank’s governance indicators of 2008, Guatemala’s control of corruption is better than only about 28 percent of the countries in the sample. Governance issues related to crime, security, corruption, and political instability are likely a major constraint to growth.
Market Failures: Innovation 1.53. Guatemala’s suboptimal investment in innovation and technology can partially be explained by information externality market failures. Since entrepreneurs bear the full cost of failure of an innovation investment, but only receive a portion of the gains, they are often unwilling to engage in the process of “self-discovery.”
1.54. The Global Competitiveness Report 2009-10 classifies Guatemala as in transition from a factor driven economy to an efficiency driven one. The third stage of development is the innovation-driven of which Guatemala is currently not even approaching. As stated above, Guatemala ranks poorly on indicators related to innovative capacity – quality of scientific research institutions and availability of scientists and engineers (See Table 5).
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Access to Finance 1.55. Inadequate access to finance can limit firms’ ability to invest in new products or processes – important factors for growth and competitiveness. Hausmann, Rodrick, and Velasco identify high interest rates as a symptom indicating access to finance is a constraint. As in many other countries, interest rates for smaller loans are much higher in Guatemala than for larger loans, with an average of 27 percent for loans below 100 000 Quetzales compared to 9 percent for large loans of 10 million Quetzales or more (Guatemalan Superintendence of Banks 2010). Overall, the average interest rate spread is approximately 8.3 percentage points, ranking Guatemala 95th in the Global Competitiveness Report and puts Guatemala behind Chile, Panama, El Salvador, and other countries in the region.
1.56. Executive surveys also indicate access to finance to be a major obstacle for firms. When asked what their greatest obstacle to doing business was, 9.4 percent of business executives interviewed for the Global Competitiveness Report said access to finance. According to the Enterprise Survey of 2006, about 23 percent of SMEs cited access to finance as a major or severe obstacle to operating their business. However, only about 5 percent of SMEs listed this as their greatest constraint to operating a business. At the time of the survey, only about 35 percent of the SMEs had a loan from a financial institution. Almost three-quarters of those that did not apply for a loan in the preceding year stated that the main reason was because they did not have a need for one.
1.57. In summary, interest rates are considered relatively high in Guatemala, especially for smaller firms, and some firms cite access to finance as a major obstacle. On the other hand, most firms indicate that they have sufficient opportunity to apply for loans and Guatemala’s ranking on the Doing Business Getting Credit indicator is among the best in the world, with a ranking of four.
Diagnostics concluding remarks
1.58. The diagnostic instruments conclude a wide variety of areas are in need of reform. If one looks at the recurring themes or those that were more firmly emphasized, the reform areas could be grouped under the categories of infrastructure (logistics and electricity); business regulations and informality; innovation and technology and quality; human capital; and access to finance. Macroeconomic instability and governance indicators, e.g. crime and corruption, also arise as major impediments to growth and SME competitiveness. These issues, although important, will not be addressed directly through the study, as noted below. Among the areas that should be the greatest priorities, the instruments point to addressing weaknesses in innovation, infrastructure, and human capital.
1.59. Since the focus of this study is on SMEs, another critical aspect that does not result directly from the diagnostic instruments, is the importance of integrating SMEs into value chains to increase their productivity. Incorporating SMEs in value chains and clusters broadens their access to markets and can lead to increased productivity through access to better technology, information, credit, and external services. The study therefore examines three indicative sectors—agribusiness, wood processing / forestry, and tourism—to determine what issues are inhibiting the sectors’ growth and how SMEs can be further integrated into the value chains. The
25
analyses also highlight how the cross-cutting issues covered in other chapters are relevant to the value chains, as well as specific reform areas.
1.60. Another critical aspect that does not result directly from the diagnostic instruments is the importance of developing the rural economy. In Guatemala, about 50 percent of the population live and work in rural areas (CIA World Factbook). Although Government interventions are often focused on rural areas, poverty, malnutrition, and illiteracy persist. To help policy-makers design effective rural interventions, the study employs a mapping technology that divides the country into a typology of focalized micro-regions. The resulting maps could assist the Government in prioritizing investments in rural productivity improvement, market access, and poverty reduction.
1.61. Guatemala ranks poorly on measures related to innovation in the Global Competitiveness Report and the growth diagnostic confirmed that greater investment in this area would aid growth. The growth diagnostic, using the predicted value of discoveries based on GDP, found that Guatemala was an underperformer in developing new products. If Guatemala hopes to compete with economies with similar socio-economic characteristics, expanding its capacity for innovation is crucial.
1.62. Particularly for pushing innovation and technological change, improving human capital is important. The Global Competitiveness Report ranked Guatemala poorly on education measures, specifically those related to higher and technical education. The growth diagnostic also found that returns to higher education were greater than regional averages, indicating that a higher educated workforce is a scarce resource and investment should target the growth of this segment.
1.63. Within infrastructure, electricity and transportation/logistics stand out as major binding constraints to competitiveness. Both hard data from the Global Competitiveness Report and opinions from business executives in the Enterprise Surveys highlighted problems in infrastructure. In the Enterprise Surveys, electricity stood out as one of the few factors important for operating a business whose perception worsened between 2003 and 2006. The Doing Business rankings indicated that there is vast room for improvement of logistics (through the Trading across Borders measure). The recurring nature of this theme indicates that infrastructure is one of the critical areas in need of reform.
1.64. Among other areas in need of reform, the business regulations would benefit from improvements, particularly those that could encourage firms to formalize. Informality is cited as a major obstacle to effective operation for SMEs, according to the Enterprise Surveys. Reforms to business regulations that encourage firms to formalize, such as easing the registration process, are critical. The Doing Business rankings noted shortcomings in Guatemala’s business and investment climate. Guatemala’s ranking for starting a business is poor and has been deteriorating over the last years. Poor performance on the dealing with construction permits measure also indicates that processes for businesses are costly and time consuming.
1.65. The Global Competitiveness Report cited access to finance as a constraint for firms. Business executives cited this factor as a major impediment to doing business in this report. The Enterprise Surveys also showed that few SMEs accessed formal finance. It is important to note that of those that did not apply for a loan, most stated the reason was that they did not need one.
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Areas not covered by report
1.66. Several areas will not be covered, even though they emerged as key constraints in the diagnostics. They have not been included for one of the following reasons: a) they have been covered in some detail in a recent, separate World Bank report; b) their impact on SME development is less direct than the selected topics; or c) they are beyond the scope of this report.
1.67. Corruption is cited as an impediment to effective business function by several sources, including the ICA and the Global Competitiveness Report. Two-thirds of firms interviewed through the Enterprise Survey do not believe that business laws will be applied in a predictable and consistent manner. However the ICA states that perception of firms has improved considerably between 2003 and 2007 and informal payments to officials have decreased. This study addresses enterprise-related corruption concerns only indirectly through the business regulation chapter; recommendations in that chapter would lead to more transparent policies and regulations.
1.68. Crime emerges in several sources as a serious social and economic problem. Increased crime and violence also diverts resources away from productive activities to crime prevention. The Global Competitiveness Report ranks Guatemala at 131 (out of 134) on the Business Costs of Crime. Small and medium firms interviewed as part of the Enterprise Survey in 2006 cited crime, theft, and disorder as a severe obstacle to the effective operation of the establishment. Crime can also be a significant deterrent to tourism. The Bank is providing the Government analytical support to improve crime prevention strategies, including enhancing the quality of police and justice systems, and the Bank recently concluded a Crime and Violence in Central America report. With the exception of the logistics and tourism sector analysis, this SME study does not directly address crime and violence concerns. Rather, it includes strategies for increasing economic opportunities, which should reduce crime and violence in the longer-term.
1.69. Disaster Mitigation, which is a problem in all Central American countries, is a key challenge for the Guatemalan Government. Guatemala is vulnerable to floods, hurricanes, and earthquakes; a single catastrophic event could undermine years of growth and poverty reduction efforts. Despite the role disasters play in hurting growth and investor confidence, this study will not directly address this challenge. The Bank has taken an important role in assisting disaster mitigation efforts. In Guatemala, a program is underway that creates a catastrophe draw down option which will provide contingent financing and is accompanied by the implementation of comprehensive disaster risk reduction measures.
1.70. Political and Macroeconomic Instability was specifically identified by small and medium firms as an obstacle to their firms’ effective functioning. It should be noted that the interviews were conducted in 2007, which was a tumultuous election year.
1.71. Taxation and Fiscal Policy is an obstacle to government provision of adequate services and infrastructure. Guatemala collects only about 12 percent of GDP in taxes, which does not provide sufficient fiscal space to address social needs. Furthermore, collection rates are low and despite efforts to raise tax revenues, political opposition and unfavorable court rules have prevented increases in tax revenues. The Bank is providing programmatic fiscal and institutional development policy loans to help the Government expand its fiscal space.
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1.72. Access to Land was considered as a potential topic since almost twenty percent of SMEs cited this as major or severe obstacle to doing business in the Enterprise Survey. However, since less than two percent cited it as the greatest obstacle and this issue did not come up as a major obstacle with the other tools, the report focuses on areas identified as higher priority.
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CHAPTER 2. ELECTRICITY8
2.1. BACKGROUND9
2.1. 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 limited financing options for new investments gave a clear signal that the state-run model needed structural reform. The Government reoriented the electricity sector development policy towards a mixed system with private sector participation. The Electricity Law of 1993 and its regulatory framework 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 transmission and distribution grids. Private organizations could participate in both system operation and wholesale power market administration.
2.2. The reforms led to the establishment of the Wholesale Market Administrator (AMM, Administrador del Mercado Mayorista), which is the center of the present energy market structure. It is also the system operator for transmission, distribution and international connections. The AMM determines the hourly spot market prices and is responsible for the reliability and availability of energy provision. All market agents fulfilling minimum size requirements have a right to participate in the AMM and select its Board.
2.3. In 2007, the agents operating on the wholesale market included 31 generators (30 private and 1 public), 3 transmission companies (1 public and 2 private), 19 distribution companies, 14 suppliers (“comercializadores”) and 800 large consumers, most of which get their power through contracts with suppliers. The distribution companies have 2.3 million regulated “captive” consumers. The Ministry of Energy and Mines (MEM, Ministerio de Energía y Minas) has final oversight responsibility; issues authorizations to generators, transmission and distribution companies; and prepares national energy plans, indicative generation plans, and the ten-year national transmission plan that is prepared bi-annually.
2.4. In the past ten years, Guatemala has also made some progress in encouraging investment in renewable energy. In 2003, the government passed the Law of Incentives for the Development of Renewal Energies. The law seeks to promote the development of renewal energy projects and establish tax, economic and administrative incentives. These incentives include: (1) Exemption from import duties, value-added tax, and charges and consular rights in the import of equipment and materials for the pre-investment stage and execution and (2) Exemption from payment of income tax (ISR) during the first 10 years of operation.10
2.2. SUPPLY
2.5. The composition of the generation of energy in Guatemala is primarily hydroelectric (35 percent) and fuel-oil (32 percent). Other power supplies are: biomass (13 percent), gas turbines (9 percent), steam (6 percent) and geothermal (2 percent) (See Figure 9). Nominal installed 8 This section draws heavily on World Bank (2009), Central America regional programmatic study for the energy sector – general issues and options module, Washington, D.C 9 World Bank (2008), Guatemala Investment Climate Assessment, June 26, 2008. 10 Ministerio de Energía y Minas de Guatemala (2007), La Energía en Guatemala
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capacity in 2008 was 2,197MW while maximum demand was 1,505MW. Electricity demand tends to grow by 5 percent each year and consists of industrial (32 percent), residential (28 percent), commercial and services (23 percent), losses (14 percent), and other (3 percent).
Figure 9: Installed Capacity and Maximum Demand
Source: CNEE 2.6. The electricity grid in Guatemala covers 84 percent of the country; this percentage is just above the Central American average (82 percent). In urban areas electrification is 93.7 percent while in rural areas the rate is only 68 percent (See Figure 10).
Figure 10: Coverage per Country
Source: INE (Instituto Nacional de Estadística).
Generation Expansion Plans 2.7. According to the Indicative Generation Expansion Plan 2008-2022 of the National Electric Energy Commission (Comisión Nacional de Energía Eléctria, CNEE), reserve margins were estimated to increase from 34 percent in 2008 to 56 percent in 2012, assuming Mexico can export up to 200 MW and that their prices are competitive in the Guatemalan wholesale market.
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New investments in hydro and coal generation plants would not only serve to meet increases in electricity demand but would also substitute existing fuel-oil generation. The CNEE plan estimated that marginal generation costs would decrease from US$120 /MWh in 2008 to US$80 /MWh in 2012, while maintaining a reliable supply. The expected value of power deficits during 2008-2012 (considering planned and forced outages of generation units and stochastic variations of water flows to hydro plants) was negligible.
2.8. Considering that the investments in new generation would be done by private companies, the feasibility of this expansion plan depends on the economics of new plants and the investment strategies and risk-taking policies of new investors. Recent estimates suggest that not all of the new generation included in the CNEE plan will be undertaken. A 2009 report prepared for the IFC found plans for 360 MW of new renewable energy and 472 MW of new conventional thermal by 2014 (Table 7). In contrast, the CNEE plan estimated 560 MW of new renewables and 567 MW of new conventional thermal by 2012.
Table 7: Short-Term Generation Expansion Plan (2009-2014) Project Year Technology Capacity (MW) Amatex II 2009 MMVB 25 Zacapa 2009 MMVB 32 Chimalte GECSA II 2009 MMVB 35 Mexico-GT Interconnection 2009 Interconnection 200 Xacbal 2010 Hydro 94 Ingenio Costa Sur 2010 Biomass 50 SIEPAC I 2010 Interconnection 200 Las Palmas II (Duke) 2011 MMVB 80 Palo Viejo (ENEL) 2011 Hydro 80 SIEPAC 2 2012 Interconnection 250 Animas 2012 Hydro 10 Panama-Colombia 2013 Interconnection 200 Quiché 1 (ENEL) 2013 Hydro 94 Río Hondo Zacapa 2013 Hydro 32 Jaguar Energy (AEI) 2014 Coal 300 Totals Renewable 360 Conventional Thermal 472 Interconnection 850
Note: MMVB = medium speed bunker (fuel oil) motor (motores de media velocidad bunker). This plan is an updated version of part of the CNEE’s Indicative Generation Expansion Plan 2008-2022, based on a report prepared for the IFC. Source: Mercados Energéticos Consultores (2009).
2.9. When firm capacity—the amount of energy guaranteed to be available at a given time or the amount that generators can deliver in a “safe” manner—is considered, estimated reserve margins dwindle substantially. As shown in Figure 11, peak demand as a percentage of firm capacity is over 95 percent for most years between 2008 and 2021. Figure 12 highlights the significant difference between installed and firm capacity compared to peak demand for those same years. These numbers suggest that Guatemala must actively promote the execution of its generation expansion plans if adequate reserves are to be maintained and marginal generation costs are to fall.
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Figure 11: Peak Demand / Firm Capacity Ratio (%)
Source: Mercados Energéticos Consultores (2009).
Figure 12: Peak Demand vs. Supply (MW)
Source: Mercados Energéticos Consultores (2009).
2.3. DEMAND11
2.10. Electricity is a clear obstacle to the operation of enterprises. While in 2003, 27 percent of companies interviewed for the Enterprise Survey indicated that access to electricity was a critical issue, this percentage increased to 47 percent in 2006 (see Figure 13). This is a serious deterioration, especially since entrepreneurs’ perceptions improved on almost all other investment climate dimensions. However, among its regional comparators, fewer firms suffered power outages than in most other countries (see Figure 14). One of the possible explanations for 11 World Bank (2008), Guatemala Investment Climate Assessment, June 26, 2008.
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the deterioration of enterprises’ perception of the electricity sector is that power outages have increased from 1.5 (2003) to 5 (2006) times per month. These outages accounted for an average loss of 6.1 percent of sales in 2007. In rural areas, the problem is particularly alarming – power outages cost up to 6.7 percent of sales and lasted an average of 37 hours per month compared to 8 hours in metropolitan areas.
Figure 13: Electricity as a severe obstacle for enterprise operation
Source: Enterprise Surveys, 2006
Figure 14: Enterprises that suffered outages (%)
2.11. Electricity consumers are split between unregulated and regulated customers. Large consumers, those that use more than 100kW (about 30 percent of total demand), can choose their suppliers and negotiate prices and conditions for supply. Prices for these consumers are not regulated and reflect variations of energy prices in the wholesale power market. Regulated consumers either pay established cost-based prices or a subsidized social tariff (IFC 2009).
2.12. Electricity prices in Guatemala are regulated by the CNEE (Comisión Nacional de Energía Eléctrica) based on a total of generation, transmission, and distribution costs. Generation costs are determined by a combination of energy and capacity costs of long-term energy supply contracts and the cost of purchases in the spot market. Transmission value added is applied on a nodal basis and revised every two years. CNEE revises the value-added of distribution every 5 years (See Figure 15).
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Figure 15: Evolution of Residential Prices
Source: CNEE
2.13. The price of electricity is one of the highest in the region (See Figure 16). This is due to high marginal costs of generation and due to the fact that they do not subsidize energy as heavily as other Central American countries, particularly Nicaragua and Honduras. The low tariffs in those countries are considered unsustainable. These rates are a clear disadvantage for Guatemalan SMEs who suffer higher prices than their competitors in the region. Informal enterprises can pay residential prices and benefit from the social tariff (for consumption below a certain level). Large users are free to buy directly from generators or in the spot market. SMEs usually do not have this flexibility.
Figure 16: Electricity Prices, Residential Sector 2007 (USCents/kWh)
8.3 8.6
15.3 15.8 16.018.4
0
5
10
15
20
Note: Guatemala price corresponds to non-social tariff, Guatemala City Source: World Bank (2009), Central America regional programmatic study for the energy sector
2.14. The electricity-intensive manufacturing sector is hit by the high power prices in two ways. First, the most electricity-intensive industries resort to self-generation. This cuts into a firm’s ability to invest and hurts product expansion. Second, all relatively electricity intensive industries are affected by paying higher tariffs than competitors in other countries. For instance, the textile industry in Guatemala mainly processes products under foreign brand names. The industry is in direct competition with manufacturers in China and Bangladesh, where electricity
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tariffs are much lower. Growth prospects of the Guatemalan textile industry are clearly impaired by high power tariffs.
2.15. A social tariff established in 2000 kept electricity prices stable in the range of 10 to 12 USCents/kWh for about 90 percent of residential consumers and was financed by the economic rent of the National Electrification Institute’s (INDE, Instituto Nacional de Electricificación) hydroelectric plants. Beginning in 2006, when it was obvious that INDE could not continue paying for the subsidy, the coverage of the subsidy was reduced to about 70 percent of consumers and the average social tariff for urban areas was increased to about 16 USCents/kWh.
2.16. Although prices are higher than its regional comparators, Guatemala is a strong performer in time needed to get an electricity connection. The time needed to get a connection to the electricity grid is currently 39 days, down from 62 days in 2003. In this respect Guatemala performs better than the rest of Central America, with the exception of Honduras (33) and Panama (35) (See Figure 17).
Figure 17: Number of Days to get Electricity, 2009
Source: Doing Business 2010
2.17. In 2007, generator ownership among Guatemalan firms was comparable to the levels of other Central American countries, but self-generation was among the highest in Latin America. Usually, generator ownership and self-generation signal that energy supply is unreliable, expensive, or both. For those firms that owned or shared a generator, 28 percent of their energy needs on average were met through that generator. This is among the highest levels of self -generation among Latin American firms. In addition, in 2007, important differences 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 firms in the capital area were met through self-generation as opposed to 39 percent for firms elsewhere in the country.
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2.4. RECOMMENDATIONS
2.18. Expansion plan. Critical problems in Guatemalan electricity derive mostly from supply and high prices. Carrying out the Indicative Generation Expansion Plan will help lower the marginal costs of generation and maintain a reliable electricity supply.
2.19. Renewables. Investments in renewable energy, particularly hydro, are important not only to substitute the generation from fuel oil but also to push out of the market high-cost generation units. Also mini-hydroelectric projects may help improve coverage and reliability in rural areas. However, according to the government there is no information and training plan for rural communities on how to take advantage of hydro resources for electricity generation. If hydroelectricity is going to become the principle source of energy in Guatemala, a capacity study during the dry months may be important. The Government should consider a study of the impact of climate change on hydroelectric power.
2.20. The Government should also consider more effective mechanisms to promote investments in renewable energy apart from hydroelectric. The Law of Incentives for the Development of Renewable Energy Projects has been important in promoting hydroelectric energy but it has not had much impact for other renewable sources. Geothermal energy presents a mostly untapped opportunity in Guatemala. The country is estimated to have the potential to generate 1000 MW of geothermal energy, but only has an installed capacity of 44 MW. The potential of wind energy could be large (estimates are as high as 7800 MW), but current installed capacity is zero. The Government should consider further research into this sector.
2.21. Interconnection and regional market. It will be important to take advantage of the interconnection with Mexico, for instance through “firm energy” contracts between Mexican generators and Guatemalan consumers. Also, Guatemala should reinforce its transmission grid in order to be able to serve as a bridge between Mexico and the Electric Interconnection System for Central America (SIEPAC) backbone line. Moreover, the Central America integration agenda should promote moves toward a regional power market to make regional electricity transactions viable.
2.22. Social tariff. The social tariff may have to be reoriented and refocused on the neediest. The current scheme is poorly targeted, with huge inclusion and exclusion errors, which convert into severe drains on the fiscal accounts. Better targeting would mean the subsidies would be more effective with fewer resources. The savings could be used for planned investments in transmission and hydropower.
2.23. Energy efficiency measures in industry (including power supply) and buildings (commercial, public residential) should be strengthened. It not only includes demand-side measures, but also supply-side measures. Promoting and enforcing energy efficiency require strong backing by government leadership.
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CHAPTER 3. TRANSPORTATION AND LOGISTICS
3.1. MOTIVATION AND ORGANIZATION
3.1. Trade logistics deals with the management of international flows of goods. Its agenda, focused traditionally on transportation and inventory management, is progressively converging with trade facilitation and border management issues, in an integrated approach. Logistics management can be defined as “ …the part of the supply chain process that plans, implements and controls the efficient and effective flow and storage of goods, services and information, from the point of origin to the point of consumption, whilst trying to satisfy customer requirements.” 12 When dealing with international trade, issues like documentation and border control become a critical aspect for the physical flow of goods. Nowadays, trade logistics has shifted towards a comprehensive understanding of the supply chain, considering not just the international physical movement of goods, but also the procedures and associated control processes typically covered by trade facilitation and border management, in a common framework.13
3.2. The relevance of trade logistics as a component of trade cost has grown, together with the reduction of tariffs, and has become a critical component for developing countries’ competitiveness. For most countries, logistics costs have become a more important component of total trade costs than tariff barriers.14 The gradual reduction of tariffs that took place in recent years by a large number of countries, together with the emergence of multiple free trade agreements, brought about an increase in the relative share of logistics costs in total trade costs. The measurement of total logistics costs in a country – which basically includes transportation, warehousing, deterioration and theft, inventory carrying cost and other associated administrative costs – is a complex task because of the multiplicity and diversity of the involved supply chains. Figure 18 illustrates, with three relevant indicators, the logistics gap between Latin America and the OECD countries - the proportion of goods from the primary sector not reaching markets, logistics costs as a proportion of the value of products, and inventory levels. The magnitude of the gap and the relevance of logistics cost on trade are drawing attention for public policies to reduce them in order to enhance countries competitiveness. In this regard, a recent study concludes that: “… the empirical analysis suggests that measures to improve logistics performance and facilitate trade are likely to have the greatest positive effects in expanding developing country trade, increasing the trade impacts of lowering remaining border barriers by a factor of two or more.” 15
3.3. This chapter, aimed at the analysis and identification of policy priorities for Guatemala’s trade logistics, is organized in three sections. The first one after this introduction deals with Guatemala’s trade flows in general, in order to find the relevance of different types of exports and imports, and the main spatial patterns and freight circuits, identifying the main nodes and links involved. The next section analyzes the country’s logistics performance, reviewing the most relevant international indicators, the studies carried out recently in Guatemala, and the 12 Simchi-Levi, D. et al (2008) 13 Arvis et al. (2009) 14 For example, in Latin America, average tariffs were lowered from 40% in the 80s to 10% in the present decade. 15 Hoekman and Nicita (2008)
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results of several interviews with key stakeholders undertaken for this report. The section concludes with a summary of the main problems and challenges the country faces. The final section of the chapter includes the policy priorities proposed for the enhancement of Guatemala’s logistics performance relevant to SMEs, identifying several key initiatives, as well as a proposal for institutional arrangements to implement a cross-cutting agenda.
Figure 18: Logistics indicators comparing OECD and LAC countries
Source: Adapted from Gonzalez, Guasch and Serebrisky (2008).
3.2. GUATEMALA TRADE FLOWS
Main trade flows
3.4. Guatemala’s economy is relatively open, although less than others in the region, and trade plays a key role leading growth. The ratio of traded goods to GDP in Guatemala is close to 60 percent, showing a relatively open economy. Nonetheless, other CA countries in the region have higher ratios, particularly Costa Rica with 89 percent. Trade has been growing consistently in Guatemala; in 2000 merchandise trade as a proportion of GDP was below 40 percent. The trend shows an increasing openness of Guatemala’s economy; the degree of openness achieved by neighbor countries (like Costa Rica) suggests ample potential for further expansion. The 2008 economic and financial crisis has had a deep impact on Guatemala´s economy and has severely affected Guatemala’s trade partners, reducing exports and imports. The reduction in trade has affected fiscal revenues: IVA from imports was 22.6 percent lower in 2009 than in 2008, and customs import rights (DAI), 16.1 percent.16 Table 8 shows the recent evolution of exports and imports.
16 MFP - IV Informe Financiero, August 2009.
0
5
10
15
20
25
30
Primary goods % not reaching markets
Logistics costs as a % of sale values
Inventory levels
OECD CountriesLAC Countries
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Table 8: Evolution of Guatemala exports and imports
2004 2005 2006 2007 2008 2009
Exports US$ Million – FOB 5033 5381 6013 6932 7,737 7,360
Tons - Thousand 6978 7097 7255 8483 8063 N.A.
Imports US$ Million – CIF 9477 10499 11915 13578 14,547 11,521
Tons – Thousand 9875 10482 11073 11969 10936 10289
Source: Banco de Guatemala – Departamento de Estadísticas Económicas 3.5. Exports growth has been led by non-traditional products, reflecting a structural change in the country’s trade pattern, with some changes in trading partners. Guatemala’s trade basket, as most CA countries, has undergone marked changes since 1990, with the share of traditional agricultural exports declining in favor of light manufactures resulting from the rapid growth of maquilas. Currently, manufactures – including plastics, iron and metals, rubber products - represent an average of 46.9 percent of Guatemala´s exports, well below the Dominican Republic (81.4 percent), El Salvador (73.9 percent) and Costa Rica (63 percent). Agricultural products still make up 41.8 percent of the country exports, consisting basically of coffee, sugar, cacao, shrimps, fruits and vegetables. With regard to imports, manufactures are dominant (65.1 percent, mostly vehicles and equipment), followed by fuels and mining products. Exports are concentrated in the US (39.4 percent, 2008 data), Mexico, El Salvador and Honduras (28.7 percent) and the European Union (EU 27, 5.6 percent). Imports are also mostly from the US (36.7 percent), México and El Salvador (14.4 percent), EU 27 (6.6 percent) and China (5.8 percent). In the last few years the relevance of the US as a trade partner has grown, particularly as a destination for exports (it used to be 29.4 percent just three years before). China and the European Union are gaining relevance as a source of imports. Trade with neighboring countries continues to be relevant, with an increasing role for México, particularly for exports.
3.6. Maritime transportation is the dominant mode of transportation, but surface transportation is growing; air transportation is not used much, moving only the highest value-density products. Figure 19 illustrates the use of different types of transport in Guatemala’s international trade, both in value and volume. Most trade flows (65 percent in value, 77 percent in volume) are currently carried by the Atlantic and Pacific ports, in approximately similar proportions, utilizing road transportation to link the ports with production and consumption centers. Surface transportation grew substantially in Guatemala, as in other Central and South American countries; it currently represents 26 percent of the country’s trade in value (23 percent in volume, 2008 data). This highlights the relevance that border crossings and trucking industry performance have for the country’s competitiveness. Air transportation has a relevant participation in terms of value: 11 percent for imports and 7 percent for exports. The value density of the waterborne trade is the lowest: US $707 per ton for exports and US $911 for imports, due to the incidence of fuels and other bulk commodities. Airborne trade ’s average density value is US $11,857 per ton for exports and US $23,382 for imports; surface transportation (by truck) is US $884 and US $1566 respectively.
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Figure 19: Modal participation in Guatemala’s international trade
Exports - $ Exports - Ton Imports - $ Imports - Tons
Maritime Air Surface
Major trade circuits
3.7. Several key trade circuits can be identified according to the origin-destination of the national and in-transit freight, the types of transportation used, the gateways utilized and the routing throughout Guatemala’s territory. The joint consideration of these factors suggests five main trade circuits. Figure 21 sketches the spatial representation of the main trade flows across the country.
i. Imports and exports through the Pacific port of Quetzal and other private terminals. Trade flows through this circuit are mostly imports from Asia and the US west coast, directed to the metropolitan region of Guatemala City (MRGC). Puerto Quetzal is currently handling two-thirds of the country’s import volume, which includes the import of dry bulk commodities (mostly grain) and vehicles from Asia; 70 percent of Puerto Quetzal incoming flows and 40 percent outgoing are in bulk. Exports originate in the MRGC and the southern part of the country. Much of the highway linking Puerto Quetzal and MRGC has been upgraded to four lanes and the surface movement is only by trucks. There is another port terminal in the Quetzal area, Boyas de San José, which is limited to the movement of oil and fuels. There are also other privately owned and operated terminals.
ii. Imports and exports through the Atlantic ports, Santo Tomás de Castilla and Puerto Barrios. These ports concentrate on exports to Europe and the US Gulf and East Coast. The two ports have a balanced inbound and outbound activity, mostly of containers, but also some general cargo and vehicles. Containers represent two-thirds of Puerto Santo Tomas tonnage and 90 percent of Puerto Barrios (specialized in banana exports). Figure 20 shows the volume moved by the four main ports in the country. The inland origin and destinations of the cargo moved through the Atlantic ports are the MRGC, the country center and Petén (where fruits and vegetables are produced like papaya, melon and pineapple). The two ports also manage freight with origin or destination in El Salvador, circulating in transit through Guatemala; daily, some 300 containers are processed through the Anguiatú border station. Honduras’ Puerto Cortés, located close to Guatemala’s Caribbean maritime terminals, used to capture some trade from Guatemala,
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but improvement in Guatemala’s ports and earthquake damage in Puerto Cortés have minimized these flows.
Figure 20: Port freight volume - 2008
Source: Comisión Portuaria Nacional
iii. Airborne trade, utilizing La Aurora airport. Air transport moves high-value exports and imports generated mostly in the MRGC. The most important products are high value manufactures, many of them carried by express services utilizing dedicated air freighters.
iv. Trade between Guatemala and other Central American countries and México. A significant proportion of the country’s trade originates in or is destined for neighboring CA countries and Mexico. In 2008 30.4 percent of the exports were directed to the other four CA countries (mostly Honduras and El Salvador), and 6 percent to México. These trade flows require processing through international border facilities. Trucks run freely through CA highways, because countries have similar technical standards and have harmonized procedures, but there are some relevant differences with Mexican standards, where larger and heavier trucks are allowed. Because of that, most freight to and from México change trucks at the border (few trailers pass through). As a result, large logistics parks have emerged on the Mexican side of the border.
v. Trade between other CA countries and México, crossing in-transit through Guatemala. Much of the in-transit trade is between Mexico and El Salvador and Costa Rica. At the main border crossing between Guatemala and Mexico, Tecún Uman, about 25 percent of the passing trucks have an origin or destination in another CA country. This trade utilizes a transit regime agreed upon by the CA countries in 2001, which has proved to be a valuable tool to enhance regional trade.
Santo Tomás de Castilla
Puerto Barrios
Puerto Quetzal
Boyas de San José
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Figure 21: Major trade circuits in Guatemala
3.3. LOGISTICS PERFORMANCE: PROBLEMS AND CHALLENGES
An integrated logistics-border management perspective
3.8. The physical movement of goods is conditioned by numerous factors that can be organized into three major groups, which comprise a country’s logistics system: (i) infrastructure and transport services; (ii) logistics business management by carriers and shippers; and (iii) trade facilitation procedures, including issues like documentation, control and provision of security for trade flows. Each major group encompasses different components (see Figure 22) that are interrelated in a complex network. Infrastructure represents the system’s hardware - it is critical to ensure efficient transportation and storage of goods. Business logistics includes cargo owners and service providers. Cargo owners’ main focus is on the organization of the supply chain, while logistics providers are interested in improving and broadening the scope of their services, by investing in new equipment and facilities. Trade facilitation initiatives (as well as other regulations related to the circulation of goods) are generally under the mandate of the public sector, and – together with transport regulations - could be considered the system’s “software”. These have a large impact on the system’s functioning, as they determine the processes and documents with which users and providers need to comply. This basic definition of the factors involved in the flow of goods leads to two important conclusions. The first is that analyses and proposals on the issue should not be constrained to infrastructure bottlenecks (as they are most times), but should also consider relevant aspects in all the system ’s components. The second is
Puerto Quetzal
Guatemala CityMetropolitan Region
La Aurora Airport
PeténAtlantic Ocean
Pacific Ocean
MEXICO
EL SALVADOR
HONDURAS
BELIZE
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that the logistics system performance depends on the coordinated effort of stakeholders both in the public and the private sectors.
Figure 22: Factors conditioning logistics chain performance
INTERNAL FLOWS
TRANSFER NODES
EXTERNAL FLOWS
INTERPHASES AND COORDINATION ACTIVITIES
SUPPLY CHAIN ORGANIZATION
LOGISTICS OPERATORS AND INTERMEDIARIES
DOCUMENTATION, TECHNOLOGY AND INTERMEDIARIES
CARGO SECURITY
Infr
astr
uctu
rean
d tr
ansp
ort
serv
ices
Trad
efa
cilit
atio
nPr
ivat
ese
ctor
lo
gist
ics
Freight movements withinnational boundaries
Activities Functions Components
External trade transfer nodes
Freight movements outsidenational boundaries
Operational and commercialcoordination among modes
Supply chain design and management
Provision of integrated logisticsservices
Documentation, e-commerce, customs and other borderagencies control
Security along the entiresupply chain
� Roads, surface transportation� Railway� River transportation
� Ports� Airports� Border crossings
� Maritime and air transportation� International surfacetransportation
� Coordination of receptionand delivery of freight� Multimodal transport
� Materials and inventorymanagement� Distribution
� Logistics operators, 3PL, forwarders, agents� OTM, Logistics zones
� Documentation� Customs control� Immigration control
� Controls in key nodes� Controls alongside thesupplychain
Note: 3PL = third-party logistics. OTM = multimodal transport operators. Source: “Argentina: The Challenge of Reducing Logistics Costs”, World Bank 2006
3.9. From a public policy perspective, the agenda to improve logistics performance is complex and hard to handle, as it encompasses many cross-cutting issues that challenge the public sector’s traditional organization. The logistics agenda includes issues that are typically under the mandate of different agencies: Ministry of Transport and/or Public Works (or Infrastructure and Transport Services); Ministry of Production/Economy (support and training initiatives in private sector logistics, SMEs promotion, and sanitary control); Ministry of External Trade; and Ministry of Finance (customs). The wide scope of the issues involved dilutes the possibilities of having a single champion to forward the agenda. Line ministries have traditionally focused on their own sector issues and plans; incentives to coordinate agendas among them are limited. The creation of Logistics or Competitiveness Councils is increasingly being considered as the best (albeit limited) answer to coordination challenges. This type of agency is generally able to involve the private and public sector in the dialogue, and has the capacity to set up the agenda, but difficulties remain related to their ability to mobilize line ministries into action.
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The current performance: what international indicators show
3.10. The Logistics Performance Index (LPI) - the international indicator that best reflects countries’ logistics performance - places Guatemala in a relatively low position, improving in absolute terms but not in relative terms. Estimated for the first time in 2007, the LPI comes from several sub-indices, resulting from consultation with numerous international trade operators. The result is a score (1 to 5) which allows the ranking of the countries (more than 150 have been measured). Although a country’s rank roughly correlates to GDP per capita, there are better and worst performers, according to the efforts they make to improve trade logistics. Guatemala performs at the level expected for its GDP, and is improving the absolute value of its logistics performance. The LPI score improved between 2007 and 2009 from 2.53 to 2.63 (Table 9). But the country is worsening its relative position, as its ranking dropped from 75 to 90. Some other countries in CA have improved in relative terms, like Honduras and Costa Rica.
3.11. The LPI sub-indexes show: (i) operators functioning at an acceptable level, (ii) weak infrastructure, and (iii) low trade facilitation performance (Table 9). According to the 2009 LPI, the performance of the operators (competence, punctuality) is good, with a ranking of 62. Infrastructure and availability of ICT tools is mediocre, with ranks around 84. And border control (which is not constrained to customs procedures and functioning, but include all border management actors) have low values, under 90. International Shipments (which is defined as “ease of arranging competitive price shipments”) shows a remarkably low rank (150). This may have been caused by a special situation at the time of the interviews. Two potential reasons are: (i) the implementation of a new, modern customs system, named SAQ´B, which presented many start up problems, and (ii) the high level of red channels imposed on the border at that time due a tighter control policy (to mitigate the reduction in customs revenue due to the economic crisis).
Table 9: Logistics Performance Index overall results 2007 2009
Rank Score Rank Score Guatemala 75 2.53 90 2.63 El Salvador 66 2.66 86 2.67 Costa Rica 72 2.55 56 2.91 Nicaragua 122 2.21 107 2.54 Honduras 80 2.5 70 2.78 México 56 2.87 50 3.05 Chile 32 3.25 49 3.09
Source: World Bank (2010). Logistics Performance Index.
Table 10: Guatemala LPI sub-indexes
LPI Customs Infra-structure
Int’l. shipments
Logistics quality &
competence
Tracking & tracing Timeliness
Guatemala 07- Rank 75 87 104 73 79 90 64 Guatemala 07- Score 2.53 2.27 2.13 2.62 2.5 2.43 3.23 Guatemala 09– Rank 90 91 84 150 62 84 61 Guatemala 09 - Score 2.63 2.33 2.37 2.16 2.74 2.71 3.52
Source: World Bank (2010). Logistics Performance Index.
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3.12. The World Economic Forum developed an indicator of barriers to trade in 2008, which shows Guatemala in an intermediate position, in which infrastructure and transport services appear as the most negative aspects. The WEF recently produced the Global Enabling Trade Report, which analyzes the barriers to global commerce, including logistics and trade facilitation factors. It covers 10 pillars, grouped into four sub-indices, summarized in turn into a single indicator called the Enabling Trade Index 2008 (ETI 08). Six of the 10 pillars are related to border management and transport infrastructure and communications. Data comes from perception surveys as well as hard data. The relative position of Guatemala is not bad (ranked 54 out of 118 countries), which is better than many of the other CA countries (Table 11). While customs appears to be very efficient (19), import and export procedures (81) and low transparency (63) adversely affect the border management performance. Infrastructure, transport services, and the use of ICT are presented as obstacles.
Table 11: Enabling Trade Index 2008 results
ETI08 Customs efficiency
Export & import
procedures
Customs transparency
Transport infra-
structure
Transport services
Com. & Info.
Technology Guatemala 54 19 81 63 84 84 72 El Salvador 55 72 64 49 94 68 73 Costa Rica 44 65 53 42 68 88 52 Nicaragua 67 85 65 73 96 107 100 Honduras 64 77 77 74 70 105 90 Mexico 65 63 76 57 87 55 58 Chile 27 17 30 18 45 38 45 Source: World Economic Forum (2008). Enabling Trade Index. 3.13. The Liner Shipping Connectivity Index (LSCI) shows Guatemala in an unfavorable position in the region. Although the country shows some improvement in absolute terms, it is losing ground in relative terms. This index is estimated by UNCTAD considering the number of liner vessels, the loading capacity of containers, the number of shipping companies, the number of maritime routes and the size of the largest vessel calling ports. The export -oriented countries in Asia have grown at least 5 points in the last four years LSCI (Malaysia and the Philippines, almost 15 points, Thailand, India and Vietnam, between 5 and 10).
Table 12: UNCTAD´s Liner Shipping Connectivity Index
2008 2004 04/08
change Guatemala 63 15.4 60 12.3 3.16 El Salvador 90 8.7 101 6.3 2.37 Costa Rica 69 12.8 57 12.6 0.19 Nicaragua 88 8.9 122 4.7 4.16 Honduras 84 9.3 80 9.1 0.15 Mexico 26 31.2 30 25.3 5.88 Chile 44 17.4 56 15.5 1.94
Source: UNCTAD. Liner Shipping Connectivity Index.
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Recent initiatives to enhance trade logistics
3.14. Several studies and proposal initiatives have been developed in recent years in Guatemala, both at the national and regional levels, creating a convergence of initiatives to improve logistics performance. The simultaneous appearance of these diverse initiatives illustrates the interest that many policy makers and other stakeholders are having in trade logistics issues. The most relevant ones are the following:
� Plan Multimodal de Obras de Infraestructura de Transporte. It is aimed at positioning Guatemala as an export platform, ensuring the competitiveness of the country’s productive chains and to performing the role of a regional logistics hub. The Plan also emphasizes works to facilitate tourism. It identifies programs and projects to combine transport modes, sets priorities, and estimates public and private financial needs, suggesting several working groups for implementation.
� A new Port Act project, developed by the National Ports Commission.
� SIECA’s contributions, particularly with regard to the harmonized regional transit circulation regime.
� Mesoamerican International Network of Highways (Red Internacional de Carreteras Mesoamericanas, RICAM), a project that includes the Pacific corridor that runs through Guatemala, to be implemented under a PPP.
� New PPP Law, to spur the participation of the private sector in infrastructure projects.
� Competitiveness related studies made by Agexport (Logistics Cluster) and PRONACOM (special zones, maritime transportation market performance).
� Several World Bank and PPIAF studies (ICA, PPP in infrastructure).
Review of key logistics performance factors
3.15. A review of existing documents and a set of interviews completed for this report have allowed the assessment of key aspects that determine Guatemala’s logistics performance. Their main problems are briefly presented in the following paragraphs.
Customs and border management. Customs services have made significant progress during the last years, as a result of a modernization effort. Performance is good in airports, acceptable in ports, and weak in border crossings. The customs institution has developed a good dialogue with users. There is also progress in the implementation of paperless procedures and a unified window. But there are still overlaps in controls, due to a weak coordination among customs control and narcotics and agricultural products-foodstuff control.17 Occasionally all three open the same container, sequentially. The proportion of red channel control is relatively high, due to trade policies (quotas, rules of origin, numerous treaties, differentiation of tariffs) and a need to reinforce tariffs revenue control.
17 A recent assessment by WTO (March 2008) presents a detailed report of the trade facilitation weaknesses.
46
Surface transportation. Guatemala’s truck fleet includes around 10,000 units (excluding small urban trucks), with an average age of 20 years and weak operational performance. 18 The law regulating the activity is from 1946. The trucking industry is going through a very slow process of modernization. It currently shows low professionalism, weak financial capacity, and reluctance to adopt new logistics procedures (i.e., multiyear contracts with clients). Most vehicles purchased are used US units, used tires are also imported. Many large firms work with their own transportation (cement, oil, beverages), instead of with the hire and reward trucking companies. There is a shortage of human resources, and a low level of driver professional training. Security is a very serious concern for the activity; the risk is not constrained to the theft of the cargo or the truck, but also to drivers’ kidnapping and even murder. Operations frequently require armed guards, and in some areas trucks only operate during daylight hours.19 Trucking companies estimate that US $25 million are spent yearly contracting security services. SMEs and supply chain management. Most of Guatemala’s traded goods originate or are destined for large firms. There may be several reasons for the reduced presence of SMEs in international trade; one of them is that SMEs confront many difficulties for the implementation of an efficient logistics design in order to integrate into global supply chains. There are no public logistics platforms, public cold chambers are very scarce, and a policy to support SMEs is lacking.
Highways. There has been a sustained effort to improve the network during the last years, by increasing capacity and upgrading highways, but weak maintenance has resulted in a growing deterioration of the network condition. In 2000 some 60 percent of the network was in good condition and 10 percent in poor; in 2008 only one-third of the network was in good condition and another third in poor shape. Guatemala’s network is vulnerable to natural disasters, like earthquakes and landslides. Congestion problems in the MRGC are serious: traffic is restricted to vehicles over 3 tons during six hours a day. The network is under increasing pressure due to the rising motorization and the expansion of domestic and international trade. This growing demand is combined with insufficient funding to ensure sustainable conservation, putting at risk the road assets. The country has accumulated a considerable road liability, estimated at Q3 billion (US$370 million). The instruments designed to ensure road maintenance in the 90s—the COVIAL (Unidad Ejecutora de Conservación Vial) and its trust fund—are being used mainly to expand the network and increase its capacity (with additional budgetary resources), rather than for maintenance.20
Airports and freight air transportation. Air accessibility, key for tourism, is adequate for North America (from where 60 percent of the tourists come) and South America, but weak for Europe. The lack of an additional air strip is limiting the Aurora airport capacity; there is much movement of small aircrafts (for business and tourism), that clogs the existing runway. The airport’s elevation limits the load. Also, many operations take place at night to take
18 There are no operational indicators available; according to sector sources, trucks run some 60,000 km a year (should run twice), and have low occupation ratio, in the range of 50%. 19 For example, loaded trucks do not leave Acajutla after 7 PM. 20 The procurement rules of the COVIAL, a fiduciary fund, are simpler than the standard administrative rules (Ley de Contrataciones).
47
advantage of lower temperatures. The airport modernization process is still not complete. Some airline freighters use Guatemala as a regional air hub.
Ports and maritime activities. Most ships using Guatemala’s ports are feeder vessels, transferring containers at Panamanian, Mexican and Jamaican terminals. Most general cargo is moved in containers, with a high prevalence of refrigerated units. The major ports constraint is their difficulty to accommodate larger vessels, due to lack of deepness and the structural characteristics of the berths (not allowing modern, heavy cranes). Puerto Barrios, one of the three major ports in the country, is an extreme example—a berth access is utilized for ships loading/unloading (the original berth was destroyed by a storm)21. Port occupation factors are relatively low and the service provided has been acceptable. The management model is called tool-port22, with port administration directly responsible for operations. Puerto Quetzal and Santo Tomás de Castilla are publicly owned and operated, while Puerto Barrios is given in concession to a private firm. Each port is independently managed and financially autonomous, which creates incentives for bulky expenditures on current and retired staff, constraining investment.23 Although port services are relatively similar at each port, the productivity of Puerto Barrios is much higher. The shipping market is competitive in general terms, but there is some cartelization through the CADA (Central America Discussion Agreement), a kind of freight conference that coordinate commercial conditions for reefer traffic between the Caribbean and the US Gulf and Florida ports.
Summary of the main problems and challenges
3.16. The results of the international indicators and the analysis of the main logistics components allow for the identification of a series of activities that would enhance Guatemala’s logistics performance. There is no single initiative that may overcome the current weaknesses, but a set of diverse interventions.
3.17. Table 13 summarizes a qualitative analysis of the main components influencing logistics performance, as were stated in Figure 22. Three categories have been selected in order to qualify the severity of the problems (minor, considerable and serious). This summary is the basis for the policy priorities suggested in the next section.
21 The original port design included an access and a berth, in a T form. The berth itself (the upper part of the T) was destroyed by a tropical storm, while the access survived. It is this access that is currently utilized as a berth, although it was not originally designed with this purpose. 22In a Tool Port, the port authority - generally a state owned enterprise - is directly responsible for operations, eventually outsourcing some services. This management structure is different from the landlord one, in which the port authority (usually public) is separated from the terminal operators (usuall y private). For more detail, refer to the World Bank Port Reform Toolkit. 23 Being autonomous and able to decide on the use of financial surpluses, when getting positive financial results the port authorities cannot resist pressure from current and retired employees, who push for larger payments. As a result, the port gains are appropriated by current and past staff, reducing the investment in new infrastructure or equipment.
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Table 13: Summary of Guatemala logistics factors problems
Good, minor problems Fair, considerable problems v Bad, serious problems
Trucking industry
Railways
Ports
Airports
Border crossings
Maritime
Airborne
Surface
Supply chain management
Logistics operators
Control, inspections
Security
Urgent need to enhance workers professionalization and firms development
They currently have no role
Port weaknesses (like short draft) constrain ship size, increasing freight rates. Ample room for efficiency gains.
Some improvements needed to increase capacity
New crossings required; need to improve border operations efficiency
Connectivity is not bad. A weak market and port deficiencies lead to operation based on feeder vessels. Some cartelization in reefer cargo.
Good service in general, particularly express services
Good integration with other CA countries; with Mexico trade is unloaded-loaded at the border (on the Mexican side)
SMEs find obstacles in supply chain and logistics organization
Good quality logistics services
Customs improving, but lack of coordination among entities performing controls at the border. Red channel too high
A very serious issue in surface transportation
DOMESTIC TRANSPORTATION
GATEWAYS
EXTERNAL TRANSPORTATION
BUSINESS LOGISTICS
Trade Facilitation
The growing demand requires network expansion and modernization. Growing maintenance backlog, and urban congestionHighways
Source: Author’s elaboration
3.4. TRADE LOGISTICS POLICY PRIORITIES FOR SMES
Key initiatives for a logistics agenda
3.18. As a result of the analysis of the current logistics weaknesses and the potential for trade expansion, ten key initiatives are proposed. The initiatives, recommended as policy priorities, are related to highways, surface transportation, ports, border management, and logistics software and institutions. They are designed to enhance the overall competitiveness of the country, while being particularly beneficial for SMEs. The initiatives are presented in the following paragraphs and some other relevant potential actions are described afterwards.
Roads and highways: 3.19. Increase the role of the private sector in providing infrastructure services . There are several ways to promote public-private partnerships (PPPs), particularly on highways. The existence of a new legal framework—a new PPP Act, currently under discussion24—might help in their implementation. The effectiveness of the new law will depend on its final form. There are many issues that will be relevant for the law’s actual impact, such as the independence of the regulatory entity, the level of approval required for PPP projects, the role of the controlling
24 The project is named “Ley de Participación Público Privada en Materia de Infraestructura”. At the time of this report’s preparation, the law was under review in Congress.
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agency (Contraloría) with respect to the technical aspects, and the constraints for potential project renegotiation.
i. The recommended actions in this regard are: � Complete the corridor between the MRGC and Puerto Quetzal. The main road and
alternate roads work is already done; the concession scheme may be similar to the existing one, centered on operations and maintenance.
