Creating a Business-Friendly Environment

With the precipitous fall in energy revenue over the last four years, from $19 billion in fiscal 2013/14 to $2 billion in 2016/17, the theme of engendering sustainable growth in the domestic economy through diversification, has dominated the national conversation. Given the economic hardships imposed by the fall-off in revenue, the increased focus on developing other sectors is indeed warranted. However, it sometimes seems like we place all the emphasis on birthing new industries or developing existing ones without acknowledging how critical a business-friendly environment is to the process. Without the appropriate environment, all efforts to incentivise key sectors, foster innovation and nurture SMEs will likely yield decidedly sub-optimal results. For instance, it is very easy for new innovations to perish and incentives to go unused in unfavourable settings, where there is a high level of apprehension among investors. For this reason and because such initiatives are normally quite costly, it is in our interest to seek to maximise the probability that they will bear fruit. In this regard, a business-friendly environment can be seen as fertile soil, because it not only encourages investment, it also allows businesses to grow, both of which are necessary for diversification.

Although diversification must be facilitated by government, it will be most successful when led by the private sector. For this reason, it is important to remember that investment is in a sense a living thing, since it goes where it feels welcomed. Nations that fail to create an environment that is conducive to investment and by extension business, consign themselves to long-term economic hardship. This note discusses a few key elements of a business-friendly environment and how they apply to Trinidad and Tobago.

For commercial activity to thrive over the long term, it is essential to have strong and efficient support institutions. Establishments, such as registries, statistical offices and tax offices, provide critical services to society in general and play a major role in determining how smoothly businesses can conduct their affairs. Inordinate delays for simple transactions or burdensome bureaucratic red tape are not only a source of great annoyance, but can also be a major hindrance to commerce. Moreover, when the operations of these institutions are inefficient, opportunities are created for corrupt practices to flourish, since individuals will be more likely to try to circumvent processes. For these reasons, for countries like Trinidad and Tobago, institutional strengthening is a vital component of diversification. Without taking action to augment the capacity and efficacy of support institutions, it will be foolhardy to expect to achieve economic transformation.

In terms of the current state of this country’s support institutions, if the repeated complaints from businesses regarding delayed VAT refunds are anything to judge by, then we can certainly do better. Similarly, concerns raised by the International Monetary Fund (IMF) and international credit rating agencies about the quality of macroeconomic data available domestically, paint a troubling picture about the plight of the Central Statistical Office (CSO). Further, over the last five years, Trinidad and Tobago has seen its position on the World Bank’s Doing Business ranking consistently fall. A major reason for this fall is the length of time it takes to secure construction permits, with the country ranking 119th out of 190 countries in this area. According to the report, it takes 253 days and 16 procedures to gain full permission to build in this country. A lot can also be said of the challenges citizens face when accessing key public services. To be fair, the authorities have acknowledged that there is need to reform key institutions and are thus taking steps to inter alia, implement the Revenue Authority, enhance the operations of the CSO and to automate the process for granting construction permits. However, if we are honest with ourselves, we will admit that we often have problems with implementation and more specifically, the speed thereof. Accordingly, it will surprise no one if some key reforms, which have supposedly been underway for years, continue to be delayed, while other new initiatives join the queue.

A supportive legislative framework is also another important ingredient of a healthy business environment. To the extent that there are regulations in place to provide adequate protection for key stakeholders, the incentive to take part in commercial activity will be high. For this reason, it is essential to have legislation that provides appropriate protection for the environment, investors and consumers, to name a few. While the legislative environment in Trinidad and Tobago continues to improve, a bit more attention needs to be paid to the rights of consumers and the environment. For instance, in the World Economic Forum’s 2017 Travel & Tourism Competitiveness Index, this country ranked near the bottom of the pile with regard to environmental sustainability. With regard to the stringency of environmental regulations, it was ranked 124th out of 136 countries, while it was 132nd in terms of enforcement of environmental regulations.