� Urban highways that access MRGC are a major need, and a great opportunity for involving private investment, as there is a large potential for resources from user charges. The initiative—already incorporated in the Plan Nacional de Desarrollo Vial—demands careful planning, framing it in a strategic mobility plan with the development of some associated logistics centers.
� By-pass of urban areas in main corridors, to improve highway circulation and solve urban congestion problems, particularly on highways CA-2 Occidental and Oriental. Mexico’s “libramientos”, awarded in concessions in recent years, are interesting examples to examine.
� Contracts for rehabilitation and maintenance. There are multiple examples in the Region, like the CREMAs (contratos de rehabilitación y mantenimiento) in Brazil, Argentina and Uruguay, or the Prestación Privada de Servicios (PPS) in México.
ii. Ensure road maintenance, by making sure that an adequate amount of funding from the
fiduciary fund and fuel consumption fees are dedicated to maintenance rather than new works. The implementation of multiyear rehabilitation and maintenance contracts may be a useful tool to ensure the maintenance of adequate road standards. The COVIAL road condition monitoring system should be reviewed.
Surface Transportation:
iii. Trucking industry modernization program. Several activities could improve trucking industry performance: � Review the current regulations, considering the inclusion of a unified register and the
establishment of a cargo document to be issued by carriers (a bill of lading, as is done in most countries).
� Generate a program to renew the fleet, promoting the removal of the oldest vehicles and providing incentives for the incorporation of new, more efficient and clean units.
� Implement a professionalization program, including mandatory training for workers (linked to the issue of the professional driver license) and to the entrepreneurs. There are good examples to review in Argentina and Uruguay.
iv. Mexico/Central America road transport harmonization program . As trade with Mexico
increases, the lack of harmonization, which leads to loading/unloading at the borders, generates inefficiencies. The harmonization of standards, at least for the circulation of trailers (switching only tractor units at the border) would reduce logistics costs.
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Guatemala should propose logistics zones close to the Mexican border, as this is already happening in Ciudad Hidalgo (on the Mexican side).
v. Road freight security and protection program . The program should be prepared by
security forces. It should improve control of roads and informal markets, where stolen goods are sold, based on previous intelligence surveys. Firms may contribute by refining their personnel selection process, mapping crime and sharing results with authorities, loading trucks in ways less attractive to thieves, installing vehicle monitoring devices, and improving communications channels with security authorities.
Ports:
vi. New port legislation and institutional organization. A new legal and regulatory framework will help enhance port performance. The diverse reforms carried out in the region in the last years provide useful lessons (México, Peru, Uruguay). The studies produced by Pronacom, the National Port Commission (CPN), and the Public-Private Infrastructure Advisory Facility (PPIAF)25, as well as World Bank Port Reform Toolkit and the IMO (International Maritime Organization) and COCATRAM (Comisión Centroamericana de Transporte Marítimo) recommendations provide valuable background. Some of the key issues for the new legal framework, which should be consulted with relevant stakeholders, are: (i) a centralized national policy and administration organization to optimize port sector resource utilization, (ii) incentives for private investment in infrastructure, (iii) long-term planning procedures, (iv) effective mechanisms for user participation, and (v) establishment of an adequate regulatory entity.
Border management:
vii. Coordination among border control agencies. The integration of border control is a major challenge to facilitate trade. The involved agencies should coordinate joint inspections (customs, agriculture and food, narcotics, public health). There have been initiatives in this regard, to avoid repeated inspections, which were set aside. All involved parts should be committed, including security and immigration agencies.
Logistics software and institutions:
viii. Facilitate modern logistics activities. Efficient business logistics need the support of regulations and promotional policies. Two initiatives are proposed in this regard: (i) facilitate warehouse access, particularly to SMEs, with logistics platforms being the most efficient way to do it; (ii) support the development of cold chain facilities, since Guatemala has a very small capacity of refrigerated chambers and they are mostly private (only 15 percent of total refrigerated warehouses capacity is for public use).26
ix. Development of logistics platforms. Establishing logistics centers would have a positive
effect on trade and on the reduction of negative externalities produced by freight 25 Nathan Associates (2005) 26 Transport Intelligence (2009)
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operations in densely populated areas. This will particularly help SMEs and small transport operators. Box 1 includes a description of a logistics center and its expected benefits. Peri-urban locations close to the MRGC and locations close to the ports are likely to be the most appropriate. There are various countries in the region that have designed networks of logistics platforms (Colombia, Peru). Mapping and performance analysis of the main value chains would allow for the identification of the most appropriate locations and the type of functions the logistics centers should perform.
x. Setting a National Logistics Council. The implementation of a logistics agenda will
demand the participation of several government entities. The cross-cutting nature of the agenda suggests the need to establish a coordination council - the National Logistics Council - at a high level of government, composed of representatives from government areas involved (reflecting users and providers of logistics services), as well as representatives of the main private stakeholders. It may be embedded in some existing competitiveness or trade promotion entity. The Council might be supported by a small technical office (a Logistics Observatory), responsible for generating key performance indicators and knowledge with regard to trade logistics.
3.20. There are other issues that are relevant for improving Guatemala’s trade logistics . Two of them that are particularly significant are the need for a regional perspective and the role of railways.
� The logistics performance of Central American countries depends to a large extent on the combined effort of the countries at the regional level. Integration efforts should continue looking for efficient methods of implementation. The construction of highway corridors (particularly the Pacific corridor) with harmonized standards (RICAM), the improvement and modernization of border crossings, or the transit regime27 (with remarkable support from SIECA), are critical for a better logistics performance.
� Railways have not participated in freight transportation in Guatemala since 2007. A 50 year concession awarded in 1997 is currently under dispute. There is a potential role for railway freight transport, and the current trends towards cleaner transport modes, reducing greenhouse gas emissions, are likely to offer new financial sources to promote railway development. Public initiatives should be based on thorough and realistic studies, supported by a clear understanding of the potential clients’ needs.
27 The transit regime is the set of rules regulating the transit of a vehicle and freight pertaining to one country, throughout the territory of another one, without customs control. This is the case, for example, of a Mexican export going by truck from Mexico to Costa Rica, crossing Guatemala’s territory.
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Box 1: Logistics centers: basic concept and expected benefits
Logistics centers, also known as freight villages, logistics zones or logistics parks, are a special category of special economic zones (FIAS, 2008). They are defined as areas within which all activities relating to transport, logistics and the distribution of goods, both for national and international transit, are carried out by various operators. These operators can either be owners or tenants of buildings and facilities (warehouses, break-bulk centers, storage areas, offices, etc.) which have been built there. They should be served by a multiplicity of transport modes and run by a single body, either public or private. It is vital that a logistics centre be managed as a sin gle and neutral legal body if synergy and commercial cooperation are to be ensured. (Europlatfoms, 2004). Logistics centers are important nodes within the supply chain network. As a shipments breaking point, they allow for the design of efficient networks, consolidating large freight volumes on trunk corridors in order to take advantage of the transport economies of scale (larger vehicles, higher load coefficients). At the macro level, hub terminals play this role in international trade; at the micro level, distributions centers, where cross docking is performed, play a similar role. Logistics centers also allow the switch between transport modes, the management of inventories, value added logistics activities (like packaging, labeling, or bar coding). The y may serve several value chains at the same time, and particularly small and medium enterprises (SMEs) not able to develop their own facilities, providing services to the vehicles (service station, shops), the personnel (hotels, restaurants), and the freight (cargo agencies, banks, customs). There are diverse types of logistics centers. Although a unified typology has not yet being developed, most authors categorize logistics centers according to their function. The simplest ones are single -mode distribution centers (typically for trucks), oriented towards final consumers. When logistics activities are added (inventory management, value added logistics) they become logistics parks; they are usually associated with more than one transport mode, and linked to major gateways, like ports and airports. In some cases the logistics zones become hubs for international trade, as multimodal logistics platforms. (ECLAC, 2009) The direct benefits of a logistics platform are the potential to reduce logistics costs (by lowering transport and inventory costs), to improve quality of service, and to allow for agglomeration economies, helping small carriers to consolidate their freight flows. Logistics centers help SMEs to connect to global value chains. But logistics platforms may also generate large indirect benefits, concentrating in peri-urban areas activities that are usually scattered across the city, therefore reducing congestion and other negative externalities derived from freight operations and vehicle circulation, and enhancing land values.
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CHAPTER 4. HUMAN CAPITAL
4.1. INTRODUCTION
4.1. In the knowledge economy, human capital28 becomes even more important for adapting to new circumstances in a changing world. Overall, skilled workers can adapt to change and learn new skills better than non-educated ones. Companies need workers who are willing to update their skills and are capable of continuing to learn during their working lives. However, low levels of education are frequently pointed out as a principal obstacle to greater productivity in Latin America (Gill, et al. 2005; World Bank, 2003; Duryea and Pagés 2002).
4.2. Human capital is a key factor for the growth and productivity of SMEs. In Guatemala, it is estimated that an increase of one percent in the average number of years of schooling would increase productivity by about 0.33 percent.29 Furthermore, education has been identified as one of the main constraints to growth in Guatemala (see Stein, 2008 and diagnostic in Chapter 1). This chapter examines the current human capital situation in Guatemala, particularly with regard to what is relevant for the development of SMEs, the degree of development in relation to other countries, and the main challenges for its development. Despite advances in education, the conclusion is that the Guatemalan educational system has not been able to meet the challenges posed by the knowledge economy.
4.2. THE EDUCATIONAL SYSTEM IN GUATEMALA
4.3. During the 1990s, the national educational system was reformed and two subsystems were established: the School Subsystem and the Out-of-School or Parallel Subsystem30. The School Educational Subsystem is organized in different levels: Beginning Level, Pre-School, Elementary School and Secondary School. Secondary school is split between basic and diversified cycles. The Out-of-School Subsystem is designed for the population that has not had access to school education and for those who had it, but would like to broaden it.
4.4. The diversified cycle that is part of secondary education is aimed at 16-19 year olds and encompasses: training to prepare for university; professional and technical training; training for teachers; and specialties such as home economics. However, little progress has been achieved in the modernization of technical-professional training. A 2005 study concluded that: i) the number of courses offered is extensive, particularly for a small country; ii) few courses are aimed at making people ready for tertiary schooling; iii) the curriculums of the training offerings are disorganized; iv) among the students of the diversified cycle, there are some who enroll in courses for which they have no vocation; and v) students choosing the basic cycle with an occupational focus do not have an institutionalized pathway to pursue a technical career. 31
28 Mix of innate skills and abilities of people, as well as the skills and learning that they acquire through education and training (OECD 2007). 29 Loening (2005) 30 Legislative Decree 12/91 -“National Education Act”. 31 Miranda (2005)
54
4.5. The preparation given during the diversified cycle of secondary school is considered inadequate, particularly because of deficiencies in science, mathematics, language and their application (Fortin, et al. 2009). This is confirmed by the results of PREAL-CIEN (2008), which found that most Guatemalan students do not achieve a satisfactory level of basic skills in reading and mathematics. The report states that by the end of secondary school, only the best students remain, and even out of the students who completed the diversified cycle in 2006, the percentage of students who had a satisfactory or excellent performance was very low (only 6 percent in math, and 23 percent in the reading).
4.6. Higher education takes place in three types of centers: a public university, private universities, and a specialized center that is part of the Universidad del Istmo (the Feminine Institute of Higher Studies - IFES). The University of San Carlos of Guatemala is the only autonomous public university and its main source of financing is from a constitutional mandate requiring a budget allocation of no less than 5 percent of the State’s income. Currently there are 10 private universities governed by the Higher Private Education Council.
4.7. Technical education was introduced in Guatemala in 1960 as a state service to support productive development. However, only in 1972 did an initiative arise to create a specialized institution that goes beyond basic training, to offer a range of modern, large-scale professional training programs. The initiative offered fixed or mobile training centers or directly at the job site and worked with companies and labor agencies. Out of this initiative, the Technical Institute for Training and Productivity (INTECAP) was created.
4.8. Despite the fact that INTECAP is an independent entity, it is not fully autonomous, since it is subject to the policies of the Ministry of Labor. It is mainly financed with private funds equivalent to 1 percent of the payroll of workers in the private sector. Its Board of Directors is presided over by the Minister of Labor and includes other public and private representation. INTECAP now has 21 training centers offering 56 specialties. Most of these training centers provide different specialties, but some have a specific focus: metal mechanics, tourism and hotel management, meat products, banking, insurance and financial services, textile and clothing technologies, and information and communication technologies.
4.9. The training offerings are classified into five competence levels:
(a) Level 1: focusing on functions related to a low complexity level, without variability, and low autonomy.
(b) Level 2: aimed at non-complex functions, with little variability, dependency on third parties, and handling of manual, mechanical and electrical equipment.
(c) Technical level: specialized mid-level technician or professional technician, aimed at variable and complex functions, with some labor autonomy. He/she supervises the work of third parties or manages his/her own work. Handling of electronic equipment.
(d) Professional level: complex and variable functions, with labor autonomy, analytical and design capabilities applied to equipment, processes, tools, systems and others, with a focus on conflict resolution;
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(e) Specialized professional level: complex, variable functions, with a high degree of labor independence and decision-making capabilities with capacity for approaching and managing on-line systems and processes.
4.10. In 1984, the number of people trained by INTECAP was 30,000, while in 2006, this number had reached 255,532, which is equivalent to 3.6 percent of the total working-age population.32 Most of those trained worked in the service sector, particularly hotel management, transportation, banking, and insurance. In order to access INTECAP’s courses, an individual should have at least 6 years of formal education, which means that this training is not reaching those with a limited education.
4.11. In addition to INTECAP, there are several agencies in charge of providing educational services in different sectors. Among them are the National Central Agriculture School (Escuela Nacional Central de Agricultura, ENCA), devoted to farming and forestry training that receives 5 percent of the budget of the Ministry of Agriculture (MAGA). Other ministries have institutions that offer intermediate and advanced technical diplomas in coordination with the country’s universities. Some other state agencies also have some education programs (Duarte, 2008).
4.3. PERFORMANCE INDICATORS
4.12. Recent studies have analyzed the performance of the school education subsystem and have concluded that despite poor education indicators there have been positive changes.33 However, there is ample room for improvement. In 2006, the average years of schooling of 25-65 year-olds was 4.8 years, well below other countries in LAC, including those with a lower level of development (Figure 23). Even though the average years of schooling of the Guatemalan population has increased in recent years, it is still more than two years below the world average, and also significantly below that of other Central American countries.34
32 Klueger and Rosas (2008) 33 Sobrado et al. (2008) 34 PREAL-CIEN (2008)
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Figure 23: Average Years of Schooling for Population Aged 25-65 (2005/2007)
Bolivia
Chile
Costa Rica
El Salvador
Guatemala
Honduras
Panamá
Colombia
Rep. DominicanaEcuador Mexico
Nicaragua
Paraguay
Peru Uruguay
Venezuela
Brasil
0
2
4
6
8
10
12
- 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000
Ave
rage
yea
rs o
f edu
cati
on
GDP per capita (PPP $ 2005)
Source: WDI and SEDLAC 4.13. Another measure of the availability of skilled workers is the percentage of the population that has finished secondary education (Figure 24 and Figure 25). For workers aged 25, roughly 23 percent have completed secondary school; for the population as a whole, this number is only 8 percent. Some studies have found that the contribution to the country’s mean productivity of the segment of the labor force with secondary education or higher, is between 0.1 and 0.5 percent.35 Additionally, estimates36 calculate that the probability for a man who has not finished secondary school to be hired in the formal sector is 0.15, while this probability increases to 0.38 if he has completed secondary school or higher. In the case of women, these figures show a greater contrast, going from 0.03 to 0.33.
4.14. The poor performance of Guatemala with regard to accumulation of human capital is not surprising. Despite the fact that currently most children go to elementary school, there are few students who are able to finish their studies. In fact, out of each 100 children, 89 are enrolled in elementary school, 55 complete sixth grade, 38 are matriculated in secondary school, and only 18 finish it. Figure 24 and Figure 25 highlight the educational achievement levels of the workforce.
35 Escribano y Guasch; 2005. 36 Klueger y Rosas; 2008.
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Figure 24: Educational Achievement in Guatemala by Age (25-59 years)
Figure 25: Distribution of Educational Level in the Labor Force
No education
Some primary
Primary completeSome secondary
Secondary complete
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
Age
No education
23%
Incomplete primary
30%Complete primary
16%
Incomplete secondary
16%
Complete secondary
8%
Superior7%
Source: INE (2007) Source: National Status Project (2008).
4.15. Human capital is unequally distributed in the labor force with a large number of unskilled workers and a minority with higher education. Based on the 2006 National Survey of Living Conditions, estimates show that people in the wealthiest quintile had 9.5 years of schooling, whereas those in the poorest quintile only had 1.3 years; that means there was a gap of more than 8 years between both groups. Closing this gap is one of the challenges for the future.
4.16. Guatemala also ranks poorly in terms of the number of students enrolled in the sciences. According to the normalized scale developed by the World Bank’s Knowledge Assessment Methodology (KAM), Guatemala has the lowest score of all of the comparator countries on the percentage of tertiary students enrolled in science (Figure 26). These numbers are worrying if we take into account the critical role played by highly-skilled workers in the adaptation, adoption, and effective use of new technologies developed elsewhere as a key element for productivity growth in the manufacturing sector.37
37 World Bank (2004)
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Figure 26: Science Enrollment Ratio (2007)
0.7
1.6
3.8
3.9
4.4
4.6
6.7
0 2 4 6 8
Guatemala
Honduras
Chile
Panamá
Costa Rica
Mauritus
El Salvador
Position normalized with respect to all countries (0 a 10)
Source: World Bank KAM Website
4.17. Another measurement of human capital of a country is the share of technical and professional workers in the labor force (Figure 27). Out of the labor force at the national level, 8.6 percent are technical and professional workers, and only 3.3 percent are located in rural areas. This ratio is relatively low in comparison to other countries. In addition, it can be a constraint to attract foreign investment, which needs highly-skilled workers for the development of added-value activities.
Figure 27: Technical and Professional Workers as Percentage of the Labor Force
6.1
8.6
10.6
10.8
12.6
14.2
15.0
19.2
21.8
0 5 10 15 20 25
Honduras
Guatemala
Sri Lanka
El Salvador
Mauritus
Panamá
Bolivia
Chile
Costa Rica
% of Technical and Professional Workers in the Labor Force Source: KAM Website and INE (2007).
4.18. Quality of education. Available measures suggest that the quality of education in Guatemala is relatively poor, meaning that even workers who have attended school have skill deficiencies. Guatemala took part for the first time in a regional examination of school performance in 2006 that included 16 LAC countries.38 Guatemala scored lower than all of the
38 Second Regional Comparative and Explanatory Study (SERCE) of UNESCO which evaluated the learning of third and sixth grade students of elementary school in 16 Latin American Countries and the Mexican State of Nuevo
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other countries on reading and math, with the exception of the Dominican Republic. Guatemala does not participate in international exams such as PISA (Programme for International Student Assessment) or TIMSS (Trends in International Mathematics and Science Study), but other studies give a sense of the problem. Fortín et al (2009) found that those interviewed considered the level of training of students in the diversified cycle to be inadequate. Deficiencies in science, mathematics, and language were considered particularly problematic. PREAL-CIEN (2008) present evidence that most Guatemalan students do not achieve a satisfactory level of basic skills in reading and math. The report states that only 6 percent of students that finished the last grade of the diversified cycle in 2006 had satisfactory or excellent performance in math and 23 percent in reading. This result is particularly surprising given that generally it is the better students that remain to the end of secondary school.
4.19. A separate analysis currently being undertaken by the World Bank on skills and employment generation in Central America has also found that quality of education is a key issue in Guatemala. The analysis finds that Guatemalan students exhibit gaps in skill acquisition that do not diminish with additional years of schooling and that these gaps are later reflected in the labor market.39
4.20. One final measure of educational quality comes from Bratsberg and Terrel (2002). They estimated the return to education for migrants from 67 countries to the United States, and found that Guatemala ranks 64. This means that one additional schooling year in Guatemala is worth less than in most countries in the study sample. For the sake of illustration, a worker educated in Japan doubles his or her income simply by being educated in Japan rather than Guatemala.
4.4. HUMAN CAPITAL AND THE NEEDS OF SMES
4.21. The 2006 national survey estimated the total population of Guatemala to be 12.9 million and the labor force to be 5.4 million, of which 52.7 percent are located in urban areas and 61.6 percent are males. Workers with some level of post-secondary education accounted for only 6.5 percent (in comparison, for example, with 11.7 percent in Central America), and had an income level an average of four times greater than workers with no education at all. More than two-thirds of employment was concentrated in micro businesses, and self-employment amounted for 46 percent of the labor force. A high percentage of the labor force (71 percent) was part of the informal economy and 15 percent was underemployed.
4.22. An analysis of education levels of micro and small enterprise owners showed that 6 percent had no schooling at all, 35 percent had elementary education, 49 percent had secondary education, and only 10 percent had higher education. For companies with permanent workers, 4 percent of the employees had no schooling; 46 percent, elementary education; 46 percent, secondary education; and 3 percent, higher education.40
Leon on language and math. The study also included an exam for sixth graders on Natural Sciences, but Guatemala did not participate in that portion. 39 World Bank (forthcoming). Human Capital and Social Policies to Promote Good Quality Job Creation in Central America. 40 PRONACOM (2007)
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4.23. According to the World Bank enterprise surveys, 29 percent of Guatemalan companies identified the poor education of the work force as a serious or very serious constraint. This percentage increases with the size of companies: 27 percent of small, 32 percent of medium, and 35 percent of large enterprises. From a comparative perspective, Guatemala fares worse than most of the comparator countries (Figure 28).
Figure 28: % of Companies that Identified Inadequate Education as a Constraint, 2006
13
14
21
23
23
28
29
32
0 5 10 15 20 25 30 35
Costa Rica
Panamá
Sri Lanka
Nicaragua
Honduras
Bolivia
Guatemala
El Salvador
% of Businesses Note: Costa Rica data is from 2005 and Sri Lanka data from 2004. Source: World Bank Enterprise Surveys
4.24. According to focus groups conducted by CIEN (1998)41, Guatemalan entrepreneurs considered that the educational and training levels of human resources did not meet their needs in the different productive levels. In some cases, it was because worker skills were not sufficient, and in others, because required skills did not exist at all in the labor market. Entrepreneurs considered it important that in the future education be more oriented toward the needs of the labor force. In contrast, the education system at the time was considered to be static and unresponsive to market requirements.
4.25. Enterprise surveys of the manufacturing sector in 2006 found that 28 percent of firms offered formal training to their employees, and the incidence of training increased with company size: 24 percent of small, 35 percent of medium, and 66 percent of large enterprises offered formal training.42 The incidence is much higher in exporting companies (68 percent), foreign ones (64 percent), and high-tech sectors (e.g., chemical and pharmaceutical companies: 70 percent). From an international comparative perspective, Guatemala again fares poorly (Figure 29). A study from the World Bank (2004) reported that 36 percent of companies in Guatemala deem that the supplied external training was not very relevant to meet their training needs. A separate study using focus groups indicated that the training offerings from entrepreneurial development service institutions did not match the demands of micro, small and medium sized enterprises (Garrido, 2005).
41 CIEN conducted focus groups with representatives from important business associations and from INTECAP. 42 Note: the enterprise surveys do not include firms in the informal sector.
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Figure 29: Percentage of Firms Offering Formal Training, 2006
25.6
28.1
32.6
33.3
43.3
43.9
46.4
46.9
49.6
53.9
Mauritus
Guatemala
Sri Lanka
Honduras
LAC
Panamá
Costa Rica
Chile
El Salvador
Bolivia
Percentage of Firms
Note: Costa Rica data is from 2005, Mauritius in 2009, and Sri Lanka 2004. Source: World Bank Enterprise Surveys.
4.26. Using a production function, Batra et al (2000) measured the effects of different factors on productivity and found that formal training has a positive and statistically significant impact (controlling for other factors that could affect productivity). However, informal training was not found to have any significant impact on productivity.43 Both in-house formal training and external training using private providers were found to have a positive and significant impact on productivity— 30 percent and 48 percent greater productivity, respectively. However, external training through public institutions, such as INTECAP, did not have a statistically significant impact on productivity. This result may suggest that the training provided by these institutions was not appropriate for employers’ needs.
4.27. The Batra et al study found that the use of mature technologies was the most commonly quoted reason for why companies provided little or no training. The productive attributes of mature technologies are well established and there is little room to make improvements through the existing production techniques. Therefore, no additional training is required and the workers are able to become competent through learning by doing. Additionally, employers may not need to train because the mature technologies are widely disseminated and there is labor skilled in the use of old technologies that can be directly hired from other companies.
4.28. The second most important reason was that the high turnover rate of personnel makes training costly. A high employee turnover rate may inhibit training when it makes it difficult to recover the investment in worker skills. Furthermore, a high percentage of companies cited two additional factors for not providing training to their workers: i) lack of satisfaction with the training providers (mainly among the medium and large enterprises amounting to 45 percent and 53 percent, respectively); and ii) the availability of skilled workers from other companies.
4.29. As part of the current study, a series of interviews were conducted with owners and managers of SMEs in Guatemala City to get a better flavor for their education and training needs 43 The study does not define “informal training”, however it most likely refers to on-the-job training provided by employees of the same firm that is receiving the training.
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as well as limitations in the skills of their employees. Annex 1 contains a list of the firms interviewed and the interview guide used. The interviews found that there is a general perception that graduates of the education system do not have adequate skills to perform in the labor market. Employers considered this to be due to the lack of practical application of knowledge acquired in school. The education system was considered to be very theoretical, with deficiencies in curricula, teachers, methods and teaching techniques, and infrastructure of education centers.
4.30. The majority of those interviewed considered INTECAP to be one of the better institutions in terms of offering adequate training programs, however they were not totally satisfied with INTECAP offerings. Most of the managers had not been able to give any input to the curricula of the courses taken by their employees. On the other hand, the majority of the firms interviewed provided informal training—taught by their more experienced workers—to their employees.
4.31. Most employers considered soft skills to be critical. For instance, employers often considered it more important for their employees to have personal motivation and the ability to work in teams than to have specific technical skills. Interpersonal relations and being honest, responsible, and loyal to the company were also seen as very important. Many interviewees expressed that their employees had shortcomings in terms of attitudes, knowledge, and skills. Interviewees considered that training curricula for their employees should include customer service, ethics, human relations, and specific courses for their line of business.
4.32. In relation to other constraints, many employers did not consider the human capital of their employees to be a major limiting factor, although there was a wide variation of opinions ranging from not an obstacle to a very severe obstacle. Shortcomings of workers that lowered productivity included: lack of ability or desire to learn, irresponsibility, difficulty interacting with customers, limited capacity for teamwork, and lack of honesty and own initiative.
4.5. POLICY RECOMMENDATIONS
4.33. The previous sections covered Guatemala’s underperformance on a range of indicators, including a low average number of years of schooling of the workforce, low levels of secondary graduates, weak quality of education, relatively few technical and professional workers, and low science enrollment. Shortcomings in terms of the needs of firms for adequately skilled workers and training programs were also covered. Clearly, aggressive measures are necessary to increase the number of secondary graduates, improve the quality of education, and boost enrollment in and the quality of science, technology, engineering, and math courses. However, recommendations to improve these measures are beyond the scope of this report. Rather, the recommendations here concentrate on a limited set of measures to make education and training more relevant to the needs of Guatemalan SMEs. The recommendations are based on a review of existing analyses and proposals, as well as interviews with SMEs. Recommendations in this section complement those in other chapters, particularly those related to innovation.
4.34. Foster more access to education and strengthen its quality and relevance through the building of competencies for the “diversified cycle”. A good starting point is the National Strategy for the Development of Basic Strategies for Life created by the Ministry of Education in 2008. Consultations, validations, and technical reviews of the competencies framework and new
63
curriculums efforts need to continue in order to bring the models to the classrooms. Greater private sector participation in identifying basic competencies should improve the educational system. Clear learning objectives in the educational system should be established that include labor market requirements to better prepare graduates for the workplace.
4.35. Align educational inputs with required competencies, implementing a continuous consultation process to address labor market needs. Matching job-related competencies with curriculum, educational materials, teaching, training of teachers, and evaluations would help students see education as relevant to their future success at work. This would likely reduce school drop-out rates. In order to institutionalize a permanent feedback process, a forum is needed to allow all stakeholders to identify the present and future needs of companies and students and promote cooperation among participants.
4.36. Foster strategic partnerships with the private sector to improve education through internships in companies. This recommendation is aimed at improving the transition from school to the labor environment, promoting more relevant teaching, and greater hiring of graduates. In particular, the development of study programs which combine education with working experience should be promoted and the possibility of shared financing among employers, students and Government should be explored.
4.37. Establish a technical training public policy that responds to the competitiveness challenges of the country. The Ministry of Labor, in its role as ruling body of labor training, should make explicit and public the labor training policy of the country. The formulation of public policies should be an ongoing process with the participation of stakeholders, particularly the private sector, and should allow for dynamism and flexibility. This should include clear objectives, goals, structure, responsibilities, and an estimate of required financing. Given the limited public budget of Guatemala, public/private financing modalities could be explored. Box 2 presents lessons and recommendations from international experience on reforming training programs.
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Box 2: Lessons and Recommendations on Training Reforms
Lessons
� Greater participation of the private sector in defining the strategic direction, policy and administration of the training system.
� Separation of policy functions, administration, setting of standards, certification, accreditation and service delivery.
� Reform and decentralization of the administration of training centers to better meet the demands of companies and sectoral needs.
� Reform of the training financing system to stimulate the development of private centers, improvement of public offerings, more relevant and timely services, and more on-the-job training.
� Reforms to improve SMEs access to training. � Increases in trade integration tend to raise the training needs of the private sector and make reforms
especially timely. Recommendations
� Separate key functions in the regulation and delivery of training. � Establish a decentralized training market, regulated by a three-party (business, labor, state) supervision
agency independent from the Government. � Support the development of diversified supply of training offerings that is driven by demand and high
quality and consists of both public and private institutions. � Reengineer public training institutions to reduce high administration costs. � Strengthen public training institutions since they are the leading entities in the training marketplace. � Increasing training delivery to SMEs that have been left out of the process.
Source: Fajnzylber (2005).
4.38. Develop a national labor skills certification system. To improve the quality and relevance of training, a system could be implemented to certify student/worker labor competencies and to accredit training service providers. Certified competencies would allow workers to signal to employers that they have proven skills in specific areas that are relevant to the job. In contrast, traditional diplomas and degrees do not necessarily guarantee the mastery of knowledge and skills required by the marketplace. Certifications and accreditations should be administered by credible independent agencies that follow rigorous evaluation processes.
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CHAPTER 5. INNOVATION
5.1. INTRODUCTION
5.1. Innovation is a key driver of economic growth and critical to increasing competitiveness. Studies have shown that differences in technological progress, rather than capital investment or labor growth, account for much of the widening gap between rich and poor countries. For example, Hall and Jones (1999) and Dollar and Wolf (1997) found that differences in total factor productivity (TFP), which are generally associated with technological progress, account for roughly half of the cross-country variations in per capita income and growth. Easterly and Levine (2001) argue that productivity differences largely explain global income gaps. To boost productivity, governments need to do all they can to foster an innovation-friendly business environment.
5.2. This chapter uses the term “innovation” in the broadest sense, going beyond such traditional sources of innovation as research and development (R&D). Innovation also encompasses technology absorption and the adoption and upgrading of existing products and processes. According to this definition, changes that a firm makes to improve a production process to meet a quality standard would be considered innovation.
5.3. An environment that fosters innovation will help Guatemala take advantage of the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA). The trade deal offers the potential for significant economic gains from cross-border investment, access to export markets, and opportunities to adapt foreign technologies for domestics firms. To fully benefit from DR-CAFTA, a well-functioning national innovation system44 is needed, as well as complementary actions on the educational front.45 Looked at from a different perspective, increased competition from within DR-CAFTA, as well as from Asia and the rest of the world, means that Guatemalan SMEs will have to innovate to survive and prosper.
5.4. This chapter draws on a variety of indicators to benchmark Guatemala’s performance on innovation input and output indicators. The analysis finds that Guatemala performs poorly on many innovation indicators but somewhat better on technology adoption/transfer indicators vis-à-vis comparator countries. The chapter then includes an analysis of Guatemala’s barriers to innovation, followed by policy recommendations to help overcome those barriers. Policy recommendations address the following areas: institutions, knowledge transfer, links between supply and demand for innovation, quality infrastructure, and regional cooperation.
5.2. HOW GUATEMALA PERFORMS
5.5. This section analyzes data from a variety of sources to benchmark Guatemala’s performance. Innovation output indictors include patents and scientific publications; Innovation
44 The term “national innovation system” generally refers to an interactive set of national in stitutions, enterprises and individuals that contributes to the country’s technological and economic development (Agapitova, 2005). 45 See De Ferranti et al (2003) and Jaramillo and Lederman (2006).
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input indicators are expenditures on R&D and availability of researchers. Technology transfer, quality certifications, and innovation-related institutions are also considered.
Innovation Output Indicators
5.6. Patents and scientific publications. Numbers of patents granted and scientific publications can serve as proxies for innovation levels. A look at patents per million workers in the labor force over the last five years illustrates Guatemala’s underperformance with respect to comparator countries (Figure 30). In terms of scientific publications, Guatemala scores well below the LAC average (after controlling for GDP) and publications would have to increase by at least a factor of 5 to reach Costa Rican and Panamanian levels (Figure 31).
Figure 30: Patents Granted to Residents Per Million Labor Force (2002-2007 Average)
Figure 31: Scientific Publications / GDP (US$ billions), 2007
1
2
3
6
8
9
18
45
Guatemala
Honduras
Costa Rica
El Salvador
Panama
Chile
LAC
Brazil
Source: RICYT (2009) Source: RICYT (2009)
Innovation Input Indicators
5.7. R&D expenditures and researchers. Based on data from 60 countries, Lederman (2007) shows that R&D expenditures tend to be significantly associated with product innovation—i.e. non-patentable innovation—in developing countries. Yet R&D expenditures in Guatemala are very low—0.06 percent of GDP, compared with a LAC average of 0.6 percent and 0.37 percent in Costa Rica (Figure 32). Figure 34 shows that Guatemala’s R&D expenditures are even lower than one would expect given the country’s GDP per capita. (The curve in Figure 34 shows the predicted level of R&D based on a country’s level of GDP per capita, and Guatemala falls below the curve). When the number of researchers in R&D is considered, Guatemala again comes out at the bottom of the list of comparator countries. Guatemala has only 10 percent of the LAC average, and about 1/3 the number of researchers (per million people) of Costa Rica (Figure 33). Moreover, the flow of potential new researchers is paltry. In 2006, there were only 163 new masters and 2 Ph.D graduates from Guatemalan universities in the sciences (Table 14). (Note that these numbers do not capture Guatemalans that graduate from foreign programs and intend to return to Guatemala.)
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Figure 32: Expenditure on R&D as a % of GDP, latest year available
Figure 33: Researchers in R&D per Million People, latest year available
0.05
0.06
0.19
0.25
0.37
0.38
0.61
0.67
Honduras (2003)
Guatemala (2008)
Sri Lanka (2004)
Panama (2005)
Costa Rica (2004)
Mauritius (2005)
LAC (2005)
Chile (2005)
42
87
122
141
431
833
Guatemala (2006)
Panama (2004)
Costa Rica (2005)
Sri Lanka (2004)
LAC (2004)
Chile (2004)
Source: SENACYT (2009) for Guatemala; World Bank, Development Data Platform (2009) for all others.
Source: SENACYT (2008) for Guatemala; World Bank, Development Data Platform (2009) for all others.
Table 14: Flow of Potential Researchers —Graduates by Scientific Discipline, 2006
Bachelors
(Licenciatura) Master Ph.D Natural and exact sciences 75 0 0 Engineering and technology 1485 64 0 Medical sciences 607 52 2 Agricultural sciences 352 47 0 Total 2519 163 2
Source: SENACYT (2008)
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Figure 34: Predicted and Observed R&D Based on GDP per capita
Source: Lederman and Maloney (2006)
Technology Transfer / Adoption 5.8. Given Guatemala’s size and level of development, technology and knowledge transfer is more important for SMEs in most cases than is new-to-the world R&D. Of course, in many cases, some degree of R&D is necessary to adapt new technologies. Available data shows that Guatemala performs reasonably well on technology transfer measures. Royalty and license fee payments as a percentage of GDP are in the same range as Chile, Panama, and Costa Rica (Figure 35). According to the World Economic Forum’s executive perceptions surveys, Guatemala compares favorably to many comparator countries on firm-level technology absorption and FDI and technology transfer (Figure 36). These indicators suggest that government efforts to promote further technology transfer could be easily understood and well -received by firms.
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Figure 35: Royalty and License Fee Payments as % of GDP, 2007
Figure 36: Technology Transfer Indicators—Ranking out of 133 Countries
0.09%
0.12%
0.12%
0.13%
0.20%
0.20%
0.23%
0.24%
0.27%
Mauritius
El Salvador
Bolivia
LAC
Costa Rica
Honduras
Guatemala
Panama
Chile
Royalty and license fee payments as % of GDP 7
12
21
31
37
39
55
68
131
53
58
31
44
62
46
91
79
132
Costa Rica
Panama
Chile
Guatemala
Mauritius
Sri Lanka
Honduras
El Salvador
Bolivia
Firm-level technology absorption
FDI and technology transfer
Source: World Bank (2010), Development Data Platform
Note: Rankings are based on perceptions measured through executive surveys. Lower rankings are better. Source: WEF (2009)
5.9. Quality Certification. Guatemala has the lowest share of ISO 9001:2000 quality certifications of the comparator countries. Specifically, Guatemala had only 10 ISO certifications per US$ billion industry value added in 2006, compared to 28 in Panama, 39 in Costa Rica, and 55 in Chile (Figure 37).
Figure 37: ISO 9001:2000 Certifications per US$ Billion Industry Value Added, 2006
10
14
22
28
39
43
51
55
155
Guatemala
Honduras
El Salvador
Panama
Costa Rica
Bolivia
Sri Lanka
Chile
Mauritius
Source: ISO (2007) and World Bank (2009), Development Data Platform
Institutions
5.10. Innovation. The National Science and Technology Council (Consejo Nacional de Ciencia y Tecnología, CONCYT) is in charge of coordinating science and technology policy in
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Guatemala. CONCYT has nine members from government, the private sector, and academia, including:
� Public sector: Vice President of the Republic; Minister of Economy; and the President of the Science and Technology Commission of the Congress;
� Private sector: Presidents of the chambers of industry, agriculture, and business; � Academia: Rector of the Universidad de San Carlos de Guatemala (USAC), a rector to
represent the private universities, and the President of the Academia de Ciencias Médicas, Físicas y Naturales de Guatemala.
CONCYT is advised by a consultative commission that includes nine members from the same nine institutions mentioned above. The National Science and Technology Secretariat (Secretaria Nacional de Ciencia y Tecnología, SENACYT) is charged with implementing the decisions and policies of CONCYT.
5.11. SENACYT’s budget is small and has fluctuated substantially in recent years, going from US$ 0.4 million in 2002 to US$ 5.4 million in 2007 to US$ 3.6 million in 2009. SENACYT operates the National Science and Technology Fund (Fondo Nacional de Ciencia y Tecnología, FONACYT). FONACYT has several windows, the largest of which is the Fund for Scientific and Technological Development (Fondo para el Desarrollo Científico y Tecnológico, FODECYT). In 2009, FODECYT approved funding for 64 research projects for a total of approximately US$2.0 million, or an average of US$32,000 per project. Beneficiaries are primarily university researchers in areas such as agriculture, biotechnology, earth sciences, environment, and health.
5.12. Another FONACYT window is the Science and Technology Support Fund (Fondo de Apoyo a la Ciencia y Tecnología, FACYT). In 2009, FACYT financed 58 projects for a total of about US$331,000, or an average of US$5,700 per project. Projects consist mainly of financing for forums, panels, workshops, and trainings. In 2009, 1,247 people benefitted from these activities. Institutions awarded financing were primarily academic, but also included government ministries, research centers, and business associations. A smaller window known as the Fondo Múltiple de Apoyo al Plan Nacional de Ciencia y Tecnología (MULTICYT) approved three projects in 2009 for a total of US$145,000.
5.13. Due to the cross-cutting nature of innovation, strong coordination is needed between CONCYT/SENACYT and other relevant ministries, such as economy, education, and agriculture. Coordination is also needed with the private sector to ensure that government programs are aligned with demand. This type of coordination could be strengthened substantially in Guatemala.
5.14. Quality-related institutions. Guatemala has a national Quality Act that defines the quality infrastructure (QI) components for standardization, metrology, and accreditation. However, given that it has the largest population in the region, Guatemala’s QI is relatively underdeveloped. The accreditation body (Oficina Guatemalteca de Acreditación, OGA) is functioning well. It has received international recognition for the accreditation of laboratories and is working towards international recognition for the accreditation of calibration, inspection, and certification services. Several labs have already been accredited and demand appears to be increasing. In metrology (Centro Nacional de Metrología, CENAME), a modern building houses
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more than a half-dozen equipped laboratories, but human resources are not sufficient to use the infrastructure. As a consequence, the industrial sectors mostly look for service providers from neighboring countries or try to set up sector-specific calibration laboratories with traceability abroad. In standards (Comisión Guatemalteca de Normas, COGUANOR), there are institutional shortcomings, with slow adoption and approval of international standards. Overall, there is a lack of awareness in the economy of the importance of quality.
5.3. WHAT MIGHT BE CREATING OBSTACLES TO INNOVATION?
5.15. The previous section showed that Guatemala has a long way to go on the path to a more knowledge–driven economy. This section explores the factors that could be obstacles to innovation.
5.16. All aspects of a country’s investment climate can affect firms’ ability and willingness to invest and innovate. Factors as diverse as the macroeconomic environment, business entry and exit regulations, degree of competition, restrictions on labor mobility, and transportation infrastructure can all play a role. (See Figure 38 for an overview of the interrelated elements of a country’s innovation system.) Given that many of these topics are beyond the scope of this chapter and/or are covered elsewhere, this section focuses on a narrower subset of barriers t o innovation. These include market failures; human capital; access to finance; links between supply and demand for innovation (e.g. universities and the private sector); and quality infrastructure.
Figure 38: Innovation Involves an Entire Production System
Source: Maloney (2008)
Market Failures
5.17. Market failures in the creation and diffusion of knowledge lead to underinvestment in innovation. Measurement difficulties inhibit quantitative analysis of market failures’ impacts in
72
Guatemala. Nevertheless, the presence of the following types of market failures is well accepted:46
� Knowledge cannot be fully appropriated. Firms that invest in generating knowledge cannot reap all the benefits from their activities. As a result, their investments tend to be less than socially optimal. This reasoning applies not only to the generation of knowledge that is new from a global perspective but also to the first introduction of foreign ideas in countries where they have not been tested commercially. Hausman and Rodrik (2003) argue that patents may help realize private benefits in the case of new products, but formal protection mechanisms do not exist for the first production of existing products in a country. Thus, entrepreneurs assume the full cost of failure, but they are forced to share the benefits with imitators if the products succeed. This reduces the incentive to invest in developing new products and processes and the search for technologies in which a country might have an untested comparative advantage.
� Knowledge spillovers generate positive externalities and social returns that exceed
private returns. As suggested by Griliches (1992) and others, the social rate of return on R&D is often three times larger than the private rate of return.47 In other words, gains increase several fold when taking into account the impact of R&D on the economy through knowledge spillovers that improve other companies’ products and production techniques. Lederman (2007) also finds evidence of knowledge spillovers. Looking at patent density, he finds that firms with access to more commercial ideas are more likely to innovate.
� R&D investments can be large, long-term, and risky. Less developed financial
markets seldom provide adequate instruments and term structures for financing R&D expenditures. Innovation activities entail a fundamental information asymmetry where the firm has more intimate knowledge of the innovation and capacity to develop it compared to the external financing agent, such as banks, who lack the capacity to verify it. Moreover, many R&D operations have increasing returns to scale and large sunk costs, creating obstacles for funding R&D initiatives at smaller firms.
� Network failures may hinder investments in innovation. Innovation and its application
often require collaboration among many institutions and firms. The cost of coordinating the various agents and institutions involved in the production of knowledge is relatively high and no single agent has the incentives to bear those costs, since the benefits of such coordination are not fully appropriable.
Human Capital
5.18. Human capital (i.e. worker skills and education) are covered in detail in a separate chapter. However, it is worth noting here how critical human capital is to innovation. A country’s skill level is an important factor in its capacity to undertake research and adopt foreign 46 For discussions of market failures that shape private sector investments in innovation, see De Ferranti et al (2003); Jones and Williams (2000); and Hausmann and Rodrik (2003), among others. 47 See also Lederman and Maloney (2003) and Jones and Williams (1998) for more on social returns to R&D.
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technologies. De Ferranti et. al. (2003) find that upgrading skills and technology transfer reinforce each other. Innovation raises demand for skilled workers, and the improved job prospects increase incentives to stay in school. In turn, a better educated workforce can further stimulate firms’ demand for new technologies. Some countries may enter a virtuous cycle of upgrading both technology and skills, resulting in higher productivity and growth rates.
5.19. In contrast, countries with low skill levels may not be able to absorb much technology through trade and may not attract much FDI. These countries may also be unable to generate technological upgrading through domestic R&D, another skill-intensive process. Therefore, countries with very low skill levels may be trapped in a vicious cycle of little technology transfer, no domestic innovation, low returns to education, low productivity, and stagnant growth prospects.48 Adequate levels of secondary schooling and above are crucial to breaking out of this cycle and facilitating technological upgrading for local manufacturers, attracting FDI with high technological content, and benefiting from potential spillovers from those investments.49 Consistent with this argument, Rodriguez-Clare (2005) finds a strong positive correlation between R&D spending relative to GDP and education levels.
5.20. As highlighted in the human capital chapter as well as Table 14 above, the supply of secondary and university graduates with skills in science, engineering, and technology is quite small. This makes it difficult for SMEs to find workers with the skills to adapt new technologies and undertake innovative projects.
Access to Finance
5.21. Investments in technology upgrading, new production processes, and research and development all require substantial access to finance. Besides friends/family and retained earnings, money can come from bank loans, venture capital, or capital markets. The finance chapter of this study presents evidence that access to finance is not a major constraint. According to the World Bank’s 2006 enterprise survey, more than two-thirds of firms did not apply for credit, and most of those firms reported they did not need credit. However, these results could underestimate access to finance as a constraint to innovation. Firms might not even consider undertaking innovative investments because they consider them too risky to finance with debt or not viable or are not aware of their potential. Moreover, data from the World Economic Forum’s Executive Opinion Surveys show that Guatemala’s “venture capital availability” and “financing through local equity markets” rankings are near the bottom of the group of comparator countries (Figure 39).
48 De Ferranti et al (2003) 49 Jaramillo and Lederman (2006)
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Figure 39: Venture Capital Availability and Financing Through Local Equity Markets , 2008/2009
92
81
89
72
85
45
60
16
30
126
121
116
98
92
51
34
31
14
Honduras
Guatemala
Bolivia
Costa Rica
El Salvador
Mauritius
Sri Lanka
Panama
Chile
Ranking out of 133 countries
Financing through local equity market
Venture Capital Availability
Source: World Economic Forum (2009)
Quality Infrastructure50
5.22. National systems for measuring and certifying product quality are critical for trade, innovation, and competitiveness. Such systems form a country’s quality infrastructure (QI)—the public and private entities required to establish and implement standardization, inspection, testing, product and system certification, and accreditation. These QI services are necessary to provide evidence that products and services meet requirements imposed by authorities or the marketplace.51 The services provided by QI institutions help boost the private sector’s competitiveness and facilitate exports. Deficits in quality systems can also constitute technical barriers, an issue that is gaining importance as DR-CAFTA eliminates formal barriers. Moreover, quality certification can be a stepping stone to new technologies. Standards embody technology, and they can act as a channel for technology transfer for firms that adopt them. For more information on the importance of QI, see Guasch et al (2007).
5.23. Some elements of Guatemala’s quality infrastructure function relatively well, but further improvements could enhance the country’s competitiveness. Efforts should lead to a reduction in technical barriers to trade, better products and processes, and more competitive and innovative firms. QI is particularly important for small and medium enterprises (SMEs) because they typically do not have the resources to test and verify product quality.
5.24. Recent trade agreements, including DR-CAFTA, give Guatemala increased opportunities to sell its products around the world. Exports must meet consumer expectations, of course. Just as important, they must fulfill target markets’ increasingly stringent legal, health, safety, and environmental requirements. The industrial nations’ high standards can present a challenge for
50 This section is based on inputs from the technical cooperation arm of the German national metrology institute (Physikalisch-Technische Bundesanstalt, PTB). 51 This terminology could potentially be confused with high-quality infrastructure, which could refer to good electricity and water supply, roads, etc. However, quality infrastructure in the context of this chapter refers to a completely different aspect of competitiveness.
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Guatemala in certain sectors. Similarly, domestic consumers are becoming increasingly quality conscious, meaning that Guatemalan firms must compete with high-quality imports to maintain local market share.
5.25. SMEs can only meet international quality standards if they have local access to a competent, integrated, and recognized QI. Important features include: access to national, regional, and international standards and technical regulations; participation in related international working groups; internationally recognized calibration of measuring instruments; internationally recognized testing; and the certification of products and quality management systems. Additionally, quality management systems must be introduced to SMEs, especially those not directly linked to multinational activities or companies. As a rule, these interlocking services are provided by a nationally organized, yet internationally integrated, QI.
5.26. Sound QI can facilitate innovation and technology adoption. New products and processes often require exact measurements and analyses during development and production stages. Foreign measuring and testing facilities usually are not feasible because the necessary oversight has to be performed locally. Hence, reliable, local QI is necessary. Furthermore, standards that contain technical specifications for methods or products can smooth technology transfer. In doing so, international standards may be adjusted to fit local or regional needs, a process best undertaken by a competent standards institute. Shortcomings in Guatemala’s QI are described in the previous section on institutions.
Links Between Supply and Demand for Innovation
5.27. A well functioning national innovation system requires fluid interactions between universities and scientific research institutions that can generate or adapt knowledge from abroad and firms that can transform this knowledge into new and innovative products and processes. According to the World Economic Forum’s Executive Surveys, Guatemala performs relatively well in this area, ranking 50 out of 133 countries. However, interviews with stakeholders in the public and private sectors tell a different story. Most consider linkages between universities / research centers and the private sector to be quite weak and underdeveloped.
5.4. POLICIES TO ADDRESS LACK OF INNOVATION
5.28. The market failures and obstacles described in the previous section imply that an unregulated and purely privately funded market for knowledge may lead to sub-optimal outcomes. Regulations alone do not align private and social returns, which is why many governments look to supplement private innovation-related expenditures with public funds. Many developed nations invest close to 1 percent of GDP in science, technology, and innovation, financing universities, technology transfer centers, metrology institutions, venture capital funds, private sector R&D, and knowledge sharing activities. This section focuses on policy recommendations in the following areas: leadership/institutions, knowledge transfer, links between supply and demand for innovation, quality infrastructure, and regional cooperation.
Strengthen Leadership and Institutions
5.29. Strong leadership, vision, and institutions within the national innovation system are critical if Guatemala is to improve productivity, innovation, and technology transfer. Currently,
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an institutional structure exists, including CONCYT, the consultative commission to CONCYT, SENACYT, and the National Science, Technology, and Innovation Plan for 2005-2014. However, these institutions and frameworks are relatively weak, underfunded, and not strongly linked to other relevant stakeholders in the economy. To strengthen the system, the following actions are recommended:
� Focus on leadership, vision, and a strategy. The first step to jumpstarting innovation in Guatemala is strong leadership. More importance should be assigned to innovation at the highest levels of government (e.g. at the level of the presidency), with a strong champion or champions that can foster coordination between CONCYT, line ministries (e.g. economy, agriculture, energy, and education), PRONACOM, the private sector, and academia and move the agenda forward. A clear vision and actionable strategy to attain the vision is also needed. Given the relatively undeveloped nature of Guatemala’s national innovation system, the strategy will have to take a gradual approach with feasible goals and targets for the short, medium, and long term.
� Increase the amount of funding to institutions that promote innovation. Funding could go
to modified SENACYT programs, as described below, or to other relevant organizations, such as PRONACOM.
� Create and strengthen international linkages. Given that in most cases it is more efficient
for Guatemala to learn from international experiences and adopt policies, technologies, and knowledge from abroad, rather than develop things from scratch domestically, strong linkages with international institutions are needed. Examples of international institutions include CONACYT in Mexico, Colciencias in Colombia, and the National Academies in the U.S. Linkages with these types of institutions can teach Guatemala about policies and programs that have been successful elsewhere, and provide a starting point for connecting with international research centers and experts related to key clusters in Guatemala.
Facilitate Knowledge Transfer
5.30. Focusing on the discovery, transfer, and adaption of technologies that exist internationally generally makes more sense for SMEs in Guatemala than does investing in new -to-the-world R&D. One way to facilitate technology transfer to the productive sector is through technology innovation centers (a.k.a. centros de innovación tecnológica or CITES). Technology innovation centers should be sector/industry specific and located geographically where the firms for these sectors are concentrated. The aim would be to create new or upgrade existing centers to: (i) facilitate the transfer of existing technologies (off-the-shelf) to Guatemalan SMEs; (ii) address sectoral quality issues; (iii) identify bottlenecks and opportunities for further innovation of products and processes at the sectoral level; and (iv) facilitate the commercialization of new products. Such technology centers could also facilitate the development of matching grant proposals (see below), provide information about markets for SME products and services (both foreign and domestic), identify inefficiencies in production processes, and help integrate SMEs into larger value chains. The above activities could occur in collaboration with other research centers (both national and international) and existing institutions where applicable.
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5.31. Clearly, finding employees and consultants to staff the centers with the right skill sets is an important challenge. Public support would be required to operate the centers for the first few years, but the aim would be for them to become self-sufficient through user fees and/or contributions from firms in the sector. Given the challenges of setting up such centers, a pilot initiative could begin with 2-3 centers in sectors with demonstrated demand from the private sector.
5.32. Matching grants. Although SENACYT operates some grant programs, for instance FODECYT and FACYT, they are small, focused mainly on academics, and have not had much impact on innovation in SMEs. These, or similar programs, could be expanded substantially to focus more on financing innovative projects that benefit SMEs. A new window could be created to finance joint projects between firms or groups of firms and universities / research centers. To be successful, the matching grants would have to do the following:
� Focus explicitly on innovation for competitiveness. Matching grant applications should require that proposed R&D, innovation, or technology transfer activities to be financed have a tangible application;
� Greatly increase publicity and advertising efforts; � Create a technical assistance unit that can help firms develop proposals, guiding them
through each step of the process. Technology and research centers and technology brokers can be enlisted to help SMEs develop proposals. These entities can also help build linkages between SMEs and researchers for joint proposals.
� Create a monitoring and evaluation system to track the success of the matching grant mechanisms.
Link Supply and Demand for Innovation
5.33. Supply and demand for knowledge and innovation tend to be disconnected. Supply emerges from the universities and public research institutions that generate knowledge, and demand comes from private enterprises that use the knowledge to boost productivity and profits. Linkages facilitate the sharing of costs, risks, and human resources between the public and private sectors. They also allow for the transfer of tacit knowledge through personal interactions, research projects, networks, and clusters, or by means of mobility between the public and private sectors. Without such linkages, firms are much less likely to undertake innovation on their own. Successful national innovation systems are characterized by interaction among all players.
5.34. Barriers within higher education often discourage the transfer of knowledge to the private sector. Barriers can include a mismatch between knowledge supplied by universities and knowledge demanded by businesses; ineffective reward structures for academics; and lack of an entrepreneurial culture in universities. Government-sponsored initiatives to facilitate knowledge transfer—such as the matching grants programs discussed above—can strengthen university-industry linkages. In addition, it is worth considering improving the incentives of academic researchers so that they can benefit more from collaborating with the private sector.
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Train Human Capital for the Knowledge Economy 5.35. In addition to the recommendations in the human capital chapter, scholarships for students to study in national and international masters and PhD programs in priority subject areas could help build the stock of human capital. Another possibility is to strengthen university and technical programs in priority science, technology, and engineering fields.
Strengthen Quality Infrastructure
5.36. The government can take action to strengthen the supply of quality infrastructure, such as allocating permanent financing to contract and train metrologists to operate existing equipment in the national metrology lab (CENAME). Contracting of new personnel should be based on the study of demand for metrology services that is being undertaken. The government could also facilitate reforms to make COGUANOR more responsive to the needs of the private sector. Improvements could also aim to address specific bottlenecks faced by the private sector. To identify such bottlenecks, analyses of priority value chains could be undertaken. Such analyses could identify things like whether certain industries have access to: a) relevant standards; b) accredited organizations that can award quality certifications; c) entities that can calibrate specialized equipment, etc.
5.37. Demand for quality infrastructure. While resources should be dedicated to areas where there is a clear demand from the private sector, efforts could also focus on stimulating demand and raising awareness within the private sector about the benefits of using quality infrastructure services. Often, firms are not aware of the importance and/or benefits of meeting product quality standards, especially if they want to become part of export value chains. Targeted seminars and workshops can raise awareness about the importance of quality. Matching grants to finance quality improvements in SMEs could also be considered.
Consider Regional Cooperation
5.38. Given the size of its economy, Guatemala will not be able to create high-quality research capacity in many sectors. Collaboration with the rest of Central America, Mexico, and other countries makes sense to take advantage of economies of scale in R&D and technology transfer initiatives. One example could be the development of regional centers in cross-cutting sectors such as agroindustry, maquilas, and software. These centers could begin as hubs for technical knowledge, collecting information from abroad and disseminating it to firms in the region. Once they become more advanced, the centers could undertake fresh research themselves. Other functions could include collaborating with existing knowledge centers in the region and elsewhere, including the INCAE Business School in Costa Rica and the Escuela Agrícola Panamericana (better known as Zamorano) in Honduras. Another possibility for regional cooperation could be a regional matching grants mechanism open to firms and research centers in Central America.
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CHAPTER 6. ACCESS TO FINANCE
6.1. INTRODUCTION
6.1. It is estimated that around 800,000 to 1.2 million micro, small and medium enterprises (MSMEs) operate in the country.52 The majority of them are micro-businesses operating in the informal sector. Informality in Guatemala is particularly high, and estimated at around 75 percent of the labor force.53 MSMEs are being served by the formal financial system, which accounts for around 90 percent of all financial sector assets, and unregulated Microfinance Institutions (MFIs), which represent another 10 percent of the system’s assets.
6.2. This chapter examines the evolution of MSME finance during an uncertain period that includes the effects from the global financial crisis, hence results must be interpreted accordingly. The chapter offers an assessment of the supply of and demand for such services and an analysis of the underlying financial infrastructure, before offering proposals for strengthening financial access.
6.3. The analysis pulls data from diverse sources to offer a global view of MSME finance in Guatemala, yet it should be recognized that such sources are often incomplete or outdated. This is particularly so in the case of demand for financial services. To assess firms’ access to financial services, the analysis uses data from the Banking Superintendence, the Central Bank, the Red de Instituciones de Microfinanzas (REDIMIF), the Microcredit Information Exchange (MIX), the 2006 Enterprise Survey, the World Council of Credit Unions (WOCCU) and trade financing and other financial data collected by Bank staff. The chapter has also benefited from the Investment Climate Assessment (ICA) report of 2008, preliminary results from the Western Hemisphere Credit and Loan Reporting Initiative (WHCRI) assessment of early 2010, and surveys conducted by ASIES, a local think tank.
6.2. EVOLUTION OF THE SUPPLY OF MSME FINANCE AND THE GLOBAL FINANCIAL CRISIS
6.4. Guatemala compares unfavorably with other countries in the region in terms of domestic financing to the private sector (see Figure 40.1). The supervised system is comprised of banks (onshore and offshore54); finance, insurance and bonding companies; foreign exchange houses; warehouses; and leasing, factoring and credit card companies. The banking sector is m ainly domestic and privately owned. As of January 2009, it accounted for about 84 percent of the assets of the financial system. Supervised non-banking sectors are small. Finance and insurance companies account for another 14 percent of the system’s assets and the participation of bonding companies, warehouses and exchange houses only reaches 1 percent. The insurance and pension sectors are small and underdeveloped, the former heavily oriented toward non-life insurance and the latter largely public. There is no equity market and the private debt market consists mainly of short-term promissory notes, mostly issued by credit card companies and a few enterprises. The government and Banguat are the primary bond issuers. In the unregulated sector, microfinance
52 De León, 2009. 53 De León, 2009. 54 The banking system in Guatemala comprises two different kinds of institutions: the domestic banking system and the offshore institutions. The two kinds of institutions are linked through ownership: the owners of the offshore are domestic banks and the offshore institutions operate in the premises of their domestic owners.
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institutions have grown in recent years, reaching an estimated total of about 4 percent of the banking system’s credit portfolio. Close to 300 registered Savings and Credit Cooperatives are the most relevant microfinance institutions in terms of lending and provide a wide range of financial services like micro-savings, remittances payments, micro-insurance, and housing loans to mostly moderate-income Guatemalans.
6.5. According to data from the Central Bank, the four biggest banks are the largest providers of SME lending within the banking sector. The four largest onshore banks hold about 73 percent of the system’s assets and accounted for 69 percent of SME loans and 80 percent of microloans as of June 2008 (see Figure 40.2). The majority of the 16 finance companies also belong to the local financial groups and, in total, there are 10 financial conglomerates with Q134.4bn (US$17bn) of assets. There are no majority state-owned banks in the system, with the government only holding a minority position in Banco de Desarrollo Rural (Banrural), an institution with about 18 percent of the banking sector’s assets that is dedicated to providing small short-term loans to farmers. Overall, MSME loans only comprise a small percentage of large bank’s commercial loan portfolio, while smaller banks dedicated around 50 percent of their portfolio to MSME lending prior to the crisis (see Figure 40.3).
6.6. The global financial crisis has impacted the banking sector’s MSME portfolios di rectly and significantly (see Figure 40.4). Asset growth slowed for all banks, as deposits and foreign lines of credit dropped off or their growth slowed down (see Figure 40.5). In reaction to the increased economic uncertainty due to the global financial crisis, banks have decreased lending and increased their investment portfolios and liquidity positions. Thus, as a share of assets, the credit portfolio accounted for only 55 percent as of August 2009 compared to 58 percent in June 2008. The drop in credit portfolio relative to total assets is particularly pronounced in small banks that reduced their credit portfolio share by 10 percent or more (see Figure 40.6). Credit to the private sector in terms of volume grew very modestly for the system as a whole and decreased by 25 percent in small banks.
6.7. Within the banking sector credit composition by size of enterprises, micro-loans shrank the most (see Figure 40.7). Micro-lending dropped by 14 percent year on year in August 2009, as mostly smaller banks reduced their micro-loan exposure significantly. Large banks continued to increase their loan portfolio to large enterprises, while SME loans grew only moderately and micro-loans dropped off slightly. Medium sized banks reported lower credit volumes to large and micro-loans, while their SME portfolio remained more or less stable. Small banks, seeing their assets shrink by 11 percent since December 2008, dramatically cut back on lending, with microloans shrinking in volume by more than 60 percent, compared to 43 percent for SME and 6 percent for large enterprises. Given the above, the share of large banks has lately increased to 83 percent in microloans and to 70 percent in SME credit.
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Figure 40: Evolution of MSME Finance in the Guatemalan Banking Sector 1. Guatemala’s domestic financing to the private sector compares unfavorably with the region.
2. Large banks dominate MSME credit provision …
Domestic credit provided by banking sector (% of GDP)
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4. Since fall 2008, export growth turned negative, but economic and credit growth continued positive, albeit at lower levels.
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7. …. with particularly small banks cutting back on their lending to smaller enterprises.
8. Guatemala’s implicit intermediation margin has increased, yet remains below the region’s average.
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Source: WDI&GDF, Concejo Monetario CentroAmericano, Banguat and SB
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6.8. As a reaction to the international crisis, banks tightened their lending conditions. Examining banking sector interest rates, spreads do not appear to be an excluding factor, with anecdotal evidence suggesting that the heightened economic uncertainty in combination with balance sheet considerations has affected the market from the supply side. The reported interest rates suggest that nominal interest rates only increased slightly (with the exception of construction), but that the spread between micro- and mega loans increased from less than 9 percentage points in January 2009 to over 11 percent percentage points in March of 2010. The reported intermediation margin increased compared to earlier years, but at 8 percent, it compares favorably to an average of 9 for the Central America region. Furthermore, there is some indication that banks tightened other loan conditions such as needed documentation, collateral requirements and available maturities, which likely disproportionately affect smaller enterprises (ASIES). Banks also turned down more enterprises due to perceived higher overall economic risk or lower expected income generation.
6.9. In general, rejection of credit applications is more important for smaller firms, but does not appear to pose a significant hurdle overall. About 12 percent of loan applications were rejected based on a survey in Guatemala, which is in line with the region. Unfortunately, given the small number of responses, it is not possible to determine why financial institutions are rejecting credit applications with any degree of confidence. For illustrative purposes, among the few firms that provided data, problems with collateral and insufficient profitability appeared as the two most common reasons for rejection. High debt levels, problems with credit history, and incomplete loan applications were less relevant. Credit applications of smaller enterprises were more likely to be rejected, likely due to a lack of collateral and available documentation. During the last fiscal year preceding the survey, no credit application from a large enterprise was rejected, while a third of applications from micros and almost 15 percent of SMEs’ applications were turned down by financial institutions.
6.10. Leasing and factoring do not appear to play a large role in Guatemala, but data on this market segment is scarce. Table 15 shows that leasing constitutes 2.8 percent of investment financing in Guatemala.55 According to CEDLAS, factoring is only possible for suppliers of big companies, and, while operating leases are more common, finance leases are practically nonexistent, thus not playing a big role in times of crisis, as companies delay capital investments.
Table 15: Financing Sources of Firms (%) Guatemala (N=32) Whole Sample (N=3,000)
External Finance to Investment 57.3 40.9 Bank 28.4 19.0
Equity 1.1 5.6
Leasing 2.8 2.6
Supplier Credit 18.7 6.7
Development Banks 2.6 3.8 Source: Beck, Demirguc-Kunt, and Maksimovic (2004a, b)
55 Beck, Demirguc-Kunt and Maksimovic (2004 a, b), based on the 1999 World Business Environment Survey. Unfortunately, Guatemala is not surveyed in two major international reports on factoring (Factor Chains International) and leasing (Global Leasing Report).
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6.11. Turning to microfinance in more detail, given the dominance of micro-businesses and the unregulated sector, credit unions dominate the market. There are three types of microfinance providers in Guatemala: (i) credit unions and savings and loan cooperatives (financial cooperatives)56, (ii) commercial banks57, and (iii) non-governmental organization microcredit institutions (MCIs). Total assets for all microfinance providers amounted to US$ 776.4 million in April of 2009 – equivalent to 7.9 percent of the total financial sector assets, marking an increase from late 2005, when the microfinance portfolio represented only 5.3 percent.58 The market share of credit unions and cooperatives jumped over the past three years at the expense of commercial banks, with the share of NGO microfinance institutions slipping slightly (See Table 16). By the end of 2008, credit unions lent 61 percent of the microcredit portfolio, compared to 27.4 percent by commercial banks and only 11.6 percent by NGO MFIs. The loan portfolio of the financial cooperatives grew by 50 percent (from $316 million to $473 million), while the loan portfolio of NGO MFIs experienced a 25 percent increase and remained stable for commercial banks.
Table 16: Composition of Microfinance Supply Type of Provider Portfolio Dec.
2005 (US$ mm) % of Total Portfolio
Portfolio 2009 (US$ mm)
% of Total Portfolio
% increase 2005-2008
Credit unions, cooperatives 316.3 53.0% 473.6 61.0% 49.7%
Commercial banks 209.1 35.0% 212.8 27.4% 1.8% NGO MFIs 71.9 12.0% 90.0 11.6% 25.2% Total 597.3 100.0% 776.4 100.0% 30.0% Sources: REDIMIF, WOCCU, SB. 6.12. The microfinance sector is highly dispersed, with the leading Guatemalan microfinance institutions targeting much poorer clients than regional comparators, but experiencing weaker outreach. While average loan balance as a percentage of per capita GNP reached more than 60 percent in Nicaragua and Bolivia, the Guatemalan figure was only 13 percent. The differences in average loan balances were even more dramatic – with most countries reporting over US$900 on average and Guatemala’s average loan balance below $370.59 On the other hand, leading Guatemalan MFIs only reached 1.8 percent of the population, far below regional leaders Nicaragua (9.4 percent) and Bolivia (8.7 percent).
56 The 2008 ICA estimated that there are close to 300 registered Savings and Credit Cooperatives organized under federations. However, there is considerable variability in size of portfol io and membership, with the top 30 representing about 85 percent of total savings assets. Credit unions and savings and loan cooperatives differ by voting and share distribution, but are similar in organizational features and deliver the same menu of finan cial services to members. For this section, credit unions will be used to represent both types of organizations. 57 Many commercial banks have experimented with microfinance since 2005, although only four have made a strong institutional and financial commitment to this market niche (see Annex 1). At the end of 2005, the industry leaders held more than 90% of the microcredit portfolio and 40% of the clients. By April of 2009, four banks had made a larger institutional commitment to microfinance, jumping from 40,000 clients to 152,000 in less than four years. 58 Data based on SB, REDIMIF and FENACOAC. 59 Average loan balance is approximately 50 percent of average loan size, since approximately the same number of loans are new as those nearing final payment.
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Table 17: Comparison of Leading Latin America MFIs (Outreach and Loan Size)
Country Gross Portfolio (US$ millions)
Number of active
borrowers
Avg loan balance per borrower
(US$)
% coverage of population
Avg loan balance as % GNP capita
Guatemala 132.2 251,901 367 1.8% 13% Nicaragua 506.5 531,219 710 9.4% 61% El Salvador 305.4 188,725 958 3.1% 27%
Ecuador 1,002.0 614,497 1,111 4.6% 28% Peru 2,976.7 2,513,574 1,145 8.7% 26% Bolivia 1,159.8 771,786 1,104 8.0% 64% Colombia 3,433.4 1,829,701 917 4.1% 17% Sources: www.themix.org, WDI&GDF. For Guatemala, statistics include commercial banks and NGOs, not cooperatives. 6.13. In contrast to other microfinance providers, the cooperatives and credit unions have more than 830,000 members, a relatively high penetration rate (16 percent), and a savings base of more than $500 million. With the exception of Costa Rica, Guatemala has the largest financial cooperative and credit union loan portfolio in Central America. With $101 million in reserves, the movement is well positioned to absorb short term economic problems and spikes in loan losses. The credit unions have partnered with WOCCU’s International Remittance Network (IRNET) to increase the efficiency, decrease the costs, and create an automatic savings option for the large amount of remittances received by members ($246 million in late 2007). A caveat is required in this portrait of the financial cooperatives and credit unions. Since members include both middle and low income populations and some portion of lending is for consumer needs, the figures presented may overstate the productive lending to micro businesses and low income households.
Table 18: Comparing Cooperative Coverage in Central America
Country Members % Central America members
Loan Portfolio
(US$ mm)
% total Central
American portfolio
Savings (US$ million)
Penetration rate (%)
Guatemala 831,942 33% 473.6 19.5% 518.4 11.0
Honduras 606,067 24% 410.1 16.8% 369.0 13.3
El Salvador 116,512 5% 137.9 5.7% 133.5 2.7
Nicaragua 299,800 12% 183.7 7.5% 180.7 5.2
Costa Rica 527,620 21% 1,109.0 45.5% 1132.9 18.8
Panama 137,359 5% 120.5 4.9% 323.4 6.4
Total 2,519,300 100% 2,434.8 100% 2657.9 9.6
6.14. Guatemala’s cooperative movement is strong in terms of coverage, membership, loan portfolio and savings. There are 646 registered cooperatives in the country, with agricultural cooperatives making up 45 percent (292) and savings and loan cooperatives adding another 35 percent (163).60 Savings and loan cooperatives are operating in 21 of the 22 departments of the
60 INACOP statistics, 2008.
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country (only Suchitepequez is not covered), and coverage is especially impressive in Huehuetenango (with 22 cooperatives). The Department of Guatemala leads with 43 cooperatives, but the concentration is much less than in the case of bank branches. With 831,200 members, savings and loan cooperatives represent 91 percent of all members of cooperatives (including 477,100 male and 354,200 female members).61 The leading savings and loan movement is the National Federation of Savings and Loan Cooperatives (FENACOAC), which has shown strong growth in membership (37 percent), savings (67 percent), and loan portfolio (84 percent) since 2004.
Table 19: Growth in FENACOAC Credit Unions from Dec. 2004 to March 2008 Indicator (in US$ mm) Dec. 2004 Dec. 2006 March 2008 % growth
over period Number of members 438,249 549,653 600,388 37% Total Assets 372.5 568.1 644.7 73% Outstanding Loan portfolio 248.1 393.7 455.4 84% Savings 240.5 365.7 400.7 67% Shares 66.0 93.4 100.9 53% Institutional capital 48.8 78.7 88.9 82%
Source: FENACOAC statistics, 2004 to March 2008 6.15. Yet, even though the microfinance market has experienced growth over the past four years, it still fails to meet the very large demand for a menu of microfinance services. The historic emphasis on microcredit has been tempered by the increase in small savings deposits, especially with the credit unions and financial cooperatives. However, given the importance of the rural sector and agribusiness in Guatemala, innovative products such as microleasing, weather-index insurance (for crops and livestock) and other microinsurance products (covering health, funeral and assets) could be very popular and effective in increasing the value and impact of microfinance in the country. This would imply improvements in the legal and regulatory framework for various microfinance products. There is also a risk that commercial banks will lose interest in this market segment, retrenching in the face of the lingering effects of the globa l financial crisis.
6.16. Furthermore, Congressional approval of the proposed legal framework for microfinance has been delayed and there is currently no supervision of non-bank financial intermediaries, in contrast to the trend in Central America (see Table 20). The Micro-Finance Companies Law (Ley de Sociedades de Microfinanzas) draft has been under discussion by the Monetary Board since the issuance of a favorable opinion in 2006 (the next step is its presentation to the executive branch for submission to Congress). However, following a meeting in September 2006 between banks, Banguat, and the Ministry of Economy, it was not possible to reach an agreement and no significant advances have been made since then. The Non-Profit Micro-Credit Entities Law (Ley de Entidades Civiles de Microcrédito No Lucrativas) is also under review by the Monetary Board, as of mid 2008. Regardless of these developments, the latest two draft laws on micro-finance entities may yield limited impact in their current form.
61 Social, economic and financial survey of cooperatives, INACOP, 2008
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Table 20: Supervision in Central America
Country Under Regulation Agency's Supervision? (Y/N)
Commercial Banks Cooperatives MFIs SSFIs
Costa Rica Yes Yes Yes Yes
Dominican Republic Yes Yes No Yes
El Salvador Yes Yes Yes Yes
Guatemala Yes No No No
Honduras Yes Yes Yes Yes
Nicaragua Yes No Yes Yes
Panama Yes No Yes No Note: MFIs= Microfinance Institutions; SSFIs= Specialized State Financial Institutions Source: CGAP (2009)
6.3. DEMAND FOR FINANCIAL SERVICES
6.17. Compared to the 2003 Enterprise Survey, the ICA (2008) observes that, although access to finance lags other countries, firm perceptions have changed. The Investment Climate Assessment (ICA) of 2008 presents findings on access to finance derived from the 2006 Enterprise Survey. The survey collected data from 524 formal enterprises in Guatemala and included enterprises with different size, location and economic sector characteristics. The analysis did not apply to informal enterprises but provided a general picture of access to finance issues and disparities across size, location and industry. The proportion of surveyed firms which 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 2006. In the last fiscal year more than two-thirds of firms did not apply for credit, and most of those firms reported they did not need credit (which is also the case in many other countries in Latin America). All other reasons that are traditionally thought to play an important role in credit demand, like high interest rates, insufficient collateral, complex application procedures and insufficient maturity appear as less relevant in comparison (see Figure 41). MSMEs and firms located outside of Guatemala City demanded less credit and also reported lack of need as the main reason for not applying for credit.62
62 During the year before the survey, 21 percent of micro and 29 percent of SMEs applied for credit compared with 52 percent of large enterprises and 25 percent of firms located out of 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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Figure 41: Applications for credit and reasons for not applying (%)
32%
54%
69%
7%2%
0% 1%1%
3%
Applied credit/loan No need for loan
Application procedires are complex Interest rates not favorable
Collateral requirements are unattainable Size of loan and maturity are inssuficient
Did not think it would be approved Other
Source: Enterprise Survey
6.18. Based on more recent survey results from the Research and Social Studies Association (Asociación de Investigación y Estudios Sociales -ASIES), the number of enterprises with a bank loan dropped from August 2008, but slightly recovered in April 2009, with several factors contributing to this. Over one third of the MSMEs stated that they did not need a loan, compared to 15 percent for large enterprises. Firms in general rely more on internal sources of funding, (see Figure 4444). As a larger share of MSMEs saw their production decline in the last year compared to larger enterprises, this has likely translated in a reduction of demand for credit. Additionally, two thirds of MSMEs did not request a loan, leaving open the rationale behind this decision (Figure 43). Results from the household survey in 2006 suggest that annual income and the economic viability of the entrepreneur as well as the level of education and available remittances are the key factors determining whether an enterprise requests a loan. With profitability and remittances having dropped, it is likely that many enterprises do not perceive themselves as viable debtors, and voluntarily abstain from seeking a loan. Costs and administrative hurdles can also contribute to lower demand. As discussed earlier, interest rates in real terms went up, but are still not prohibitively high compared to other countries.
Figure 42: Sources of Financing, 2007 Fixed Assets Investments
63%
20%
9%2%
1%2%
1%1%1%Internal funds/retained earning
Private commercial banks
State-owned banks
Family/friends
Non-bank financial institutions
Credit purchase/customer advance
Others
New equity shares
New debt
Source: Enterprise survey
Working capital
63%12%
3%
1%
17%1% 3%
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6.19. Bebczuk (2009) makes use of empirical evidence drawn from the official 2006 Household Survey and draws comparisons to the ICA Survey to conclude that MSMEs unmet demand for credit is significantly lower than is usually thought.63 The sample comprises 5,866 enterprises, of which 5,687 have up to 5 workers, 168 between 6 and 20, and just 11 between 21 and 91 workers (Table 21). Only 13 percent of the total applied for a loan and, within this subset, only 7.5 percent were rejected by the lender—a uniform fact across the three firm size groups. Examining the reasons invoked for not applying for a loan, a majority of firms declare a preference for internal funding and no need for a loan (49.2 and 23.7 percent respectively). Bebczuk checks robustness against the ICA and concludes that financial constraints are not as pervasive as typically deemed and confirms that the lack of demand is possibly a consequence of poor investment opportunities and/or reluctance to get indebted.
Table 21: MSME Access to Credit based on the 2006 National Household Survey
1 a 5 6 a 20 21 a 96 Total
Number of enterprises in the sample 5,687 168 11 5,866Number of enterprises that applied for a loan 723 39 3 765 Number of enterprises that obtained a loan 668 37 3 708 Number of enterprises that were refused a loan 55 2 0 57Number of enterprises that did not apply to a loan 4,964 129 8 5,101
In % of total sample:Enterprises that applied for a loan 12.7 23.2 27.3 13.0 Enterprises that obtained a loan 11.7 22.0 27.3 12.1 Enterprises that were refused a loan 1.0 1.2 0.0 1.0Enterprises that did not apply to a loan 87.3 76.8 72.7 87.0Total 100.0 100.0 100.0 100.0
Reasons for not applying for a loan (in %) Prefers working with his or her own resources 49.0 56.6 75.0 49.2 There was no need 23.6 27.9 25.0 23.7 People like them do not get credit 23.3 8.5 0.0 22.9 Already has an outstanding debt 0.9 3.9 0.0 0.9 Cannot repay the loan 1.6 1.6 0.0 1.6 The interest rate is too high 1.0 1.6 0.0 1.0 Other 0.6 0.0 0.0 0.6 Total 100.0 100.0 100.0 100.0Reasons for not having obtained the loan (in %) Lack of collateral 9.1 8.8 Low income 21.8 21.1 Does not meet the requirements 69.1 100.0 70.2
Number of Employees
Source: Bebczuk (2008)
63 Bebczuk observes that denied access to credit is a weak proxy for financial constraints, as it igno res the underlying characteristics of the entrepreneur’s project. Thus, a rejected loan application implies the presence of a financial constraint only if one can make certain that the applicant had a valuable investment opportunity. Unfortunately, the study does not test for the presence of financial constraints.
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Figure 43: ASIES Survey Results 1. The economic slowdown hurt micro and small enterprises, with output and profitability declining more rapidly.
2… leading to less demand for credit and potentially contributing to the reduction in the MSME portfolio observed in the banking sector.
0
10
20
30
40
50
60
70
no changes making loss reduced production
temporarily closed
other
Reported effects of economic slowdown(by size of enterprise)
Micro
Small
Medium
Large
0% 20% 40% 60% 80% 100%
Other
not needed
not requested
Stated reasons for not having a loan
Large
Medium
Small
Micro
Sources: ASIES 6.20. De León (2009) provides results of a 2009 national survey that provides some more specific insights into microfinance. The survey, financed by the Soros Foundation with a focus on economic illiteracy, interviewed 1,200 respondents and revealed that access to financial services for this market segment appears low. About 42 percent reported that they used formal financial services. Respondents in Guatemala City have significantly greater access (51.8 percent compared to only 39.5 percent in smaller urban markets). The lack of access to financial services was attributed to five causes. Slightly more than half reported that they didn’t have the funds necessary to open a bank account. More than 30 percent cited a lack of confidence in banks as institutions. Twelve percent expressed no interest in establishing a relationship with a financial institution. The remaining responses included problems with meeting bank requirements (2.6 percent) or faced a high degree of physical insecurity involved in moving funds to financial institutions (2.1 percent).
6.21. The above discussion suggests that there are cultural reasons and eligibility criteria that hamper the demand for financial services. The ensuing strong reliance on internal sources of funding is likely to have a negative impact on the pace of economic growth, as possible viable investments hinges on the company’s own capacity to fund it.
6.4. DOING BUSINESS AND FINANCIAL INFRASTRUCTURE
6.22. In terms of the ease of doing business, Guatemala stands in the middle of the ranking of countries in the Central America region, yet outperforms with regard to the getting credit rank. The Movable Property Guaranties Law that came into effect in January 2008 has been an important development, aiming to unlock access to credit for enterprises, especially MSMEs. Smaller enterprises, particularly micro-enterprises, have less acceptable collateral than larger companies that consists more commonly of movable collateral. The law makes the guarantees required by banks more flexible with intangible assets accepted, while business owners are able to use future yields, shipment guarantees, and livestock, among other things, to leverage loans. The new legal framework has also enabled the creation of the Registry of Non-Real-Estate Assets, which has been active since January 2009, but still counts with low inscriptions as it is establishing its role in the sector. However, other weaknesses remain. The framework for creditor rights still shows deficiencies, liquidation proceedings involve lengthy and often costly
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judicial proceedings with a low prospect for recovery for creditors, and the legal framework for insolvency is scarcely used and is perceived as ineffective as courts in charge of insolvency proceedings lack expertise and specialization and are overloaded with cases.
Table 22: Doing Business Getting Credit Rankings for Central America (2010)
Economy
Ease of Doing
Business Rank
Getting Credit
Rank
Strength of legal rights index (0-10)
Depth of credit
information index (0-6)
Public registry coverage (% of
adults)
Private bureau
coverage (% of adults)
Costa Rica 121 61 5 5 24.3 56 Dom. Rep. 86 71 3 6 29.7 46.1 El Salvador 84 43 5 6 21 94.6 Guatemala 110 4 8 6 16.9 28.4 Honduras 141 30 6 6 21.7 58.7
Nicaragua 117 87 3 5 16 28.4 Panama 77 30 6 6 0 45.9
Source: Doing Business 2010 6.23. With regard to the credit and loan reporting system in Guatemala, preliminary findings from a recent study point to a rather fragmented, unregulated system with a weak legal basis (World Bank 2009). This is despite significant improvements over time including the establishment of a public Credit Bureau, operational since 2004, with mandatory data submission. The preliminary report suggests that the available databases on borrowers are incomplete and lack quality assurance standards. Furthermore, not all financial institutions report to the private credit bureau, and access to the public bureau is limited. The necessary legal basis for the operation of sound credit bureaus is missing. Thus, the available information on borrowers is deficient. There is significant room for improvement in the credit reporting practices of Guatemala that could eventually alleviate the current inefficiencies of credit and loan reporting systems in the country.
6.24. There have been significant advances on the payment systems infrastructure, yet challenges remain. The regulatory framework for the payments system has been substantially strengthened and the Real Time Gross Settlement (RTGS) has been fully operational since January 2006. The World Bank’s Global Payment Systems Survey of 2008 places Guatemala at a high level of development with regard to Large-Value Payment Systems, the only country in that list in the Central America region.64 Nevertheless, the study also recognizes that significant work remains to be done in other aspects of the payments system such as the Legal and Regulatory Framework and Retail Payment Systems in which the level of development remains low. The use of bank correspondents and mobile-banking has not yet been developed in the country. In relation to Payment Systems, Guatemala has also undertaken assessments according to the General Principles for International Remittance Services. Remittances accounted for a significant share of Guatemala’s GDP, at nearly 13% in 2007. According to the General Principles, Guatemala’s remittance market could benefit from various improvements including a stronger consumer protection basis and better governance and risk management in the market. 64 Cirasino and Garcia (2008).
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6.5. PROPOSALS FOR STRENGTHENING FINANCIAL ACCESS
6.25. The above discussion indicates that there is no significant gap between actual supply and demand for credit, but that the overall level of credit in Guatemala is below its potential. This has a negative impact on economic growth and SME development, and has repeatedly led to the launch of government programs to foster the provision of funding through matching grants and other forms of government supported credit provision. In order to foster the deepening of the financial system, a number of recommendations can be made:
� Assemble better data. Regular surveys could be carried out to help understand demand and supply restrictions. There should be systematic efforts undertaken to assemble broad and reliable databases with micro information on users of financial services.
� Adopt a National Inclusion Strategy. A national inclusion strategy can increase access to financial services by non-traditional clients (SMEs, microbusinesses, and low income households) by determining reforms needed to enhance the available financial infrastructure, setting up a conducive framework for the deepening of the financial system, and providing short term incentives and technical assistance for the development of specialized products, processes and banking platforms. Examples for the successful development of such a strategy include Colombia, Brazil, Canada, and Peru.
� Promote the sound and transparent growth of commercially oriented microfinance institutions. The growth and stability of microfinance institutions require an adequate legal, regulatory and supervisory framework that would encourage prudent accounting and risk management practices among larger institutions and eliminate market distortions between financial entities. However, the latest two draft laws on micro-finance entities have not progressed and may yield limited impact. It is important to revisit this issue and quickly establish the necessary legal and regulatory framework for these types of institutions without unduly hampering their sound growth.
� Improve the credit information infrastructure. Areas for improvement include a the development of a sound legal framework for the operation of credit bureaus in Guatemala, a stronger role for the Superintendence of Banks as a supervisor and regulator of the credit information market, the streamlining of public access of the public registry, the necessity of all system participants to provide complete credit data and promoting awareness to the general public, as well as the credit information system participants, on the culture of credit and the usefulness of credit information to evaluate credit risk.
� Develop a legal and regulatory system, with supervision by authorities or by a third party reporting to authorities, covering the largest individual credit unions and networks. Since many have significant loan portfolios, memberships and assets, it is not prudent to leave them in unregulated. Given their size, a fraud or mismanagement problem in one large cooperative could have contagion effects reaching the formal financial sector.
� Improve creditor rights and insolvency proceedings. Enhancing the institutional framework for the enforcement of creditor rights and insolvency proceedings would foster
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credit growth, decrease its cost and increase the efficiency of collateral by increasing the probability of recovering funds in the event of default.
� Provide technical support to banks and non-bank financial intermediaries interested in expanding outreach to MSMEs, and fostering reforms of the retail payment system. This may include technical assistance on innovative technologies that could expand access, for example branchless banking that allows broader access and growth beyond the bricks-and-mortar growth that is inherently limited by its cost. Financial support, if needed, should be in the form of second tier lending and take under consideration instruments that leverage resources and share risks, like partial credit risk guarantees.
� Promote greater transparency and financial education. Policies to provide comparable information to consumers and reduce consumer search costs, as well as increase consumer awareness and understanding of the market and the benefits of using a variety of financial products can help markets function more efficiently. These may include promoting better disclosure and greater transparency in pricing, by centralized publishing of rates and commissions, and programs of consumer education and financial literacy to reduce susceptibility to predatory financial practices and to encourage savings and investment.
� Promote the development of capital markets and alternative financial instruments. The limited domestic capital market could be developed by encouraging larger issuers access and providing a more inclusive legal and regulatory framework for the involvement of institutional investors. The right regulatory and supervisory framework for financial conglomerates, the existing exchange, brokers and contractual saving vehicles would also allow for the development of debt instruments like mortgage-backed securities. Similarly, factoring and leasing could grow substantially within the right legal framework.
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CHAPTER 7. BUSINESS REGULATIONS AND ADDRESSING INFORMALITY
7.1. INTRODUCTION
7.1. The quality of the business climate clearly has a significant impact on firm productivity, efficiency, and growth. Fajnzylber, Guasch, and Lopez (2009), through their econometric analysis, found proof that improving the business climate in Latin American countries can encourage a variety of outcomes, such as increased innovation and improved access to credit. Conversely, an inefficient business climate and burdensome regulations can create distortions and discourage firms from formal operations. In Guatemala, the instruments in the diagnostic pointed to business regulations as an important area in need of reform, particularly addressing regulations that encourage firms to formalize. SMEs cited competition from informal firms as a top obstacle to effective operation in the 2006 Enterprise Surveys. Also, the Doing Business rankings noted shortcomings in Guatemala’s business and investment climate, particularly in starting a business and dealing with construction permits.
7.2. This chapter first diagnoses the size of the informality problem in Guatemala. It then summarizes priority recommendations to address informality and improve the business climate. The business climate recommendations go beyond those that will encourage formalization; they cover changes to regulations that should improve the overall efficiency of business operations.
7.2. INFORMALITY
7.3. Like most Latin American countries, the size of the informal sector in Guatemala is estimated to be large. Measuring the size of an informal economy is difficult given its nature, but a few estimates are available for Guatemala. Based on a survey completed in 2004, informal workers were estimated to make up 75 percent of the labor force but only absorb 46 percent of income. In another measurement, the informal economy was estimated to have produced between 35 and 47 percent of total production in 2005 (CIEN 2006). Another study using a modeling approach measured the informal economy to equal about 51 percent of total GDP in 2000. This was above the estimated average for Latin America of 41 percent (Schneider and Klinglmair 2004).
7.4. Informality in firms runs along a spectrum from completely informal to partially. At one end are subsistence activities mostly by individuals or families, such as farmers or street vendors. These individuals generally have little expectation of growing their businesses into more productive and dynamic enterprises. At the other end of the spectrum are larger firms that do not fully report their sales, taxes, or workers. In between are smaller firms that may or may not be partially registered, but often have potential to grow (DCED 2009).
7.5. Smaller firms particularly might see formality more as another input into the production process and therefore weigh the costs and benefits of becoming formal. Informal microenterprises often have high turnover and their need for credit is low. Also, these firms would not benefit from organized markets, since they know most of their clients personally and would not use court systems (Perry, et al 2007). Formality correlates with increased productivity, in part because formal firms have access to opportunities that informal firms do not,
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such as credit and exports. Also, as firms grow they are more likely to register, both because they can access greater opportunities and they are less likely to escape the radar of enforcement agencies.
7.3. METHODS FOR ADDRESSING INFORMALITY
7.6. Not surprisingly, informality is linked with low productivity; developing countries with lower productivity generally have larger informal economies. Therefore, reducing informality requires actions that increase the aggregate productivity of the economy. Improving human capital, especially for the poor, would allow more workers to find jobs in the formal sector. An enabling investment climate will also permit small firms to grow and pay higher wages. If not, microenterpriseses will continue to have high failure rates and will see little benefit in engaging with formal institutions or with other formal enterprises (Perry, et al 2007).
7.7. Several studies on Guatemala have been completed (mostly by the Center for National Economic Studies, CIEN) that make recommendations on what can be done to address informality. CIEN’s recommendations take a broad approach to addressing informality, mostly suggesting ways to improve the overall business climate to increase productivity and make formalization more appealing. For example, they suggest improving contract enforcement with methods such as decreasing the costs of litigation. This would allow firms to interact with other formal firms, without having to rely on personal relationships. Other recommendations to improve the business climate and productivity are to increase security, expand access to finance, and promote the importance of quality (CIEN 2008).
7.8. The most common method for addressing informality, which also affects productivity, is to improve business regulations. A World Bank flagship report in 2007 found that improvements in microenterprise performance could be achieved by lowering burdens to formalization and implementing administrative simplification programs. High entry costs are not the only reason that firms do not enter the formal sector, but they do induce more dynamic firms to enter. Plus, beyond firm registration, administrative simplification that facilitates firm operation can reduce informality by reducing the costs of regulatory compliance (Perry, et al 2007). Several other studies have confirmed that improving business regulations encourages firms to operate formally (Cardenas and Rozo 2007; Aghion, et al 2008; Bruhn 2008; Fisman and Sarria-Allende 2004).
7.9. The following section details priority recommendations for business regulations in Guatemala.
7.4. BUSINESS REGULATION REFORMS
7.10. Beyond addressing informality, a well-functioning business climate can encourage investment. For example, rules that establish and clarify property rights can reduce the costs of resolving disputes. Or regulations that protect investors against abuse increase the predictability of economic interactions. This section first details the results of the 2010 Doing Business Report, which measures business regulations and their enforcement. It then lists priority recommendations for improving the business climate. The recommendations derive from key suggestions from the 2008 Doing Business Reform Memo, updated to reflect more recent changes (See Annex 3 for the complete recommendations from the Doing Business Advisory
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Unit) and interviews with key stakeholders. The section concludes with recommendations for implementing regulatory reviews based on best practices in other countries.
Doing Business 7.11. In Doing Business 2010, Guatemala ranks 110th out of the 183 economies covered by the report (see Table 1), up seven places from the previous year. It ranks 20th out of 32 ranked economies in the Latin America and Caribbean region (LAC), ahead of Argentina, Bolivia, Brazil, Costa Rica, Ecuador, Honduras, Nicaragua, Paraguay and Venezuela.
7.12. In 2008-2009 Guatemala made a substantial improvement in the Getting Credit area, from 28th to 4th out of 183 ranked economies. The change came about from strengthening legal rights of creditors with respect to collateral requirements and bankruptcy procedures. The value of the Legal Rights index increased from 7 in 2009 to 8 in 2010 (the maximum index value is 10, indicating better protection of creditor rights). The time to obtain a construction permit was also lowered by 37 days (Table 23).
7.13. In other areas, however, where Guatemala had been improving in previous years, some loss of interest is noted. For example, in the area of Starting a Business – where there is high reform activism worldwide, Guatemala dropped 9 places in Doing Business (DB) 2010. This is due mostly to the effect of other countries reforming and moving up the rankings, but also because of an increase in the number of days. In other DB areas, the changes were less pronounced. These developments reinforce the message that further reforms will be needed should the government wish to move up – or even maintain – its current rank.
Table 23: Guatemala’s Doing Business Performance in 2009 and 2010 reports
Doing
Business in 2009
Doing Business in
2010
Global and Regional Best
Practices (2010) Starting a Business
Rank 147 156 New Zealand Procedures (number) 11 11 Puerto Rico
Time (days) 26 29 Cost (% of income per capita) 50.6 45.4 Min. capital (% of income per
capita) 26.3 23.5
Dealing with Licenses Rank 163 150 Hong Kong, China
Procedures (number) 22 22 St. Vincent and the Grenadines
Time (days) 215 178 Cost (% of income per capita) 1204.1 1079.3
Registering Property Rank 25 24 Saudi Arabia
Procedures (number) 5 4 Guatemala Time (days) 30 27
Cost (% of property value) 1.1 1.0 Protecting Investors
Rank 127 132 New Zealand Disclosure Index 3 3 Colombia
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Director Liability Index 3 3 Shareholder Suits Index 6 6
Investor Protection Index 4 4 Trading Across Borders
Rank 119 119 Singapore Documents for export (number) 10 10 Panama
Time for export (days) 19 17 Cost to export (US$ per
container) 1,182 1,182
Documents for import (number) 10 10 Time for import (days) 18 17 Cost to import (US$ per
container) 1,302 1,302
Employing Workers Rank 126 127 Australia
Difficulty of Hiring Index 44 44 Singapore Rigidity of Hours Index 40 40 United States
Difficulty of Firing Index 0 0 St. Kitts and Nevis Rigidity of Employment Index 28 28
Non-wage labor cost (% of salary)
Firing costs (weeks of wages) 101 101 Getting Credit
Rank 27 4 Malaysia Legal Rights Index 7 8 Guatemala
Credit Information Index 5 6 Public registry coverage (%
adults) 16.1 16.9
Private bureau coverage (% adults) 19.7 28.4
Paying Taxes Rank 133 108 Maldives
Payments (number) 39 24 Suriname Time (hours) 344 344
Total tax rate (% profit) 36.5 40.9 Enforcing Contracts
Rank 106 103 Luxembourg Procedures (number) 31 31 Argentina
Time (days) 1,459 1,459 Cost (% of debt) 26.5 26.5
Closing a Business Rank 93 93 Japan
Time (years) 3.0 3.0 Jamaica Cost (% of estate) 14.5 15
Recovery rate (cents on the dollar) 28.2 28.2
Overall ease of doing business 117 110 Singapore Source: Doing Business database, www.doingbusiness.org. Note that the rankings published in Doing Business 2010 are not comparable to those published in Doing Business 2009, because two new countries were added and there were some methodology changes. The rankings displayed for DB 09 here were recalculated based on these updates.
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7.14. Any reforms that Guatemala chooses to implement should be properly advertised and monitored. Monitoring changes in the business environment will highlight what was a success and where further effort is needed. Publicity surrounding reforms ensures that changes are accepted and implemented. It also sends a clear message that Guatemala is increasing its competitiveness, which improves investor perceptions and encourages investment and job creation.
Starting a business 7.15. Doing Business measures the procedures, time and cost necessary to start and formally operate a business. As of June 2009, it took 11 procedures, 29 days and 45.4 percent of GNI per capita, plus 23.5 percent of GNI per capita as minimum capital, to start a business in Guatemala City. This makes Guatemala 28th in Latin America and the Caribbean region (out of 32 countries): a poor performance by any measure.
7.16. Only a few years ago, Guatemala was cited as an exemplary case in modernizing its registration process (Kappler, et al. 2007). In 1996, Guatemala began a modernization program that ultimately resulted in e-registration by 1999. The changes led to an increase of over 20 percent in the number of registered firms. However, the results were not sustainable because a stipulation in the commercial code prevented the possibility of using the registrar’s electronic signature. Therefore, the e-registration option was closed and firms had to register in person or through agents once again.
7.17. In 2006, a one-stop shop was introduced for business registration and housed in the commercial registry. Agents from the commercial registry, the tax administration, and the social security administration participate in the one-stop shop. The change cut registration time from 30 to 26 days and procedures from 13 to 11 between the Doing Business 2008 and 2009 reports. The improvement was the result of the introduction of a new fast-track system which uses a single registration form for a variety of processes required for registering a business – such as an application for a business license and notice of appointment of a legal representative.
7.18. Unfortunately, although it officially still exists (and despite an estimated US $250,000 investment from the Ministry of Economy), the actual use of the one-stop shop has declined considerably, in part because citizens have the option of performing all of the registration processes independently and the one-stop shop has not been promoted adequately. Also, some users indicate that the commercial registry gives less priority to applications submitted through the one-stop-shop, increasing delays for entrepreneurs. Consequently, the number of days to register a business increased from 26 to 29 days between the Doing Business 2009 and 2010 reports. Part of the problem with the one-stop shop is that each agency applies its own unique identification number to firms which hinders the harmonization of systems. The tax administration and social security institute, both of which have modernized and digitized their systems, have begun to harmonize their systems.
7.19. A primary recommendation is to modernize and digitalize the systems in the commercial registry to permit the harmonization of their systems with those of the tax and social security administrations. The commercial registry, tax, and social security administrations collect the same sets of documents; therefore the information in the tax and social security administrations
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is secondary and repetitive, based on the initial information and documents already filed in the commercial registry. The whole set of information needs to be transferred internally and automatically between institutions without requiring clients to do so. Not only would shared systems make the process easier for clients, it would also help ensure that firms are complying with registration and operational requirements. For example, currently a firm that closes is likely to inform the tax administration of this, to avoid paying further taxes, but may not inform the commercial registry where it would owe a fee. Greater coordination among the agencies would permit having databases that are harmonized and more accurate, allowing for more efficient enforcement of policies and more accurate accounting of business activity.
7.20. In order for the commercial registry to get to a point where it could share its systems with the tax and social security administrations, other changes would be necessary. Adjustments to the commercial code would be needed, such as allowing for the registrar’s electronic signature. The commercial registry may also need greater financial and operational autonomy to implement and sustain changes, since currently its budget is assigned from the Ministry of Economy.