An issue that is very much related to legislation and indeed law enforcement is the level of crime. It goes without saying that both investors and consumers require a certain level of security as they go about their daily activities, all of which cannot be provided by the state. In this way, high crime rates can increase both business and household costs, as the demand for security related goods and services normally increases in such an environment. Crime can also directly affect economic activity if it is allowed to deteriorate to critical levels. For instance, the entertainment and restaurant sectors could suffer if citizens curtail their nighttime activity for fear of being robbed or worse. Consequently, the high murder count (257 as at mid-June 2018) continues to be a cause for major concern. However, violent crimes are not the only form of illegal activity that worries investors, since white collar crime can also be a bane to business. The more bribes investors have to pay to complete what should be simple transactions, or the higher the level of fraud and bid rigging, the smaller may be the incentive to invest.

The fiscal health of a country can influence its ability to attract new investment. If public finance is at a place where the fiscal deficit is large and recurring and government has accumulated a very large debt stock, this can undermine investment, especially against a backdrop of low GDP growth. For developing countries, such a state of affairs could lead to the adoption of IMF programmes, debt restructuring and downgrades of their sovereign credit ratings. Further, the reforms required to bring fiscal accounts back to some measure of rectitude, normally curtail growth over the medium term. In this situation, the motivation to invest may be limited, since it may be difficult for businesses to experience consistent growth in such an environment. In the case of a sovereign rating downgrade, businesses domiciled in the affected country could themselves be subject to credit rating downgrades and will likely face an increase in the cost of credit. Over the last two years, the country’s deteriorating fiscal position was partly responsible for the downgrade of its credit rating by Standard and Poor’s and Moody’s. Despite this, the fiscal accounts are not yet in a place where an IMF programme is needed, but persistent deficits remain a cause for major concern. Public debt remains at manageable levels, despite rising from 58.8 percent of GDP to 61.6 percent in 2017, while the fiscal deficit expanded to 8.5 percent of GDP in 2017 from 5.3 percent.

Finally, to be defined as truly business-friendly, a country should be able to supply industries with trained labour. While it is expected that some talent may have to be imported, the aim is for such occurrences to be in the minority. With increased government spending on education subsidies, the student participation rate in tertiary education increased from 8 percent in 2002 to 65 percent in 2015, according to the 2017/2018 Budget Statement. During the period, government expenditure on technical vocational education also increased significantly. However, with government now facing severe fiscal challenges, it is an opportune time to enhance the effectiveness of programmes, such as the Government Assistance for Tuition Expenses (GATE). It is important to establish greater linkages between these programmes and the needs of employers and with the diversification goals of the country. After all, it can’t be a pleasant experience for graduates to be without jobs for long periods after completing their studies or to be forced to accept jobs well below their competence. For businesses, the absence of that nexus may mean significant delays in filling key positions or having to facilitate extensive training themselves. As a result, the level of productivity in the country may be negatively affected. With regard to diversification, government spending on tertiary education should help to guide students toward courses aligned with the process. For instance, GATE can be transformed so that areas of study that are related to the country’s diversification thrust receive a greater percentage of tuition support than other areas. In addition to the incentives being directed at those sectors, an adequate supply of appropriately trained human resources is also essential.

Given the key role the environment plays in determining a country’s economic prospects, it would be a good idea to devote a greater level of focus on pushing through key reforms in the areas identified above. However, the areas dealt with here are not an exhaustive list, but represent only a subset of the issues we need to address. It should also be noted that the responsibility to create a business-friendly environment does not rest entirely on government, since businesses themselves, trade unions and citizens all have important roles to play. As we go forward, a good practice will be to continually track how we measure up against other nations in terms our business environment. For instance, Trinidad and Tobago’s ranking on the 2017/2018 Global Competitiveness Index improved to 83rd (out of 137 nations) from 94th a year earlier, but was only one spot higher that the position the country held in the 2012/2013 index. With regard to its Ease of Doing Business ranking, the country fell over the last five years from 66th to 102nd out of 136 countries. This is an indication of the significant work we still have to do as a nation.