7.21. Making online registration possible, which tax and social security already allow, is another important recommendation. Making registration electronic is one of the most effective ways to speed start-up. Online start-up works best in countries with reasonably high Internet penetration and laws allowing electronic signatures. The commercial registry already uses electronic signatures, and with over 1,320,000 internet users as of August, 2007 (10.1 percent of the population),65 Guatemala is well positioned to make company registration available on-line. Allowing for online registration would also be important for decentralization of services. Currently, firms can visit branch offices of the commercial registry, but agents in these offices just mail the application to the capital, since the Registrar’s actual signature is necessary to accept an application. Not surprisingly, about 90 percent of registered firms are located in the capital; digitalization would facilitate registration all over the country.
Other Recommendations for Starting a Business66 7.22. Introduce standard incorporation documents. Currently, the founders of a company have to hire a notary or a lawyer to draft the deed of incorporation. It would be easier and more convenient to introduce a standard Memorandum and Articles of Association that could be available at the one-stop shop and downloaded online. The introduction of Standard Articles of Association would eliminate the need for a notary’s intervention, and reduce the rejection rate from the registrar later on in the process.
7.23. Eliminate the minimum capital requirement and the need to open a bank account to deposit the initial capital. Before a company’s articles of incorporation can be signed, a minimum capital requirement of GQT 5,000 must be deposited in a local bank. In the medium term, Guatemala could eliminate the minimum capital requirement for company registration. This is a simple change that usually requires legislative action. Many countries defend the capit al requirement as necessary to protect creditors. But the effect is counterproductive. Without all
65 International Telecommunications Union, 2007 66 The Doing Business Reform Advisory unit is currently working on an extensive proposal that addresses starting a business, protecting investors, and closing a business.
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their funding at their disposal, entrepreneurs have a harder time establishing an office, hiring employees, marketing new products and otherwise getting their business underway. When Georgia abolished the need to deposit a minimum capital, it simultaneously eliminated the need to open a separate bank account. If Guatemala were to follow suit, it would save entrepreneurs 2 procedures and 2 days of their time.
7.24. Eliminate the need to purchase fiscal stamps. Some requirements have been in place for decades and continue to exist mainly due to institutional inertia. Currently the notary has to buy fiscal stamps for the company deed, corporation license and the nomination of a legal representative prior to certifying the deed of incorporation. Abolishing such dated requirements will eliminate 1 procedure from the registration process, cut the time by 1 day and reduce the cost by GQT 650.
7.25. Make optional or abolish the requirement to use notaries. Currently a notary public has to draw the deeds of constitution, buy the fiscal stamps and then issue a certified copy of the deed of incorporation for filing with the Commercial Registry. The notary’s involvement in drawing up the deed of incorporation and verifying it is an extra step because the registry also checks the deeds of constitution for legal compliance. This step adds at least 3 days to the process. Creating a standard Articles of Association template and checking that the incorporation deed complies with the law could be done at the registry itself.
7.26. Combine the procedures to submit the deed of incorporation at the registry, file for nomination of a legal representative, and obtain a trading license (patente) . With the introduction of the one-stop shop many procedures have been merged – obtaining the definite registration, tax and social security numbers, and authorization to print invoices. Still, in addition to the registration itself, the new entrepreneur must hire a notary to draw and notarize the deed of incorporation, buy fiscal stamps and issue a certified copy of the deed of incorporation, file for nomination of a legal representative of the company and obtain a trading license. If the requirements to notarize the deed of incorporation, file for a legal representative and obtain a trading license were eliminated, the whole process could be merged into one procedure. The founder would go to the Commercial Registry and present the standard deed of incorporation, which could be verified by the staff of the registry. Such an arrangement could eliminate 3 procedures, and shorten the time to start a business by 5 days.
7.27. Eliminate the need to register a company representative separately, make it simultaneously with the standard application form. Alternatively, if the requirement to register a company legal representative is maintained, it could be modified so that such registration occurs at the time of submitting the standard application form. That would cut one procedure and 1 day which are needed at present.
7.28. Make submission of accounting and salaries books sequential to the registration and not a part of it. This is a functional activity of an acting company and should not be a part of the registration.
7.29. Eliminate the need for a general trade license (patente). This procedure should be reviewed and possibly eliminated after analyzing the fee revenue that would be lost (especially if this is municipal revenue and the license gets renewed annually). In principle, for general
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commercial activity the company should be able to start operating upon completion of registration, without the need for such a general trade or operational license. Only companies engaging in activities that may impose environmental or health hazards or threaten public safety should be subject to licensing.
7.30. Eliminate the 8-day protest period after the publication of the edict and possibly the very publication of the edict in the Official Gazette (Diario Oficial). At present the Commercial Code obligates the Commercial Registry to wait for 8 days after the publication of the edict for provisional registration to receive any potential protests from the public regarding the registration of the company. Only after this 8-day period is over, can the Commercial Registry proceed to make the registration final and definitive. In practice, this only delays the process. An analysis should be made to see how many protests are actually received in registration of limited liability companies for general commercial activity, and, if the number is negligible, reduce or completely eliminate the need for such a protest period. Finally, Guatemalan legislators should re-consider the need to publish in the Diario Oficial de Centroamerica the edict for registration of the company. This is an outdated practice which, if eliminated, could further speed up registration.
Dealing with construction permits
7.31. Another area where Guatemala performs poorly in the Doing Business rankings is dealing with construction permits. Doing Business measures the procedures, time and cost necessary to build a commercial warehouse and connect it to utilities. With 22 procedures, 178 days and costs of 1,204 percent of income per capita, Guatemala performs worse than almost all other countries in Latin America and the Caribbean on this indicator. Since early 2007, Guatemala has focused on increasing the efficiency of obtaining construction permits and has expedited the decision processes for construction, reducing the time from 286 to 178 days. The recommendations below complement the ongoing initiatives and the work of the Task Force established to speed up the issuance of construction permits.
Short-term recommendations
7.32. Eliminate the need to prepare an environmental impact assessment and obtain an approval by the Ministry of the Environment and Natural Resources (MARN) for low-risk construction projects and introduce self-evaluation for such projects. Not all construction requires environmental management. Commercial construction projects in low-risk zones and for the storage of non-hazardous goods should be exempt from environmental impact analysis. Higher-risk construction, for example buildings related to mineral extraction, chemical or machinery production, or utilities generation would need environmental management and monitoring plans. Many countries are following this approach. Ecuador requires environmental impact assessment only for high-risk construction. Focusing regulatory efforts on higher-risk construction would not only lower the bureaucratic burden for builders but also make regulators more efficient in managing environmentally sensitive projects. This reform could introduce self-evaluation submitted to MARN by the builder for low-risk environmental impact projects.
7.33. Reduce fees for construction licenses. To obtain the construction permit, an approval must be granted by the Department of Construction Licenses at a cost of 922 percent of GNI per
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capita which is Q 175,581 (US$ 22,503). Building permit fees should reflect the amount of scrutiny and revision needed by buildings department employees. In this case, the price far exceeds the administrative cost of processing the license paperwork. The Department of Construction Licenses could consider lowering its fee schedule. A lower fee scale would reduce the cost to builders and make Guatemala an easier place in which to carry out construction projects. The impact of this reform, however, depends on the level of reduction of the fee schedule. As a reference point, other authorities in the region charge significantly lower fees – in Costa Rica it is 136 percent of GNI per capita (US$ 7,555), while in Panama the charge is 77 percent of GNI per capita (US$ 4,267), less than a fifth of the cost faced by builders in Guatemala.
7.34. Eliminate monthly inspections during construction. In Guatemala, seven inspections by the Department of Construction Licenses can be expected for a construction project of about six months. During construction, inspectors from the Construction Licensing Department visit the construction site to confirm that the works conform to the building plans. A new system could be considered, making one inspection at each phase (foundation, wall, floor, etc), rather than monthly as it occurs now. Moreover, the inspectors will still be able to inspect the site and review the entire building documentation during the final inspection. By eliminating the monthly inspections, the procedures and time needed to build a warehouse could be shortened by 7 procedures and 7 days. In the longer term, the state could make the architect responsible and accountable for the supervision and quality of the construction. Such a system exists, for example, in Sweden and Mexico.
Medium-term recommendations
7.35. Establish a one-stop shop for building permit clearances. Currently, a construction company must obtain documents and approvals from at least seven different agencies in order to obtain a building permit. Each agency must clear its respective utility or zoning drawings. In sum, builders must complete 22 procedures between obtaining the most recent property certificate and making the warehouse fully operational. A one-stop shop would centralize all of these clearances in one location and make the technical approvals an in-house process at the Department of Construction Licenses. The effectiveness of the one-stop shop will depend on having representatives from the different technical departments—with the authority to clear projects—in the Construction Licensing Department. The increased efficiency would eliminate up to 10 procedures and reduce overall time, once implemented. In addition, the regulatory plans of municipalities and communes should be updated in order to provide a sound basis for development control.
7.36. Allow online application for permits. Guatemalan authorities could also permit builders to complete some procedures via email or through a website. Examples could be applications for location approvals, zoning clearances and utilities hook-up. In Singapore, builders apply for building permission by filling out a form and submitting building plans, road interpretation and survey plans via the internet.
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Regulatory Reviews
7.37. Although addressing necessary reforms in starting a business, dealing with construction permits, and other Doing Business measures is important, the Doing Business indicators only evaluate a subset of regulations that affect businesses. The government should consider the implementation of comprehensive regulatory reviews to eliminate many unnecessary and costly bureaucratic requirements. This could include both reviewing existing regulations and establishing a process to assess new regulations prior to their implementation. In the first instance, if there is a sense that firms are overly burdened with regulations, several tools can be applied to distinguish between the unnecessary and outdated regulations and the relevant ones. In Guatemala, the National Metrology Center, CENAME, has already initiated an interagency commission to review required technical standards. These standards are declared by ministries and the commission is finding that many are obsolete or need updating. A similar process for regulations in general would be useful. Table 24 presents some tools that have been used in other countries for reviewing regulations.
Table 24 : Key Features of Selected Regulatory Reform Tools and Approaches Standard Cost Model “Guillotine” Process reengineering Key objective of tool
To estimate administrative burdens imposed on businesses and economy by regulations and other obligations
To reduce unnecessary licenses and other selected regulations quickly
To document and streamline business-government interactions and internal government procedures affecting businesses
Approach Systematic review of burdens imposed by particular legislation and regulations
Reversal of burden of proof – regulators justify need for regulations
Detailed review of transactions and processes within and among institutions
Benefits Measures baseline and potential outcomes of reforms, provides impetus for needed reforms
Cross-governmental initiative; common understanding of criteria to determine burdens; opportunity for major reforms
Streamlined processes leading to faster processing time
Disadvantages Information often difficult to gather; does not include broader regulatory compliance costs
Requires thorough coordination across government; does not by itself ensure implementation takes place
Does not address underlying regulatory policies and constraints
Source: Investment Climate Advisory Services – The World Bank. “Better Regulation for Growth: Governance Frameworks and Tools for Effective Reform.” Working Paper. July 2009. 7.38. In addition to reviewing existing regulations, many governments implement systems to ensure new regulations are creating net benefits. A Regulatory Impact Analysis (RIA) is a tool governments can employ to assess systematically the impacts of regulation and the different options they have to achieve policy objectives. RIA is recognized in most developed countries as a key tool to improve the efficiency, transparency, and accountability of regulatory decision-making. RIAs assess the likely impacts of new regulations in both quantitative and qualitative terms, helping decision makers to make good choices. By providing a systematic, evidence based and consultative framework for regulatory policy-making, well-functioning RIA systems typically encourage ‘good governance’ features and contribute to a better business enabling environment.
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7.39. However, a comprehensive RIA system may not be appropriate for Guatemala. The five critical elements of a well-functioning RIA system are:
1) Political commitment to establish and operate an effective and self sustaining RIA process;
2) A unit or group of regulatory reformers—preferably based in a central area of government—that oversees, comments, and reports on the quality of regulatory proposals, before decisions about regulation are made;
3) Clear and consistently applied criteria and rules employed to screen regulatory proposals;
4) The regulatory policy development process is transparent and includes consultation with stakeholders;
5) A capacity building program is in place, involving preparation of guidelines, training of officials preparing RIAs and facilitating the required cultural changes, and establishing monitoring, evaluation and reporting systems.
7.40. Evidence from other countries has shown a “light” system , incorporating these elements, can still add value to regulatory decision making through enhanced transparency, better quality information for decision makers and stakeholders, and improved consultation regarding regulatory issues, among other things (Investment Climate Advisory Services, World Bank 2009). The Mexican experience described in Box 3 illustrates the institutional structure and political commitment necessary to realize the benefits of regulatory reform.
Box 3: The Mexican Regulatory Experience During the 1990s, Mexico considered regulatory reform to be a central element to transform its relatively closed economy into an open, market-based one. The speed, reach, and depth of the reforms were greater than the majority of OECD countries. Like many countries, before the reform the economy was heavily regulated. Reducing business regulations was part of a larger effort to transform the investment climate. By the end of the project, the government was successful in reducing the required procedures for businesses by 45 percent and they adopted a Regulator y Impact Analysis System (RIA) to reduce costs. The original goal of the regulatory reform was purely to eliminate regulatory barriers. With time, the Government recognized that overregulation was not the only problem; many areas were poorly regulated. Also, the ministries had a top-down regulatory style that was both interventionist and opaque. Thereafter, the new goal was not only to eliminate regulations, but also to improve the regulatory system. The Government established a central agency to establ ish reform policies, the Economic Deregulation Unit (UDE). The agency was outside of the bureaucratic structure and was staffed by technical experts – economists and lawyers. This entity spearheaded the management of the regulatory system and the promotion of more reforms. Faced with the monetary crisis of 1994, the Government decided that regulatory reform should form an important part of the recovery process. In December 1995, President Zedillo submitted a decree that gave a broader mandate to UDE to revise existing and proposed regulations. Also, UDE worked with the majority of states to promote state -level reforms to provide technical assistance and coordinate efforts to facilitate starting a business. UDE completed an extensive mapping of all the required processes to start and operate a business. They created a formal registry of all the procedures, except those related to taxes. Also, ministries and relevant agencies had to submit a justification for each procedure, which forced them to eliminate unnecessary, duplicative, and forgotten procedures. In addition to reducing almost half of the required procedures and facilit ating starting a business, they eliminated a significant source of corruption. Furthermore, the UDE was successful in transforming some licenses to
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notifications, excluding or simplifying requirements for small firms, and simplifying inspection procedures. Before the 2000 elections, the President decided to institutionalize reform policies and congress approved a Federal Administrative Procedures Law. With this law, UDE was transformed into the Federal Commission of Regulatory Improvement (COFEMER), with a broader mandate, legislative support, and new execution powers. The mandate of this commission was to ensure the transparency of the regulatory process, for example ensuring that information about existing regulations is available for the public. The institutionalization of the reform policy also ensured that the reforms would continue in spite of political changes. The structure of this regulatory evaluation process is shown in the below figure. Structure and Management of Regulatory Reform in Mexico
For more examples in other countries, see Lessons for Reformers: How to Launch, Implement, and Sustain Regulatory Reform published by the World Bank. Source: World Bank (2008d).
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CHAPTER 8. PRIORITIZING RURAL INVESTMENTS67
8.1. INTRODUCTION
8.1. Developing the rural economy in Guatemala is a critical and cross-cutting issue for SMEs. While the preceding chapters covered key issues for both rural and urban producers, such as transportation and logistics costs, electricity prices, access to finance, etc., this chapter takes a more direct look at the rural sector given its importance in terms of employment and lagging human development indicators. Poverty and extreme poverty are highly concentrated in rural areas and among indigenous communities. About 50 percent of the population live and work in rural areas and roughly 80 percent of rural people are indigenous. The country’s high rates of illiteracy, infant mortality and infant malnourishment are even higher among rural indigenous peoples. Most rural poor people depend on agriculture, either as subsistence farmers or agricultural day laborers, and incomes are supplemented through small rural enterprises, especially the production of handicrafts.
8.2. Past governments have spent a significant amount of money to alleviate poverty in rural areas. The bulk of the programs are either safety nets such as temporary work programs or nutrition programs. Many programs are based on monetary or food-based transfers to help the poor in the short run, but do little to overcome the structural causes of poverty. That requires making the poor more productive so that they can earn their own way out of poverty. Productivity can be increased through investment programs such as irrigation, education, knowledge transfer on productive activities, or road construction. However, determining where and how to intervene in rural development is difficult for policymakers
8.3. The objective of this chapter is to outline an instrument that can help policymakers prioritize rural investments. While this instrument can provide an initial prioritization, it is important to take into account local nuances that might not be captured by the available data before making investment decisions. The chapter uses mapping technology and a variety of data to divide rural Guatemala into a “typology” of micro-regions that differ according to their characteristics, problems, and potential for development. The typology is based on relevant criteria, including climate and topography, production, access to roads and markets, off-farm job opportunities, population density, gender distribution and the presence of various institutions (formal and informal), such as credit providers. The analysis takes advantage of the availability of rich biophysical data on Guatemalan geography and a highly detailed geo-referenced household survey to construct the typology. The data sources are combined using a stochastic profit frontier approach to estimate the efficiency and potential of local farmers.
8.4. Guided by this typology policymakers can design poverty reduction programs adapted to each micro-region's particular combination of developmental challenges. This chapter aims to create a guide to poverty reduction that can help Guatemalan policymakers better understand what works in various situations and why. Such a guide will avoid the extremes of either overly general or overly particular solutions to structural poverty. For details on the stochastic profit
67 This chapter was prepared by Eduardo Maruyama, Maximo Torero and Alberto Pasco Font.
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frontier approach, the econometric model and its estimation, and other technical details, see Annex 4.
8.2. THE DATA
Household Survey Data
8.5. The key household survey used is the 2006 “Encuesta Nacional Sobre Condiciones de Vida”, ENCOVI. This survey was administered to 13,686 households, of which 7,878 (58 percent) were in rural areas and 5,808 (42 percent) in urban areas. From this survey we obtain the necessary economic data for the estimation of the stochastic profit frontier and the effici ency following the estimation procedure outlined in Annex 4. The key variables used are:
- Prices of the products (p): fruits, industrial crops, maize, other cereals, vegetables, staples, potatoes and other tubers;
- Input prices (w): fertilizers, urea and labor; - Fixed inputs (z): size of the plot, and capital
Biophysical data 8.6. Key to this project is the availability of information about the economic potential of every community in rural Guatemala. For agriculture, precise information about climate and land characteristics is needed to determine this potential. Using data from the GIS department of the Ministry of Agriculture we can map the whole country according to the divisions they create, the agro-ecological quality of the soil (high, medium or low), and its class:
- Land suitable for non-permanent crops: Land with ecological conditions that allows for the periodical and continued removal of the soil for the cultivation of intensive crops or of crops of short growing period.
- Land suitable for permanent crops: Land without the adequate ecological conditions for periodical and continued removal of the soil, but that allows for the cultivation of permanent or semi-permanent crops under techniques economically accessible to farmers.
- Land suitable for pastures: Land without the ecological conditions adequate for the cultivation of permanent or semi-permanent crops, but that allow the growth of natural pastures.
- Land suitable for forestal production: Land without the ecological conditions adequate for the cultivation of permanent or semi-permanent crops, or pastures and that only allow for the production of wood and other forestal outputs.
- Protected land: Land without the ecological conditions adequate for the cultivation of permanent or semi-permanent crops, pastures or forestal production.
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8.3. MARKET ACCESSIBILITY ANALYSIS
8.7. GIS (geographic information system) data has recently made it possible to investigate the market access question in a more sophisticated way. With this data one can calculate the shortest time or distance from any village to a regional or local market using the distance traveled on different road surfaces combined with an impedance measure that reflects the speed one can travel on roads of different qualities and on the slope of the terrain through which the road passes. The resulting market access measure can be expressed as a weighted average of the distance traveled on each type of road, where the weights are proportional to the impedance factor.
8.8. There are two problems with these measures of access. The first is that they do not incorporate transportation costs, which may well vary with distance and type of road surface in a different way than does time. Where that is the case, the time-based measure will be misleading because it could imply that for a particular village, one market is closer than another in that it takes less time to get there even though it may cost more to get there. By the same token it could imply that one village is “closer” to market than another as measured by t ime but not when measured by cost. But presumably what the farmer wants to know is not how far it is to his market, but rather how much he can sell his produce for in that market or equivalently, what his farm gate price is, net of transportation cost. In this analysis, a measure is used that incorporates both aspects. Market distance data for each village is merged with a matrix of transportation costs by truck on two different classes of roads, and on rivers or by animal on trails where there are no roads This provides a measure of accessibility in terms of costs.
8.9. The second problem with the typical market access indicator is that it considers only the local market. But the level of prices in local markets may well vary according to how far they are from the country’s largest market, Guatemala City. It could well be that a farmer would get a higher price for his products by shipping them to a market which, while further from his village, is closer to Guatemala City, or equivalently, in which the price of his product is higher. Therefore we estimate the costs to simultaneously access the local market and the Guatemala City market, reporting the variable that minimizes the cost to access to both markets simultaneously. (See Annex 4 for additional details on how the accessibility model was calculated.)
Accessibility Results 8.10. Accessibility maps were constructed based on the methodology explained above and in Annex 4. In order to illustrate how important this information is and how much it can be vary in different regions, accessibility to markets measured in terms of time is shown for the entire country (see Figure 44). This demonstrates how accessibility is not only a function of geography but also of socioeconomic development. We observe high connectivity in the south and relatively low connectivity in the north. Access to markets in terms of transportation costs is shown in Figure 45. Costs are based on transporting one kilogram of potatoes to the closest (in terms of monetary cost) local market (as defined by population).
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Figure 44: Accessibility to Markets of 50,000 Inhabitants (in time of access)
Source: Authors’ elaboration.
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Figure 45: Accessibility to Markets of 50,000 Inhabitants (in terms of cost of transportation)
Source: Authors’ elaboration.
8.4. RESULTS
Profit frontier estimation 8.11. Regressions were undertaken to estimate the correlation between select variables and frontier profits and technical inefficiency (see regression results in Annex 4). The correlation between frontier profits and technical inefficiency is negative and significant, indicating that farmers with higher potential are more likely to have higher efficiency levels in our sample. Farmers’ experience is associated with lower inefficiency, but this link weakens for those with higher profit potential. Household size is negative correlated with efficiency, but this association increases with farm profit potential. A possible interpretation for this result is that farms with higher profit potential are less labor constrained and at the same time they can also offer wages
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that are attractive enough to override some of the imperfections in local labor markets that small farms cannot.
8.12. For farms with high potential, access to formal credit is significantly associated with lower levels of inefficiency. Land ownership is correlated with higher levels of efficiency (for all farmers but particularly for farmers with high potential), which is in line with common notions of land ownership opening access to credit and encouraging productive investments. Unfortunately, to arrive to any conclusion on this aspect we would need to have better controls for land quality, as there might be an endogenous component on which land is owned and which is rented, particularly for smallholders.
8.13. Access costs and inefficiency are positively and significantly correlated. The association fades for farms with higher potential, which indicates that accessibility is a more important bottleneck for smallholders. Adequate policies that reduce transportation and transaction costs could be progressive if carried out jointly with assistance programs that increase the competitiveness of rural areas compared to urban areas.
8.14. It is important to note that in this section the term “inefficiency” is used in ways that are consistent with the literature on stochastic frontiers. However, the model and data cannot capture all the complexities of the farm productive process, so the econometric calculation may identify as “inefficient” decisions that are perfectly rational but difficult to explain by the analyst who has incomplete information. For instance, a farmer facing extremely variable climate conditions, may opt for more resilient but less profitable crops in order to reduce the risk of losing all of his harvest. If the analyst cannot observe this high variability he will regard the farmer’s decision as sub-optimal. Another example is over-utilization of available resources such as land or water. In the short run, practices that over-exploit productive assets can result in high profits, but in the long run this can cause a premature exhaustion of the productive capacity of the farm. A farmer with better foresight could appear to be “inefficient” for missing a short run high profit opportunity when in fact he is maximizing his long run profits.
8.15. Unfortunately, until household surveys or other auxiliary sources collect more (and better) information on risk preferences, climate variability over time, price variability of inputs and outputs, conservation practices of productive assets, etc., it will be impossible to differentiate the risk averse or non-depredatory producers from inefficient producers who are not optimizing long run profits. If the appropriate data is collected, then we could add covariates that capture preferences for risk, weather variability, etc. and test if they can capture a significant fraction of the variance of the technical inefficiency term.
Constructing the typology 8.16. The stochastic profit frontier estimation results in the previous section and the scaling-up steps described in Annex 4 allow us to construct a typology of micro-regions using the notions of profit potential (frontier), profit efficiency (technical efficiency), and priority (poverty rates). We can assess what is the maximum profit farmers in a given area can generate given their average characteristics and assuming an efficient allocation of resources and skills. Figure 46 shows that profit frontiers are the highest in the Northern part and in a few areas in the south where accessibility is the best.
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Figure 46: Frontier profits (potential) for rural households in rural Guatemala
Note: Alta = high; Media = medium; Baja = low Source: Authors’ elaboration.
8.17. Once the profit potential of an area is established, it is necessary to know how far each region is from that frontier. This distance is given by the inefficiency component . Figure 47 shows the efficiency levels for rural households. More efficient areas or areas closer to their potential (frontier), are depicted in blue, while less efficient areas are depicted in green. Some interesting patterns start to appear in the maps. Many areas classified as having a high potential, are nevertheless highly inefficient, which might explain some of the poverty rates in those areas observed in Figure 48.
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Figure 47: Technical efficiency for rural households in Guatemala
Note: Alta = high; Media = medium; Baja = low Source: Authors’ elaboration.
Figure 48: Poverty Map for Guatemala
Note: Alta = high; Media = medium; Baja = low Source: Authors’ elaboration.
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8.18. To complete our typology, we need a measure of the priority in which investments should be made to have a greater impact on overall welfare levels of the rural population. For this a reasonable criteria is to use poverty rates, depicted in Figure 48. Combining Figure 46, Figure 47, and Figure 48 results in our basic typology, shown in Figure 49. With only these 3 dimensions we can observe the extreme heterogeneity that exists in the rural highlands .
Figure 49: Combining profit frontiers, efficiency and poverty into a typology of micro -regions
Note: Utilidad=profit frontier; Eficiencia=efficiency; Pobreza=poverty; Alta=high; Media=medium; Baja=low. Source: Authors’ elaboration.
Typology results
8.19. Because of the high heterogeneity between micro-regions (even when considering only 3 basic dimensions) it is difficult to interpret all the information presented in the above maps. Hence, we collapse the micro-regions into a 7-group typology that captures some key characteristics that matter for policy making. These groups are described below and shown in Figure 50; in Figure 51 they are overlapped with the results of our accessibility model:
- Critical areas (high poverty and low potential) [Turquoise] - High priority areas (high poverty and medium/high potential) [Pink]
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- Medium priority areas without opportunities for agriculture (medium poverty and low potential) [Blue]
- Medium priority areas with opportunities for agriculture (medium poverty, high/medium potential, and low/medium efficiency) [Red]
- Low priority areas with opportunities for agriculture (low poverty, high/medium potential, and low/medium efficiency) [Orange]
- High performance areas (low poverty, high/medium potential, and high efficiency) [Yellow]
- Low priority areas (low poverty and low potential) [Green]
Figure 50: 7-groups typology
Note: Alto rendimiento = high performance; Baja prioridad con oportunidades agrícolas = low priority with agricultural opportunities; Prioridad media con oportunidades agrícolas = medium priority with agricultural opportunities; Prioridad media sin oportunidades agrícolas = medium priority without agricultural opportuniti es; Alta prioridad = high priority; Criticas sin potencial agricola = Critical with agricultural potential. Source: Authors’ elaboration.
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8.20. With this basic setup it is possible to start designing policies based on each region’s characteristics. For instance, because of their low agricultural potential and high poverty rates, critical areas would be the first candidates to receive funds from cash transfer programs and other immediate assistance. Areas that combine high potential with low efficiency need invest-ments that can reduce transaction costs and increase productivity to take full advantage of the regions’ opportunities. The agro-ecological conditions, technologies, and economic environment of high performance areas should be analyzed to see how these settings can be replicated else-where. The accessibility model results (shown as color intensities in Figure 51) can identify areas that could develop quickly if properly connected, and others where access is not the main bottleneck for development.
Figure 51: 7-groups typology and accessibility costs
Note: Baja prioridad = low priority; Alto rendimiento = high performance; Baja prioridad con oportunidades agrícolas = low priority with agricultural opportunities; Prioridad media con oportunidades agrícolas = medium priority with agricultural opportunities; Prioridad media sin oportunidades agrícolas = medium priority without agricultural opportunities; Alta prioridad = high priority; Crit icas sin potencial agricola = Critical with agricultural potential. Source: Authors’ elaboration.
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8.21. Figure 52a-d shows four specific areas where different types of interventions can be implemented. Figure 52a shows critical areas, i.e. areas of extreme poverty and very low potential for agricultural development given their low level of potential and efficiency. Policies in these areas should provide direct social assistance in the short term. Figure 52b shows high priority areas, i.e. areas with high poverty and low efficiency but with high agricultural potential for agricultural development. The policies in these areas should target the specific bottlenecks that do not allow producers to reach and take advantage of their high potential for production. These policies could include technical assistance and better access to hard infrastructure and production infrastructure (e.g. as market places). Figure 52c shows high performance areas, i.e. areas with low poverty, high efficiency and high potential. These are the areas that policymakers can learn from and try to replicate what is happening there. Finally, Figure 52d shows medium priority areas with opportunities for agriculture (low poverty, high potential, and low efficiency). The low efficiency and low poverty imply that producers in these areas are doing other activities outside of agriculture that allow them to have higher income levels. These are areas where labor saving technologies could be implemented to increase efficiency of the land.
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8.5. CONCLUSIONS
8.22. This chapter presents an alternative method to classify and analyze rural regions in Guatemala using stochastic profit frontier estimation. Unlike other classification methods such as poverty maps or cluster analysis, this procedure is based on a basic assumption of resource optimization under economic and physical constraints. This methodology has been applied with success in Peru and Ecuador. In Peru, the National System of Public Investment uses the typologies to set priorities in its interventions. Moreover, at the upcoming American Network of National Investment Systems to be held in Lima, the Peruvian experience with the typologies will be presented to regional representatives.
8.23. We take advantage of rich biophysical data on the Guatemalan geography and a detailed and fully geo-referenced socioeconomic household survey for rural Guatemala to construct our typology. We combine these data sources using a profit frontier approach to estimate agricultural potential and efficiency at the regional level, and properly account for the impact of random shocks inherent to farm activities by adding a stochastic component.
8.24. Adding information from poverty maps and a comprehensive calculation of access costs to local markets to the profit frontier results generates a multi-dimensional typology that is detailed enough to capture the high heterogeneity of rural populations, but simple enough to be practical as a tool for policymaking and investment decisions. An important caveat of the above maps is that although they can be helpful for guiding policy decisions, they should not be considered in isolation. The maps do not account for all the inputs that should inform policy-making or region-specific idiosyncrasies,68 such as conservation areas or national parks (with the exception of the Reserva de la Biosfera Maya), and do not consider past and ongoing interventions.
8.25. The richness of the methodology and available data allow room for additional analysis, depending on the interest of policymakers. For instance, areas can be weighted by population, or more use can be made of the information on off-farm job opportunities, population density, gender distribution and/or the presence of various institutions (formal and informal), such as credit providers, by crossing them with the efficiency, potential and poverty classifications. In other words, the information in this chapter is just a subset of potential analyses that could be done. Section E of Annex 4 contains a table with details on population, poverty, market access, potential, and efficiency for each municipality in the country. Based on these classifications, additional dimensions for select areas could be investigated, for instance to identify what factors could be potential bottlenecks in areas of low efficiency.
68 Examples of idiosyncrasies include: parts of Chimaltenango and Sacatepéquez showing as low potential even though these regions are known for export-oriented vegetable production; heterogeneous conditions in Petén that are not fully captured given the size of the micro-region; and the existence of deserts in the Zacapa, Chiquimula and El Progreso mixed in with higher potential zones.
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CHAPTER 9. ANALYSIS OF SELECTED VALUE CHAINS / CLUSTERS
9.1. INTRODUCTION
9.1. The preceding chapters all detail areas that have been identified as constraints to competitiveness and growth in Guatemala, and where weaknesses specifically hurt SMEs. This chapter examines three indicative sectors with promising growth potential in Guatemala—forestry/ wood processing, agribusiness, and tourism—to determine what is inhibiting increased participation and value-added of SMEs.
9.2. The analyses identify cross-cutting issues, many of which are covered more generally in other chapters, and highlight specific reform areas. The analyses found that roads, electricity, training, quality, and access to finance were transversal problems across the sectors. Each analysis found that logistical infrastructure, especially the security of roads, is a major impediment to sector growth. Lack of adequate electricity was found to be a critical constraint especially for SMEs in the wood sector. All of the analyses reported that increasing the capacity of SMEs through training was necessary to improve their productivity and their ability to access new markets. Training could cover management skills, marketing, new production processes and technologies, quality, etc. Increasing the quality of their products and obtaining certifications was seen as particularly critical, especially for small agricultural producers. Lastly, access to finance appears to be a constraint for small producers across the sectors.
9.3. Associativity, meaning tighter associations or productive linkages between SMEs, is also a key way to improve value chains. This can generate economies of scale in terms of access to training, purchasing power for inputs, gathering market intelligence, crafting joint marketing and branding strategies, meeting quality certification and sanitary/phytosanitary requirements, lobbying for improved public services such as local roads and infrastructure, exporting in bulk, etc. Greater associativity among SMEs could benefit the cluster development of each of the three sectors studied.
9.4. On a cautionary note, when considering interventions targeted at specific sectors or industries, things like direct subsidies, tax incentives, and market privileges should be pursued cautiously because they could be costly and subject to capture by specific groups.
9.5. The following sections lay out the principal findings from each sector analysis. For the complete reports, see Annexes 5, 6, and 7.
9.2. FORESTRY / WOOD PROCESSING69
Sector Description
9.6. Guatemala has a land area of 10.8 million hectares, roughly forty percent of which is forest. Two-thirds of the forest is designated as conservation forest, but the line between
69 The forest / wood processing analysis for this report was done by Global Development Solutions, LLC, using their Integrated Value Chain Analysis methodology.
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conservation and production areas is blurred as deforestation driven by agricultural encroachment/fires and illegal logging continues on a significant scale.70
9.7. Another major factor pressuring the forest resources of the country is the pervasive poverty in the country. For an estimated 75 percent of the population living below the poverty line, the forest is a source of much needed firewood. Due to shortcomings in the electricity grid as well as high electricity tariffs, some businesses also use firewood for their energy needs. As a result, over 95 percent of all wood removed from forests of Guatemala in any given year (17.4 million cubic meters) is used as firewood. The pervasive forest exploitation for social purposes not only contributes to deforestation but also reduces the opportunities for commercial/industrial exploitation of the forest.
9.8. Forest exploitation for industrial processing takes place in both private and public forests (there is roughly a fifty-fifty split between private and public ownership of the forests). With the exception of some large scale concessions in the north, timber harvesting as well as processing in Guatemala is generally a low-tech affair dominated by animal-based hauling at the forest level and old machinery at the mill level. An estimated 35,000 people are involved in timber extraction activities.
9.9. Primary Processing: Primary processing generally takes place in small to medium size mills that are often placed along main roads. Small mobile mills are also common, but fixed sawmills within or in the immediate vicinity of the forest are an exception. Most sawmills are located close to Guatemala City, along both coasts and in the northern plains of Peten. In the highlands, where the road density is reported to be as low as one meter per hectare, mechanized sawmilling facilities are few. Statistics regarding mills—such as registered entities, capacity and employment—are limited and often contradictory.71 According to the forest directory produced by the Cluster Forestal, 188 sawmills are listed as operating in the country. This figure is closer to 200 sawmills as reported by private millers. Official government data indicate that there are only 87 processing firms (sawmills and all other secondary processors). Capacity utilization is not known although it is generally reported to be low due to the fact that most mills are ill -equipped to adjust to small diameter log processing; large diameter logs in the country are increasingly less available as mature forests are exploited. Typically, a Guatemalan mill employs 5 - 10 people and produces 4,000 - 8,000 cubic meters of lumber per year.
9.10. Secondary Processing: Secondary processing is characterized by high levels of consolidation of exporting firms (over 50 percent of sector’s exports come from ten firms) and a number of small carpenter/furniture workshops that serve the domestic market. The range of products manufactured in the industry is concentrated in few products such as pallets, doors and windows, as well as beds and furniture. Most firms engage in furniture production. In 2008, there were 158 furniture companies listed in the forestry directory of the Cluster Forestal.72 An estimated 2,750 people are reported to work in the forest processing industries in general (primary, secondary, and services), although the actual number of people employed is generally 70 Annual deforestation is estimated to be between 75,000-85,000 hectares (2% of forest cover). 71 Data on the number of processing firms operating in the sector, for example, range from 87 to over 250. Discrepancies stem from factors such as under-registration, poor registry updating, etc. In 2004 registered firms in the forestry sector were 2,219 compared to 462 in 2008. 72 This number is much bigger than the number of firms registered in the forestry industry in total (87).
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believed to be much higher. The number of people employed in the secondary processing industries is not known. Labor productivity in the country, forestry processing included, is generally low and declining.73
9.11. The majority of firms in the sector are small enterprises that process softwood with low technological capabilities. Apart from a handful of backward integrated processing firms, most manufacturers must rely on volatile supplies of raw materials from third party suppliers. Product quality is generally low and value addition is limited. Roughly 70 percent of the processed wood originates from coniferous forests, with pine being by far the most important source of industrial roundwood.
9.12. Supply Chain: The supply chain begins with timber harvesting in the forest.74 Small to medium size owners typically hold between 1 - 30 hectares of forest. A large scale owner may hold anywhere from 30 to as many as 2,000 hectares of forest. One of the defining characteristics of the supply chain, however, is not the ownership but the location of the timber. The bulk of softwood timber in Guatemala is located in its highlands. This geographic feature would be adverse to—and increase the complexity of—timber harvesting and delivery to market in any supply chain. In Guatemala, geographic adversity is compounded by poor road infrastructure and low mechanization levels. As a result, the timber supply chain in Guatemala is not only rudimentary but also costly (see Figure 53).
73 According to an AGEXPORT study, labor productivity in Guatemala decreased by 14% from 1980 to 2005 but minimum wage increased by 257% over the same period. 74 In the case where timber comes from plantations—a low percentage in Guatemala—the supply chain begins with timber plantation and after multiyear (15-25 year) thinning and pruning cycles, timber is harvested and enters the supply chain.
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Figure 53: Forest-to-Furniture Supply Chain, Guatemala
Primary Processing: Natural Forest Extraction Value Chain Analysis 9.13. Typically for every timber industry in the world, the stumpage price of trees depends on how far the trees are from the buyer and how difficult it is to access them. These two indicators show remarkable variability internationally as well as domestically. For pine species, for example, stumpage prices vary from as low as Q0.50 per board foot (BF) for poorly accessible forest to as high as Q1.15/BF for easy access forest in close proximity to main roads (see Table 25). This price range refers to the Chimaltenango region and within 25 percent variation reflects the Coban region prices as well. These prices may be different from other regions in the country.
Table 25: Pine Stumpage Price Variations, 2009 Stumpage Price VariationsStumpage Price (to timber owner) Good Forest Access/Roads Poor Forest Access/RoadsMill/Buyer Near Forest (10-20km) 1.15 0.70Mill/Buyer Far from Forest (50-100km) 1.00 0.50
Quetzal/Board Foot
Source: Global Development Solutions, LLC
The value chain for timber harvesting can be divided into six key value adding activities:
1. Logging roads (construction and maintenance);
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2. Demarcation; 3. Felling/Bucking; 4. In-forest hauling (cutting already felled trees into smaller pieces and moving them to
collection points); 5. Loading and transportation; and 6. Administration and overhead
9.14. In the Guatemalan softwood timber context, the first two stages are undertaken only by plantation owners, and by and large owners of natural forests and/or cutting licenses do not engage in road construction and/or maintenance or in demarcation. Loggers mainly engage only in felling, bucking/hauling, and transportation of wood in addition to administration issues such as cutting license fees, their transfers, etc. In some cases, logs may be sold at forest collection points depending on the buyer’s preference.
9.15. High Transportation Costs: A typical logger’s value chain (see Figure 54) shows that apart from the stumpage paid to timber owners, which constitutes 45 percent of the value chain, charges associated with moving timber by hauling (25 percent) and transporting it to the client (14 percent) constitute most of the remaining costs.
Figure 54: Value Chain for Natural Forest Timber Extraction, Chimaltenango
9.16. Guatemala is a very small country compared to most timber producers such as Canada, Russia, USA, Chile, Brazil, etc. Yet, its hauling and transportation costs constitute a major share of the costs of delivered timber. This is mainly due to the poor road infrastructure across the country, especially in the highlands where most softwood is found—only an estimated 35 percent of the 14,000 km road infrastructure is paved. In the particular example illustrated below, the total cost of hauling and moving timber from the forest to a mill 20 kilometers away is
Stumpage 49%
Felling/ Bucking 4%
In-forest Hauling
26%
Transport to mill
6%
Admin/ OH
15%
Fuel
13%
Materials/ Mainten.
43%
Deprec- iation 11%
Labor
33%
Q100 per pine tree, difficult access but
relatively good road to client
Q150-Q200 per 1,000 board feet for skidding charges of bull-owner (buellero). No access
roads. 50% less expensive if truck loading point is
closer to forest
Own truck and labor. Market price for rented trucks and labor 25% higher. Short
distance to buyer (7km) but excessive wear and tear due to poor roads inside and
outside forests.
Source: Global Development Solutions, LLC
Cutting license transfers and municipal royalty fees
Timber Cost Price: Q1.19/BF Delivery Price: Q1.40/BF Profit margin: 15% Distance to market: 20km Client: Sawmiller exporting to El Salvador.
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estimated at Q0.38 per board foot, or US$20 per m3. This is in line with global forestry averages but the transportation distances of 20 km from forest to mill in countries such as Canada, Russia, and USA are unheard of unless mills are located within forests. This indicates that the per kilometer-ton unit cost of moving timber in Guatemala is not competitive internationally.75
9.17. Table 26 illustrates the fact that the people who ultimately foot the bill of transportation costs are the timber owners. Namely, depending on location and road characteristics, the non-stumpage cost of moving timber can vary by 248 percent and as a result loggers discount the stumpage paid to timber owners in order to meet the going market price of timber at sawmillers (Q1.4 - Q1.7 per board foot as of November 2009).
Table 26: Pine Stumpage Price Variations, Coban and Chimaltenango, 2009 Stumpage Price VariationsStumpage Price (to timber owner) Good Forest Access/Roads Poor Forest Access/Roads AverageMill/Buyer Near Forest (10-20km) 1.15 0.70Mill/Buyer Far from Forest (50-100km) 1.00 0.50
Cutting 0.03 0.03 0.03
Transport Forest to Collection Point Good Forest Access Poor Forest AccessAnimal Traction 0.10 0.35 0.23
Transport Collection Point to Mill Good Access/Roads to Mill Poor Access/Roads to MillMill/Buyer Near Forest (10-20km) 0.15 0.35Mill/Buyer Far from Forest (50-100km) 0.30 0.70 0.38
Quality Control Agent 0.03 0.03
LOW HIGHTotal Non-Stumpage Cost 0.31 1.08 0.70Global Development Solutions, LLC
0.84
Quetzal/Board Foot
9.18. Post Harvesting Practices Inadequate for High-Value Added Processing: Since loggers serve a millers’ market catering to the construction materials industry, their post-harvest practices deteriorate the timber quality needed for high value added wood products. For example, a logger may keep his timber in forest collection points for months at a time until he negotiates the best price with millers or scopes the neighborhood for additional timber to cut. In the meantime, timber may and often does get fungus stains which make it suitable only for pallets, structural lumber or other applications (fungi do not affect wood strength). Such timber, however, very rarely would be accepted by non-structural wooden product exporters or any processor other than the smallest local carpentries that make products for the rural community market.
Secondary Processing: Sawmilling Value Chain Analysis
9.19. The value chain analysis suggests that raw material constitutes the largest share in the delivered cost of construction lumber (41 percent), followed by sawmilling (40 percent) and transport to market (14 percent) – see Figure 55. 75 Per kilometer-ton transportation costs of timber are not available but such cost comparisons for other agricultural goods are available and can be provided separately upon request.
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9.20. Construction/Sawnwood Market Sets the Benchmark Price and Quality of Lumber: The particular miller illustrated below buys logs from various sources, which is typical. Half of its lumber comes from independent loggers. A quarter comes from its own forest and another quarter comes from purchased cutting licenses from third parties—in both cases timber extraction is performed by contracted loggers. This is typical of many millers.
Figure 55: Forest-to-Sawmill Value Chain Analysis, Pine Lumber
Raw Material
41%
Felling/Bucking
3%
In-forestTransport
16%
Transportto Mill25%
Drying
0%
Transportto market
14%
Admin/OH5%
Stump-age56%
1. Poor road access in and near forest may reduce forest/license holder’s stumpage tree value by as much as 56%
2. High cost of transportation makes the price of logs delivered at mill gates in Guatemala one of the highest in the world:
Log Cost (US$/m3)Guatemala US$79-US$85Chile US$50Canada US$42Russia US$40Europe US$112(Germany, Finland, Austria)
Own Electricity
11%
Materials/Mainten.15%
Waste*
34%
Labor
40%
1. Lumber Recovery Factor (LRF) – Typical LRF: 55%-60% (old machinery). Improved LRF (case illustrated): up to 76% but of low quality lumber (scaffolding boards)
2 Relatively low labor productivity: Guatemala: 290-480 cubic meters/worker/yearUSA/Canada (2008): 2,125cubic meters/worker/year
3. Sawmilling costs close to global averages despite high electricity prices (compensated by low labor costs):Guatemala: US$69-US$78/cubic meterGlobal average (2008): US$75/cubic meter
Limited/no market for byproducts (sawdust, chips, shavings etc).
Very poor rural/secondary road infrastructure a major contributor to high costs of short haul timber transportation
Sawn Boards, Wet. to El Salvador: Mill Gate Sales Price: US$185/m3 (Q3.5/BF)Production Cost: US$167/m3 (Q3.1/BF)Profit Margin: 10%
* Producers typically load waste at raw material cost stage. For this presentation, waste has been allocated/loaded to respective processing stages
Sawmilling
40%
Source: Global Development Solutions, LLC.
9.21. The price of raw material varies depending on the source of timber and is generally set based on the going rate for construction lumber. The going rate for mill-gate construction lumber in November 2009 was Q1.5/BF in the Alta Verapaz region around Coban. This is the price at which millers can buy timber and make a profit by selling construction lumber in the regional or local markets. Based on this price, millers work backwards and source timber from different locations. In the case illustrated above, timber is sourced from the miller’s own forest via hired loggers and constitutes 41 percent of the delivered price of the lumber. As is the case with the forest harvesting value chain, factors such as poor forest access and other road conditions constitute almost half (41 percent) of millers’ raw material costs. When compared to other major timber-producing countries, Guatemalan timber is one of the most expensive (see value chain analysis illustration above).
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9.22. While it is typical in any part of the world for millers to be influenced by the construction materials market, in Guatemala most millers appear to be almost completely focused on this market.76 As a result, the price benchmark of lumber by and large corresponds to the construction material market needs. By the same token, the quality benchmark of lumber supplied by millers is the one that is satisfactory to the construction material industry. This characteristic of the local supply chain creates major problems for the high value-added wood processing industry.
9.23. As can be seen in Figure 56, the amount of lumber recovered from a log unit (the lumber recovery factor – LRF) is anywhere from 55 percent - 70 percent in Guatemalan mills. This is an indication that Guatemalan mills do not supply what is generally known in developed markets as ‘grade’ lumber that can be turned into multiple wood processing applications of high value. Instead, by catering to the construction materials market that has low lumber quality requirements, Guatemalan softwood mills sell mostly non-grade lumber. Parts of logs that would otherwise go for pulp and other industries in developed markets are actually turned into lumber in Guatemala.
Figure 56: Grade Lumber and Non-Grade Lumber Recovery Rates
Global Development Solutions, LLC 9.24. This approach allows for maximizing lumber recovery, but these recovery rates are at the expense of lumber output quality. As a result, this setup is inadequate to meet quality requirements of medium-to-high value adding home/office furniture industries.
9.25. In this context, millers are anticipated to continue their legitimate short -term profit maximizing decisions by combining volume sales for the construction material lumber and limited but high margin sales for other products such as tomato box assembly.77 At least three strategies can be envisaged that could influence millers’ processing decisions in the direction of improved lumber.
76Influenced, among other factors, by the fact that markets for other product classes such as pulpwood do not exist. 77 Tomato box margins range between 30%-40%.
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9.26. One avenue goes back to reducing the cost of harvesting and moving timber from forest to mill. Guatemalan pine logs are some of the most expensive compared to other countries and the value chain shows that a significant portion of log cost is generated by poor access to and from forests. While some private sector companies can influence cost reductions by building their own roads within or close to forests, such investments are considerable for most forest owners.
9.27. The second avenue is to stimulate investments in industries for processing waste wood biomass chip/shavings/waste intake, such as pulp, charcoal, etc. Such investments are anticipated to increase the value of timber biomass and may influence the economics of sawmilling towards lumber production in increasingly better quality than currently produced.
9.28. The third avenue is to increase the competitiveness of the secondary processing industry so that it can provide sufficient price and volume incentives to the milling industry for the improvement of its lumber offerings. Additional details about these strategies and more can be found in Annex 5.
9.3. AGRO-INDUSTRY78
9.29. Guatemala has a strong agricultural production and export record. It is the second largest sugar exporter in LAC after Brazil and the world’s fifth largest banana exporter; it is a major exporter of cardamom, plantains and fresh pea pods, and; it is one of the market leaders in specialty coffees. Total agricultural exports in 2007 were estimated at US$2 billion. About three quarters of its products are exported to the US and the rest to Central America and some to Europe.
9.30. Guatemala has a dual agricultural production structure. Sugar, bananas and some other related fruits are produced on large estates; some of which are directly connected to US based companies such as Del Monte. Coffee, cardamom and fruit and vegetables are mainly produced by agricultural small and medium-sized enterprises and smallholders.
9.31. Changing Markets. During the last twenty years, agricultural production and marketing have seen important changes. As in all other countries in Central America, Guatemala’s supermarket sector has grown very fast. Since 2005, this sector is now dominated by Wal-Mart, a US retail giant. The growth of supermarket share of agricultural produce marketing has introduced important changes in production and marketing. The supermarkets have centra lized procurement, are buying more directly from producers (SME and smallholders) and have introduced their own food safety and voluntary quality standards. Producers have adjusted fairly easily to those changes in the local retail business.
9.32. The country also had to deal with rapid changes in its export markets because of quality standards in particular in the fresh fruit and vegetable sector (sanitary and phytosanitary standards - SPS, Food and Drug Administration and US Department of Agriculture regulations, EurepGAP requirements, trade specific and private standards). The 2000 coffee crisis also changed the marketing environment for specialty coffee through the growth of organic and fair -trade coffee. 78 See Annex 6 for additional details.
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9.33. Unfortunately, Guatemala has not been all that successful adhering to international SPS standards. During the nineties, the FDA and USDA intervened directly in Guatemala to reduce the number of detentions at US borders for products (in particular snow peas) that were not in compliance with the maximum pesticide residue limits. An SPS compliance program was introduced; and a private-public institution PIPAA (Integral Program for Agricultural and Environmental Protection) was created to reduce the pesticide problem. Although the situation improved, Guatemala remains the country with the largest percentage of US border detentions (13 percent in 2007).
9.34. In spite of those constraints, the fruit and vegetable export sector in general has grown by an annual 15 percent. This growth rate is mainly the result of the strong performance of the agro-industrial sector. The SME and smallholder sector is outperformed by some competing countries which have taken better advantage of the import growth in the US over the last five years.
9.35. Nevertheless, the Guatemalan private sector (smallholders, agricultural SMEs, intermediaries and exporters) have shown dynamic entrepreneurship in dealing with the above challenges and the competition. Many exporters are creating integrated channels of production, processing and export: supervising production at the farm level, providing technical assistance and extension services to farmers, providing credit for internationally approved chemicals, making exclusive arrangements to certify producers in Good Agricultural Practices (GAP), generating the volumes for the high-end export markets, and purchasing directly from the farmers in a closed market channel. This has been successful in some particular value chains, such as green beans or peas for the UK market.
9.36. A large number of exporters, however, continue to buy from wholesale markets and intermediaries without much control over the origin of supply. This produce runs the risk of being detained at the US borders for phytosanitary reasons, which hurts Guatemala’s already poor reputation. As a result, much of the Guatemalan produce is still sold through brokers and distributors with consequently lower prices than competitors selling directly to US supermarket chains. Unless across the board measures are taken to increase SPS and food safety compliance in the fruit and vegetable sector, the whole of Guatemala’s fruit and vegetable export sector will continue to suffer some of the negative consequences of non-compliance.
9.37. There is an opportunity for Guatemala to take advantage of the fast growing organic fruit and vegetable consumption in the US and the EU. Organic farming and marketing, however, requires more exclusive production and trading channels. Fairtrade still has to find a stable ground in the fruit and vegetable sector and Guatemala could explore Fairtrade for vegetables produced by smallholders.
9.38. The full report (see Annex 6) presents some detailed analysis of three supply chains. It shows the successful ring fencing of the French bean value sub-chain managed by Cuatro Pinos for Costco, a US bulk purchasing club. It shows the difficulties some oriental fruit (rambután) producers and exporter face to increase produce quality and to promote the fruit in the export market. A third analysis shows the contribution a well managed value chain governance structure can make to price stabilization in the tomato supply chain and how greenhouse tomatoes can be successfully exported to the US.
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9.39. Competitiveness issues. At the production level, the main constraints are:
(i) A scattered production base for certain types of crops produced by smallholders and smaller SMEs, which generates high transaction costs.
(ii) Incompliance with SPS standards because of ignorance and weak government control of SPS norms.
(iii) Lack of public sector research and extension. Most private research is done by the large agro-industrial sector while research and extension by the less capital intensive private sector is carried out on a piece-meal basis. Lack of research and extension has also resulted in low technology and poor training of many smallholders and small enterprises. Lately, the public and private sectors in collaboration with the international cooperation, are assisting farmers with the introduction of Good Agricultural Practices (GAP), Good Processing Practices (GPP) and Good Entrepreneurial Practices (GEP). For an strong international example of agricultural research/extension services, see Brazil’s Embrapa/Emater system.
(iv) Lack of easy access to productive and commercial credit.
9.40. At the commercial level, the competitiveness issues are: (i) lower prices and insufficient access to high-end markets because of the lingering SPS and food safety issues; (ii) stagnating markets in the US for snow peas and broccoli; (iii) the need for legislation to create for-profit producer associations; and (iv) at the level of the supply and value chains, there is room for improvement in organization, coordination and management of many supply chains although there are also examples of cooperation and willingness to create a true value chain.
9.41. Public Sector. At the public sector level, there is a multitude of interventions (by the Ministry of Agriculture, international cooperation, NGOs) which are insufficiently integrated into and coordinated with the main actors of the supply chains. PIPAA (SPS control) is structurally weak and underfunded.
9.42. Nevertheless, the Guatemalan public sector is addressing some aspects of the fruit and vegetable supply chain’s enabling environment through improvements in communications and irrigation infrastructure. It is also providing investment guarantees for productive credits through Guate-Invierte, a guarantee fund that was successfully initiated in 2005 to improve producer access to bank credit.
9.43. Value Chain Promotion. The main recommendation is for the private sector (farmers and exporters) to continue creating and leading product-specific value chains involving strong participation of producer associations. The elected management of the value chains need to: (i) develop a common vision and strategy; (ii) increase transparency to build trust amongst the links within the chain; and (iii) introduce some form of professional management where needed.
9.44. The public sector (and international cooperation/NGOs) could then support the strategic activities of the value chains by carrying out or financing (for instance through vouchers) those activities that traditionally are part of the public sector role: (i) research and extension; (ii) training of value chain members (farmers, intermediaries) and eventually assistance with producer GAP, GPP, GPE and GlobalGAP certification; and (iv) developing regulations for
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standards, SPS and food safety norms within the value chain as well as enforcing those standards and norms.
9.45. At a more general level, there is a need for: (i) additional public-private sector funding for PIPAA to ensure its independence; and (ii) financing (through bank credit) of productive and commercial investments (irrigation, greenhouses, packing houses, cold storage, production technology, and SPS control) as well as mechanisms to provide producer or commercial credit guarantees within the supply chain.
9.4. TOURISM79
9.46. Guatemala offers a range of attractions, including beautiful lakes, beaches, volcanoes, and an impressive archaeological heritage. Tourism has high growth potential and is already the second largest source of foreign income after remittances. Tourism represents approximately 18 percent of total foreign exchange earnings in the country.
9.47. In recent years, several approaches have been used to try to develop and/or improve the tourism sector, including the creation of a national tourism cluster, tourism routes, marketing the country with different names such as “Alma de la Tierra”, “Corazón del Mundo Maya”, etc. Statistics show that these initiatives were partially successful and the number of visitors, foreign exchange earnings, and tourism-related jobs all increased. However, the number of tourists visiting Guatemala has grown at a slower pace than in most other Central American countries.
9.48. SMEs play a key role in the provision of services to tourists. They constitute the “life blood of the travel and tourism industry worldwide” (Erkkila 2004). Yet, improving the quality of their products and services can be challenging. In other tourist destinations, it has been shown that collaboration among SMEs is needed to achieve competitiveness and economies of scale.
Geographic Clustering or Integrated Community Tourism 9.49. Geographic clustering organizes individual local enterprises and encourages them to define a common strategic plan, producing synergies and complementarities that reinforce everyone’s ability to attract and serve clients. Internal competition is translated into collaboration, specialization, joint efforts for better services, improved quality, and a commitment to shared branding as a tourism destination. Collaboration in the form of tourism clusters can help SMEs overcome the multiple challenges that would be prohibitive for individual stakeholders working in isolation. For an example of a successful community tourism initiative outside of Guatemala, see Box 4.
9.50. In some regions of Guatemala, SMEs are no longer interested in participating in clusters because of unsatisfactory past experiences. Leadership of an SME tourism cluster is critical to its ultimate success and sustainability. Key elements of cluster leadership include:
� Internal governance of the cluster should provide for periodic elections and rotation of leadership, avoiding the capture of the cluster by sub-groups of vested interests.
79 See Annex 7 for the complete tourism sector analysis.
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� Transparency and accountability should be ensured through clear rules of member participation and rights of information.
� Leadership responsibilities should be entrusted to members with proven ability after having been trained along with the community in the business model and cluster concept.
� Transferring leadership/responsibilities from an external agent (where necessary) to community leaders should be planned from the beginning and should take place gradually. Much of the success of the project will depend on this transfer and the correct election of leadership.
Box 4: Community Tourism in Bolivia Deep in the Amazon region of Bolivia, in the Madidi National Park, is a pristine tropical rainforest. This rainforest is a conservation priority because of its diverse wildlife and ecosystems and is home to the community of San José de Uchupiomonas. In 1992, a group of villagers realized that the future of the community depended on finding economic alternatives to the production of coffee, rice, and peanuts. They also needed to prevent the destruction of the forest from hunting and logging.
Community leaders worked with an NGO, Conservation International (CI), to build and market the community as a tourist attraction. With grant funds from the Inter-American Development Bank and technical assistance from CI, 70 local families donated at least 20 days of labor to build the Chalalán Ecolodge. The lodge was built using local materials harvested in a sustainable manner.
In 1998, the lodge opened and has proven to be a viable economic alternative to hunting and logging. CI provided training to ensure the villagers had the necessary skills to run the lodge - in guiding tours, preparing food, housecleaning, marketing, and management. Besides creating jobs to run the lodge, local entrepreneurs earned income by supplying the lodge with produce, fruit, and drinks. The community also saw a decrease in youth emigration from the village since new jobs were created.
In 2001, CI transferred complete ownership of the ecolodge to the community. Today, the lodge receives about 1,000 visitors per year. Virtually all 600 of the residents benefit from the ecolodge since 50 percent of the profits are reinvested in the community in health care, infrast ructure, and education. The remaining profits are divided among the families that own an interest in the lodge.
Because of its high level of success and active community involvement, the Chalalán Ecolodge has become a model that is replicated locally, such as San Miguel del Bala in Tacana and Albergue Mapajo in Pilón Laja, and internationally.
Source: Conservation International website, 2010
INGUAT / Institutions 9.51. The Instituto Guatemalteco de Turismo (INGUAT) plays an important role in tourism development in Guatemala. It oversees tourism policies and is a key actor in planning for the sector. INGUAT is funded through a 10 percent hotel tax, a percentage of airport departure taxes, and fines occasionally charged to hotels. According to stakeholder interviews, many consider INGUAT to be bureaucratic and out of touch with the needs of small and medium tourism ventures. A high number of SMEs are informal and are unsatisfied with INGUAT. The 10 percent tax is seen as an impediment to formalizing, especially since the resources are not perceived to come back in the form of benefits to their region. Stakeholders also complained about a lack of continuity across successive administrations and a lack of understanding of local needs.
132
9.52. Local government capacity to facilitate tourism development could be strengthened. Policies could continue to be generated at the national level, but decision making for operational issues and resource management can often be handled better at the local government level. Institutional strengthening, including building the capacity of municipalities to address tourism and support the competitiveness of local tourism SMEs, is a key task. Each municipality should be the principle ally of the tourism clusters. Municipalities receive income from tourism, yet, instead of helping tourism SMEs, municipalities often can be a barrier to their development. One example is the burdensome procedures for obtaining licenses. The support of both central and local government is very important to the success of clusters or integrated community ventures.
Security 9.53. Security is a concern for all international tourists. If security improved, tourism arrival numbers would likely increase significantly. Crime and theft in Guatemala has been identified by the WEF’s Global Competitiveness Index (2009-2010) as the most problematic factor toward conducting business in the country. According to the Travel and Tourism Competitiveness Index, Guatemala ranks 114 out of 133 countries on safety and security due to the reliability of police services, business costs of crime and violence, and the business costs of terrorism (WEF 2009). Guatemala is the lowest ranked in Central America on this index.
9.54. Tourism security in Guatemala is not easily monitored, since at most destinations there is no collection of crime statistics related specifically to tourism. Most of the data available reflects crime statistics for the country and sometimes at the local level, but not specifically for tourism crime. This information is important since the safety of tourists is often not directly related to the crime level present in the countries.
9.55. INGUAT’s Tourist Assistance Office (Assistur) in partnership with national police and local government has instituted preventive measures such as police protection of tour groups en route to tourism destinations, preparation of emergency plans, people assigned to address problems faced by tourists at main destinations, and preparation of a safety guide to be given to tourists at airports and hotels. Additional initiatives, however, still need to take place to guarantee the safety of tourists and curtail the image of Guatemala as an unsafe tourism destination.
9.56. Community policing is a new alternative for guaranteeing local security and should be considered as one of the main tasks of the tourism cluster. Community policing refers to collaborative partnerships between law enforcement agencies and communities to develop solutions to problems and to proactively address the immediate conditions that give rise to public safety issues such as crime (US Department of Justice 2010). This would be a good practice at the community level, where tourism clusters could create partnerships with local police to increase the security of their destination and their region. However, it should be noted that training and community organization are critical to implement such a strategy.
Certification
9.57. Certification is an effective marketing tool. It guarantees tourists that tourism providers have achieved certain standards. Given trends for travelers to look for more remote destinations,
133
certification gives tourists confidence that suppliers will be reliable, distinguishing them from enterprises that are not certified. Certification would give SMEs the chance to access the market of tourists and tour operators who care about the environment.
9.58. Currently, Guatemala has a Great Green Deal certification program that is supported by the Rainforest Alliance, accredited by the Sustainable Tourism Council (STC), and standardized according to global sustainable criteria. Although it is expensive for SMEs to get the certification, it can be highly beneficial. Many of the tourism enterprises certified to date have done so with financing from the government or NGOs. Continuing and expanding this support could be useful. Certification has typically been granted to hotels, restaurants, guides, etc. To expand the benefits of certification within tourism clusters, community certifications could be established, where the whole community is certified as a sustainable tourist destination. CERTIFICA is currently developing this type of certification and government support could be beneficial.
Marketing 9.59. The sustainability of tourism businesses and clusters require solid marketing strategies. An ASIES survey conducted in Guatemala showed that only 24 percent of the tourists are international and 76 percent are national. This demonstrates the importance of designing a targeted marketing campaign to more attract international tourists as well as having agreements with organizations that promote community or pro-poor tourism. For instance, relationships with Stay Another Day80 and Traveler’s Philanthropy81 could help channel resources to communities.
9.60. The internet is the major distribution channel for the travel industry; many travelers look for information online themselves instead of relying on a travel agency. If the information is not precise and reliable it can be counterproductive. Currently, the information found on the internet about Guatemala is scarce, disorganized, and often inadequate to organize a trip.82 The lack of information is not helped by the high prices that INGUAT charges to advertise on its web page. This shows again the importance of clusters; they can develop their own web pages and eventually create links to other clusters in Guatemala to convince tourists to stay more than one day. Improved country branding (“Marca Pais”), which is part of the functions of Guatemala Trade and Investment (GTI), can also help support tourism marketing efforts.
Recommendations 9.61. Recommendations to promote tourism that benefits SMEs include:
� Geographic clustering or integrated community tourism . Community tourism organized around a cluster is an effective way to create both direct and indirect employment at the
80 Stay Another Day is an international organization that was set up with the goal of promoting tourism while helping to conserve local culture and heritage and to support community projects benefitting local people. It is supported by the IFC and GTZ. 81 Traveler’s Philanthropy encourages tourists to support social service and conservation projects in the communities where the travel experiences take place by donating money, time, and talent. 82 The Taiwanese Cooperation is currently funding a national tourist website through the Association of Tourism Operators in Guatemala.
134
local level. Tourism clusters should try to reach all members of the community, not just the traditional tourism stakeholders such as hotels, transportation enterprises or restaurants, but farmers, producers, and service providers, as well.
� Institutions / INGUAT. Decision-making about tourism development strategies could be strengthened at the local government level, with support and technical assistance from INGUAT. By building the capacity of tourism divisions within municipalities and strengthening their role, resource distribution could be more demand driven, participatory, and sustainable by ensuring buy-in from the community and local government.
� Security. Tourist security should be a priority at the community and local cluster level. Although safety and security issues loom large in Guatemala, safety for tourists could be treated within the clusters as a local or municipal priority to create “safe islands” that protect tourists. Community policing can be one way to address this issue.
� Certification. Initiatives to promote the certification of tourism enterprises, as well as potentially the certification of communities, could be supported.
� Training. Training courses for tourist enterprises, particularly in-situ, could be expanded. These could potentially include brand-building and marketing, management practices, customer service, production techniques, and/or case studies on national or international success stories.
� Marketing. Destination branding that differentiates the cluster is essential. Marketing of that brand, as well as marketing of individual enterprises, should be encouraged, particularly via the internet. Familiarization trips for journalists, tour operators, travel agents, etc. could also be considered.
135
ANNEX 1: HUMAN CAPITAL SME INTERVIEW DETAILS List of SMEs Interviewed:
Name Position Name of Firm Activities of the Firm
Nestor López Propietario Negocios Totales Renta, compra y venta de servicios de entretenimiento
Aura Méndez Accionista Soluciones Técnico Contables
Contabilidades, auditorias, trámites fiscales, asesoramiento fiscal, financiero y laboral
Estanislavo González Propietario La Casa del Maletin Elaboración de artículos promocionales
Rita Muralles Gerente General
Industria Técnica farmacéutica S.A. Producción y comercialización de medicamentos
Arely Peralta Propietaria Oficina Peralta Contabilidad Daniel Donis Propietario Taller Doble D Mecaniza general de automoviles Antonio Pinto Propietario Supercarnes Venta de carnes, verduras y abarrotes Lester Váquez Propietario Panadería Los Girasoles Elaboración de pan y pasteles Norberto López Gerente Publiprint Publicidad Victor Higueros Propietario SIMTEC Importación y venta de equipo de cómputo Corina Rodríguez
Encargada de ventas Vidriería Zona 15
Enmarcado, e instalación de vidrios y espejos a domicilio
Mariela Yurissa Propietaria Salón Marielos Servicios de belleza para damas y caballeros Annabella Franco
Gerente General ECOTERMO
Manejo y tratamiento de desechos sólidos hospitalarios e industriales
Rodrigo Muñoz Gerente General FUMSERSA Servicios de fumigación y limpieza
Juan Carlos Amado
Gerente General MAYANIQUEL, S.A. Estudios de exploración minera
Daniel Hernández Propietario Servicios SPEED
Reparación y mantenimiento de aire acondicionado y refrigeración
Roberto Velásquez Propietario Talleres Velásquez Enderezado y pintura
Hugo Arévalo Socio Fundador PFK Servicios profesionales de auditoría
Estuardo Liang Gerente General Pergaminos Almacenaje de documentos
Marlon Guerra Propietario Asetradero Maya Producción y venta de maderas
136
SME Interview Guide Objetivo general: Explorar las necesidades de educación y capacitación de micro, pequeñas y medianas empresas de Guatemala. Información del entrevistado Nombre Posición Nombre de la empresa Se explica que el Banco Mundial está llevando a cabo un estudio cuya metodología requiere realizar entrevistas a una muestra de micro, pequeñas y medianas empresas para explorar limitaciones de las habilidades de sus empleados para operar y mejorar su desempeño. (Respuestas confidenciales). Información sobre la empresa 1. ¿A qué actividades se dedica su empresa? (Ej.: fabricación de prendas de vestir, venta de
alimentos, etc.) y ¿en qué año inició operaciones? 2. ¿Cuántos empleados tiene actualmente su empresa y cuáles son sus calificaciones? Tipo de empleado Sexo Edad
promedio Años promedio de escolaridad
Experiencia laboral
Hombre Mujer % Años Permanente
Obreros83 Trabajadores
especializados84
Profesionales85 Temporal
Obreros Trabajadores
especializados
Profesionales Oferta del sistema educativo 3. En base a su experiencia, ¿las personas que egresan del sistema educativo de Guatemala
salen equipadas con las habilidades y destrezas necesarias para desempeñar su trabajo?, ¿por qué razones?, ¿qué hábilidades y destrezas debieran dominar para estar listos para el mercado laboral?
Enseñanza secundaria Enseñanza universitaria Capacitación vocacional Si Si Si
83 Un trabajador o persona no técnica, cuyo trabajo es en su mayoría de tipo manual y repetitivo. 84 Una persona cuyo trabajo es, en su mayoría, de tipo manual y repetitivo pero que requiere un nivel de destrezas o comprensión ligeramente más sofisticado que el trabajo manual. 85 Una persona, que trabaja independientemente, realiza una variedad de tareas, y requiere un alto nivel de habilidades o comprensión.
137
No No No � � � � �
� � � � �
� � � � �
4. En base a su experiencia, ¿cuáles considera que son las principales carencias de la educación
formal y de los cursos de capacitación? (en orden de prioridad) Enseñanza secundaria Enseñanza universitaria Capacitación vocacional Plan de estudios Plan de estudios Plan de estudios Tiempo de clases Tiempo de clases Tiempo de clases Métodos y técnicas de enseñanza
Métodos y técnicas de enseñanza
Métodos y técnicas de enseñanza
Profesores Profesores Profesores Infraestructura Infraestructura Infraestructura Heterogeneidad de los estudiantes
Heterogeneidad de los estudiantes
Heterogeneidad de los estudiantes
Aplicación práctica Aplicación práctica Aplicación práctica Otras: Otras: Otras: 5. ¿Qué instituciones considera que ofrecen los programas más adecuados para las demandas de
su empresa? (indique para qué tipo de empleado) Enseñanza secundaria Enseñanza universitaria Capacitación vocacional 6. ¿Alguna vez tuvo alguna incidencia en la elaboración del plan de estudios de los cursos que
han tomado sus empleados? (explicar) Necesidades del empleador 7. ¿Cuál es el nivel educativo y de experiencia que requiere de los empleados de su empresa? Categoría Obreros Si Trabajadores
especializados Si Profesionales Si
Sin educación Sin experiencia laboral Sin experiencia laboral Sin experiencia laboral Con experiencia laboral Con experiencia laboral Con experiencia
laboral
Primaria Sin experiencia laboral Sin experiencia laboral Sin experiencia laboral Con experiencia laboral Con experiencia laboral Con experiencia
laboral
138
Ciclo básico Sin experiencia laboral Sin experiencia laboral Sin experiencia laboral Con experiencia laboral Con experiencia laboral Con experiencia
laboral
Ciclo diversificado
Sin experiencia laboral Sin experiencia laboral Sin experiencia laboral Con experiencia laboral Con experiencia laboral Con experiencia
laboral
Capacitación vocacional
Sin experiencia laboral Sin experiencia laboral Sin experiencia laboral Con experiencia laboral Con experiencia laboral Con experiencia
laboral
Universitaria Sin experiencia laboral Sin experiencia laboral Sin experiencia laboral Con experiencia laboral Con experiencia laboral Con experiencia
laboral
8. Por favor describa los deberes, tareas y responsabilidades de las ocupaciones de sus
trabajadores/puestos de trabajo. Obreros
Trabajadores especializados
Profesionales
9. ¿Qué conocimientos, habilidades y actitudes debiera tener la persona que ocupa cada puesto
de trabajo para desempeñar sus tareas y funciones adecuadamente? Obreros Trabajadores especializados Profesionales Motivación personal Motivación personal Motivación personal Habilidades técnicas Habilidades técnicas Habilidades técnicas Trabajo en equipo Trabajo en equipo Trabajo en equipo Otros: Otros: Otros: 10. ¿Qué conocimientos, habilidades y actitudes tienen actualmente los trabajadores que ocupan
los puestos de trabajo de la empresa? Obreros Trabajadores especializados Profesionales Motivación personal Motivación personal Motivación personal Habilidades técnicas Habilidades técnicas Habilidades técnicas Trabajo en equipo Trabajo en equipo Trabajo en equipo Otros: Otros: Otros:
139
11. ¿Qué temas serían los que Ud. escogería en un plan de estudios para capacitar a los trabajadores de su empresa?
Obreros Trabajadores especializados Profesionales 12. Si tuviera que escoger sólo tres temas críticos, urgentes o más relevantes, ¿cuáles serían y
explique por qué? Obreros Trabajadores especializados Profesionales 13. ¿Considera que los temas críticos señalados pueden impartirse adecuadamente en una
institución educativa o necesariamente deben realizarse en el lugar de trabajo?, ¿por qué? 14. ¿Qué puestos son los que más dificultad ha afrontado para llenar? Obreros Trabajadores especializados Profesionales 15. ¿Qué habilidades y destrezas son las que más dificultad ha tenido de encontrar? Obreros Trabajadores especializados Profesionales 16. ¿Ha contratado empleados en los últimos 24 meses? (Si / No), ¿cuánto tiempo le tomó llenar
la vacante (días)? Obreros Trabajadores especializados Profesionales 17. ¿Cuenta con una unidad dentro de su empresa que se encargue de capacitar a sus empleados?
(Si / No), ¿por qué? 18. Si respuesta de pregunta 17 fue “Si” => ¿Qué tipo de capacitación se ofrece y días promedio
de duración? (técnica, administración, etc.) Obreros Trabajadores especializados Profesionales
140
19. ¿Brinda capacitación informal a través de sus empleados más experimentados? (Si / No) Por favor especifique para cada caso qué tipo de capacitación y la duración
Obreros Trabajadores especializados Profesionales 20. ¿Contrata servicios externos para capacitar a sus empleados? (Si / No), ¿por qué? Por favor
especifique para cada caso qué tipo de capacitación y la duración Obreros Trabajadores especializados Profesionales 21. ¿Qué cursos han recibido en los últimos 12 meses sus empleados? (incluya, % de empleados
que lo recibieron, la duración, el costo, quién financió y el proveedor de cada curso) Obreros Trabajadores especializados Profesionales
22. ¿Cómo calificaría las habilidades y la calidad de sus empleados para la operación y
crecimiento de su empresa? No es obstáculo Obstáculo menor Obstáculo moderado Obstáculo mayor Obstáculo muy severo 23. ¿Qué tan de acuerdo está con las siguientes afirmaciones? (1= desacuerdo total y 5= acuerdo
total) Afirmación 1 2 3 4 5 La capacitación no es asequible por los recursos limitados La capacitación es costosa debido a la alta rotación de personal La capacitación no provee beneficios para la empresa La capacitación informal que proveemos es adecuada y suficiente En lugar de capacitar es mejor contratar de otras empresas No estamos satisfechos con la oferta de capacitación disponible 24. ¿Cuáles considera que son las principales limitantes en el desarrollo y desempeño de su
empresa como consecuencia del “capital humano” de sus empleados? Sugerencias y recomendaciones 25. ¿Cómo puede mejorarse la colaboración entre las empresas y las instituciones educativas?
141
26. ¿Qué acciones específicas recomienda para cerrar la brecha entre lo que las empresas demandan y lo que las instituciones educativas ofrecen?
Impacto de la crisis 27. Con respecto al año anterior (2008), ¿cómo se comparan los ingresos de su negocio para este
año? Mayores Iguales Menores 28. ¿Cómo calificaría Ud los ingresos de su negocio respecto a sus expectativas (proyecciones) a
inicios de año? Por encima de lo esperado Igual a lo esperado Por debajo de lo esperado 29. Con respecto al año anterior (2008), ¿cómo se compara el volumen de producción de su
negocio para este año? Mayor Igual Menor 30. Con respecto al año anterior (2008), ¿cómo se compara el uso de los siguientes insumos para
este año? Insumo Más Igual Menos Electricidad Materiales Trabajo (horas) Combustible Otros (especificar) 31. Si su negocio utilizó menos trabajo en total, ¿de qué manera se redujo principalmente el
trabajo? Despidos Renuncias Reducción de horas con igual número de empleados 32. ¿Hizo su negocio algún ajuste a los salarios de la mayoría de sus empleados? Subieron Ningún ajuste Bajaron
142
ANNEX 2: COMMERCIAL BANK LENDING FOR MICROFINANCE
Table 27: Commercial bank lending (Microfinance clients) Financial Institution December 2005 April 2009
Microloans Total loans
% micros of total
Microloans Total loans
% micros of total
Banrural 46,406 257,417 18% 75,683 623,997 12%
Bancafé * 11,491 152,979 8% --- --- ---
Banco Trabajadores 4,063 96,678 4% 49,425 450,444 11%
Banco Industrial 1,293 132,201 1% 3,557 161,181 2%
Banco de Comercio * 1,618 6,327 26% --- --- ---
Banco Privado para Desarrollo
1,700 13,924 12% 16,792 106,281 16%
Banco G&T Continental 592 10,582 6% 6,426 79,411 8%
Banco Credit Hipotecario
1,465 22,711 6% negligible negligible negligible
Others 2,646 641,250 <1% 13,375 1,597,548 <1%
Total 71,274 1,334,069 5% 165,258 3,018,862 5%
Source: SB. * Bancafe went bankrupt in late 2006 and Banco de Comercio was liquidated in early 2007. Table 28: Commercial bank lending (Microfinance loan portfolio) Financial Institution
December 2005 April 2009
Portfolio micro (Q. mm)
Portfolio total (Q. m)
% micros of total
Portfolio micro (Q. mm)
Portfolio total (Q. m)
% micros of total
Banco Trabajadores
180.6 3,296.9 4 49,425 450,444 11
Banrural 1,032.5 15,714.1 17 75,683 623,997 12
Banco Industrial 75.7 19,056.0 1 3,557 161,181 2
Banco Privado para Desarrollo
56.5 606.4 27 16,792 106,281 16
G&T Continental 142.9 13,782.8 0 6,426 79,411 8
Other banks 93.6 22,861.9 0 13,375 1,597,548 <1
Total 1,702.2 76,129.1 1 165,258 3,018,862 5
Source: SB.
143
ANN
EX 3
: DO
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BU
SIN
ESS
REFO
RM M
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86
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cess
of c
adas
tral a
nd p
rope
rty re
gist
ratio
n be
twee
n th
e Pro
perty
Reg
istry
and
th
e Cad
astra
l Reg
istry
�
Ado
pt a
law
or r
egul
atio
n sp
ecify
ing
how
to re
solv
e di
sput
es b
etw
een
phys
ical
and
tit
led
prop
erty
(Art.
90
and
91Le
y de
l RIC
) �
Rev
iew
the
Civ
il C
ode
(art.
113
0 an
d 11
31) w
ith re
spec
t to
the n
eed
to h
ave
both
a p
lan
and
a ph
ysic
al d
escr
iptio
n of
the
prop
erty
in o
rder
for i
t to
be in
scrib
ed in
the P
rope
rty
ppppppppppppppppppppppppppppppppp
86
The
info
rmat
ion
in th
is an
nex
is ba
sed
on th
e Ja
nuar
y 20
09 “
Doi
ng B
usin
ess i
n G
uate
mal
a: R
efor
m m
emo”
, with
som
e up
date
s to
refle
ct th
e DB
201
0 re
sults
.
144
Topi
cs
Ran
ks (2
010
DB
R
epor
t) O
ngoi
ng P
rogr
ess
Sugg
este
d R
efor
ms
Reg
istry
�
Cre
ate
a sin
gle-
acce
ss p
oint
for p
rope
rty re
gist
ratio
n
ppppppppppp
Prot
ectin
g in
vest
ors
Dis
clos
ure
inde
x: 3
D
irect
or li
abili
ty: 3
Ea
se o
f sha
reho
lder
suit:
6 O
vera
ll ra
nk: 1
26
� R
equi
re sh
areh
olde
r app
rova
l for
larg
e re
late
d-pa
rty tr
ansa
ctio
ns
� R
equi
re im
med
iate
disc
losu
re o
f con
flict
of i
nter
est t
o th
e pub
lic an
d re
gula
tors
(Art.
14
5 an
d 16
9 of
the C
omm
erci
al C
ode)
�
Mak
e dire
ctor
s rep
ay d
amag
es a
nd p
rofit
s fro
m re
late
d-pa
rty tr
ansa
ctio
ns.
� A
llow
shar
ehol
der t
o re
ques
t a g
over
nmen
t ins
pect
or (a
ll of
the
abov
e re
quire
cha
nges
to
the C
omm
erci
al C
ode)
�
Exp
and
the
scop
e of d
ocum
ents
ava
ilabl
e to
shar
ehol
ders
dur
ing
trial
(Cod
e of C
ivil
Proc
edur
e)
Get
ting
cred
it
Lega
l rig
hts:
8
Cre
dit i
nfor
mat
ion:
6
Ove
rall
rank
: 4
� P
rivat
e cr
edit
bure
aus s
houl
d ad
opt a
nd e
nfor
ce a
cod
e of c
ondu
ct a
llow
ing
borro
wer
s to
insp
ect a
nd d
isput
e inf
orm
atio
n; a
ppoi
nt a
gov
ernm
ent a
genc
y to
supe
rvis
e th
e im
plem
enta
tion
of su
ch c
ode
of co
nduc
t Em
ploy
ing
wor
kers
R
igid
ity o
f em
ploy
men
t: 28
Fi
ring
costs
: 101
O
vera
ll ra
nk: 1
06
�
Pro
mot
e a
soci
al d
ialo
gue
(wor
kers
, em
ploy
ers,
gove
rnm
ent)
� R
evis
e th
e La
bor C
ode
with
resp
ect t
o:
1.
Allo
w fi
xed-
term
con
tract
s for
per
man
ent t
asks
(Art.
25
and
26)
2.
Elim
inat
e nig
ht w
ork
rest
rictio
ns (A
rt. 1
16)
3.
Red
uce
seve
ranc
e pa
ymen
ts
Trad
ing
acro
ss
bord
ers
Day
s to
expo
rt:17
D
ays t
o im
port:
17
Ove
rall
rank
: 119
� S
ingl
e-w
indo
w fo
r Exp
orts
(VU
PE)
oper
atio
nal
� R
ecen
tly a
ppro
ved
Law
for t
he
Rec
ogni
tion
of E
lect
roni
c C
omm
unic
atio
ns a
nd S
igna
ture
s (20
08)
to re
duce
man
ual s
igna
ture
s and
do
cum
ent s
tam
ps
� C
ontin
ue to
redu
ce th
e nu
mbe
r of d
ocum
ents
requ
ired
for t
radi
ng
� Im
prov
e th
e si
ngle
win
dow
for e
xpor
t s �
Dev
elop
a si
ngle
win
dow
for i
mpo
rts
Payi
ng
taxe
s*
Tax
rate
: 40.
9%
Num
ber o
f pay
men
ts:
24 Ove
rall
rank
: 108
� E
lect
roni
c fil
ing
and
paym
ent
(Ban
casa
t ) in
trodu
ced
�La
w fo
r the
Rec
ogni
tion
of E
lect
roni
c C
omm
unic
atio
ns a
nd S
igna
ture
s ado
pted
(A
ugus
t 200
8)
� P
rom
ote
e-fil
ing
and
paym
ent t
hrou
gh p
ublic
acc
ess p
oint
s (ki
osks
) �
Est
ablis
h a d
ialo
gue
with
the
Gua
tem
alan
Inst
itute
of S
ocia
l Sec
urity
(IG
SS) t
o cr
eate
a
unifi
ed sy
stem
of e
lect
roni
c fil
ing
and
paym
ent o
f tax
es an
d so
cial
secu
rity
cont
ribut
ions
pppppppppp
Enfo
rcin
g co
ntra
cts
Pr
oced
ures
: 31
Tim
e (d
ays)
: 145
9 C
ost (
% o
f cla
im):
26.5
%
Ove
rall
rank
: 103
� A
men
dmen
ts to
the L
ey d
e Am
paro
dr
afte
d �
Rev
ise
and
clar
ify th
e dr
aft a
men
dmen
ts to
the L
ey d
e Am
paro
, esp
ecia
lly w
ith re
gard
to
whi
ch c
ourts
can
dec
ide
on a
“re
curs
o de
am
paro
” �
Cla
rify
whi
ch c
ourts
hav
e ju
risdi
ctio
n ov
er “
recu
rso
de a
mpa
ro”
in a
dmin
istra
tive
case
s �
Allo
w c
ase
man
agem
ent b
y th
e ju
dge
in re
gula
r civ
il co
urts
� In
trodu
ce ju
dici
al p
erfo
rman
ce m
easu
rem
ent i
n re
gula
r civ
il co
urts
�
Map
cour
t pro
cess
es to
iden
tify
poin
ts of
del
ay
Clo
sing
a bu
sines
s Ti
me
(yea
rs):
3 C
ost (
% o
f est
ate)
: 15%
R
ecov
ery
Rat
e (c
ents
on
dolla
r): 2
8.2
O
vera
ll ra
nk: 9
3
�
Ado
pt a
Ban
krup
tcy
Law
to e
stab
lish
clea
r and
obj
ectiv
e pr
oced
ures
in c
ases
of
inso
lven
cy
� P
rovi
de b
ankr
uptc
y tra
inin
g fo
r jud
ges a
nd la
wye
rs
� In
trodu
ce a
spec
ializ
ed co
mm
erci
al c
ourt
or st
reng
then
the
com
mer
cial
sec
tions
of t
he
regu
lar c
ivil
cour
ts
pppppppppppppppppppppp
yyyyyyyyyyypppppppppp
yyyyyyyyyyyy
* Pr
ogre
ss o
n th
e ta
x in
dica
tors
will
be
refle
cted
in th
e D
oing
Bus
ines
s 201
0 re
port
(see
met
hodo
logy
in th
e D
oing
Bus
ines
s Rep
ort).
145
This reform memorandum describes potential reforms that Guatemala could implement to improve the ease of doing business. Reforms are recommended across all ten areas covered by the Doing Business project87. Successful implementation of the suggested reforms will lead to an improved environment for doing business in Guatemala and will be reflected in the Doing Business indicators. Table 2 summarizes Guatemala’s ranking in each area according to Doing Business 2010 as well as ongoing reforms and suggested reforms in each Doing Business area. Registering Property The Doing Business Registering Property indicator measures the procedures, time, and cost to transfer a property (a plot of land and a building on it) from one domestic company to another domestic company in Guatemala. A simple property registration process facilitates access to finance because people can obtain formal titles for their properties and use them as collateral. In 2007 Guatemala allowed property registrars to submit electronic signatures. As a result of this reform the time to register property was reduced to 27 days and Guatemala’s ranking improved. This performance makes Guatemala the top performer in Latin America and the Caribbean on the Registering Property indicator. Despite Guatemala’s good performance on this indicator, additional reforms could further streamline the property registration process. The following reforms could further improve the property registration process:
� Introduce a fast-track procedure at the Registry � Adopt implementing regulations for the Law on the Registry of Cadastral Information � Adopt a law or regulation specifying how to resolve disputes arising between owners of physical and titled property � Review the Civil Code with respect to the need for both a plan and a physical description of the property in order for it to be inscribed in the Property Registry � Create a single-access point for property registration
Short-term Recommendations: Introduce a fast-track procedure at the Registry. The internal registration process at the Registry seems to perform well. However, the time to register a property could be reduced if companies had the possibility to pay an extra amount on the registration fee in order to get the new title faster. This would also help the registry to prioritize the incoming dossiers and workload. Adopt the implementing regulations for the Law on the Registry of Cadastral Information (Ley del RIC) of 2005. The Law on the Registry of Cadastral Information was passed in 2005, however, negotiations about its implementing regulation (Reglamento de la Ley del RIC) are still ongoing. It would be important to adopt this regulation and, through it, to ensure an integrated process of cadastral and property registration between the Property and Cadastral Registries. 87 The Doing Business methodology has its limitations. Other areas important to business—such as a country’s proximity to large markets, the quality of its infrastructure services (other than those related to trading across borders), the security of property from theft and looting, the transparency of government procurement, macroeconomic conditions or the underlying strength of institutions—are not studied directly by Doing Business.
146
Adopt a law or regulation specifying how to resolve disputes arising between owners of physical and titled property. Articles 90 and 91 of the Law on the Registry of Cadastral Information specify that cases not covered by the law would be decided in accordance with the Law of the Judiciary, decree 2-89 and its amendments, as well as in special agrarian courts. It would be beneficial to pass the law or regulation regarding such resolution of cadastral disputes as contemplated in Article 90 of the Law on the Registry of Cadastral Information. Review the Civil Code with respect to the need for both a plan and a physical description of the property in order for it to be inscribed in the Property Registry. Articles 1130 and 1131 of the Civil Code establish that for the registration of immovable property, both a description of the physical location and other characteristics of the property as well as the plan of the property, prepared by a civil engineer, architect or agronomist, are needed. Both documents are required by the Property Registry. With the new Law on the Registry of Cadastral Information, a cadastral plan should be sufficient for the purposes of property registration. Medium-term Recommendations: Create a single-access point for property registration. Parties now have to deal primarily with three different agencies— Dirección de Catastro y Avalúo de Bienes Inmuebles (DICABI), the Municipality, and the Property Registry – to register property. Guatemala could improve the efficiency of property registration by strengthening the coordination of these three relevant agencies and creating a single interface for the citizen. Entrepreneurs could ideally visit only the Property Registry, without having to visit the Municipality and DICABI. This could be done by linking the Registry database to DICABI and the revenue records database of the Municipality, and by training the staff of the Registry. This reform would allow all records to be combined into the same files, so that they are automatically updated with every transfer. A single-access point would only function well if the Registry is fully computerized88. The single-access point would eliminate 2 steps and 10 days of the process and provide greater security to title certificates. Protecting Investors Doing Business measures the strength of minority shareholder protections against directors’ misuse of corporate assets for personal gain. On an index range of 0-10, Guatemala scored 4.0 on the strength of the legal protection for minority shareholders in 2009, in large part due to its lack of sufficient disclosure requirements. Globally, Guatemala ranked 132nd on the strength of its investor protection. The following reforms, although requiring legal changes, are important to enhance Guatemala’s investor protection:
� Require shareholder approval for large related-party transactions � Require immediate disclosure of conflict of interest to the public and regulators � Make directors repay damages and profits in related-party transactions
88 This is already an ongoing process under the Land Administration and Management Project.
147
� Allow shareholders to request a government inspector � Expand the scope of documents made available to shareholders at trial
Guatemala scores 3 points both on the Extent of Disclosure index and on the Director Liability Index. To increase the transparency of corporate dealings, Guatemala should revise the Commercial Code and the Civil Procedure Code as follows: Require shareholder approval for large related-party transactions. To reduce possible misuse of company assets, shareholder approval should be required for large transactions involving persons related to the company (for example, transactions larger than 5% of the firm’s assets involving a director or an officer). Smaller related-party transactions could be reviewed and decided by the board of directors. Currently, the Commercial Code is silent on this point and all these operations are approved by the Chief Executive Officer of the company. The recommendation is to include a provision to this effect in the Commercial Code. Require disclosure of transactions and director’s conflict of interest to the public and market regulators. Regulations should require that firms with many shareholders disclose big transactions (for example larger than 5% of the firm’s assets) and related-party transactions (transactions between the firm and company insiders, such as directors or managers) to the Stock Exchange or market regulators. Directors should also disclose the existence of a conflict of interest and all material facts relating to that conflict of interest. The annual report of the company (Article 145 of the Commercial Code) should also contain detailed disclosure of the nature and the extent of the conflict of interest, the key terms and conditions of the transaction and all other relevant information. Make directors repay damages and profits from related-party transactions. The law should require that directors exercise appropriate diligence and make decisions that are informed when running the company. They should also avoid conflicts of interest and always put the interest of the corporation before those of the director or other individuals. In case of prejudicial related-party transactions, directors should compensate the company for any damage caused to the company and disgorge the profit made in violation of their duties to the corporation. Under the current situation, there is only a general responsibility for damages by the directors (Article 169 of the Commercial Code), without establishing specific obligations.
Allow shareholders to request a government inspector. The law should offer the possibility for shareholders to request the appointment of an inspector to investigate the activities and documents of the company, in case management fails to provide the shareholders with adequate information about the company.
Expand the scope of documents available to shareholders during trial. For investors to be able to enforce their rights, Guatemala should also review its civil procedure rules to permit investors to better prove their case in court. Often, it is more difficult to implement changes to the courts, so this reform is considered long-term. The Civil Procedure Code should allow parties in a trial to request categories of documents from the defendant without having to identify the specific documents being sought as evidence.
148
Getting Credit The Getting Credit indicator measures how easy or difficult it is to obtain access to finance in a country, according to the availability of credit information and the strength of legal rights of borrowers and creditors. Due to recent reforms, Guatemala is now a top performer in this measure, ranking 4th in the world in Doing Business 2010, mainly due to reforms in the Movable Collateral Law. The Getting Credit indicator has two major components: the availability of credit information, captured by the Depth of Credit Information index and the Public Credit Registry coverage (or Private Credit Bureau coverage), and the protection of creditor and debtor rights in collateral and bankruptcy laws captured by the so-called Legal Rights Index. In terms of the credit information system, Guatemala is doing well, with a Credit Information Index of 6 out of 6. Guatemala has one public credit registry and many private credit bureaus. The private bureaus distribute historical credit information on individuals and firms. The information distributed includes positive information (like amount of loans and on-time payments) as well as negative information (like late payments and defaults). Credit bureaus collect information not only from financial institutions, but also from utilities like cell phone companies or retailers. This allows obtaining a broad scope of information. The public registry coverage is 16.9 % of adult population, and the private credit bureau coverage is 28.4%. The following reforms would further increase credit information and, if implemented, could raise the Depth of Credit Information Index to reach up to 6 points (the highest possible score):
� Private credit bureaus should adopt and enforce a code of conduct allowing borrowers to inspect and dispute information � Increase coverage
Private credit bureaus should adopt and enforce a code of conduct allowing borrowers to inspect and dispute information. The credit bureau TransUnion has a code of conduct that was updated in 2008, but has not been strongly enforced. This code of conduct should also include procedures for the inspection, presentation of complaints and dispute resolution by borrowers disagreeing with the information stored in the registry. The rest of the Guatemalan credit bureaus should adopt this existing code of conduct and make sure all members follow its guidelines. A government agency should supervise its implementation. Another alternative for Guatemala is to approve regulations with similar provisions to the ones mentioned above. Increase coverage. The private credit bureau has around 8.9 million data subjects in its database. This includes most of the population. However, only one million had at least one credit reference last year. This led to relatively low private credit bureau coverage of 19.7%. In any case, the credit bureaus have been incorporating more suppliers of information over the past year. These actions should be sustained, incorporating more retailers, utilities, microfinance institutions or credit card companies as suppliers of information, in order to allow more people and SMEs to build credit histories and have a better access to credit in the future.
149
Employing Workers The Rigidity of Employment Index measures the degree of flexibility that the Labor Code allows private sector employers when they: 1) allocate workers’ hours (Rigidity of Hours index), 2) hire new employees (Difficulty of Hiring index) and 3) dismiss one or a group of employees for redundancy (Difficulty of Firing Index). The cost of firing (notice period and severance payment, in terms of weekly wages) is also measured. Guatemala ranks 127th overall in this area. Potential reforms in this area will require revisions to the Labor Code. For that purpose, the social dialogue and the tripartite negotiation (employers, workers and Government) have to be renewed. Such potential reforms include the following:
� Allow fixed-term contracts for permanent tasks � Eliminate night work restrictions � Reduce severance payments
Allow fixed-term contracts for permanent tasks. According to the Labor Code (articles 25 and 26), employers in Guatemala do not enjoy the flexibility to respond to market fluctuations with fixed-term contracts for permanent tasks. With rigid regulations as this one, employers may choose their employees conservatively – women and youth are often the last to be hired under such circumstances. Eliminate night work restrictions. According to Article 116, there is a shorter shift for night work in Guatemala (6 instead of the ordinary 8 hours). Night-time work exceeding those 6 standard hours is payable as overtime and subject to a 50% premium. One flexible solution would be to remove the shorter shift for night work, leaving the 50% premium only for overtime exceeding 8 hours at night. Reduce severance payments. Following the method established in the Labor Code, the severance payment for a worker with 20 years of tenure amounts to 23.3 months of salary (101 weeks), which places Guatemala among the 20 countries with the highest severance payments in the world. We acknowledge the importance of workers’ protection in case of dismissal. However, excessively high firing costs scare employers away from creating jobs. Severance pay in Guatemala is 4 times higher than in Nicaragua, for example. A very interesting way to ease dismissal costs is to offer unemployment insurance rather than severance pay, as is the case in Austria, Chile, Italy and St. Kitts and Nevis. Trading across Borders The Trading across Borders indicators measure the time, cost and number of documents required to export and import a standardized cargo by sea. In Guatemala, it takes on average 17 days to export and 17 days to import at a cost of $1,182 for exports and $1,302 for imports. Ten
150
documents are required for exports and imports89. In Doing Business 2010, Guatemala ranked 119 out of 183 countries overall on Trading across Borders. At present, the Government of Guatemala has ongoing initiatives to improve the trade logistics regime. For example, the Customs Agency in Guatemala (SAT -Superintendencia de Administración Tributaria) is now discussing how to further implement paperless processes at customs. Additionally, the Single Window for Exports or VUPE (Ventanilla Unica para las Exportaciones) is currently improving its administration and procedures to obtain a quality certificate (ISO 9001) on the services provided. These initiatives could be complemented with the following recommendations to further reduce transaction costs in export and import procedures: The following reforms could further improve the process to export and to import:
� Continue to reduce the number of documents required for trading � Improve the functioning of the single window for exports (VUPE) � Develop a single window for imports
Continue to reduce the number of documents required for trading. Currently ten documents are required to complete export and import trade clearance requirements in Guatemala. Reducing the number of documents required for completing trade clearance transactions in Guatemala will help to further streamline the clearance process. For example, the complementary export declaration could be integrated into the electronic system (VUPE) to update the export transaction with accurate/real information. Efforts to enhance the existing electronic data interface system to accommodate the admission of all trade documents would help to facilitate the trade clearance process.
Medium to Long-Term Recommendations Improve the functioning of the single window for exports. Some export transactions require obtaining authorizations and licenses from a variety of governmental agencies. All of these prerequisites at present entail processing manual applications. Adding a module within VUPE to include the processing of such authorizations and licenses would further reduce the time to export. Additional improvements like integrating relevant information and help-desk features into the system to reduce delays and rejected applications would further reduce transaction costs for exporters (e.g., built-in steps to complete export declaration or for export preference agreements). Singapore, through its TradeNet system, has been a global leader in the implementation of such a platform/single window. TradeNet handles 20-30,000 trade declarations per day and links 35 government controlling units.
89 The documents required for exports are: Bill of Lading, Commercial Invoice, Certificate of Origin, Customs Export Declaration, Export License, Foreign Exchange Authorization, Inspection Report, Packing list, Technical Standard/Health Certificate and Terminal Handling Receipts. The documents required for import are: Bill of Lading, Commercial Invoice, Certificate of Origin, Customs Import Declaration, Import License, Foreign Exchange Authorization, Inspection Report, Packing List, Technical Standard/Health Certificate and Terminal Handling Receipts.
151
Develop a single window for imports. Similar to the effort to simplify procedures for export transactions, an electronic single window for imports would reduce transaction costs for importers in Guatemala. The system should also include a module to apply for approvals, authorizations and licenses from all trade-related governmental agencies. Paying Taxes
Doing Business records the taxes and mandatory contributions that a medium-sized company must pay or withhold in a given year, as well as the time it takes to meet these obligations. In 2009, it took a medium-sized Guatemalan company 24 payments and 344 hours per annum to comply with tax and social security obligations. The total tax rate payable was 40.9% of commercial profit. This ranks Guatemala 108th on the Doing Business index of Ease of Paying Taxes. At present, the tax branch of the SAT (Superintendenica de Administracion Tributaria) is working to improve tax administration in several ways. First, electronic filing and payment was introduced in Guatemala in 2002 and currently 44% of tax declarations are filed electronically. According to SAT estimates, this represented more than 90% of the amount of tax collected as of July 2008. The SAT is working toward further increasing the use of electronic filing and payment. The passage of the E-Signature Law in August 2008 will further enhance the use of electronic filing and payment of taxes. At the end of November 2008, Guatemala’s Congress voted to replace the Extraordinary and Temporary Tax (Impuesto Extraordinario y Temporal de Apoyo a los Acuerdos de Paz, (IETAAP)), which will expire in December 2008, with a new Solidarity Tax (Impuesto de Solidaridad (ISO)). The new tax will be levied at 1% of sales for all business entities which make a profit margin of 4 percent or higher. It is expected that for the calculation of the total tax rate (in percent of annual profit as per the case assumptions), the effect of this change is going to be minimal. While these are welcome developments, the following reforms could further simplify tax administration and possibly broaden the tax base and increase revenue for Guatemala:
� Further extend the use of electronic filing and payment o Promote e-filing and payment through public-access points (kiosks) o Establish a dialogue with the Guatemalan Institute of Social Security (IGSS) to create a unified system of electronic filing and payment of taxes and social security contributions
Short term recommendations:
Further extend the use of electronic tax filing and payment. We note that electronic tax systems have been introduced for VAT. However, according to the information received from various practitioners on the ground, the impact of these reforms has not been felt by the majority of small and medium-sized (SME) enterprises. In several countries covered by Doing Business, it took time and intensive public relations efforts for promoting large-scale SME usage of electronic filing and payment. Smaller firms may also not have the hardware or software resources, or
152
knowledge, to effectively utilize the electronic systems and this is a factor that ought to be considered by tax administrators.
In Azerbaijan, for example, the tax authorities provided free software to taxpayers 6 months before launching the electronic system. Also, several computer stations are being installed across the country for use by SMEs which lack access to computer facilities. These are some ideas that could be explored by the Guatemalan tax authorities to enhance the usage of the electronic system especially by SMEs. If the usage of the electronic systems becomes widespread among SMEs in Guatemala, this would significantly reduce the tax compliance time. Public-access points (kiosks) where taxpayers can file and pay electronically are another way of extending the usage of electronic means and have been used in Albania and other countries. As part of the effort to promote e-filing and payment, the SAT should also establish a dialogue with the Guatemalan Institute of Social Security (IGSS) so that a unified electronic system for both taxes and social security contributions is established and implemented. This would further reduce the number of payments and the time for compliance. Consolidate tax payments. Currently, the capital gains tax is paid separately from corporate income tax. This adds an extra payment to the number of payments a firm has to make. If the capital gains tax were to be paid jointly with one of the corporate income tax installments, the number of payments will decrease by 1. In many countries the two taxes are combined to ease tax compliance Enforcing Contracts Ranking globally 103rd in the Enforcing Contracts area, Guatemala courts register long delays in the time to enforce a commercial dispute (1459 days). Although there are efforts underway to reduce this time, such as better training for court staff, there is still much room for improvement. Existing court deadlines should be enforced in a more stringent way. The current revision of the Ley de Amparo can be useful in order to lower Guatemalan courts’ workloads. In that regard, the limitation of the object for the “recurso de amparo” is welcome. However, it would be necessary to revise and clarify the draft amendments of the law to make them consistent, especially with respect to which courts can decide on a “recurso de amparo”. The following reforms could also be pursued but would yield results only in the long term:
� Allow for active case management by the judge � Strengthen judges’ performance measurement � Map processes to identify court delays
Allow for active case management by the judge. Adjournments, requested by either party and granted by the judge, commonly occur at all stages of the proceedings, thereby delaying the judicial process. The situation is exacerbated by the lack of enforcement of existing legal time limits. Courts can remedy this by making judges systematically put cases on timetables. Judges should set and monitor trial schedules as soon as they estimate the complexity of a case. Requests for adjournments should be scrutinized to limit their occurrence to the inevitable. By
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assuming a more active role, judges can insure that cases move through the courts more expeditiously. Introduce judicial performance measurement. Building on the existing court IT infrastructure, the case management system could be used to collect and process data on judges’ individual performance. This would allow better distribution of the caseload and increased productivity. A performance management system could help to identify and reduce bottlenecks within the court system. Map processes in the courts to identify points of delay. Sometimes the source of delays is found not in the courtroom but in the clerk’s office. Mapping exercises for court processes can help address this. When mapping, a team follows the steps necessary to take a commercial case through the courts and enforce the judgment. The team records the time associated with each step. Mapping is a way to identify points of delay in commercial cases and ways to remove them. Closing a business Guatemala ranks 93rd in the area of Closing a Business. On average, it takes 3 years with a recovery rate of 28.2 cents on the dollar to successfully close a business. Guatemala currently follows the Doing Business recommended path for poor countries: foreclosure on defunct companies. Guatemala’s recovery rate on bad debts is low due to the difficulties in finding buyers for large assets, but as the country becomes richer and economically more dynamic, this problem will likely be resolved. In the meantime, some other measures should be taken as follows:
� Adopt a bankruptcy law to establish clear and objective procedures for cases of insolvency
� Consider the establishment of a specialized commercial court which could handle insolvency proceedings or strengthen the capacity of commercial chambers to deal with bankruptcy cases (currently there is a chamber within the Civil Court dealing with commercial cases)
� Provide bankruptcy training for judges and lawyers, given that their lack of preparation is a major cause of delays
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ANNEX 4: PRIORITIZING RURAL INVESTMENTS METHODOLOGY A. The stochastic profit frontier approach A.1 Why use stochastic profit frontiers to construct a new typology?
Rural households in developing countries are extremely diverse in their economic characteristics. This diversity occurs for several reasons: (i) the heterogeneity in the quantity and quality of their assets; (ii) the technologies available to the household; (iii) the transaction costs in markets for outputs and inputs; (iv) the credit and financial constraints; (v) the access to public goods and services; and (vi) the local agro-ecological and biophysical conditions. Rural development policies need to take this heterogeneity into account in order to be effective. Among the variety of typologies used to categorize territories, poverty maps are arguably the most widely developed because they allow policy makers to design spatially targeted poverty alleviation programs (see Elbers, Fujii, Lanjouw, Ozler, and Yin (2004)). By imputing consumption and income values from survey data estimations and extrapolating them to census data (see Elbers, Lanjouw, and Lanjouw (2003)) poverty maps give a reasonable static diagnostic of welfare. This is extremely useful to rank areas from poorest to richest when designing a transfer program. It is much less useful, however, for policy makers deciding how to invest resources when designing poverty alleviation programs. Another common tool to construct typologies is cluster analysis. Cluster analysis methods have become popular because they are data-driven and can be used without formulating rigorous models to define the factors that determine the chosen welfare measure to be analyzed. When used to construct a typology to characterize communities’ welfare or economic performance, however, the resulting index offers very little information on what policies should be implemented to improve the current conditions of these regions because the groups are not constructed ordering all variables monotonically (ascending or descending), generating confusion about the interpretation of the results. Hence, cluster analysis works well only when differences are determined over a small and relatively homogenous group of variables. This section constructs a typology that takes into account these issues while at the same time being strongly based on economic foundations. By recognizing the fact that farmers are productive units optimizing an objective function subject to a set of constraints developed from the stochastic profit frontier analysis deals with many of these issues. The efficiency indicator is a continuous measure, similar to a score, and its interpretation is direct and simple. The functional form used for its estimation, which is explained in detail in the following secti ons, is flexible and imposes a limited structure on the analysis. Moreover, it is possible (with more and better data than what we have available at this point, unfortunately) to calculate the stochastic profit frontier using non-parametric estimation, in which case no parametric form is imposed for the analysis. Finally, the theory behind stochastic profit frontier estimation methods is standard theory of the firm, involving a constrained optimization process and allowing for random shocks, a setup that is suitable to model a farmer’s decision process and analyze the opportunities and challenges he faces.
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Profit frontiers have been used to estimate farm efficiency levels in developing countries. Using data for Basmati rice producers in Pakistan, Ali and Flinn (1989) find a mean level of profit inefficiency of 28% associated with the household’s education, nonagricultural employment, credit constraints, water constraints and late application of fertilizer. Also for Pakistan, Ali, Parikh, and Shah (1994) find an average farm profit inefficiency of 24% and that the size of holding, fragmentation of land, subsistence needs and the higher age of farmers contribute positively to inefficiency. Rahman (2003) finds a mean level of profit inefficiency of 23% among Bangladeshi rice farmers, explained largely by infrastructure, soil fertility, experience, extension services, tenancy and share of non-agricultural income. Using data for Chinese farm households, Wang, Wailes, and Cramer (1996) find a 39% mean profit inefficiency level, influenced by farmers’ resource endowment, education, family size, per capita net income, and family ties with village leaders. All these studies, however, treat farms as single-output firms. For the purposes of our typology, it is essential to work with multiple output profit frontier as this is a more realistic depiction of the farmers’ decision process. In that respect, we are unaware of studies that use the stochastic profit frontier approach in a multiple output farm setting. A.2 Theoretical framework A major caveat encountered when designing a comprehensive typology of the communities in Guatemala is dealing with the difference between the economic potential of an area and its current observed status. For instance, a detailed diagnosis describing the present situation of local economies will help to identify the most deprived areas (i.e. poverty maps), but some of these areas might have already reached their maximum economic potential given current conditions, and short run investments will have little or no impact on the welfare of the local population. Hence, for policy making, a useful typology of local communities needs to differentiate and combine the notions of current status and optimal potential. In other words, it has to take into account the idea that agents’ attempt to optimize, but do not always succeed. The stochastic frontier approach provides an ideal framework to build the typology. Conceptually, it is developed from a theory of producer behavior in which the motivation is the standard optimization criteria (minimize costs or maximize profits), but in which success is not guaranteed. The associated estimation procedures allow for failures in efforts to optimize and different degrees of success between producers. This opens up the possibility of analyzing the determinants of variation in the efficiency with which producers pursue their objectives. Taking the farm as an example, the stochastic frontier approach accounts for the fact that, conditional on geographic location, elements such as prices, biophysical conditions, and (in the short run) fixed inputs are exogenous to the farmer’s decision process. Hence, holding these factors fixed there exists an optimal production technology and production plan that generates the maximum profit the farmer can obtain. With this approach it is possible to identify where the profit frontier lies, and how much of the difference between it and observed profits (i.e. profit loss) can be explained by the farmer’s choices resulting in profit inefficiencies. Adding the stochastic component allows for a better fit to the farm production process, which is very sensitive to unpredictable changes in exogenous conditions, like weather or international prices. In this context, profit inefficiency is defined as the monetary loss which results from not operating at the frontier given the prices and levels of fixed production factors faced by the farm.
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B. The model and estimation B.1 The model
Let x denote a (1 ×m) vector of variable and quasi-fixed inputs and y denote a (1 × q) vector of multiple outputs involved in the farm production process. Let z denote a (1 × r) vector of environmental variables that, though not directly determining the farmer’s profits, could affect the farm’s performance. We will discuss later in this section our criteria to place specific variables as elements of x or z.90 Let be the set of feasible production plans of the farm. We define a measure of output technical inefficiency δ (Farrell 1957) for some production plan such that:
δ0 = δ(x0,y0 |P) ≡ sup{δ | (x0,y0) P,δ > 0} (1)
For (x0,y0) P,δ(x0,y0 |P) ≥ 1. We now define the restricted profit function π(p, z, δ) as the maximum profit attainable by a farm with characteristics z, facing output prices p P (z) and input prices w W (z):
(2) Let πi be the observed profits for farmer i. The analyst is confronted with a set of observations (πi,pi,wi,zi) for i =1,...,n, which are realizations of identically, independently distributed random variables with probability density function f(π, p, w, z). This function has support over . We assume z is not independent from (π, p, w), i.e. f(π, p, w | z) f(π, p, w). This means that the constraints on farmers’ choices of prices p and w, and on observed profits π, due to the environmental variables z the farms face operate through the dependence of (π, p, w) on z in f(π, p, w, z). There exist several ways to formulate the model such that the production set is dependent on z (Coelli, Rao, and Battese 1998), however, we consider it is more appropriate given the empirical setup we are analyzing to assume the environmental variables z influence the mean and variance of the inefficiency process, but not the boundary of its support. Hence, in our formulation the conditioning in f(δi | zi) operates through the following mechanism:
δi = exp(ziβ + εi) (3)
where β is a vector of parameters, and εi is a continuous i.i.d. random variable, independent of zi.91
We assume the term εi is distributed N(0, ) with left truncation at −ziβ for each i.
90 Deprins and Simar (1989) and Kumbhakar and Lovell (2000) discuss the rationale for placing certain variables as elements of x or z, admitting this issue is frequently a judgment call. In many cases, it is not obvious whether an exogenous variable is a characteristic of production technology or a determinant of productive efficiency. 91 See Simar and Wilson (2007) for estimation in a semi-parametric setup.
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B.2. Estimation
Because the effect of covariates z operates through the dependence between π and z induced by 3, these assumptions provide a rationale for second-stage regressions. Kumbhakar and Lovell (2000) and Kumbhakar (1996) provide the typical setup in these cases, defining the stochastic profit frontier function as:
πi = g(pi,wi) exp(νi − ξi) (4) where νi is the stochastic noise error and xii is a non-negative random variable associated with inefficiencies in production. Then the profit efficiency of farm i can be defined as:
(5)
where Xdi are exogenous (to the production process) variables characterizing the environment in which production occurs and that can be associated with inefficiencies of the farm. As noted by Simar and Wilson (2007), regressing efficiency estimates obtained from maximum likelihood estimation of a parametric model for Π(p, w, δ) will very likely result in problems for statistical consistency because the covariates in the second-stage regression (z) are correlated with the one-sided error terms from the first stage (in order for there to be a motivation for a second stage).92
Consequently, the likelihood that is maximized is not the correct one, unless one
takes account of the correlation structure. In order to do so we estimate (4) in the first stage modeling heteroskedasticity in the one-sided error term ξ as a linear function of a set of covariates. The variance of the technical inefficiency component is then modeled as (6) We use maximum likelihood estimation and a translogarithmic profit function correcting for heteroskedasticity as shown in (6), and then proceed to the second stage estimation of the technical efficiency term ξ on the environmental variables z.
B.3. The distinction between production inputs and environmental factors
In this section we make explicit our criteria to distinguish quasi-fixed production inputs in x (which also includes variable inputs) from environmental variables z, as in some cases that distinction might seem arbitrary. An input is included in x when its market is active and prices can be identified.93
92 The errors and the covariates in the first stage will not be independent if the covariates in the second stage are correlated with the covariates in the first stage, which occurs in most empirical applications. 93 If there exists any evidence that these prices might not reflect actual market condi tions for all the production units in the sample (due to accessibility problems or spatially incomplete markets) then the farm’s levels or stocks of these inputs can be included in z in order to capture these market failures through their impact on farm efficiency. The idea behind this is that the input price is among the determinants of the production fron tier, and the market
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In some cases, prices for certain inputs may not exist (or are not available to the analyst), particularly when studying rural poor populations in developing countries. Active markets and monetary transactions for land or weather-based insurance, for instance, are rare in these settings, so it is extremely difficult to find a reliable price for land (of varying qualities) and weather (and climate-risk) preferences. Under these conditions, we believe elements like land size, climatic and biophysical conditions should be included in x in order to capture their direct impact on production as fixed or quasi-fixed inputs, even though the argument can be made that these variables capture failures in the land and risk-coping markets to justify their inclusion in z.94
B.4. Moving from household level estimations to spatial analysis
The procedure described in the previous sections provides profit efficiency estimates at the farm level. A remaining task is to scale up these results to the appropriate regional level , allowing them to be used for the purposes of the typology. According to our model, differences in profits are given by differences in crop choices, local prices, biophysical conditions, and farm efficiency (and, therefore, the exogenous factors affecting it). Hence, the econometric estimation of the model described in sections B.1 and B.2 makes it possible to recover technological parameters for the “representative” agricultural producer in rural Guatemala. As explained earlier, a primary objective towards the construction of the typology is to estimate the profit frontier and efficiency for a given region (e.g. community, district, province or department) in rural Guatemala. If the appropriate information (prices, biophysical factors, farm characteristics, and factors influencing efficiency) at that area’s level is available, it can just be plugged into the estimated profit function to recover regional efficiency. Price data comes from our household survey. Ideally, a multi-output frontier model would be estimated including every single output and input utilized by the farm in the production process. However, data limitations and computational feasibility makes this impossible. Therefore, it is necessary to group outputs and inputs into the categories mentioned in the previous section. Grouping, however, generates other problems. To assign a single price to broad groups as “Fruits” or “Vegetables”, the median price per kilogram of all products in that group for a given region is used. How precise this grouping procedure is will depend on how many products in a group is grown in the region, and on how different the prices of these products are. For example, if green and red apples are the only fruits grown in a region, and their prices are very similar, the median price of all the fruits produced in the region will be an adequate summary statistic. It follows that the choice of how large a region is matters as well. If a region is too large, the risk that the median price is a poorer summary statistic is higher because the probability that more products are included in each group and that there is higher price variability increases. However, if a region is too small the small amount of observations to calculate any reliable measure of
failures for that particular input influences the efficiency with which producers approach that frontier. 94 Forms of land ownership or non-market mechanisms to smooth consumption, however, should be included in z in order to capture their impact on productive efficiency if it is suspected that these markets do not work properly.
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central tendency will also be a problem. Given the data, household information is aggregated at the district level, and for those districts with too few observations the province level is used. Other farm or household specific variables used in the estimation procedures are calculated in a similar way, and subject to the same limitations. The biophysical data and the market accessibility data, on the other hand, have been specifically generated to map out in great detail the whole Guatemalan geography, so no aggregation or grouping issues occur. As mentioned before, with the price and farm data aggregated at the adequate level, and the availability of perfectly mapped biophysical and accessibility datasets, all that is left to do is to plug in all this information back into the model to predict profit frontiers and efficiency levels at the regional level. C. The Accessibility Model
To “connect” every household with the closest market we constructed a series of accessibility indicators. The notion behind them is that accessibility is not a discrete variable (i.e. have or not have access), but a continuum that reflects the difficulties each household faces when trying to access different types of infrastructure. This accessibility analysis was applied to Guatemala’s entire land surface. Accessibility is defined as how feasible it is to reach a location from others, considering factors like distance, moving costs, type of transportation and time. In other words, any indicator of effort to reach or access a particular location. The moving time on the land surface depends on different factors, the most important one being the distance, but there are other important factors like the existing road network and its specific characteristics, the slope and the presence of obstacles like rivers (except for those cases where rivers are used as a means of transport). The accessibility analysis was developed on a raster format, which means that the entire area of analysis was converted into a grid of cells measuring 92.6 by 92.6 meters. Each cell was assigned a “friction” value based on characteristics of slope, roads, and barriers, which allowed each cell to be allotted a value for the time required to reach the nearest facility (Figure 57 and Figure 58).
Figure 57: Friction surface betweens points A and B
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Figure 58: Values indicating the difficulty of crossing a “cell”
The first variable used in this analysis was transportation infrastructure, of which Guatemala has two major kinds: roads, and rivers. In Guatemala, roads are categorized as first order roads, second order roads, dirt road tracks and walking trails. First, each type of road was assigned an average travel speed, and the corresponding cell given a crossing time in seconds:
In addition to this classification according to fixed speed, additional roads were classified as dirt road tracks, and walking trails:
The second variable, slope, was used to calculate walking speeds. The walking velocity was drawn from Tobler (1993), and comprises three categories corresponding to navigation by horseback, by footpath, and off footpath. The following calculations resulted, where S is slope:
Walking velocity on horseback = [6 × exp(−3.5 × abs(S +0.05))] × 1.25 Walking velocity on footpath = [6 × exp(−3.5 × abs(S +0.05))] Walking velocity on horseback = [6 × exp(−3.5 × abs(S +0.05))] × 0.6
50 50
50 50
50 50 50
50 50
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The third and final variable used in this model corresponds to the presence of natural barriers -in this case rivers, which prevent people from traveling a straight line if there is no bridge. Cells corresponding to areas with a river and no bridge are assigned a travel time 10 times their value. Once the friction model is built and each cell has been allocated a travel time value, cost -weighted distance algorithms are run over the raster surface, calculating the accumulated time required to travel a particular route (choosing the one that is least time-consuming). This information is then used to simulate the impacts of improvements of road segments. Specifically, if a road is improved from a walking trail to a dirt road track then the new average speed is assigned to the upgraded category and re-estimates all the accessibility measures. Additional details about the transportation costs model and its inputs are available on request. D. Regression results for determinants of frontier profits and technical inefficiency
Table 30 shows the results of the first stage regression and Table 31 the results for the second stage regression of estimated technical inefficiency on environmental variables z. The association of these covariates with inefficiency is also related to the level of frontier profits, so the model is fully interacted with the predicted level of potential profits and the coefficients for these interactions are shown in the second column of the table.
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Table 30: Frontier estimation
lnprice1 -0.754 **(0.304)
lnprice2 0.484(0.443)
lnprice4 3.062 **(1.409)
lnprice5 0.213(0.611)
lnw_price -3.846 ***(1.078)
lnprice1_lnprice1 0.039 **(0.019)
lnprice1_lnprice2 0.134 **(0.059)
lnprice1_lnprice4 0.237(0.173)
lnprice1_lnprice5 -0.052(0.058)
lnprice2_lnprice2 -0.115 **(0.057)
lnprice2_lnprice4 -0.357 *(0.194)
lnprice2_lnprice5 -0.139 *(0.082)
lnprice4_lnprice4 -0.528(0.340)
lnprice4_lnprice5 -0.459 *(0.254)
lnprice5_lnprice5 0.157(0.120)
lnprice1_lnw_price 0.119(0.111)
lnprice2_lnw_price 0.046(0.152)
lnprice4_lnw_price -0.205(0.489)
lnprice5_lnw_price 0.104(0.206)
lnw_price_lnw_price 0.599 ***(0.192)
constant 12.505 ***(1.776)
lnsig2v(_cons) -0.530 ***(0.033)
Frontier estimation (dependent lnprofit)
Note: Price are: (1) Fruits and vegetables, (2) Industrial crops, (3) Cereals, (4) staples, (5) Tubers, w are wages
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Table 31: Inefficiency determinants
x land size
land size -0.937 * -0.067 (0.499) (0.071)
value of productive assets -0.055 -0.103 * (0.053) (0.062)
maximum years of education -0.009 -0.010 (0.021) (0.025)
household size 0.002 -0.005 * (0.002) (0.003)
belong to group of farmers 0.330 -1.052 (1.112) (1.321)
received technical assistance -0.203 -0.201 (0.594) (0.545)
formal access to credit -0.380 0.323 (0.532) (0.561)
formal access to credit * ownland 1.341 ** -1.200 * (0.656) (0.701)
ownland 0.135 -0.155 (0.143) (0.157)
head literacy 0.004 -0.049 (0.128) (0.141)
cost to market (20,000 inhab. city) 0.066 -0.123 * (0.056) (0.063)
altitud1 (0 - 500) -0.237 -0.054 (0.232) (0.225)
altitud2 (500 - 1000) -0.182 -0.229 (0.235) (0.218)
altitud3 (1000 - 1500) 0.025 -0.495 ** (0.238) (0.244)
altitud4 (1500 - 2000) 0.116 -0.595 ** (0.212) (0.254)
Controlling for additional agro-ecological conditions YES
Constant 2.315 (1.468)
sigma_v 0.767 (0.013)
Inefficiency determinants (lnsig2u)
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408
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409
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2340
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7936
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413
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145
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414
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1973
324
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415
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7163
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6Su
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1013
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4294
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6124
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9429
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1227
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3281
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6Su
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12Sa
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01Sa
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325
8047
301
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2456
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1654
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6Su
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12Sa
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1392
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6Su
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8613
1962
170
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6Su
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12Sa
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1229
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9714
1993
217
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la70
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6397
311
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702
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709
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178
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1052
025
2640
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713
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4070
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172
ANNEX 5: FOREST-TO-FURNITURE INTEGRATED VALUE CHAIN ANALYSIS95
BARRIERS TO COMPETITIVENESS
Guatemala has one of the most diverse forest systems in Central America. Home to thousands of animal and plant species, Guatemala’s forest is rapidly disappearing – from 1990 to 2005 the country lost 17 percent of its total forest cover. Also, a range of private and public sector failures such as disorganized supply chains and poor infrastructure are adversely affecting the ability of the timber-based industries to create jobs and increase value addition. The matrix below provides a summary of key findings that impede the competitiveness of the timber sector in Guatemala.
Table 32: Summary of Barriers to Competitiveness
Issues PublicSector
PrivateSector
Poor electricity infrastructure X Poor forest access roads in the highlands and non-urban areas X Unpredictable forestry reforestation funding X Limited availability forestry-related skilled labor X X Limited investments in pulp, charcoal, and other related industries X X Undeveloped forest-to-furniture research and development X X Limited access to affordable finance for SMEs X Underdeveloped supply chain X Underdeveloped support service providers X Undeveloped associative arrangements among small firms in the furniture sector X
Source: Global Development Solutions, LLC
SECTOR PROFILE
Guatemala is the largest and most populous Central American country. With a GDP per capita roughly one-half that of Argentina, Brazil, and Chile, the country is still emerging from 36 years
of civil war which ended in 1996. Due to its significant forest endowments many hopes are placed in the forestry sector to generate economic growth and employment. Forestry: Guatemala has a land area of 10.8 million hectares, roughly forty percent of which is forest. Two-thirds of the forest is designated as conservation forest, but the line between conservation and production areas is blurred as deforestation driven by agricultural encroachment/fires and illegal logging continues on a significant scale.96
95 This analysis was undertaken by Global Development Solutions, LLC using their Integrated Value Chain Analysis (IVCA) methodology. 96 Annual deforestation estimated between 75,000-85,000 hectares (2% of forest cover).
Figure 59: Guatemalan Forest Cover
173
Another major factor pressuring the forest resources of the country is the pervasive poverty in the country. For an estimated 75% of the population living below the poverty line, the forest i s a source of much needed firewood. Due to the poor electricity grid as well as its high tariff, businesses also use firewood for their energy needs. As a result, over 95% of all wood removed from forests of Guatemala in any given year (17.41 million cubic meters) are used as firewood. The pervasive forest exploitation for social purposes not only contributes to deforestation but also reduces the opportunities for commercial/industrial exploitation of the forest. With this in mind, direct fiscal subsidies for stimulation of forest plantations and forest management have been put in place since 1996 with the establishment of the Forestry Incentives Program (PINFOR). This plus additional support programs have contributed to an average annual rate of reforestation of 8,000 hectares. Forest exploitation for industrial processing takes place in both private and public forests (there is roughly a fifty-fifty split between private and public ownership of the forests). With the exception of some large scale concessions in the north, timber harvesting as well as processing in Guatemala is generally a low-tech affair dominated by animal-based hauling at the forest level and old machinery at mill level. An estimated 35,000 people are involved in timber extraction activities. Primary Processing: Primary processing generally takes place in small to medium size mills that are often placed along main roads. Small mobile mills are also common, but fixed sawmills within or in the immediate vicinity of the forest are an exception. Most sawmills are located close to Guatemala City, along both coasts and in the northern plains of Peten. In the highlands, where the road density is reported to be as low as one meter per hectare, mechanized sawmilling facilities are few. Statistics regarding mills - such as registered entities, capacity and employment - are limited and often contradictory.97 According to the forest directory produced by Cluster Forestal, 188 sawmills are listed as operating in the country. This figure i s closer to 200 sawmills as reported by private millers. Official government data indicate only 87 processing firms (sawmills and all other secondary processors). Capacity utilization is not known although it is generally reported to be low due to the fact that most mills are ill-equipped to adjust to small diameter log processing; large diameter logs in the country are increasingly less available as mature forests are exploited. Typically, a Guatemalan mill employs 5 - 10 people and produces 4,000 - 8,000 cubic meters of lumber per year. Secondary Processing: Secondary processing is characterized by high levels of consolidation of exporting firms (over 50% of sector’s exports come from ten firms) and a number of small carpenter/furniture workshops that serve the domestic market. The range of products manufactured in the industry is concentrated in few products such as pallets, doors and windows, as well as beds and furniture. Most firms engage in furniture production. In 2008, there were 158 furniture companies listed in the forestry directory of Cluster Forestal (see summary table below for more details).98 An estimated 2,750 people are reported to work in the forest processing industries in general (primary, secondary, and services), although the actual number
97 Data on the number of processing firms operating in the sector, for example, range from 87 to over 250. Discrepancies stem from factors such as underegistration, poor registry updating, etc. In 2004 registered firms in the forestry sector were 2,219 compared to 462 in 2008. 98 This number is much bigger than the number of firms registered in the forestry industry in total (87).
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of people employed is generally believed to be much higher. The number of people employed in the secondary processing industries is not known. Labor productivity in the country, forestry processing included, is generally low and declining.99 The majority of firms in the sector are small enterprises that process softwood with low technological capabilities. Apart from a handful backward integrated processing firms, most manufacturers must rely on volatile supplies of raw materials from third party suppliers. Product quality is generally low and value addition is limited. Roughly 70% of the processed wood originates from coniferous forests, with pine being by far the most important source of industrial roundwood.
Table 33: Guatemalan Forestry Sector Profile 1.0 Forest Cover 1.1 Primary Forest (million hectares) 2.03 1.2 Modified Forest (million hectares) 1.86 1.3 Productive Plantations (million hectares) 0.16 1.4 Forest Gain (Loss) per Year (% of cover) (2%) 2.0 Forest Harvesting/Management 2.1 Roundwood (million cubic meters/year (2007) 17.41 2.1.1 Wood Fuel 16.69 2.1.1 Industrial Roundwood 0.72 2.2 Loggers (number) Not available 2.3 Forestry Regents (persons) 61 2.4 Forest Management Planning (firms/persons) 98 2.3 Forest Carrying Capacity Planning (firms/persons) 90 3.0 Primary Processing (firms) 3.1 Sawmills 188 3.2 Plywood/MDF 17 3.3 Kiln Drying 2 3.4 Impregnating 5 3.5 Molding 15 4.0 Secondary Processing (firms) 4.1 Furniture/Carpentry 158 4.2 Doors 26 4.3 Pallets 16 4.4 Flooring 11 5.0 Wholesalers/Traders (firms) 93 6.0 Employment (number of jobs) 6.1 Forestry 37,250 6.2 Primary and Secondary Processing 2,750 6.3 Distribution/Trading/Other Services 15,000 Total 55,000 6.4. Employment Estimate (Industry Interviews) 85,000 7.0. Forest Removals Value* 7.1 Wood Fuel US$ 167 million 7.2 Industrial Roundwood US$ 43 million 7.3 Non-timber Forest Products Not available
99 According to an AGEXPORT study, labor productivity in Guatemala decreased by 14% from 1980 to 2005 but minimum wage increased by 257% over the same period.
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7.4 Total Value (US$/ha) 50 8.0 International Trade**
Wood Exports, Value - US$
$30,000,000
$40,000,000
$50,000,000
$60,000,000
$70,000,000
$80,000,000
$90,000,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Compiled by Global Development Solutions, LLC from FAO, National Forest Institute, Cofama, Cluster Forestal, Gremial Forestal, Agexport, Cofama and other industry interviews. Note: A precise forest and industry inventory is not available. With the exception of international trade data, all the above numbers should be considered as rough estimates, especially firm and employment statistics. * Based on forest removals of 2007 assuming a 2008 valuation of US$10/cubic meter for wood fuel and US$60/cubic meter stumpage tree value. ** Data for 2009 based on author’s estimate based on actual export data up to October 2009.
MARKET STRUCTURE AND THE SUPPLY CHAIN
The figure below illustrates the softwood supply chain in Guatemala. Softwoods are the main input of Guatemalan wood-based industries and will be the focus of this report. Among softwoods, pine is the main species that constitutes two-thirds of all wood-based exports of the country. The supply chain begins with timber harvesting in the forest.100 Timber in Guatemala is owned by both the private and public sector. Small to medium size owners typically hold between 1 - 30 hectares of forest. A large scale owner may hold anywhere from 30 to as many as 2,000 hectares of forest. One of the defining characteristics of the supply chain, however, is not the ownership but the location of the timber. The bulk of softwood timber in Guatemala is located in its highlands. This geographic feature would be adverse to - and increase the complexity of - timber harvesting and delivery to market in any supply chain. In Guatemala, geographic adversity is compounded by poor road infrastructure and low mechanization levels. As a result, the timber supply chain in Guatemala is not only rudimentary but also costly (see Value Chain Analysis sections of the report).
100 In the case where timber comes from plantations - a low percentage in Guatemala - the supply chain begins with timber plantation and after multiyear (15-25 years) thinning and pruning cycles, timber is harvested and enters the supply chain.
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Figure 60: Forest-to-Furniture Supply Chain, Guatemala
Source: Global Development Solutions, LLC The bulk of timber harvesting in Guatemala is performed by low-tech contract loggers. Loggers, commonly referred to locally as madereros, are not only felling service providers but are also traders of timber. They have their own mobile teams of chainsaw operators and manual bull -based haulers, and serve as intermediaries between timber owners and millers. Typically, loggers receive orders from sawmills for a specific volume of logs whereby the price is always quoted in thousand board feet.101 Then the loggers contact their network of forest owners, holders of cutting licenses, and/or concession holders in search of best stumpage (standing tree) prices. The stumpage price negotiated between timber owners and loggers does not include the fee of transferring the cutting license from owner to logger which is paid by the logger. The per-board-foot (BF) prices that timber owners get for their standing trees depend on tree species. Also, stumpage prices of the same species exhibit high variations depending on tree location (forest access conditions) as well as forest location (road access conditions). For pine species, for 101 Throughout this report the prices and costs will be listed per board foot (the local nomenclature, BF) and cubic meter equivalents (at the rate of 424 BF per cubic meter) will be used when needed to compare with the FAO nomenclature.
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example, stumpage prices vary from as low as Q0.50/BF for poorly accessible forest to as high as Q1.15/BF for easy access forest in close proximity to main roads. Felled trees are then bucked and hauled to collection points in the forest or directly to buyers where they are ready to be sold as logs. Since there are no pulp, paper, or biofuel industries in Guatemala, the supply chain of industrial roundwood is limited to serving the milling industry only. The milling industry, in turn, is almost completely focused on serving the domestic and regional construction-related industries such as scaffolding (the industry also has limited to no outlet for its processing waste – sawdust is sold for poultry pickings and shavings are sold for fuelwood). The quality needs of domestic furniture, door, and other wood processors are of limited concern to sawmillers. As a result, contracts between sawmillers and loggers typically have very limited specifications that are mostly related to log dimensions demanded by sawmillers. In exceptional cases, wood processors’ lumber specifications are set and met back at the forestry extraction stage. This happens in cases where private plantation owners, with integrated harvesting operations, have established long-term relations with wood processors who have their own sawmilling facilities. This combination, however, is rare. This is one the defining characteristic of the supply chain; namely, the only connection between timber owners and end users of lumber is through loggers and millers. Loggers and millers, however, are by and large traders of timber/lumber whose key concern is finding the cheapest timber and selling it as high as possible for logs or lumber. In this context, unless they undergo costly vertical integration back to the forest stages of the value chain, secondary processors generally cannot rely on the local supply chain for consistent supply of quality lumber. Another feature of the supply chain is the undeveloped base of specialized service suppliers such as kiln driers, finger joint plants, etc. This further limits choices in the local market which is why lumber imports from countries such as Chile and other Latin American countries are common.
INTERNATIONAL TRADE
Institutional Support Structure
Legal and Policy Framework: The legal framework of the sector is set out in the present forest law (Decree 101-96 of 1996) which emphasizes, among other things, the importance of reforestation and forest conservation. The current forest policy of Guatemala was formulated in 1999. One of its key features is the concept of productive management of natural forests (‘fomento al manejo productivo de bosques natural’). Its aim is to make natural forests a main feature of economic development in order to conserve biodiversity and improve the living conditions of forest-dependent populations. This aim is to be achieved by intensive silvicultural management to increase the quality and quantity of timber. The policy also makes specific reference to restoration and rehabilitation as major elements of forest development. Based on this new policy, a strategic plan was developed that includes new financial mechanisms, such as incentive payments for reforestation, the Clean Development Mechanism, payments for environmental services, etc.
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Through a congressional decree approved in 2000 (Decree 90-2000), the Ministry for Environment and Natural Resources (MARN) shares authority over natural resources with the Ministry of Agriculture and Foods (MAGA), but the relative responsibilities of the two ministries for forest management are not clear. The National Council of Protected Areas (CONAP), established under MARN in 1989, is responsible for the management of protected areas; in effect, CONAP manages most of the hardwoods and precious species in the country. For non-protected areas, The National Forest Institute (INAB) was created in 1996 out of the former forest service as an independent and decentralized state agency. INAB is responsible for forest management in natural forests. INAB is also responsible for forest inventories and the preparation of forest management plans in both planted and natural forests. INAB is supervised by a national council (Junta Directiva del INAB) that is comprised of representatives from MAGA, the private sector and the national association of municipalities.102 National Forest Institute, INAB: Another important responsibility of INAB is the establishment and management of planted forests supported through a national incentive program (PINFOR). Both INAB and its PINFOR incentives are reported to face funding shortages which weaken INAB’s efficacy. INAB has 9 regional and 31 subregional offices (see table below). It employs 435 people which, according to its managers, is insufficient to cover all its mandates throughout the roughly two million hectares under its administration (all non-protected areas). For example, it takes INAB 10 - 12 months to issue a logging license even though by law it is obliged to issue (or refuse) a license within 2 months. According to INAB officials, its employees in the field as well as in its offices are overwhelmed with the forest area and number of operators they have to manage, but its annual budget allocations from the central government are generally much lower than its requisitions (53% shortage in 2009). Table 34: INAB Profile
Staff 435 Admin 30% Technical 70% Org. Departments 5 (Including PINFOR) Offices 40 INAB Budget (2009) Q63,600,000 Government Q58,600,000 Own Q5,000,000*
*Estimated value of forestry licenses (50% to INAB, 50% to municipalities) Source: Global Development Solutions, LLC INAB’s institutional weakness also negatively affects the control of the flow of legal (and illegal) timber in the country as well as its management of the reforestation program, PINFOR. In terms of timber flows, INAB is the sole authority to issue transport notes/permits for moving
102 Municipalities are required to create environmental offices and are encouraged to conduct reforestation projects; municipalities can keep 50% of the revenues from concessions and harvesting licenses.
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timber from forest to mill. INAB, however, neither controls nor measures the enforcement of its transport notes in the forest, a task which is left to the national police.103 INAB is also in charge of authorizing and registering the issuance of numbered transport voucher booklets. Millers are obliged to sign off/issue one voucher to the transporter of lumber each time lumber is moved from their mills to the customer. In practice, millers print a double or triple set of transport voucher booklets with one and the same voucher printing permit issues by INAB. As a result, even though INAB inspectors inspect millers at least once each quarter, their ability to catch illegal timber trafficking at the mill level is very low. Also, these visits are characterized by millers as rent-seeking more than anything else. Reforestation Program, PINFOR: As the custodian and manager of the reforestation program (PINFOR), INAB’s institutional capabilities are critical. As can be seen from the table below, it takes approximately 31 months for an applicant to receive the first of six annual reforestation payments. Table 35: PINFOR Approval Process
Date Application Stage/Details Month 0 INAB receives applicant’s application and documentation: property and management plan Month 1 Provide application confirmation to applicant (95% of applications confirmed) Month 13/ Month 14
Applicant starts planting as per PINFOR requirements: � 1,111 trees/ha104 � Species suitability, etc
Month 27 First INAB check: � At least 80% survival rate of the planted seedlings � “clean bill of health” (minimal weed presence and healthy trees) � GIS measurement of applicant’s area � Approve PINFOR Funding Request (95% of cases)
Month 28/29 � Inspection report, maps, and bank account of applicant sent to Fomento Nacional/INAB
� Internal audit � Reforestation guarantee (Credito Hipotecario Nacional); � Send file to Ministry of Finance
Month 31 Ministry of Finance sends first payment to PINFOR registered plantation: PINFOR Annual Payment Schedule to Approved Forest Plantations Q/ha US$/ha Year 1 5,000 617 Year 2 2,100 259 Year 3 1,800 222 Year 4 1,400 173 Year 5 1,300 160 Year 6 800 99
Total 12,400 1,531
Source: Global Development Solutions, LLC
103 This is the key reason why INAB’s officially published tree removal statistics are not trusted by anyone in the market. 104 This density requirement was established in 1996. The previous benchmark (2,500/ha) proved unsustainable for Guatemalan soils. At this planting density, mature tree yields nationally vary from 180 to 250 trees/ha. In Coban region, yields can be as high as 400 trees/ha.
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A significant part of the delays associated with the PINFOR approval and funding process is associated with INAB’s limited human resource base. The negative impact of the approval process delays on plantation owners is compounded by the fact that payments subsequent to the first one are often delayed up to six months. Also, plantation owners are concerned that such payments in the future may be not only late but also may be reduced. This fear is fueled by the fact that even though PINFOR’s budget should equal 1% of the government’s annual ordinary income, its approved budget for 2009 is estimated to be 45% lower than the amount mandated by law (see table below).105
Table 36: PINFOR Budget, 2009 Q US$ Estimated Annual Budget (1% of Ordinary Income) 204,269,851 $25,200,000 Approved PINFOR Budget 111,994,851 $13,800,000 Estimated Shortage 92,275,000 $11,400,000
Source: Interviews, Cluster Forestal Human Resources: Another institutional weakness that negatively impacts the entire sector, including plantation as well as natural forest owners, is the shortage of forest industry specialists. An estimated deficit of 1,000 forest specialists and engineers exists in the country while only 10% of industry’s needs for trained staff are reported to be met by the current educational system. A medium-sized wood processing firm may pay as much as US$30,000 for a processing specialist or other business managers. An owner of 100 - 400 hectares of forest may pay as much as US$35,000 in annual salary and benefits for an experienced forest engineer. The shortage of skilled labor pushes up not only wages but also prices of specialized forestry services such as the preparation of management and operational plans. In the case of operational plans, for example, only the licensed regents can sign them off, but the country has only 61 regents and their services are not cheap, especially for smallholders (see table below).
Table 37: Forestry Service Prices, Guatemala 2009 Service/Client Forest Size Q/ha US$/ha Forest Management Plan All 300 $37 Forest Operational Plan: Smallholder 1 ha – 10 ha 1,500 $186 Medium 10 ha – 30 ha 1,000 $124 Large 30+ ha 500 $62
Source: Global Development Solutions, LLC In the context of the above, interviews suggest that there is a need for institutional intervention in the sector as follows:
� Strengthen INAB’s institutional capabilities; � Reduce PINFOR funding uncertainties and delays; and � Increase supply of trained specialists across multiple disciplines.
Industry Associations: The main industry associations and their profiles are summarized in the table below. Generally, these associations have very limited funding and focus mainly on 105 Forestry Law. Article 72.
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addressing immediate needs of their members such as matchmaking and trade fai r organization, as well as raising public awareness about the problems that their members face vis-à-vis public institutions. Industry’s policy dialogue takes place mainly within what is called Cluster Forestal which is seated at the Chamber of Commerce.
Table 38: Key Forest Sector Associations, Wood Processing Sector Name Mission/Characteristics
Community forest associations
� Numerous community forest associations throughout the country that protect the interests of its smallholder forest owners and/or holders of community forest concessions.
� No apex association of planters or forest owners. � Generally non-affiliated or, if affiliated, are so with Gremial Forestal (see
below). Cluster Forestal � Apex organization for policy dialogue between the private and public sector,
NGOs, training institutions, etc. Guatemala Forest
Association (Gremial Forestal)
� Supports, represents, and promotes the interests of its members. � Membership across forest industry from seed manufacturers to wooden house
manufacturers. � Majority of membership are primary processing firms. � No research and development arm.
Guatemalan Exporters Association
(AGEXPORT)
� Provide industry-wide support for all exporters for international market access and for support services such as laboratory/testing accreditation.
� Specific furniture sector focus in one of its 11 focus sector support groups (Commission of Furniture Manufacturers – COFAMA – see below).
� Generally provide trade lead/matchmaking service. � No research and development arm.
Commission of Furniture Manufacturers (COFAMA)
� Improve industry’s competitiveness, policy and industry dialogue, and export promotion.
� An export promotion/trade fair organizer without major industry competitiveness improvement activit ies.
� No research and development arm. Source: Global Development Solutions, LLC Most wood industry associations in Guatemala are relatively young and in the process of development. Their progress is impressive in some areas and crucial for many companies, especially SMEs. The matchmaking floor of AGEXPORT that helps companies to access foreign markets, a service that would be difficult for many firms to perform individually, is one such example of good performance. However, progress is limited in the area of research and development. Not one training, industry, and/or cluster organization deals with the improvements in wood industry competitiveness along the entire forest-to-furniture supply chain. As a result, value chain optimization with a focus on cost-reduction and improved efficiencies across the entire supply chain is not addressed institutionally in the country. A few examples of critical issues in the sector that require further investigation and await technical and technological solutions but are not researched nor developed in Guatemala are:
� Biomass harvesting and transporting cost reductions – improved operational planning, tire configurations, fewer but geospatially precision-planned roads are just few of the solutions that are much needed by the industry. Example: high-floatation tires are estimated to require 10% less gravel and as much as 25% less gravel if truck fleets are
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equipped with tire pressure control systems – particularly suitable in situations where gravel is in short supply and/or has to be hauled over difficult terrain (such as in Guatemala).
� Precision forestry – match logs with end products at the forest to ensure that the right log is directed to the right mill.
� Biomass potential evaluations– wood residuals from harvesting operations represent a potential feedstock for alternative energy solutions. Especially pertinent for the country where electricity grid coverage is poor and its tariffs are high.
� Wooden building solutions. In this context, providing institutional and financial support for the creation of a single national non-profit research and innovation center specifically focused on forestry sector competitiveness is anticipated to improve the forestry value chain. By pooling resources and creating partnerships with academic and other institutions106, such a center would have a mission to address complex issues and challenges along the full length of the value chain: from genetics and tree improvement through to the performance of forest products in the marketplace. The National Competitiveness Project (PRONACOM) and the Technical Institute of Training and Productivity (INTECAP) both have generic ‘competitiveness improvement’ mandates and could facilitate the creation of a forest-to-furniture innovation center. Such a center is also in line with the country’s official forestry policy. The ‘technological policy instrument’ features prominently in the country’s forest policy and calls for research and development and technical assistance, as well as technological transfer, promotions of lesser known species, etc.
INTEGRATED VALUE CHAIN ANALYSIS, TIMBER EXTRACTION
Product Profile
Roughly 90% of Guatemala’s forest is either broadleaved forest that includes some of the most precious hardwood species such as mahogany or mixed forest (Figure 61).107 Commercially, however, softwood conifers are the most used species and make up over two-thirds of all processed timber in the country. Pine is by far the most utilized softwood in Guatemala which is why an estimated 75% of all plantations in the country are pine species plantations. Although it is coming in increased supplies, plantation timber is limited compared to natural forest timber. An estimated 160,000 hectares of productive plantations are available in the country but most of them in the early-to-middle stages of their production cycle which is why natural extraction is where the bulk of timber biomass comes from.108 The value of timber trees is dictated first of all by species. Other key determinants of timber value are its size (height and diameter) and quality of the trees. In countries where they exist, product classes are generally expressed in terms of diameter measured at breast height (DBH) –
106 Such as the structural wood research project of University of Guatemala (UVG). 107 By and large the division broadleaved/coniferous corresponds with hardwood/softwood terminology. 108 Plantation establishment, by and large, started in 1997 with the start of the PINFOR program.
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see table below for sample North American classes.109 In Guatemala, timber class does not exist. More precisely, in Guatemala there is only one class of timber: sawtimber. In other words, if there is a market, any tree may be turned into sawn wood irrespective of DBH characteristics o f the tree.
Table 39: Timber Product Class Comparison, Guatemala and Southeast USA
Class USA Guatemala Fuelwood Does not exist. DBH: Any diameter. More than
95% of all forest harvest in any given year. Local name, Lena.
Pulpwood DBH: 6-9 inches. Trees are chipped into small pieces, chemically or otherwise treated, and made into paper. Typically measured in tons.
Does not exist. No pulp and paper market available.
Superpulp An unofficial designation used to describe pulpwood-sized pine trees from which at least an eight square foot board could be cut. More valuable than regular pulpwood, but markets for this product are not always available.
Does not exist. No pulp and paper market available.
Palletwood An unofficial designation for low-quality hardwood timber that is not good enough for lumber, but can be sawed into slats for pallet-making.
Does not exist. Generally, if a market exists, trees with DBH of 4-8 inches (local name, Trocilla). Measured in board feet.
Chip-n-saw
(CNS)
DBH: 10-13 inches. By using a combination of techniques, these mid-sized trees produce chips for pulpwood as well as small dimension lumber. Measured in tons or standard cords. Value is heavily dependent on tree quality.
Does not exist. No pulp and paper market available.
109 The Food and Agriculture Organization classification is similar.
Figure 61: Forest Cover by Type, Guatemala (INAB)
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Sawtimber
DBH: 14+ inches. Trees are cut into lumber. Waste material is converted into chips for fuel or paper production. Measured in tons or board feet. Value is heavily dependent on tree quality.
Any tree above 8 inches DBH is considered ‘fair game’ for sawmilling and cut into lumber. Measured in board feet. Local name, Troza; 8+ inches
Veneer
DBH: 16+ inches. By means of a large lathe, the tree is converted into continuous sheets of thin wood. This is used in the manufacture of plywood and furniture, depending on the type of tree. Measured in tons or board feet. Value is heavily dependent on tree quality.
Does not exist.
Source: Global Development Solutions, LLC
NATURAL FOREST EXTRACTION, VALUE CHAIN ANALYSIS
Typically for every timber industry in the world, stumpage price of trees depends on how far the trees are from the buyer and how difficult it is to access them. These two indicators show remarkable variability internationally as well as domestically. For pine species, for example, prices vary from as high as Q1.15/BF for easy access forest in close proximity to main roads to as low as Q0.50/BF (see table below). This price range refers to Chimaltenango region and within 25% variation reflects the Coban region prices as well. These prices may be different from other regions’ forests in the country.
Table 40: Pine Stumpage Price Variations, 2009 Stumpage Price VariationsStumpage Price (to timber owner) Good Forest Access/Roads Poor Forest Access/RoadsMill/Buyer Near Forest (10-20km) 1.15 0.70Mill/Buyer Far from Forest (50-100km) 1.00 0.50
Quetzal/Board Foot
Source: Global Development Solutions, LLC The value chain for timber harvesting can be divided into six key value adding activities:
7. Logging roads (construction and maintenance); 8. Demarcation; 9. Felling/Bucking; 10. In-forest hauling (cutting already felled trees into smaller pieces and moving them to
collection points); 11. Loading and transportation; and 12. Administration and overhead
In the Guatemalan softwood timber context, the first two stages are undertaken only by plantation owners, and by and large owners of natural forests and/or cutting licenses do not engage in road construction and/or maintenance or in demarcation. Loggers by and large engage only in felling, bucking/hauling, and transportation of wood in addition to administration issues such as cutting license fees, their transfers, etc. In some cases, logs may be sold at forest collection points depending on the buyer’s preference. High Transportation Costs: A typical logger’s value chain (see figure below) shows that apart from the stumpage paid to timber owners, which constitutes 45% of the value chain, charges
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associated with moving timber by hauling (25%) and transporting it to the client (14%) constitute most of the remaining costs.
Figure 62: Value Chain for Natural Forest Timber Extraction, Chimaltenango
Guatemala is a very small country compared to most timber producers such as Canada, Russia, USA, Chile, Brazil, etc. Yet, its hauling and transportation costs constitute a major share in the costs of delivered timber. This is mainly due to the poor road infrastructure across the country, especially in the highlands where most softwood is found – only an estimated 35% of 14,000 km road infrastructure is paved. In the particular example illustrated below, the total cost hauling and moving timber from forest to a mill 20 kilometers away is estimated at Q0.38 per board foot (BF), or US$20 per m3. This is in line with global forestry averages but the transportation distances of 20 km from forest to mill in countries such as Canada, Russia, and USA are unheard of unless mills are located within forests. This indicates that the per kilometer-ton unit cost of moving timber in Guatemala is not competitive internationally.110 The table below illustrates the fact that the people who ultimately foot the bill of transportation costs are the timber owners. Namely, depending on location and road characteristics, the non-stumpage cost of moving timber can vary by 248% and as a result loggers discount the stumpage paid to timber owners in order to meet the going market price of timber at sawmillers (Q1.4 - Q1.7 per board foot as of November 2009).
110 Per kilometer-ton transportation costs of timber are not available but such cost comparisons for other agricultural goods are available and can be provided separately upon request.
Stumpage 49%
Felling/ Bucking 4%
In-forest Hauling
26%
Transport to mill
6%
Admin/ OH
15%
Fuel
13%
Materials/ Mainten.
43%
Deprec- iation 11%
Labor
33%
Q100 per pine tree, difficult
access but relatively good road to client
Timber Cost Price: Q1.19/BF Delivery Price: Q1.40/BF Profit margin: 15% Distance to market: 20km Client: Saw miller exporting to El Salvador.
Q150-Q200 per 1,000 board feet for
skidding charges of bull-owner (buellero).
No access roads. 50% less expensive if truck loading point is
closer to forest Own truck and labor. Market price
for rented trucks and labor 25% higher. Short distance to buyer
(7km) but excessive wear and tear due to poor roads inside and
outside forests. Source: Global Development Solutions, LLC
Cutting license transfers and
municipal royalty fees
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Table 41: Pine Stumpage Price Variations, Coban and Chimaltenango, 2009 Stumpage Price VariationsStumpage Price (to timber owner) Good Forest Access/Roads Poor Forest Access/Roads AverageMill/Buyer Near Forest (10-20km) 1.15 0.70Mill/Buyer Far from Forest (50-100km) 1.00 0.50
Cutting 0.03 0.03 0.03
Transport Forest to Collection Point Good Forest Access Poor Forest AccessAnimal Traction 0.10 0.35 0.23
Transport Collection Point to Mill Good Access/Roads to Mill Poor Access/Roads to MillMill/Buyer Near Forest (10-20km) 0.15 0.35Mill/Buyer Far from Forest (50-100km) 0.30 0.70 0.38
Quality Control Agent 0.03 0.03
LOW HIGHTotal Non-Stumpage Cost 0.31 1.08 0.70Global Development Solutions, LLC
0.84
Quetzal/Board Foot
Post Harvesting Practices Inadequate for High-Value Added Processing: Since loggers serve a millers’ market catering to the construction material industry, their post-harvest practices deteriorate the timber quality needed for high value added wooden products. For example, a logger may keep his timber in forest collection points for months at a time until he negotiates the best price with millers or scopes the neighborhood for additional timber to cut. In the meantime, timber may and often does get fungus stains which make it suitable only for pallets, structural lumber or other applications (fungi do not affect wood strength). Such timber, however, very rarely would be accepted by non-structural wooden product exporters or any processor other than the smallest local carpentries that make products for the rural community market (see photo below).111
What holds true for appearance is also valid for log lengths. For example, in situations where timber orders involve logs that are of odd length - this is typical for any door manufacturer ordering 7-foot logs - it would require significant amount of time to find such logs in the market. Loggers would generally not deliver such orders because the Guatemalan logging/milling practice is to process even number log lengths (8, 10, etc feet).112 In this context, unless they undergo costly vertical integration back to the forest stages of the value
111 Blue stained pine is actually a premium product in many developed markets. It is called ‘denim’ pine. No such premium perception is associated with the product in Guatemala. 112 According to field interviews, loggers and transporters believe that optimal loading configurations for timber are best achieved with logs of even lengths.
Photo 1: Fungus Stained Wood, Alta Verapaz
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chain, secondary processors generally cannot rely on the local supply chain for consistent supply of quality lumber.
Plantation Timber, Critical Counterbalancing Factor: In the current situation where the market pull is for construction and fuelwood timber, there is very little if any incentive for loggers and millers to engage in improving the supply of timber according to the needs of secondary processing firms. In fact, interviews with loggers and sawmillers suggest that premiums for quality do not exist in the market. By and large, with few exceptions, this is corroborated by other actors along the supply chain. The value chain analysis suggests that the introduction of quality in the supply chain is currently being done by some private pine plantation owners. Able to control and manage the forest from seedling to maturity stages, some plantation owners establish management and operational plans that cater to a wide range of product classes. As a result, they are able to meet end processors’ needs for different types of lumber.113 For example, a well managed plantation is able to meet most requirements of wood processors for lumber that comes from trees that have no knots, are uniform, are pest-free, etc. (see table below). There is no country-wide data that compares plantations in terms of their quality of management and their economic returns, but interviews in the field suggest that premiums of up to 30% can be obtained for supplying good quality trees to processors. However, further investigation is needed to establish both the extent of these premiums as well as their incidence.
113 Data on the economics of pine plantations in Coban is available upon request.
Photo 2: Blue-Stained Cabinetry, Coban
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Table 42: Plantation Management Practices and Tree/Lumber Quality Requirements of Wood Processors
Measures in Good Practice Plantations
Measures in Unmanaged Natural or Plantation
Forest No knots At least 3 pruning cycles. Extensive weeding. Limited to no pruning or
weeding. No pests Pest-scouting None. No fungus Ensure 10-15 day forest-to-mill delivery cycles. None. Cut timber stock may
be kept up to 3 months. Width uniformity
Precise skidding paths and other measurements performed during harvesting to minimize tree damage.
None or limited.
Length uniformity
Seed selection at nursery stage, seed origin, weeding. For long term cutting objective, poor trees removed during thinning cycles.
None or limited.
Source: Global Development Solutions, LLC Unfortunately, not all plantation owners interviewed manage their tree stocks well. Tree spacing, pruning, and other aspects are very often neglected (see photo below). Some of these forest management measures are neglected because plantation owners do not have the necessary
skills to undertake them and/or such skills sets are not readily available in the market place. For example, it was reported that in Coban, a key pine growing area, very few people know pest-scouting. Neglect is also caused by the inability of many plantation owners to cover the expenses associated with good forest management. Such is the case with pruning and weeding cycles. Regular pruning and weeding during the early stages of tree growth will ensure clean and healthy trees but such maintenance
is not affordable for many plantations. As can be seen from the table below, depending on the number of cycles performed, pruning and weeding may cost as much as US$750 and US$1,375 per hectare respectively.
Photo 3: Poorly Pruned Pine Plantation Trees, Coban
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Table 43: Pruning and Weeding Cost, Pine Plantations, Coban Pruning Cycles Q/ha/Cycle Q/ha US$/haYear 2 or 3 4 625 2,500 313$ Year 4 or 5 3 667 2,000 250$ Year 7 or 8 2 750 1,500 188$ Total 9 6,000 750$
Weeding Cycles Q/ha/cycle Q/ha US$/haYear 1 4 500 2,000 250$ Year 2 4 500 2,000 250$ Year 3 3 500 1,500 188$ Year 4 3 500 1,500 188$ Year 5 3 500 1,500 188$ Year 6 3 500 1,500 188$ Year 7 2 500 1,000 125$ Total 22 11,000 1,375$ Global Development Solutions, LLC
Interviews in the field suggest that, for those willing to incur additional costs associated with good forest management, the profit margins may be rewarding (see table below).114 It should be noted here that there are some cost items critical to the success of a plantation that are not readily available in the market, such as skilled forestry-trained plantation managers. In this context, barring sudden improvement in the supply chain of natural forest timber, plantation timber may be one of the few channels left through which processors’ needs for quality timber can be met. Strengthening the human and financial capital of pine plantations is critically important in this respect.
Table 44: Sample Profit Margins, Pine Plantations, Coban low high
Q/BF Q/BFEstimated Cost Price of Pine Logs, at Farm 0.75 0.95 Transport to Market 1 (Santa Clara -20-30 km away from farm) 0.15 0.15 Transport to Market 2 (Guatemala -200 km away) 0.40 0.40
Estimated Cost Price of Pine Logs, Delivered to Market 1 0.90 1.10 Estimated Cost Price of Pine Logs, Delivered to Market 2 1.15 1.35
Sales Price, Mkt 1 1.50 1.50 Profit Margin, Market 1 40% 27%
Sales Price, Mkt 2 1.90 1.90 Profit Margin, Market 2 39% 29%Global Development Solutions, LLC
114 Figures do not include reforestation charges.
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INTEGRATED VALUE CHAIN ANALYSES, WOOD PROCESSING
Sector Profile
Once they are moved from the forest, logs are unloaded to sawmillers’ yards. Unloading is typically done manually and is generally a risky affair for those involved (see photo below). Unloaded logs are then moved to milling lines which use various configurations of bark removal, log splitting, circular saw, and bandsaw machinery to convert logs into lumber.
Logs may be processed into various lumber configurations. They may be turned in to roughly square blocks (locally referred to as flitch) that are then sold to pallet makers, bed manufacturers, etc. They may also be turned into boards used in the construction industry for framing and scaffolding (see photo below). These two product classes, pallet and construction lumber, comprise the bulk of what is sold in the local and regional markets.
Roughly squared or planed lumber can be further processed (fine cut and milling) to make lumber that goes into higher value addition wood processing applications such as doors, beds, furniture, etc. For these applications, wood typically needs to undergo fine drying and finishing to ensure good appearance as well as moisture characteristics of lumber.
Photo 4: Log Flow in Sawmilling Yards
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Photo 5: Pallet and Construction Lumber, Guatemala
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In the sections below value chain analyses of a number of wood processing applications are provided. From sawmilling through upholstered furniture, the analyses will provide a snapshot of the current bottlenecks in the wood processing sector.
INTEGRATED VALUE CHAIN ANALYSIS, SAWMILLING
The value chain analysis suggests that raw material constitutes the largest share in the delivered cost of construction lumber (41%), followed by sawmilling (40%) and transport to market (14%) – see figure below. Construction/Sawnwood Market Sets the Benchmark Price and Quality of Lumber: The particular miller illustrated below buys logs from various sources, which is typical. Half of its lumber comes from independent loggers. A quarter comes from its own forest and another quarter comes from purchased cutting licenses from third parties – in both cases timber extraction is performed by contracted loggers. This is typical of many millers.
Photo 6: Furniture Lumber Applications, Guatemala
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Figure 63: Forest-to-Sawmill Value Chin Analysis, Pine Lumber
Source: Global Development Solutions, LLC The price of raw material varies depending on the source of timber and is generally set based on the going rate for construction lumber. Namely, the going rate for mill -gate construction lumber in November 2009 was Q1.5/BF - Alta Verapaz region around Coban. This is the price at which millers can buy timber and make a profit by selling construction lumber in the regional or local markets. Based on this price, millers work backwards and source timber from different locations. In the case illustrated above, timber is sourced from the miller’s own forest via hired loggers and constitutes 41% of the delivered price of the lumber. As is the case with the forest harvesting value chain, factors such as poor forest access and other road conditions constitute almost half (41%) of millers’ raw material costs. When compared to other major timber-producing countries, Guatemalan timber is one of the most expensive (see value chain analysis illustration above). While it is typical in any part of the world for millers to be influenced by the construction materials market, in Guatemala most millers appear to be almost completely focused on this
Raw Material
41%
Felling/Bucking
3%
In-forestTransport
16%
Transportto Mill25%
Drying
0%
Transportto market
14%
Admin/OH5%
Stump-age56%
1. Poor road access in and near forest may reduce forest/license holder’s stumpage tree value by as much as 56%
2. High cost of transportation makes the price of logs delivered at mill gates in Guatemala one of the highest in the world:
Log Cost (US$/m3)Guatemala US$79-US$85Chile US$50Canada US$42Russia US$40Europe US$112(Germany, Finland, Austria)
Own Electricity
11%
Materials/Mainten.15%
Waste*
34%
Labor
40%
1. Lumber Recovery Factor (LRF) – Typical LRF: 55%-60% (old machinery). Improved LRF (case illustrated): up to 76% but of low quality lumber (scaffolding boards)
2 Relatively low labor productivity: Guatemala: 290-480 cubic meters/worker/yearUSA/Canada (2008): 2,125cubic meters/worker/year
3. Sawmilling costs close to global averages despite high electricity prices (compensated by low labor costs):Guatemala: US$69-US$78/cubic meterGlobal average (2008): US$75/cubic meter
Limited/no market for byproducts (sawdust, chips, shavings etc).
Very poor rural/secondary road infrastructure a major contributor to high costs of short haul timber transportation
Sawn Boards, Wet. to El Salvador: Mill Gate Sales Price: US$185/m3 (Q3.5/BF)Production Cost: US$167/m3 (Q3.1/BF)Profit Margin: 10%
* Producers typically load waste at raw material cost stage. For this presentation, waste has been allocated/loaded to respective processing stages
Sawmilling
40%
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market.115 As a result, the price benchmark of lumber by and large corresponds to the construction material market needs. By the same token, the quality benchmark of lumber supplied by millers is the one that is satisfactory to the construction material industry. This characteristic of the local supply chain creates major problems for the high value added wood processing industry. As can be seen from the figure above, the amount of lumber recovered from a log unit (the lumber recovery factor – LRF) is anywhere from 55% - 70% in Guatemalan mills. This is an indication that Guatemalan mills do not supply what is generally known in developed markets as ‘grade’ lumber that can be turned into multiple wood processing applications of high value. Instead, by catering to the construction materials market that has low lumber quality requirements, Guatemalan softwood mills sell mostly non-grade lumber. Parts of logs that would otherwise go for pulp and other industries in developed markets are actually turned into lumber in Guatemala.
Figure 64: Grade Lumber and Non-Grade Lumber Recovery Rates
Source: Global Development Solutions, LLC This approach allows for maximizing lumber recovery, but these recovery rates are at the expense of lumber output quality. As a result, this setup is inadequate to meet quality requirements of medium-to-high value adding home/office furniture industries.
115 Influenced, among other factors, by the fact that markets for other product classes such as pulpwood do not exist.
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In some cases, millers diversify their product offerings, but not in product segments that m ay be of any use to high-value-adding wood processing industries. For example, in Guatemalan sawmill yards one is more likely to see product diversification towards wooden tomato box
assembly than for any improved lumber products (see photo). In this context, millers are anticipated to continue their legitimate short-term profit maximizing decisions by combining volume sales for the construction material lumber and limited but high margin sales for other products such as tomato box assembly.116 At least three strategies can be envisaged that could influence millers’ processing decisions in the direction of improved lumber. One avenue goes back to reducing the cost of harvesting and moving timber
from forest to mill. Guatemalan pine logs are some of the most expensive compared to other countries and the value chain shows that a significant portion of log cost is generated by poor access to and from forests. While some private sector companies can influence cost reductions by building their own roads within or close to forests, such investments are considerable for most forest owners – see table below for the minimal cost of building roads in a relatively well positioned plantation. It is therefore a policy intervention that is required to improve the road infrastructure in the country.
Table 45: Road Construction Costs, Private Plantation, Coban Construction Maintenance
Roads km Q/km Q/km/year Q/year US$/year Primary Road* 4 Principal Road** 4 2,800 1,500 6,448 806$ Auxilliary Roads^ 10 16,000 8,000 86,400 10,800$ Access Roads^^ 11 4,000 4,000 45,760 5,720$ Total 25 22,800 13,500 138,608 17,326$ * Municipal Road Bordering the Farm** Main Forest Access Road Within Farm, Up to 5 meters wide.^ Big Stone Roads no access for 2-3 months during heavy rains^^ Cleared Forest no access for 2-3 months during heavy rains25 years plantation cycleGlobal Development Solutions, LLC
Total Cost
The second avenue is to stimulate investments in industries for processing waste wood biomass chip/shavings/waste intake, such as pulp, charcoal, etc. Such investments are anticipated to
116 Tomato box margins range between 30%-40%.
Photo 7: Tomato Box Assembly at Sawmill, Alta Verapaz
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increase the value of timber biomass and may influence the economics of sawmilling towards lumber production in increasingly better quality than currently produced. The third avenue is to increase the competitiveness of the secondary processing industry so that it can provide sufficient price and volume incentives to the milling industry for the improvement of its lumber offerings. Poor Access to Affordable Financing for Machinery Upgrading: Most mills in Guatemala use outdated equipment. Very often, processors built their own milling stands and improvise various
machinery configurations for lack of funds to purchase standardized modern machinery. The reported annual interest rates for SMEs in wood manufacturing range from 22% to as much as 35%. As a result, most mills operate old machinery. Some of the machinery in Guatemalan mills probably has more value in industrial museums than on the shopfloors (see photo). In this context, millers share the fate of all other SMEs along the supply chain who cannot access affordable finance. Poor Infrastructure and High Price of
Electricity: The value chain suggests that excluding the cost of processing waste, electricity constitutes at least 15% of the sawmilling cost when millers generate their own electricity. This percentage can double if millers use on-grid electricity which is very costly compared to other countries (see table below).
Table 46: Comparative Electricity Tariffs
High electricity tariffs and interest rates are two factors that negatively influence the cost structure of processors across the value chain. Value chain analyses for pallet and bedframe
Photo 8: Old Sawmill Machinery, Guatemala City
As of: September, 2009
Country Domestic IndustrialCanada 0.08$ 0.06$ US 0.12$ 0.06$ China 0.13$ 0.08$ India 0.08$ 0.19$ UK 0.20$ 0.06$ France 0.30$ 0.16$ Germany 0.39$ 0.26$ South Africa 0.04$ 0.02$
Guatemala (nominal) 0.17$ 0.19$ Guatemala (real*) 0.48$ * Includes price augmentations related to fixed charges, load/power factor, etcSource: Global Development Solutions, LLC
US$/kwh
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makers illustrate the fact that already thin margins of these processors are challenged by the necessity to access these costly inputs. In the case of bedframe makers, for example, not only did the particular producer have to build its own access to the grid (see table below) but also finance that access at an annual interest rate of 23.5%. In effect, these costs create major barriers to entry for small entrepreneurs.
Table 47: Public Electricity Grid Connection Costs, El Rancho
Cost per Item Q US$ Pole, capacitator, wires, etc 45,000 5,625$ Setup 5,000 625$ Facilities 10,000 1,250$ Total 60,000 7,500$ Global Development Solutions, LLC In this context, improvements in the availability of affordable and easily accessible electricity and finance are needed to stimulate an increase in the number of SMEs entering the wood processing sector.
INTEGRATED VALUE CHAIN ANALYSIS, UPHOLSTERED FURNITURE
A value chain analysis for upholstered furniture was chosen as a proxy for illustration of key impediments related to furniture processing. The manufacturing process for upholstered furniture goes through the following stages:
1. Lumber raw material sourcing; 2. Cutting and planing of lumber; 3. Assembly of supporting frame; 4. Upholstering and finishing; and 5. Delivery to market (or sales outlet).
The value chain analysis of an upholstered furniture producer in San Juan suggest that at a delivered price of US$384 per three-piece sofa, the cost associated with upholstering and finishing constitutes the highest share at 38%, followed by administration overheads (22%) and wood raw material (14%).
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Figure 65: Upholstered Furniture Value Chain Analysis, Local Market, San Juan Raw Material14%
Transport
6%
Transportto market
7%
Admin/OH22%
SawnWood94%
1. Lumber quality and quality consistency increase in importance at secondary processing stage
2. For upholstered furniture processors, wood moisture content critical.
3. Lumber type (SME case illustrated): Sun dried roughly saw pine boards of unknown moisture content.
4. Alternative sources:a. Imported Chilean 12% moisture
lumber – unaffordable to SME Co.
b. Local kiln-dried wood – costly access/transport to a limited and distant supply base (2 working kiln-dryers in the country).
Electri-city2%
Inputs/Materials81%
InputTransport
2%
Labor
15%
1. Weak/nonexistent local auxiliary materials supporting industries.
2. 97% of input material value not local. Small-scale producers at particular disadvantage when dealing with importers.
3. High focus on unit profitability (reduction of input material consumption) generally at the expense of product quality.
Three Piece Sofa Set, Local Retail: Sales Price: US$625/set Production Cost: US$384/setProfit Margin: 39%
Cutting/Planing
6%
Bed SetAssembly
13%
Upholstering/Finishing
38%
Marketing
80%
Financing
15%
Deprec.
5%
1. High interest rates (24%-36%) for SMEs� Limited ability to expand production.
1. Business development /marketing/Expos very risky/costly (case illustrated above) due to
a. Poor marketing skills; b. High cost of financing; andc. Limited/poor product
range, quality, and design
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Most Input Materials Imported: While access to affordable electricity remains vital, access to affordable finance increases in importance as wood enters the secondary processing stage.
Ability to source the right inputs, to access local and foreign markets, etc. all require funds over and above the ones that secondary firms need for running factory floor operations. In the case of upholstering, over 80% of costs are associated with the cost of items such as foam, fiber, and thread as well upholstering material, staples, etc. Of all these items, only thread and glue are produced locally. All other items are imported. Small-scale furniture producers, like the one illustrated above, do not have
the necessary volumes to import directly or to buy in sufficient bulk at discounted prices. As a result, it is reported that such SMEs are charged exorbitant prices by importers. While additional research is needed to look into input traders’ margins, data from larger and exporting furniture makers who buy in bulk suggest that they can source inputs at prices that are 10% - 38% lower depending on type of input.
Photo 9: Sofa Springs and Foam
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Data also suggests that non-bulk small buyers, in order to compensate for higher input prices, reduce the amount of inputs that go into their furniture. For example, often they choose to put 18 - 20 kilograms of foam in one three-piece set instead of 28 kilograms typically used for identical local market upholstered three-piece sofa sets. This makes their furniture less sturdy and losses its sales value potential. As a result, such producers find it difficult to penetrate higher end local markets that provide significantly higher per-unit profits (see table below).
Table 48: Comparison of Unit Profitability, Furniture Firm, San Juan
Firm Size Small MediumMarkets Served Local Local Input Sourcing Retail Traders Bulk Retail/Wholesale
US$/Set US$/SetCost Price 384$ 1,100$ Sales Price 625$ 1,625$ Gross Profit 241$ 525$ Profit margin 39% 32%
Annual Revenue 42,500$ 390,000$ Annual Gross Profit 16,376$ 125,880$ Global Development Solutions, LLC In this context, the area of San Juan, where a large base of carpenter and furniture firms exist, could benefit from associative arrangements that would allow many small producers to source inputs in bulk. This is anticipated to reduce input costs that, the value chain suggests, constitute the highest proportion of cost (81%) of the most costly portion of the value chain: upholstering and finishing (28%). Reduced prices are expected to benefit both the producers that prefer to stick to the low end of the market as well as those that would like to upgrade to higher end segments. Costly Financing Inhibits Growth: The value chain analysis suggests that the cost of financing for SMEs producing furniture is high. At rates of 24% - 36%, financing is unaffordable for most SMEs interviewed. To put this into perspective, the furniture maker illustrated above took a three year loan of Q35,000 (US$4,375) at an annual interest rate of 36% to finance its participation in a furniture fair in 2008. The firm’s interest charges for the next three years were approximately Q21,000 (US$2,625), making the total marketing and financing expense for the period Q56,000 (US$7,000). When the minimal annual depreciation is included, the value chain analysis suggests that the firm’s overheads cost 22% of its total production costs in each of the three years during which the loan is paid out. It is therefore not surprising the owner of this firm
Photo 10: San Juan Sofa
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harbors major reservations in considering future financing. The value chain interviews suggest that the situation is similar with many similar firms who defer or do not even contemplate firm growth or product upgrades in the current environment of high interest rates. INTEGRATED VALUE CHAIN ANALYSIS, DOOR MANUFACTURING The importance of affordable financing to firm growth can be best seen in the comparison between the SME furniture maker from San Juan (discussed above) with a multinational door manufacturing firm located in Guatemala City (illustrated below). On a per unit basis, all the charges associated with financing a distribution network across six countries as well as other administrative charges and overheads, constitute a smaller portion of the total manufacturing cost (17%) than the administration/overhead charges of the furniture maker (22%) selling locally. The door manufacturer has access to financing rates as low as 9% in addition to own capital. It is the raw material portion of the value chain, however, that illustrates an equally critical aspect of wood processing in Guatemala: lack of locally supplied pine lumber of sufficient quality.
Figure 66: MDF Door Value Chain Analysis
Raw Material
72%
Cutting
<1%
Admin/OH17%
Empty Core ‘Masonite’ Door, Major Producer/Exporter: Average Sales Price*: US$20/doorAverage Production Cost: US$15/doorAverage Profit Margin: 25%*Price depends on distribution channel (4 channels) and location (38 distributors, 6 outlet stores across 6 countries) and excludes transportation/delivery charges.
MDF board imported from Chile. MDF supply likely to remain foreign-based (weak local demand/export base for MDF insufficient to justify establishment of (costly) MDF plants.
Door FrameAssembly
1%
MDF Board74%
Finger Joint Pine Frame26%
Material(FJ Frame)
79%
Warehousing/Stocking
9%
Freight/Transport
12%
Finger Joint (FJ) pine lumber imported from Chile. Despite local availability of pine wood, no local suppliers yet able to meet manufacturer’s requirements for:
a. FJ, kiln-dried pine wood; b. Consistent and reliable quality; andc. Price (notwithstanding the 21% effective protection provided by lumber freight and storage costs (3-4 months buffer supply)
Door Assembly /Pressing
7%
Finishing/Packaging
3%
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Quality Pine Lumber in Short-Supply: The value chain analysis suggests that raw materials constitute 72% of costs associated with delivering an empty core Medium Density Fiberboard (MDF) door of type ‘Masonite’. Three-quarters of the raw material cost is associated with the cost of imported MDF material (generally from Asian suppliers). Interviews with local producers suggest that the Guatemalan market size is limited to justify investments in MDF plants that can cost anywhere from US$35 million and up to US$75 million. It is anticipated that in the immediate future MDF Masonite supply is going to continue to be imported.
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What is disturbing to the door manufacturer, however, is the fact that he is unable to source the remaining quarter of raw material value that is needed to make the MDF door: the finger-joint (FJ) pinewood frame. As of November 2009, there are no Guatemalan firms that can supply pinewood that meets the following characteristics:
� Finger-joint, kiln-dried wood; � Consistent quality and quantity of supplies; � Competitive price.
As a result, the door manufacturer imports the pinewood frames from Chile as do many other manufacturers who need a consistent supply of well-priced and quality softwood. As was discussed above, across the entire supply from forest to mill, the quality of wood is not of primary concern. Harvesting, transfer to mill, and milling are performed, with the exception of individual plantations, with least concern for the needs of end-chain wood processors. In this context, the value chain analysis suggests that a range of competitiveness gaps across the local supply of softwoods such as pine (listed in respective sections above) need to be addressed in order for locally produced lumber to compete with Chilean imports. The competitiveness gap between Guatemalan and Chilean pine lumber is illustrated by the cost of a solid pine door. If imported from Chile, an assembled door reaches the Guatemalan market at a price of approximately US$29/door, including all the freight and duty charges. By contrast, only the lumber needed to make the identical door (35”x83”x1 3/8”) in Guatemala costs approximately the same (US$28) – see figure below. When assembly and other manufacturing costs are included, a door made from Guatemalan lumber would be delivered at an estimated price of US$35, or 21% more than a Chilean imported door.117
117 The cost of the local pine door of identical specifications with the Chilean door is approximated by adding average production costs across each segment of the value chain.
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Figure 67: Local Pine Door Value Chain vs. Imported Chilean Pine Door
Raw Material49%
Milling/Planing12%
Admin/OH4%
LumberUS$28.05/solid door equivalent
US$1,000/MBF* (US$424/m3)
KilnDrying
8%
Supply Chain Margin27%
Energy79%
Labor9%
Other 12%
Felling/Bucking
2%
In-forestTransport
6%
Transportto Mill15%
Logs
77%
* Actual Market Price for Planed Kiln-dried Lumber. Local lumber prices are typically quoted in thousand board feet (MBF)
Something has got to give. Improvements across the supply chain required to compete.
Chilean Assembled Solid Pine Door (CIF Guatemala City)
Assembled Door 23.00$ Freight 3.15$ Duties 3.22$ Delivered Price 29.37$
Assembly/Admin/OH/etc
+
Competitiveness Gap: Chilean assembled solid door within the same price range as Guatemalan
lumber (door equivalent)
Source: Global Development Solutions, LLC Underdeveloped Market Linkages: Notwithstanding the prevailing difficulties in the supply chain, many of the ingredients needed for the emergence of well connected supply chain from forest to finished wood processing exist in Guatemala. Well-managed plantations that engage in precision forestry to meet end-user needs exist. At least two modern independent kiln-drying facilities operate in the country.118 Another two firms have finger-joint processing capabilities, albeit one is in its very early stages of quality improvement. The connection of these suppliers into a functioning supply chain, however, is not done due to a range of factors. One such factor is a general risk aversion among established exporters to source from the local supply chain. Also, for some product classes, such as the case of the specific solid pine doors of export-grade quality illustrate above,119 the Guatemalan forestry supply chain is currently unable to respond to price and quality requirements of such products. This, however, does not mean that opportunities in other product classes do not exist. In the case of the MDF empty core door, for example, the pinewood needed for the frame does not need to have any significant wood appearance or grain qualities as it is covered by the MDF boards. What is needed is for approximately 3.25 board feet of pinewood that is needed for a MDF doorframe to arrive at assembler’s door in finger joint configuration and at the right price (US$2.10-US$2.30) and in consistent order volumes and quality. Data in the field suggest that if connected in one supply
118 There are also kiln-drying facilities within furniture making firms. 119 Note that not all pine doors, windows or other types of wooden products are of the same product class, appearance, or quality. There are solid pine door producers in Guatemala who may also export.
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chain, there is a potential to deliver local plantation timber from forest to a door manufacturer’s plant, yet such linkages are not exploited in the field. Strengthening the institutional capacity of private sector organizations to connect existing suppliers into a functioning supply chain could be a useful platform to encourage wood-processing industry growth. Another complementary platform could be for the public sector and donor organizations to engage in short -term supply chain linkage projects. Such projects would facilitate supply chain trade among firms by establishing-facilitating arrangements such as guaranteed off-take agreements backed up by loan guarantees as well as other arrangements that are currently not available to most firms.
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ANNEX 6: GUATEMALA’S FRUIT AND VEGETABLE SECTOR
GUATEMALA’S AGRICULTURAL SECTOR
Guatemala’s gross agricultural production in 2008 was valued at about $3.9 billion. Agriculture and livestock contribute 10.7 percent120 to the country’s GDP and employ 1.5 million people (40 percent of the active population)121. The main agricultural crops are sugar cane, bananas, coffee, meat, maize and fruit and vegetables. Agricultural production grew at an annual rate of 3.3 percent over the last 10 years Guatemala agriculture is an average performer in Central America (CA).122
Structure of Production. Guatemala has a dual agricultural production structure. Sugar, bananas and some other related fruits are produced on large estates many of them directly connected to US based companies such as Del Monte. Coffee, cardamom and fruits and vegetables are mainly produced by agricultural Small and Medium-sized Enterprises (SME) and smallholders.
AGRICULTURAL EXPORTS: A STRONG RECORD
Guatemala’s main exports (value-wise) are coffee, sugar, bananas, cardamom, melons (cantaloupe), rubber, food preparations, palm oil, broccoli, green peas, plantain and fruit juices (see Table 49). Guatemala is the second largest sugar exporter of Latin America. Guatemala is also the world’s fifth largest banana exporter and the world’s largest exporter of cardamom, plantain and green pod peas.
Table 49: Guatemala’s Main Agricultural Exports (2007)
Value International $
Volume Metric Tons
Coffee 577,557,000 230,621 Sugar 358,125,000 1,295,088 Bananas 300,484,000 1,408,804 Cardamom 137,208,000 27,956 Melons, cantaloupe 124,015,000 344,110 Rubber (natural dry) 96,356,000 45,474 Food preparations 89,184,000 55,805 Palm oil 83,087,000 110,186 Broccoli 39,328,000 62,356 Green Peas 35,655,000 27,171 Total Main Exports 1,885,007,000 3,759,388
Source: FAOSTAT
Guatemala has positioned itself as a market leader in the export of differentiated coffee. Total coffee exports however have remained more or less stable between 200 to 230 thousand metric
120 Source BANGUAT. http://www.banguat.gob.gt/cuentasnac/pib2001/3.2_%20PIB_por_AE_corriente.pdf 121 Source MAGA based on the 2002 Population Census, INE http://portal.maga.gob.gt/portal/page/portal/uc_upie/documentos/1-datos_demograficos_guatemala_1.pdf 122 Source: own calculations based on FAOSTAT data of Central American Countries.
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tons per year. ANACAFE (a coffee producer and marketing organization) focuses on the high quality and the variety of its coffees financed by a one percent levy on coffee exports.
Guatemala has also made remarkable progress in the export of fruit and vegetables (FV). FV exports have grown at an annual rate of 15 percent since 1998. Melons, pineapple and plantains are mainly responsible for this growth and are produced by the large agro-industrial sector. The US accounts for 75% of Guatemala’s FFV export volume and 87 percent of the export value 123. El Salvador is the second export destination (18.4% of export volume). The EU is less significant for total Guatemala exports (2.3% of volume). 124
CHANGES IN THE MARKETING OF FRESH FRUIT AND VEGETABLES
Fast Growth of Local Supermarkets
The supermarket share of food retail in Guatemala rose from 15 percent in 1994 to 24 percent in 2003 and keeps on rising125. This growth is the result of local, regional and foreign direct investment. Wal-Mart, a US supermarket giant has purchased a majority stake in CA’s largest retailer and operates 145 stores in Guatemala (Supertiendas Paíz, Hiper Paíz, Despensa Familiar, Club Co and Maxi Bodega126).
The implications of this rapid rise in supermarkets for the Guatemala Fresh Fruit and Vegetable (FFV) supply chain have been: (i) an organizational change in the procurement system of supermarkets -- centralization, a shift from sourcing from wholesale markets to sourcing from specialized wholesalers, the creation of Distribution Centers procuring directly from producers and rise of the use of preferred (mainly larger) suppliers; and (ii) the introduction of quality standards (sanitary and phytosanitary standards (SPS) as well as food safety and private quality standards) imposed upon supermarket suppliers.
Changes in the Export Markets: Steadily Growing Sanitary and Phytosanitary (SPS), Food Safety and Private Standards
Supermarkets also dominate more than 80 percent of the sale of conventional (non-organic) fruit and vegetables127 in Guatemala’s main export markets. Their standards impact the way Guatemala exports FFV. Guatemalan producers and exporters are confronted with an ever increasing number of standards to comply with. These standards relate to the product itself, are of a sanitary and phytosanitary nature, relate to food safety, or are industry standards (Globalgap) or private standards128. .
123 Calculations on the basis of BANGUAT data (2008) 124 Source: EUROSTAT(istics) – http://nui.epp.eurostat.ec.europa.eu 125 Berdegué, J., Balsevich, F., Flores L., and Reardon, T., The Rise of Supermarkets in Central America: Implications for Private Standards for Quality and Safety of FFV, USAID-RAISE, SPS Project, 2003 126 http://walmart-centroamerica.com/nuestras_tiendas_guatemala.htm 127 Integrating Micro and Small Enterprises into Value Chains, Evidence from Guatemala Horticulture and Handicrafts, microREPORT #78, Louis Berger Group, Inc. and ACDI/VOCA prepared for USAID, March 2007 128 Lamb, J., Velez j., and Barclay, R., The Challenge of Compliance with SPS and Other Standards Associated with the Export of Shrimp and Selected Fresh Produce Items to the US Market, World Bank, ARD Working Paper, 2005
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Guatemala’s diversity of export markets leads to a dual SPS compliance system, includ ing Third Party Certification (TPC) requirements ranging from the FDA food safety guidelines and the Environmental Protection Agency (EPA) pesticide residue limits for the US to private supermarket consortia standards in the EU (the Euro-Retailer Produce Working Group Good Agricultural Practices -- GlobalGAP). GlobalGAP standards require certification of each individual farm129.
Moreover, additional traceability requirements for food safety assurance are now being applied in most cases. Some ethical standards referring to child labor and labor payment and health/safety requirements that need to be certified are also emerging, 130 with certification difficulties proportionately much higher for small-scale producers who need family labor.
Food safety compliance is voluntary in Guatemala and in most cases exporters perform self audits or are visited by their buyers to verify compliance with the minimum safety requirements.
Guatemala’s Performance Complying with SPS Standards
Over the last 20 years Guatemalan exporters have made important efforts to adjust to the required SPS standards. Nevertheless, the country has lost some of its good reputation for lack of SPS adherence. In this context there are two main cases (peas and raspberries)131.
Snowpeas. The main SPS issues confronting this supply chain are pesticide residues on the snow peas exceeding the maximum residue limits (MRL) imposed by the US FDA and EPA. In the late 1980’s, 27 percent of the total shipments sampled from Guatemala were detained at the US borders, mainly for reasons of excess pesticide residue and missing information132.
GOG and the private sector created a public-private institution PIPAA (Integral Program for Agricultural and Environmental Protection) to address the snow pea pesticide residue problems. PIPAA undertook a training and inspection and certification program of Good Agricultural Practices (GAP) and Good Processing Practices (GPP) and initiated third party certification (TPC). Moreover, private accredited control and certification bodies were established (David Fresh and Primus Labs focusing on US controls; Latu Laboratories focus on EU certification).
The above measures and have not completely eliminated the problem. In 2007 Guatemala had still a 13.2% pesticide sampling violation rate133 because the snow pea supply chain remains split between an integrated channel (farmers linked to particular exporters – 40% of the market) and independent farmers selling to intermediaries (60 percent of the supply chain).
129 Such certification implies the construction of outhouse toilets and washing facilities in the fields, the fencing of the fields against intruding animals and registration of all handling of chemicals and sanitary procedures. 130 http://dev.ethicaltrade.org/resources/key-eti-resources/eti-base-code 131 Hart, M. and Reisman, S.: Economic Development, Food Safety, and Sustainable Export Market Access: the Case of Snow Peas from Guatemala, Centre for Trade Policy and Law, Ottawa, March 2003 and Henson S. and Blandon J., The Impact of Food Safety Standards on an Export-Oriented Supply Chain: the Case of the Horticultural Sector in Guatemala, International Food Economy Research Group, Department of Food, Agricultural and Resource Economics, University of Guelph, October 2007 132 Thrupp, L.A. Bittersweet Harvests for Global Supermarkets: Challenges in Latin America’s Export Boom, World Resources Institute, 1995 133 Source: FDA Pesticide Monitoring Program FY2007
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Raspberries. In the 1990’s the Guatemalan raspberry industry was full of promise and growing fast (3,220 tons - $3.9 million of exports in 1997) slowly starting to compete with Mexican exports. Over the period 1996-1998 raspberries imported from Guatemala were associated (rightly or wrongly) with outbreaks of Cyclospora in the US and Canada and resulting in more than 1,000 people falling ill and in the demise of the raspberry export industry. Once the reputational damage was done, Guatemalan exporters and the Government implemented a food safety program called “Model Plan of Excellence” which included a wide range of requirements such as HACCP, GPP, GMP, water quality control and record keeping. The measures were however too costly for the raspberry industry.
PIPAA. At present, Guatemala’s main instrument to comply with SPS and Certification standards remains PIPAA. Since its founding in 1991, PIPAA’s main technical mentor has been the FDA. To avoid conflict of interest, PIPAA has moved from the public-private sector to the public sector under MAGA. It is, however, underfunded and understaffed: as it now fully depends on public funding and some certification and laboratory fees.
The main SPS compliance activities, however, happen in the production areas where exporters are working with specific farmer groups and associations introducing safety standards, controlling the use of chemicals and helping farmers to obtain GAP and GPP certification.
COMPETITIVENESS OF GUATEMALA’S FFV SECTOR
At the Farm Level
The small size of the farms134 puts strong limits on economies of scale. Although some SME reach high yields because of labor-intensive production, these gains dissipate rapidly in the additional costs of atomized produce collection, packing and distribution, the higher the cost of certification and GAP training and more difficult access to technological innovation.
The profitability and poverty impact of FFV supply chains on small holders can be significantly positive in the short term. The longer term sustainability of increased incomes is however questioned. Some studies indicate that most fresh vegetable production generates important margins only when family labor is valued below the labor market rate135. Many smallholders adopting new cash crops do abandon those crops after a certain time136. Some of the reasons are: reduced profitability, soil exhaustion, risk aversion for oscillating prices and crop pest and disease issues. These smallholders are being replaced with new adopters living further away, increasing the dispersion of production and transaction costs which reduces overall profitability.
134 This study does not cover the agricultural estate sector. 135 See for instance costs calculations in Monterroso, A., de Romemont, A., de León, O., Grajeda, F., Proyecto Regoverning Markets, Experiencia de los pequeños productores y su inserción en mercados competitivo s: OPCION/Aj Ticonel, un estudio de caso, Junio-julio 2006; Broccoli and Desire, Op. Cit., Lundy, M., op.cit. ; Carleto et al, op.cit. 136 Carleto, C., Kirk. A., Winters, P., and Davis, P.,: Non-Traditional Exports, Traditional Constraints: the Adoption and Diffusion of Cash Crops among Smallholders in Guatemala, ESA Working Paper 07-3, FAO, 2007
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Guatemala’s Competitiveness in the US Market
For the US, Guatemala is a small supplier. It fetches lower prices than other main suppliers. While the US imports of the main vegetable (broccoli and pea pods) are stagnating.
Guatemala provides about one percent of the total of fresh fruit and vegetables (bananas not included). US imports of fresh fruit come predominantly from Mexico (38 percent), Canada (19 percent) and Peru followed by China, Costa Rica, the Netherlands and Guatemala. Mexico accounts for 64 percent of the vegetable imports while Canada 23 percent. The other parts came in varying percentages from mostly Latin American countries. Because of the proximity and ease of access, Latin America may keep a comparative advantage over Asian competitors in the fresh product markets. Competition from non-Latin American countries is however increasing in the frozen, dried and processed fruit and vegetable sector.
Prices and Market Share. The overall market performance of Guatemala’s FFV is demonstrated below. The volume of Guatemala’s non banana fresh fruit exports (table 2) to the US have stagnated somewhat since 2000 compared to other exporters but their value increased by an annual 10 percent. Vegetables have performed better. Since 2000 US fresh vegetable imports from Guatemala have increased by an annual 10 percent and the value by an annual 20 percent; Guatemala has performed better than the average importer into the US. One of the reasons is DR CAFTA which has opened the US market for Guatemala products at certain profitable times of the year. While Guatemala’s vegetable exports are also increasingly diverse.
Guatemala fetches lower prices for its key export products (pea pods and broccoli) in the US market than its main competitors (Table 3). For instance for fresh pod peas, the custom declared value is on average only 44 percent of the prices Mexican and Peruvian exporters declare (Table 50). For frozen broccoli, the price differences are 22 percent . Moreover the bulk of Mexico’s broccoli exports are fresh or chilled which fetches an additional $0.5 per kg on the US market. Guatemala’s broccoli is more than 90 percent frozen produce As far as green beans are concerned, the average price is also 22 percent below Mexico’s but the prices for 2008 seem to be significantly higher.
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Table 50: US Fresh Fruit and Vegetable Imports FRUIT 2000 2007 Annual Growth rate
From Value
($’000) Volume
(MT) Value
($’000) Volume
(MT Value Volume
Mexico 577,995 1,019,496 1,627,415 1,704,556 16% 8% Peru 152,054 420,976 423,262 713,700 16% 8% China 71,468 88,105 137,186 98,456 10% 2% Costa Rica 105,287 93,670 136,013 101,895 4% 1% Guatemala 49,639 61,154 98,783 63,218 10% 0% World 1,922,660 2,944,987 4,251,543 4,570,782 12% 6.00% VEGETABLES Value Volume Value Volume Value Volume Mexico 1,405,963 1,864,426.80 2,800,221 2,881,095.20 10.00% 6.00% Canada 412,793 705,840.70 830,310 1,018,737.50 11.00% 7.00% Peru 50,056 51,149.30 193,107 140,080.70 21.00% 16.00% China 9,318 6,209.40 120,922 93,907.50 44.00% 47.00% Costa Rica 38,682 81,862.30 59,518 118,229.60 6.00% 5.00% Guatemala 8,809 17,545.00 31,146 33,718.40 20.00% 10.00% World 2,156,909 2,903,460.80 4,282,158 4,507,824.10 10.00% 7.00%
Source: USDA / GATS - http://www.fas.usda.gov/gats Product Group : BICO-HS10 fresh or chilled which fetches an additional $0.5 per kg on the US market. Guatem ala’s broccoli is more than 90 percent frozen produce. As far as green beans are concerned, the average price is also 22 percent below Mexico’s but the prices for 2008 seem to be significantly higher.
Table 51: Average Import Prices of Selected Fresh Produce into the US Pea Pods (Snow peas included)
2004 ($/kg)
2005 ($/kg)
2006 ($/kg)
2007 ($/kg)
2008 ($/kg)
Weighted Average ($/kg)
Guatemala 0.50 0.81 0.82 0.87 1.01 0.80 Mexico 1.89 1.83 1.75 1.77 1.74 1.79 Peru 1.63 1.70 1.92 1.84 1.90 1.80 Broccoli Guatemala 0.64 0.65 0.69 0.74 0.79 0.71 Mexico 0.75 0.76 0.81 1.17 1.08 0.91 Green Beans Guatemala 1.41 1.31 .82 1.18 1.60 1.28 Mexico 1.29 1.73 1.87 1.55 1.44 1.57
Source USDA http://www.fas.usda.gov/gats/ and own calculations
Because of the generalized absence of food safety and pesticide residue control in open markets, Guatemala has very little access to specialized wholesalers or supermarkets in the US. Many Guatemala exporters still have to sell to brokers and distributors who serve the smaller fruit and vegetable outlets. The prices those brokers pay are lower than those paid by the specialized wholesalers and the large supermarket chains. To gain access to high-end export markets, Guatemala needs to implement rigid food safety measures, not only for export produce but also for domestic produce where supply chains overlap.
Table 52 also shows that Guatemalan exports of two key products for agricultural SME and smallholders (snowpeas and broccoli) remain stagnant or decline, while those of the competitors
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are increasing. While overall volume of pea imports in the US also stagnate. Green beans exports however have taken off during recent years, with some important inroads of Guatemala exports into the US high-end markets (see below). This is partial evidence that producing, processing and exporting in isolated marketing channels may be a rewarding strategy.
Table 52: Import volumes of Selected Fresh Produce into the US In Metric Tons 2004 2005 2006 2007 2008
Pod Peas World 30,800 33,050 32,441 35,596 32.2
Guatemala 19,687 18,683 18,613 20,121 18,833
Mexico 4,613 4,388 5,635 6,444 7,687
Peru 2,947 5,749 3,736 4,758 4,668
Broccoli (frozen) Guatemala 33,887 22,296 21,180 28,834 35,193
Mexico 103,282 113,103 99,172 99,490 122,914
Green Beans Guatemala 418 1,679 4,412 6,634 8,041
Mexico 23,574 23,537 22,595 24,600 26,480
Source USDA http://www.fas.usda.gov/gats/ and own calculations
GROWING COMPETITION: ORGANIC FOODS137
Consumption of organic foods in the US has increased from $3.6 billion in 1997 to $21.1 billion in 2008 or at an annual rate of about 20%. Sales of organic fruit and vegetables have increased by an annual 15 percent over the same period. Some 14 percent of organic produce was imported. Hence there are possibilities for Guatemalan producers to complement US domestic supplies. Important is the emergence in the US of the organic marketing handler who moves nearly all organic produce from farmers to the retailers. The handlers apply strict procedures to ensure that the “organic” characteristics of the produce are not lost during handling and processing.
Implications of this market phenomenon for Guatemalan producers.
(i) There are opportunities in the US market for Guatemala organic produce; the size of the market will probably keep on growing more rapidly than the conventional produce market.
(ii) Agricultural SME are better equipped than smallholders for organic farming as they may have a minimum land area or greenhouse space to protect the organic production from neighboring conventional crops as well as the technology and the volume to ensure quality control in the organic chain.
(iii) Financing (credit, grants) is needed in many cases to make the transition (3 to 5 years) from conventional to organic farming and for certification costs.
137 Dimitri, C., and Oberholtzer, L., Marketing U.S. Organic Foods, recent trends from Farms to Consumers, ERS-USDA, September 2009
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FAIRTRADE IN FFV MAY DEVELOP OVER TIME
Fairtrade is an organized social movement and market-based approach that aims to help producers in developing countries and promote sustainability. The movement advocates the payment of a higher price to producers as well as social and environmental standards in areas related to the production of a wide variety of goods. It focuses in particular on exports from developing countries: handicrafts, coffee, cocoa, sugar, tea, bananas, honey, cotton, wine, fresh fruit, chocolate and flowers.
Fairtrade products are traded and marketed either by (i) an "integrated supply chain" whereby products are imported and/or distributed by alternative trading organizations or by (ii) "product certification" whereby products complying with fairtrade specifications are certified. Fairtrade certification guarantees also the principles of ethical purchasing. The Fairtrade certification system promotes long-term business relationships between buyers and sellers, crop pre-financing, and greater transparency throughout the supply chain and more.
The sales of Fairtrade certified products have been growing on an average of almost 40% per year in the last five years. Fairtrade products generally account for 1-20% of all sales in their product categories in Europe and North America. In June 2008, over 7.5 million producers and their families were benefiting from fairtrade funded infrastructure, technical assistance and development projects138.
Fairtrade could also expand in the FFV sector. It is a matter of identifying the right marketing strategy and instrument. As many export vegetables (peas, broccoli and green beans) are produced by poor smallholders, the arguments for fairtrade could be developed. Moreover, there are precedents: in the 70s, OXFAM sponsored fairtrade shops in Europe sold “Nicas”, bananas from Nicaragua.
SUPPLY / VALUE CHAIN ANALYSIS
General Presentation of the FFV Supply Chain
The general value chain map for Fresh Fruit and Vegetables is presented in Figure 68. The main market channels for the bulk of the FFV for domestic consumption are: the producers – intermediaries – wholesalers and the public markets/retailers. Selected quality produce, however, goes from individual producers and associations through distributors to supermarkets, restaurant chains, hotels and institutions. A limited quantity of produce is channeled directly from producer to supermarkets but this channel is growing rapidly.
138 Fair Trade Organizations Labeling International – Fairtrade leading the Way - Annual Report 2008-2009
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Figure 68: Guatemalan FFV Supply Chain Map
The high-value produce for export goes through two different channels. Produce for the US and the EU market is channeled through wholesale intermediaries and/or exporters to brokers and distributors. Brokers and distributors receive produce on consignment until sold to retailers or wholesalers. For export to CA, the produce is channeled through wholesale markets or via direct purchases from producers.
According to a survey of 388 producers carried out in 2006139 slightly more than half of the smallholders receive their largest sales revenue from sales to intermediaries or buyers representatives and only half of smallholders know into which market these buyers re -sell, showing little knowledge of the downstream marketing channels. Only one percent of the smallholders receive their largest sales revenue from supermarkets. Lack of smallholder participation in this market supports the claim that supermarket procurement systems and standards favour medium and large enterprises.
Green (French) Beans (string beans)140
Guatemala exported some 7,000 tons of green beans in 2007 most of which are exported to the US and some to COSTCO (a bulk purchasing club) in particular. The main elements in the 139 Integrating Micro and Small Enterprises into Value Chains, Louis Berger Group, Inc., and ACDI/VOCA, microREPORT #78, USAID, March 2007 140 The source is: Lundy M., Assessing Smallholder Participation in the French Bean Supply Chain in Guatemala - Juan Francisco Project – International Center for Tropical Agriculture, CIAT, Colombia – 2007
NNaatt iioonnaall aanndd CCeennttrraall--AAmmeerriiccaann MMaarrkkeettss US and EU markets
Retail Public Markets & Retailers
Supermarkets, Restaurant Chains, Hotels, Institutions
Wholesale Distributors Wholesale Markets
Exporters
US/EU Distributors and Brokers
Production Individual Producers - Associations – Cooperatives
Intermediaries
Inputs Seed, Chemicals, Fertilizer, etc.
Credit Labor
Transport
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French bean supply chain herein described are the following: producers (mainly smallholders), the Cooperative Cuatro Pinos (CP), the Los Angeles Salad Company and COSTCO.
The producers: the production network linked to CP includes some 2,000 farmer families cultivating areas of about 0.20 ha or less. Producers link to CP as members of farmer associations, through informal networks organized and managed by a lead farmer and exceptionally as individual farmers. Lead farmers are producers serving as contact point between CP and a network of neighboring farmers. Lead farmers link other producers to CP by channeling information, input credit, technical assistance and payment to farmers.
Cuatro Pinos is the central coordination point between the supply from farmer organizations and lead farmers and the market (LA Salad and Costco). CP manages the volumes through production quotas among farmer associations and lead farmers via contracts, input credit, technical assistance, product purchase, selection and quality control, export and payment. CP promotes GAP, controls quality and does the grading, packing and cooling, controls food safety, tests for pesticide residues and exports.
LA Salad operates as an intermediary supplying COSTCO. It communicates to CP COSTCO’s needs in terms of quality, volume, price and product presentation. It provides CP with packing materials and ensures quality compliance in Guatemala via training and technical support. Costco does the final distribution to its sales points and to the US costumer. It pays LA Salad and provides information on market trends and the required supply schedules from Guatemala. Costco visits Guatemala once or twice per year to ensure food quality and safety.
Table 53: Income Distribution along the French Bean Chain Cuatro Pinos –Costco (2005-2006)
Costs Traditional Farmer
Improved technology
Income Distribution
Saleable production kg/ha per season
8,235 kg 9,060 kg
Production cost per kg (including family labor)
$0.51/kg $0.48/kg
Sales price to Cuatro Pinos $0.80/kg $0.80/kg 24% of the final sales price Farmer Gross Margin per ha $2,388/ha $2,900/ha Cuatro Pinos costs include transport from field, administration expenses and services provided to members and non-members.
22% of the final sales price
LA Salad gross margin 11% of the final sales price Costco gross margin 9% of the final sales price Diverse costs: includes packing, shipping, product degradation and loss at the retail end of the chain.
35% of the final sales price
Tomatoes: a popular fruit (vegetable) with an emerging export market
Guatemala’s tomato production has grown since 2004 at an annual rate of 16 percent (365,000 tons in 2008) . Exports are minimal (20-30,000 tons mainly to El Salvador) and prices are relatively low (about 50 US cents per kg wholesale) . The main variety of tomato is the plum tomato (tomate de cocina). The market is subject to yearly gluts in particular in the period from January to March and in August-September with market prices that can be as low as 50 percent of the average price.
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The main production zones in Guatemala are in the Departments of Jutiapa (20%), Baja Verapaz (17%) and Chiquimula (9%). Tomatoes are produced in open fields without irrigation (low technology level), in open fields under drip irrigation or plastic (casa maya, macro tunnels) (intermediate technology) and in greenhouses (in earth or hydroponic - high technology).
The production and marketing costs of tomatoes in intermediate production technology are presented in figure 2. Total farm gate costs per kg at a productivity of 30.2 tons per manzana (0.71 ha) amount to Q2.05 while total costs delivered to the wholesale market amount to Q3.07 per kg. The average wholesale price during the last years has been Q4.08, which allows a negotiable margin to producers and wholesalers when prices are average. In periods of gluts, with prices at 2-3 Q per kg, there is little of no margin. In practice producers do not always value family labor at the labor market rate of Q50 per day, so for producers who work mainly with family labor operational costs are less. The main production costs are agricultural inputs which amount to about 50 percent of the farm gate costs. The transport and packing costs amount to about 25 percent of the total costs. The remaining is margin negotiated between producer and wholesaler.
FASAGUA. The Federation of Agricultural Associations of Guatemala is the federation of producers of several agricultural products but in particular tomatoes, bell peppers, onions and cucumber. It was created after hurricane Mitch and has now 12 producer associations as its main members as well as input suppliers and some representatives of commercial groups (casas comerciales). The main mission of FASAGUA is to promote, consolidate and maintain the associations that are part of the federation through technical assistance, to increase productivity, develop their negotiation capacity while conserving the environment.
FASAGUA tries to establish a real value chain. It has been able to establish a planting program (seasonality and quantities per region) so as to avoid market gluts and to reduce the presence of the tropical whitefly (Bemisia Tabaci) and the consequent use of pesticides. This program has been successful for a few years and some price stabilization has taken place but in 2008-2009 other zones (in particular Salama) have come into production and the markets have again collapsed. FASAGUA’s experience, though, shows that collaboration between producers can stabilize market prices at least for a certain period. FASAGUA has been able to book some success in the control of the tropical whitefly in the valleys of Esquipulas and El Amatillo.
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In recent years, important investments have taken place in the production of green house tomatoes (and bell peppers) for export to the US. This production was launched through diversification efforts of coffee producing SME (after the coffee crisis in 2000), promoted by importers of greenhouse and hydroponic equipment and financed by bank credit supported by Guate-Invierte. Del Monte, a US based fruit company, buys and packs all the (vine ripe) tomato and bell pepper production in Santa Rosa for export to the US under its own brand name.
As is apparent from figure 3, the financial rewards per kg of greenhouse tomato production are higher than field tomatoes. The market risks are lower (stable market) but production risks are higher. The cost of the greenhouse (depreciation and financial costs) amounts to almost half of the production cost per kg. Inputs are another 40%. These greenhouses are sophisticated farm enterprises with complex irrigation systems (often hydroponic) which are more suitable for medium sized farmers with capital back-up than for smallholders. Although there are small farmers who have borrowed heavily to invest in greenhouse production (3-4000 m2) with the support of Guate-Invierte.
The greenhouse movement (22 enterprises producing for export) has been supported by ANAPI (National Association of Greenhouse Producers) which has dynamic entrepreneur -type leaders supporting small dynamic producers. ANAPI is very well organized as a value (sub) chain for tomatoes and bell peppers. It carries out field trial research and provides mutual technical assistance to members.
BUSINESS STRATEGIES DEALING WITH MARKET CHANGES
The requirements for quality, quantity, consistency, sanitary and health requirements, and traceability come with a large threshold investment and a fixed cost element that favors agricultural SME and smallholders with assets and capacities to access the necessary finance, information, and technology. Those investments are a condition for access to the markets, do not necessarily result in higher prices and tend to exclude smaller, less well capitalized producers.
Guatemalan SME have shown significant entrepreneurial drive to adapt and to invest in production and marketing through the construction of greenhouses, irrigation, and the acquisition of post harvest processing equipment. Moreover, most SME carry out their own agricultural
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research, sometimes in co-operation with international institutions or other SME in Central America.
There are significant efforts to upgrade quality. Many exporters are creating closed and integrated channels of production, processing and export: supervising the quality of the production at farm level, providing technical assistance and extension services to farmers, providing buyer credit for internationally accepted chemicals, making exclusive arrangements to certify producers in Good Agricultural Practices (GAP), and generating the required volumes for the high-end export markets. This has been successful in some particular value chains, such as green beans or peas for the UK market.
The sector also makes great efforts to diversify production away from the main non-traditional export commodities broccoli and peas, by introducing a variety of fruits and vegetables (papaya, avocado, peaches, mango, oriental vegetables) and producing under sophisticated greenhouse conditions (sweet pepper and tomatoes).
Guatemalan smallholders have adjusted in several ways:
(1) by creating and strengthening farmer organizations and associations. There are hundreds of farmer based cooperatives and non-profit civil associations in Guatemala. In the FFV sector, one of the largest and oldest co-operatives is Cuatro Pinos in Sacatepéquez (www.cooperativacuatropinos.com);
(2) through an increase in contract farming. In Chimaltenango the cold industry contracts smallholders and SME per season to produce broccoli, okra, Brussels sprouts and other produce on the basis of estimated demand in export markets; and
(3) exporters have strengthened ties with certain producer associations producing quality products for a specific market. For instance the Food Chain Partnership Project in Guatemala sponsored by Bayer Crop Sciences, Gmbh, Germany, trains farmers working on San Juan Agroexport’s own farms in GAP, residue management and import tolerances, safe use of crop protection products, and good processing practices required for GLOBALGAP certification141.
Supermarkets and exporters partner with NGOs and external financiers (including the World Bank) in an effort to improve market linkages with SME and smallholders in the supply chains. There are numerous privately funded programs assisting FFV producers to better connect to the market. The most important business driven initiatives are: (i) the Alliance Wal-Mart – Mercy Corps – USAID and AGIL (see Box) linking small producers to the Wal-Mart Group; (ii) Helvetas (Swiss NGO) connecting small producers to specific exporters financing the certification of producers forthe European markets; (iii) the AGEXPORT rural development program (encadenamientos empresariales) promoting linkages between farmer associations and agro-exporters; (iv) the Cuatro Pinos Cooperative linking farmers to Costco (US); (v) Rainforest Alliance142 promoting environmentally sustainable shade coffee ; (vi) Starbucks promoting C.A.F.E. ethical practices with selected farmers associations; (vii) CEMUSDA (Municipal 141 Source: Field Visit and Food Chain Partnerships, San Juan Agroexport, http://www.foodchainpartnership.bayercropscience.com/; http://www.sjagroexport.net/nuevo2009/ 142 http://www.rainforest-alliance.org/work.cfm?id=mesoamerica
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Center for Agro-Industrial Development) active in the fruit and vegetable sector; and (viii) Aj Ticonel another home grown co-operative exporting directly to the US and European markets.
As there are high transaction costs with purchasing from large numbers of fragmented small -scale farmers and small enterprises, most programs try to organize farmers into associations providing credit and technical assistance in production and marketing, adapting quality control and organizing the collection. They also help to improve food safety in the m arketing chain as well as traceability. There remain issues for foreign private standards that extend to labor 143 (child labor and payment requirements) with certification difficulties proportionately much higher for small-scale producers who need family labor.
PUBLIC SECTOR STRATEGIES
The Government has a role to play in the promotion of agricultural production by SME and smallholders. Public policies favoring inclusion of SME and small-scale producers can at the same time be pro-poor and pro-market144. The Government can: (i) create an enabling environment; (ii) support producer organizations; (iii) promote linkages between farmers and the commercial private sector; and (iv) bring supply chain actors together to form value chains.
CREATING AN ENABLING ENVIRONMENT.
The enabling environment in the FFV sector consists of (i) infrastructure145; (ii) support services (research and extension); (iii) SPS and Food Safety Control; and (iv) rural finance.
Agricultural Research. A key pillar of the enabling environment is the provision of and access to relevant support services in the supply chains, and the existence of complementary targeted public investments such as agricultural research. In Guatemala, public agricultural research is minimal. The funding commitment for the national agricultural research system in 2006 was only 0.06 percent of the agricultural GDP (one of the lowest in the world)146 – compared to Mexico (1.27%) and Sub-Saharan Africa (0.72%). Most of the research takes place in larger farms and SME that have the financial capacity to support it. The private sector supports most of the research related to FFV. The public sector could support private research through vouchers (subsidies).
Agricultural extension services are also lacking. The private sector and NGO set up specific extension and technical assistance services for each particular project/product /farmer association in the supply zones147. As a result, the Government finances these services indirectly through the opportunity costs of bilateral grants and loans148 while, in addition, the private sector is also financing similar custom-based services for many associations individually. The costs of all
143 http://dev.ethicaltrade.org/resources/key-eti-resources/eti-base-code 144 Inclusive Business in Agrifood Markets, Evidence and Action, Beijing, March 2008 145 Covered under another section of this document. 146 Agricultural Research and Development in Central America, ASTI, IFPRI, IICA, November 2008 147 It has not been possible to compare the costs and benefits of such “custom based” extension services country-wide with the possible costs and benefits of some wider based public general extension services, if they would be considered. Some NGO claim to spend $60,000 in technical assistance per supported producer association. 148 One of those projects “The Project to Support the Rural Economic Development Program” is financed by the World Bank.
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those association-related extension services country-wide must add up to an important amount. As long as the public sector does not provide basic general extension services, the custom -based approach will continue. For an strong international example of agricultural research/extension services, see Brazil’s Embrapa/Emater system.
SPS and Food Safety Control. The role of the Government in SPS and Food Safety Control (through PIPAA) has been described in paragraphs 14 and 17. PIPAA is structurally weak and underfunded. There is room for MAGA to strengthen PIPAA and to find a better way to fund its operations.
Imposing additional food safety controls in wholesale and open markets could increase the overall access of Guatemalan exporters to high end markets. There is a financial and political cost to introducing and enforcing food safety standards: food safety rules may encounter resistance from traders and producers. Moreover it may be necessary to install and operate laboratory equipment in key wholesale markets and undertake extensive public education. It can certainly be done (Mexico and Peru did achieve results) and the Guatemalans who shop produce from the public markets certainly deserve to eat healthy food. So do those living in Guatemala’s export markets.
Rural Finance. Financial services are crucial for agricultural SME to access dynamic markets, invest in new technology and sustain their participation. Rural producers have difficult access to credit from the Guatemalan formal financial sector. As a remedy, the Government set up in 2005 a trust fund of 150 million Qtz ($ 25 million) called GuateInvierte. This trust fund finances a guaranty program (combined with agricultural insurance and technical assistance) helping producers to obtain bank credit for agricultural (livestock and handicraft) investments. From January 2006 through September 2009 GuateInvierte/ Dacredito has supported 2,784 loans for a total of almost 300 million Qtz ($35 million) with guarantees for 215 million Qtz ($26 million) for more than 8,000 people. Since the new administration the program is now more focused on smallholders.
GuateInvierte is not the only Government Program providing financial assistance to producers. FONAGRO is a MAGA program ($2.5 million in 2009) providing financial assistance to producers investing in new technology. IDB finances a $8 million subcomponent of Project to Support the Rural Economic Development Program to provide credit. Moreover several bilateral donors provide financial assistance of microcredit programs supporting producers. There is a need for programs such as GuateInvierte and the Government could ensure some coordination of the credit rules149.
SUPPORTING PRODUCER GROUPS
Experience and research have shown the high importance of organizational assets – empowering farmers through effective and innovative farm associations and cooperatives – and policies that support group marketing and collective bargaining. Capacity building of farmer associations and
149 An interesting overview of the rural financial sector is presented in: Políticas Públicas y Servicios Financieros Rurales en Guatemala (IFAD, RUTA, SERFIRURAL).
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SME in business skills (marketing, accounting, business planning and organization) including negotiation and bargaining skills is of primordial importance150.
Organizational capacity building in Guatemala is now done on a custom basis. Most programs financed by donors and international NGOs linking farmers to markets include organizational capacity building. The basic philosophy of those programs is that farmer associations, once constituted and working properly will be able to add more value to their production, increase their bargaining power, obtain higher prices and may be able to export their own produce. Some exporters (including the Co-operative Cuatro Pinos) are also promoting an alternative model: the lead-farmer model (paragraph 0) by which a progressive agricultural SME produces and collects also from neighboring farmers to constitute sufficient volume for pick-up and delivery.
The success of the associations depends on several factors151. An important factor is trust. Horizontal relationships among producer group members in Guatemala are reputed to be problematic and characterized by fraudulent, opportunistic and rent-seeking behavior. Direct elections of the group leaders, maintaining written records and having a paid manager significantly increase the likelihood that group members trust their leaders and comply with the organizational and business rules. Moreover the greater the member’s knowledge of the market, the higher the trust in the leadership.
There is also a legal status issue which needs to be resolved. The Guatemalan law foresees the legal entity of a “non-profit civil association” and that of a “co-operative152 (also without profit objective)”. Non-profit associations cannot issue invoices and do not pay taxes. The statute of a “co-operative” is legally more complex but allows regular commercial activities. Hence, the creation of the legal status of a “producer association with profit objectives” would provide some transition for producer groups to become a “producer association with profit objectives” and to evolve further into a co-operative.
PROMOTING VERTICAL LINKAGES.
Public and private sectors promote farmer-market linkages in several ways. For exporters, dealing directly with producers is means to ensure compliance with SPS standards153. For SME and smallholders having a dedicated market and some steady relationship with a particular buyer can be very positive: technological advancement and higher incomes. For the public sector, the higher incomes of the sometimes poorest layers of society are an attractive policy goal. There are multiple ongoing farmer-market linkage promotion initiatives and more are under preparation. The WB and IDB financed “Project to Support the Rural Economic Development Program” is one of the several ongoing initiatives.
150 Inclusive Business in Agrifood Markets, Evidence and Action, Ibidem. 151 Integrating Micro and Small Enterprises into Value Chains, microREPORT #78, USAID 152 Ley General de Cooperativas, Decreto 82/78 del 7 de diciembre de 1978 http://www.aciamericas.coop 153 Integrating Micro and Small Enterprises into Value Chains, microREPORT #78, USAID
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BRINGING SUPPLY CHAIN ACTORS TOGETHER INTO VALUE CHAINS
There is, however, an important role for the public sector to enable successful alliances between smallholders, SMEs and larger business. A very under-explored public sector role is to link supply chain actors facilitating discussion and information exchange154. Dialogue and co-operation between actors in supply chains can convert “supply chains” into real “value chains”.
Enterprise relations: Production Chains / Supply Chains versus Value Chains Factors Production / Supply Chain Value Chain Information Flow Little or none Extensive Principal Focus Cost/price Value/Quality Strategy Basic product (commodity) Differentiated product Orientation Led by supply Led by demand Organizational Structure Independent actors Interdependent actors Philosophy Competitiveness of the enterprise Competitiveness of the chain
Most supply chains in Guatemala have a long way to go before being considered value-chains. A supply (or production) chain is the symbolic chain linking all participants in an economic activity from inputs to a final product and delivery to the final consumers. A value chain is understood as a vertical alliance or strategic network between a number of independent business organizations within a production chain155. A value chain is differentiated from a production chain as follows156:
The scarce factors for creating value chains are “trust”, “leadership” and “motivation”. In general there is a natural institutional distrust between different links in the supply chain: producers – intermediaries – exporters – Government because of conflicting interests. But there are also tendencies and reasons for the actors to pull together to such as searching for new export markets, reaching minimum production quantities, distributing production over time, improving quality and regulating markets (creating national norms and standards all actors have to adhere
154 Inclusive Business in Agrifood Markets, Evidence and Action, ibidem 155 Lundy M., Gottret M.V., Cifuentes W., Ostertag C.F., Best R., Ferris S., Peters D.: Design of Strategies to Increase the Competitiveness of Smallholder Chains, Field Manual, International Center for Tropical Agriculture, CIAT, Rural Enterprise Development Project, Cali, Colombia – 2004 156 Hobb, J., Cooney, A., Fulton, M., Value Chains in the Agrifood Sector: What are they? How do they work? Are they for me? Department of Agricultural Economics, University of Saskatchewan, Canada, 2003 available at: www.fao.org/docrep/009/a0011e/A0011E12.htm
The Ministry of Economy (PRONACOM) and FONAPAZ (Fondo Nacional para la Paz) promote the creation of vertical linkages between small farmers and exporters/ supermarkets/intermediaries under the Rural Economic Development Program financed by the WB and IDB. The program finances the establishment of formal linkages (agreements), farmer extension and training, SPS compliance technical assistance, GlobalGAP certification, strengthening of farmer associations, training in business and negotiation skills, marketing techniques, field investments in irrigation, investments in associative infrastructure such as cooling and packing hoses and legal and accounting services. MINECO contracts private institutions (such as NGO or development partner) to accompany each linkage until a viable business relationship is established or strengthened. FONAPAZ finances public and associative infrastructure while IDB also finances a credit program integrated into the scheme. The cost of the program is about US$40 million.
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to), and training and certifying SME and smallholders. The lack of trust has to be bridged slowly, within each supply chain separately, emphasizing what links the different actors together.
The projects now financed by foreign donors or through loans could start introducing this type of value chain discussions as a condition for producer technical assistance and support. For instance, the WB and IDB financed “Project to Support the Rural Economic Development Program” managed by PRONACOM (Ministry of Economy) could be an important instrument for achieving this type of value chain management, testing the waters with the organization of smaller sub-chains working with one agro-exporter and, later on, helping to organize larger value chains.
The business sector has much to gain from building cooperation with the public sector. The main voice of the business community is AGEXPORT, an association of mainly non-traditional products exporters. AGEXPORT is a well-run organization that caters for the interests of the exporters. Within MAGA there is Department in charge of supporting agricultural supply chains (Consejo de Producción Agricola -CONPRODA). Enhancing the dialogue between those institutional players , may provide much needed investment in the chain’s priorities.
AGEXPORT representing most exporters is the most natural leader within several value chains. It has formed product committees and shown it has the motivation to promote the non-traditional export sector and has the capacity to assemble producers, intermediaries, wholesalers and exporters around the same table stimulating dialogue and cohesion.
The Government can, for policy reasons, support smallholders and small SME in well established value chains financing technical assistance and training through projects, it can help with finance (such as in Guate Invierte), provide private research vouchers for important production and processing issues, introduce norms, SPS and other standards the value chain members agree upon and which need some Government regulation, finance the partial cost of producer certification (GobalGAP or Organic), co-finance the promotion of new products in new markets and help with the monitoring of agreements between parties within the value chains.
The fundamental question hampering strong public sector support to supply or value chains has however to do with the question of fairness in the distribution of value added amongst the different links in the chain. When the public sector subsidizes, for instance, the construction of a producer association packing shed in a remote area, who is the public sector really helping: (i) the producers who will now produce a higher quality product; or (ii) the exporters who will now be able to sell this higher quality product in higher-end markets? The answer is probably both, but on condition that higher market prices are reflected into the producer prices. There is a lingering doubt that public sector efforts to help poor smallholders and the value added which is created in the process could end up mainly with the downstream marketing agents.
To remove this doubt, the main actors in the value chain would have to work together to increase transparency and to introduce “value chain governance mechanisms” and monitoring. There is at present no transparency or information on the cost structure of the downstream marketing channels as exporters don’t have any reason to disclose such information. But if real value chains (interdependent agents, common vision, commitments) need to be developed, the discussion on how value added is distributed will have to take place within the value chain.
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AGEXPORT as natural value chain leader can provide producers and supporting NGO and the public sector with more transparency about value added and its distribution as well as the risks within each supply chain. This would certainly increase the level of comfort from public sector and NGO to support activities enhancing value chain management and investments that benefit all value chain actors.
This new type of value chain management may have very positive results. In many cases it would require professional independent facilitators applying group dynamics methodologies to establish common competitiveness goals and objectives, to develop a common vision of the value chain, to carry out participatory analysis of the strengths and weakness of the chain, to negotiate and design a participatory competitiveness strategy, to establish a value chain governance structure and an independent monitoring mechanism157.
157 For more details see: Lundy M., et.al. Design of Strategies to Increase the Competitiveness of Smallholder Chains, op.cit.
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ANNEX 7: TOURISM AND SMES
1. Introduction In a country where tourism grew 5% in 2008 and represented 6.8% of GDP and 5.9% of total employment, small and medium tourism enterprises (SMEs) are neither contributing enough, in spite of their potential, nor benefitting from this important sector. This annex examines a series of measures to help SMEs improve their products and services with the goal of increasing tourism in Guatemala while developing local economies and reducing poverty.
According to the WEF (2008), tourism is one of the major sectors that could accelerate broad-based economic growth and poverty reduction in the world. New tourism trends include interactive experiences with nature and living cultures. According to TIES (The International Ecotourism Society) surveys, 3/4 of tourists say their travel should not damage the environment, the majority say they want to learn about traditions, geography, culture, and at least 1/3 say they are willing to pay more to companies that benefit local communities and conservation. This new tourism trend means that SMEs can play a key role in the provision of services to tourists. They constitute the “life blood of the travel and tourism industry worldwide” and strongly influence the development of a region (Erkkila, 2004, p.23). For them to individually improve the quality of their products and services is very difficult and expensive. It has been proven in other tourist destinations that collaboration among SMEs is needed to achieve competitiveness and economies of scale.
In this annex, clustering or integration of local services and suppliers is used as a conceptual framework to help SMEs develop the opportunity to be competitive and sustainable locally and internationally. Clusters are understood as the complementary integration of different stakeholders that are directly or indirectly related to tourism services, e.g. transportation services, hotels, restaurants, tour guides, suppliers, tourism activities, local tour operators, etc . According to Greffe (1994), “strongly interdependent SME tourism network structure tend to exist only within a destination based on complementary products, e.g., activities, accommodation, transport and food, whereby clients are referred from one organization to another to provide a comprehensive tourist experience”.
2. Background
Guatemala is a country rich in nature and living cultures. It offers a range of attractions, including beautiful lakes, beaches, volcanoes, and an impressive archaeological heritage. Tourism has high growth potential and is already the second source of foreign income after remittances (Table 54). Tourism represents approximately 18% of total foreign exchange earnings to the country.
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Table 54: Foreign Exchange Earnings Activity 2007 (US$ thousands) Percentage 2008 (US$ thousands) Percentage
Remittances 4,128 56% 4,315 61.5% Tourism 1,199 17% 1,276 17.8% Coffee 577 8.4% 646 8.3% Sugar 358 5.2% 378 5.5% Bananas 299 4.3% 337 4.5%
Source: INGUAT and BANGUAT
In 2009, the number of tourists and tourism revenue in Guatemala fell (Figure 69 and Figure 70). According to the Asociacion de Investigacion y Estudios Sociales (ASIES) statistics, insecurity is affecting tourism in Guatemala almost as much the global economic crisis (Figure 71). The economic crisis is improving and beyond the scope of a tourism strategy, however, insecurity remains a critical issue.
Figure 69: Tourists (in millions of tourists) Figure 70: Tourism foreign exchange earnings
Source: BANGUAT
Source: BANGUAT
Figure 71: Bottlenecks affecting tourism in Guatemala
Source: ASIES
In recent years, several approaches have been used to try to develop and/or improve the tourism sector, including the creation of a national tourism cluster, tourism routes, marketing the country with different names such as “Alma de la Tierra”, “Corazón del Mundo Maya”, etc. Statistics
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show that these initiatives were partially successful and the number of visitors, foreign exchange earnings, and tourism-related jobs all increased. However, the number of tourists visiting Guatemala grew at a slower pace than in most other Central American countries (Figure 72).
Figure 72: Growth in Number of Tourist Visits in Central America (2008)
Source: INGUAT
The clustering initiative in Guatemala dates back to the 1999 INCAE/Harvard158 diagnostic, from which a number of policies were adopted. In 2006, the initiative focused on creating local clusters rather than a national one. This produced some positive results, but still had some shortcomings. According to stakeholder interviews, in most cases the cluster approach was top-down from external actors to the SMEs, without appropriate consultation and with pre-determined goals. There was a lack of empowerment and ownership of local stakeholders. In some regions, this caused disenchantment with the cluster initiative because no direct benefits were seen. In cases where SMEs were empowered and the process began with a needs and deficiencies assessment, not only of the SMEs but also of the entire community, the clusters had more success. One example is San Juan la Laguna in Sololá, where stakeholders felt that the project belonged to them because of their participation in the planning, design, implementation, and, most importantly, decision making process (Box 5).
158 INCAE and Harvard Institute for International Development (1999). Central America in the 21st Century: An Agenda for Competitiveness and Sustainable Development.
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Box 5: Case Study - San Juan la Laguna
3. Geographic Clustering or Integrated Community Tourism
Mass tourism has been promoted as a vehicle for growth in developing countries, but it often has had little impact on poverty reduction and inequality, as benefits have tended to disproportionally accrue to a limited number of large and/or international firms. On the other hand, more recent successful experiences in developing countries are showing that community tourism organized around geographic clusters can have a positive impact on SME growth and poverty reduction at the community level. At the same time tourists are more conscious and concerned about world poverty, and consequently, community or pro-poor tourism is becoming increasingly attractive to them.
Geographic clustering organizes individual local enterprises into a commonly defined strategic business plan, producing synergies and complementarities that reinforce everyone’s ability to attract and serve clients. Internal competition is translated into collaboration, specialization, and joint efforts for better services, improved quality, and the commitment to a shared branded tourism destination.
Clusters and networks are vital for regional development, increasing productivity, performance, innovative capacity, and local businesses’ critical mass. Collective action in the form of tourism clusters can help overcome the multiple challenges facing individual stakeholders working in isolation. Novelli, Schmitz and Spencer (2006) find that a cluster approach can be one of the best tools available in developing economic growth and tourism development. They find that cluster formation can foster SME innovative practices through co-operation and alliances and emphasize the importance of sustainable use of local resources. Clusters could become local platforms for the sharing of information, accumulation of collective knowledge, and cost sharing. These local platforms need to be linked to national and international knowledge-sharing and marketing mechanisms.
San Juan la Laguna was classified in 2001 as one of the poorest municipalities in the department of Solola, and it had very little tourist activity. The main occupation was agroforestry and handicrafts. For the first time, the municipality prioritized tourism in its 2001-2010 plan, and the creation of micro-enterprises was supported. In 2005 the community was strongly affected by tropical storm Stan, with great physical and material losses. The economic recovery plan of the area included joint efforts of community groups, the municipality, private sector, and national and international cooperation. They all worked around the concept of cultural and natural tourism. The community participated in the planning, designing and impleme ntation of the project. After training processes and consultation with the community to decide what destination image to use, the tourism development work began. Steps included attaining the Green Deal Certification, as well as marketing efforts. Results included:
� Heightened awareness and sensitivity of the concept of development through valuing the Maya Tz’utujil culture
� Increased community income � Strengthened capacity of community leaders. � Development of alternative work � Reduction in poverty rates
Source: Atitala Organization.
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To be successful, clusters of tourism-related SMEs should jointly set business targets and objectives and establish a system of shared responsibilities among members with clear rules of internal governance. Such a system can foster trust and predictability in delicate matters of leadership and succession.
In some regions of Guatemala, SMEs are no longer interested in participating in clusters because of unsatisfactory past experiences. Therefore it is important to differentiate new initiatives. One way is to simply change the name “cluster”, for instance to “integrated community tourism”.
Leadership
Leadership of an SME tourism cluster is critical to its ultimate success and sustainability. Finding the right leaders is not an easy task. Leaders won’t be immediately apparent, however as the project progresses they will begin to emerge. They need to be willing to invest time, energy and resources into developing and implementing the cluster. Key elements of cluster leadership include:
� Ultimate ownership and long-term leadership should remain in an empowered integrated community, even though the original initiative or support often comes from an external agent, e.g. multilateral organization, government, or NGO.
� Internal governance of the cluster should provide for periodic elections and rotation of leadership, avoiding the capture of the cluster by sub-groups of vested interests.
� Transparency and accountability should be ensured through clear rules of member participation and rights of information.
� Leadership responsibilities should be entrusted to members with proven ability after having been trained along with the community in the nature of the business model and cluster concept.
� Transferring leadership/responsibilities from the external agent to the community leaders should be planned since the beginning and done gradually. Much of the success of the project will depend on this transfer and the correct election of leadership.
4. INGUAT / Institutions
The Instituto Guatemalteco de Turismo (INGUAT) plays an important role in tourism development in Guatemala. It oversees tourism policies and is a key actor in future planning for the sector. INGUAT is funded through a 10% hotel tax, a percentage of airport departure taxes, and fines occasionally charged to hotels. According to stakeholder interviews, many consider INGUAT to be bureaucratic and out of touch with the needs of small and medium tourism ventures. A high number of SMEs are informal and are unsatisfied with INGUAT. They perceive that becoming formal could harm their business because they would need to pay the 10% tax to INGUAT and those resources are not perceived to come back in the form of benefits to their region. Stakeholders also complained about the lack of continuity across successive administrations and the lack of understanding of local needs.
One example is the Comites de Autogestion Turística (CATS), which are formed by the leaders of local associations and cooperatives with support from INGUAT. However, they often represent the interests of specific sectors (such as transport) and not necessarily the interests of
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their communities as a whole. The CATS are doing a good job only in cases where the tourism promoter (paid by the INGUAT) is active, such as in San Juan la Laguna (Box 5). Some interviewed stakeholders knew about the activities of the CATS, but they had not had the chance to work directly with them.
It would be important to consider strengthening decision-making and implementation capacity at the municipal level. Policies could continue to be generated at the national level, but decision making with respect to operational issues and resource management could be handled more at the local government level. More money could go directly to the regions to help address regional priorities, such as security. Resource distribution could be more demand driven, since not all municipalities have the same needs and tourism assets. Participatory workshops could be organized where cluster leaders, community members, and others could voice their needs and ideas with a common goal of developing their community through tourism. Ideally, this participatory process would result in a 5-year tourism plan for the community, as well as a budget to be presented to INGUAT.159 It is also important to have social accountability where community members supervise the proper use of the resources.
Institutional strengthening, including building the capacity of municipalities to address tourism and support the competitiveness of local tourism SMEs, is a key task. Each municipality should be the principle ally of the tourism clusters. Municipalities receive income from tourism, yet, instead of helping tourism SMEs, municipalities often can be a barrier to their development. One example is burdensome procedures to obtain licenses. The support of both central and local government is very important to the success of clusters or integrated community ventures.
Guatemala receives foreign assistance in tourism, especially from NGOs. Unfortunately this assistance is disorganized. In many cases, NGOs craft interesting projects that last while the donors are leading them, but they usually are not sustainable. A main reason is the lack of planning and transition of responsibilities, and in some cases, poor selection of leadership. International assistance could be more sustainable if it supported the plans that each community created during their participatory workshops. Both INGUAT and municipalities could be filters for such foreign assistance.
5. Security
Security is a concern for all international tourists. If security improved, tourism arrival numbers would likely increase significantly. Crime and theft was identified by the WEF’s Global Competitiveness Index (2009-2010) as the most problematic factor toward conducting business in Guatemala. According to the Travel and Tourism Competitiveness Index, Guatemala ranks 114 out of 133 countries on safety and security due to the reliability of police services, business
159 This type of arrangement could be based on a participatory budgeting scheme. Participatory budgeting is a process of democratic deliberation and decision-making, in which ordinary municipality residents decide how to allocate part of a municipal or public budget. Participatory budgeting is usually characterized by several basic design features: identification of spending priorities by community members, election of budget delegates to represent different communities, facilitation and technical assistance by public employees, local and higher level assemblies to deliberate and vote on spending priorities, and the implementation of local direct-impact community projects. Participatory budgeting is used by towns and cities around the world, and has been widely publicized in Porto Alegre, Brazil, where a participatory budgeting process was developed in 1989. Source: Wikipedia.
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costs of crime and violence, and the business costs of terrorism (WEF 2009). Guatemala is the lowest ranked in Central America, followed by El Salvador (Figure 73). According to the World Bank’s enterprise surveys, 53% of small enterprises in Guatemala (in 2006) saw crime, theft and disorder as a major constraint, compared to a LAC average of 37%. Moreover, in 2008 security was identified as the second biggest obstacle to tourism growth, following the economic crisis (Figure 71).
Figure 73: WEF Security Ranking (out of 133 countries)
Source: WEF 2009
As in neighboring countries, tourism security in Guatemala is not easily monitored, since at most destinations there is no collection of crime statistics related specifically to tourism. Most of the data available reflects crime statistics for the country and sometimes at the destination level, but not specifically for tourism crime. This information is important since the safety of tourists is often not directly related to the crime level present in the countries.
Providing quality tourism experiences that incorporate principles of safety and security is becoming an overriding objective of tourism destinations. According to the UN’s World Tourism Organization, “this requires tourism officials at every level to coordinate their efforts with other government officials, the tourism operational sector, the media, nongovernmental organizations, and interested citizens’ groups” (Tourist, Safety and Security Practical Measures for Destinations, UNWTO).
INGUAT’s Tourist Assistance Office (Assistur) in partnership with national police and local government has instituted preventive measures such as the police protection of tour groups on route to tourism destinations, preparation of emergency plans, people assigned to address problems faced by tourists at main destinations, and preparation of a safety guide to be given to tourists at airports and hotels. Additional initiatives, however, still need to take place to guarantee the safety of tourists and curtail the image of Guatemala as an unsafe tourism destination.
Tourist perceptions of safety and how local authorities handle security issues and crime are also
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main concerns. A study that reviewed 300 cases of crime and violence at tourist destinations around the world found that having been a victim of a theft or knowing someone who was a victim of theft in a specific destination does not significantly affect the likelihood of travel to the destination (Holcomb and Pizam, 2005). Surprisingly, a positive correlation was found between theft and the likelihood to revisit a destination. A key factor was the way in which the local authorities handled the complaint. In the research, 41% respondents gave a negative evaluation of how the authorities dealt with the crime. For the remaining 59%, proper handling of the complaint helped diminish the negative effect of the theft on the respondent. Amsterdam , for instance, has a model tourist crime assistance center, which was established to lessen the negative impact of crime on tourists. Regardless, it is necessary to have the physical presence of security forces for adequate protection of tourists and tourism facilities. An effective way of organizing this work is to manage it through public-private partnerships between the national police and private security firms. A good practice can be found next door in the Belize Security Task Force (Box 6).
Box 6: Belize Tourism Security Task Force
Community policing is a new alternative for guaranteeing local security and should be considered as one of the main tasks of the tourism cluster. It is a collaborative partnership between the law enforcement agency and the community to develop solutions to problems and to proactively address the immediate conditions that give rise to public safety issues such as crime.160 This would be a good practice at the community level, where the tourism clusters could create partnerships with the local police to increase the security of their destination and their region. However, it should be noted that training and community organization are critical to implement such a strategy.
Given the impact of crime on tourism, funding to address tourist security is critical. One possibility could be charging a security fee to tourists. The funds coming from this fee could be distributed to the different regions/tourism destinations based on each community’s strategy to improve the security of their areas.
160 US Department of Justice
The Task Force’s mandate is to devise feasible, accessible, suitable and sustainable solutions that will deter any attacks within the remote tourism destinations in Belize. It includes secure enhanced communication capabilities, effective police presence and enforcement, improved signage, and coordinated Belize Defence Force (BDF) patrols in the area. The BDF is also charged with devising a plan that will improve the overall security in the region. The Belize Tourism Board and its private sector sister agency, the Belize Tourism Industry Association (BTIA), co-chair the task force. Other members include the Belize Police Department, the Belize Defense Force, Friends for Conservation and Development, the Forestry Department, and the Institute of Archaeology. The members acknowledge that crime could be the number one deterrent to the future growth and development of Belize as a premier tourism destination, and hence the focus on bringing crime under control. In conjunction with the Ministry of Tourism, the Belize Tourism Board, and the public sector security agencies, BTIA kicked off a series of safety and security consultations in tourism destinations across Belize in September 2009. The early successes of the closer collaboration and partnership with public sector security agencies have fostered improved dialogue and a direct line of assistance to the security agencies. Continued high profile criminal activity requires constant action and vigilance to stem negative international press and travel advisories.
Source: Belize Tourism Board
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6. Certification
Certification is an effective marketing tool. It guarantees tourists that tourism providers have achieved certain standards. Given trends for travelers to look for more remote destinations, certification gives tourists confidence that suppliers will be reliable, distinguishing them from enterprises that are not certified. Certification would give SMEs the chance to access the market of tourists and tour operators who care about the environment. For example, European tour operators such as Algemene Nederlandse Vereniging van Reisondernemingen (ANVR)161, Tour Operators’ Initiative162, and TUI163 are increasingly working with “green” destinations. Given that Guatemala has had little success in penetrating the European market, it is important to pay attention to these types of customer demands.
Guatemala created a certification program through the Asociación Alianza Verde called the Green Deal, whose standards were monitored by the Rainforest Alliance. Recently, the Asociación Alianza Verde disappeared and CERTIFICA S.A. bought the rights to continue the program. It is currently called the Great Green Deal and continues to be supported by the Rainforest Alliance. The new seal is accredited by the Sustainable Tourism Council (STC) and standardized according to global sustainable criteria. Although it is expensive for SMEs to get the certification—price varies depending on the size of the firm—it can be highly beneficial. Many of the tourism enterprises certified to date have done so with financing from the government (through tourism projects) or NGOs. Continuing and expanding this support would be useful. Certification has typically been granted to hotels, restaurants, guides, etc. To expand the benefits of certification within tourism clusters, community certifications could be established, where the whole community is certified as a sustainable tourist destination. CERTIFICA is currently developing this type of certification and government support could be beneficial.
7. Training
Indifference towards tourists was perceived during stakeholder interviews. Tourists are still viewed by many community members as intruders on their lands with little benefit to the community. Therefore, cluster work should preferably begin with an awareness-building process about the importance of tourism for the economic development of the community and the benefits of being organized as a cluster. Municipalities should be included in this task. Communities need to understand how a wide range of suppliers can benefit, including hotels, restaurants, transportation, handicrafts, food producers, and service providers. Finding an identity or branding for the community is also essential. Ideally, the community should embrace and learn to be proud of the brand, allowing the location to be marketed as a niche tourism destination.
161 ANVR is the Dutch association of 170 tour operators. 162 Tour Operators’ Initiative for sustainable development is based at the UNWTO and supported by UNEP and UNESCO. 163 TUI, one of the world’s largest tour operators, has its Sustainable Tourism Departments in the Netherlands and Germany.
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FUNDESA (Fundacion para el Desarrollo de Guatemala) offers tourism training courses whose goal is to “raise service standards and quality in small hotels with four to five rooms and restaurants that have between 40 and 60 tables," according to the general manager. However, for rural communities that are located far from the capital city or other training locations, these training courses are difficult and expensive to access. When communities are organized around a cluster, specialized trainings in situ can be organized based on the needs of the community. For example, they could range from efficient ways to produce vegetables to supply the hotels in the community to good business management practices. Training the community in situ is more efficient: instead of one person leaving the community for training, many people can receive different trainings according to their needs. Training programs should also emphasize the importance of providing high-quality customer service.
Bringing the know-how of similar, successful national or international projects to the community can also be useful. This type of training can illustrate to the community the possible needs and bottlenecks that might be encountered throughout project development. In other countries, e.g. Bolivia, exchanges between successful communities and communities that are starting new projects have helped the less experienced communities visualize what they want to achieve. The first projects are also more expensive because they make mistakes; projects that replicate successful experiences can avoid such costs and mistakes.
8. Marketing
The sustainability of any tourism business requires a solid marketing strategy that ensures success and sustainability of the tourism destination. This strategy should be targeted at potential markets and tourist behavior. To influence how tourists choose their next vacation destination, it is important to educate the potential customer on how choosing the destination will make a difference and contribute directly to the conservation of natural and cultural heritage of the area, while contributing to the local economic development of a community. Evidence suggests that tourist interest in these subjects: a TIES study found that 62% of U.S. travelers consider it important to know about the cultures of the destination they visit.
An ASIES survey conducted in Guatemala showed that only 24% of the tourists are international, while 76% are national. This demonstrates the importance of designing a targeted marketing campaign to attract more international tourists, as well as having agreements with organizations that promote community or pro-poor tourism. For instance, relationships with Stay Another Day164 and Traveler’s Philanthropy165 could help channel resources to communities.
Destination branding that differentiates the cluster is essential—an archeological site, a living culture, etc.—rather than offering a generic tourism product, such as a lakeside town or hiking. Both the strength of the brand of the service provider and the brand of the destination itself matters. Guatemala has marketed the country with the Mundo Maya brand; however the brand
164 Stay Another Day is an international organization that was set up with the goal of promoting tourism while "helping to conserve local culture and heritage, support community projects benefitting local people" and is supported by the IFC and GTZ. 165 Traveler’s Philanthropy encourages tourists to support social service and conservation projects in the communities where the travel experiences take place giving financial resources, time, and talent to further the wellbeing of local communities.
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has gained limited traction, most likely because the brand has been changed multiple times. Other countries market themselves with an image; for example Peru uses a picture of Machu Picchu. For SMEs, it is important to be related to a brand that calls the attention of the tourist.
Marketing tools for SMEs
The internet is the major distribution channel for the travel industry (Figure 74); many travelers look for information online themselves instead of relying on a travel agency. If the information is not precise and reliable it can be counterproductive. Currently, the information found on the internet about Guatemala is scarce and/or disorganized. In other words, it is often inadequate to organize a trip. A recent survey from INGUAT found that 39% of tourists in Guatemala check the internet for information, 21% make reservations and payment, and 10% reservations only. The lack of information is not helped by the high prices that INGUAT charge to advertise on its web page. This shows again the importance of clusters; they can develop their own web page and eventually create links to other clusters in Guatemala to convince the tourist to stay more than one day, as currently happens in Atlitan.
Figure 74: Marketing Tools Preferred by Tourism Enterprises in Guatemala
70%
19%
12%
7%
5%
4%
1%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Internet
Brochures and catalogs
Tourism shows
Media
Radio
Specialized magazines
Television
Source: ASIES The internet is a useful and low cost marketing tool that helps tourism SMEs avoid some of the nodes in the traditional marketing chain. Many community tourism destinations have benefited from the internet, an example being Chalalan in Bolivia, because it has allowed them to become known and compete with destinations around the world.
Familiarization trips are another way of marketing and increasing product knowledge. According to the Arizona Office of Tourism (AZOT), “the journalists, tour operators and travel agents experience a destination first-hand, they are able to better relay information to their readers and clients. Since their jobs involve dispersing information to large numbers of people, this is a valuable tool.” INGUAT has an agreement with Tara Tours and together they recently released brochures for a familiarization trip “On the Mayan Path”. INGUAT could also help tourism
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clusters organize specialized familiarization trips, inviting pre-identified people directly related to community-based and sustainable tourism. For SMEs, it is important to promote working relations with organizations that support community-based or sustainable tourism such as Rainforest Alliance166, Tourism for Development167, or the European tour operators mentioned above. For example, Rainforest Alliance, which currently works in Guatemala, is marketing certified SMEs through its web page, its Go Green catalog distributed at tourism fairs, and its Smart Guide to sustainable travel. 9. Recommendations
This annex has addressed the importance of improving the product and service offering of tourism SMEs, while paying attention to the bottlenecks that affect the growth of tourism in Guatemala. Community cluster initiatives were recommended, with an emphasis on empowering members to assume larger decision-making responsibilities.
Specific recommendations to promote tourism that benefits SMEs include:
� Geographic clustering or integrated community tourism . Community tourism organized around a cluster is an effective way to create both direct and indirect employment at the local level. Tourism clusters should try to reach all members of the community, not just the traditional tourism stakeholders such as hotels, transportation enterprises or restaurants, but farmers, producers, and service providers, as well.
� Institutions / INGUAT. Decision-making about tourism development strategies could be strengthened at the local government level, with support and technical assistance from INGUAT. By building the capacity of tourism divisions within municipalit ies and strengthening their role, resource distribution could be more demand driven, participatory, and sustainable by ensuring buy-in from the community and local government.
� Security. Tourist security should be a priority at the community and local cluster level. Although safety and security issues loom large in Guatemala, safety for tourists could be treated within the clusters as a local or municipal priority to create “safe islands” that protect tourists. Community policing can be one way to address this issue.
� Certification. Initiatives to promote the certification of tourism enterprises, as well as potentially the certification of communities, could be supported.
� Training. Training courses for tourist enterprises, particularly in-situ, could be expanded. These could potentially include brand-building and marketing, management practices,
166 Rainforest Alliance “works to help tourism entrepreneurs, conserve their environments and contribute to local livelihoods, while improving their own bottom line”. 167 Tourism for Development’s webpage states that their “principles are based on the commitment of its partners in fighting poverty in countries of operation in response to a demand from its customers that require a real engagement of industry through a solidarity contribution of 1% of the package”.
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customer service, production techniques, and/or case studies on national or international success stories.
� Marketing. Destination branding that differentiates the cluster is essential. Marketing of that brand, as well as marketing of individual enterprises, should be encouraged, particularly via the internet. Familiarization trips for journalists, tour operators, travel agents, etc. could also be considered.
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