DO NOT DEMONIZE CONCESSIONS

May 08, 2015 Features / Columnists, PPP Column

---

The opposition parties/coalition in Guyana must be careful that they do not join the proverbial bandwagon that is demonizing duty free concessions to investors, be they local or foreign, be they crooked or straight.
Recent criticisms by opposition spokespersons have been highly critical of the manner in which the government has been dispensing duty free concessions. This indeed is ironic because when the PNC was in power, the same criticisms were made by the PPP about the generous duty free concessions to major investors such as Omai, Barama, Aroaima, Green Construction and Booker Tate.
These companies were granted virtually everything duty free, inclusive of tax holidays. One of the arguments that the PPP used then was that the only benefits to the country from these investments were the petty royalties and the taxes which the workers paid.
APNU should be the last to categorize concessions as premium, gold and silver. The PNC, the main party in APNU, had a track record of giving premium concessions to companies that did businesses whose overall benefit to the country is still questionable. OMAI was to have made us all millionaires. Barama was to have raked in enormous benefits for Guyana. Aroaima took out tonnes of our ore and when it left, the industry was no better off.
Green Construction did not revive the bauxite industry.
The PPP when it came to power in 1992 instituted a virtual ban on granting tax holidays. This hurt the investment prospects of the country. It was only after large investors began to demand concessions that the laws of the country were amended to allow for the reintroduction of tax holidays in certain circumstances.
The government had to correct itself when it granted to a local company a tax holiday which was not contemplated under the law. The government had to amend its own law so as to bring its actions into compliance.
One does not need to go into economic theory in order to justify the benefits of duty free concessions and tax holidays. Unless these things are offered to large scale investors, the investments are not going to materialize.
You cannot ask a company that is coming to pump hundreds of millions of dollars into an economic venture, to pay taxes on its capital equipment. That would be a drain on the resources of the investors. The investors will be discouraged.
Investors are not lining up to do business in Guyana. You, the host country, have to make the investment worthwhile. One way in which this is done is to offer incentives in the form of tax holidays and duty free concessions. Fiscal concessions are therefore necessary to attract investment.
Duty free concessions are also a means of reducing the cost of the investment and consequently the cost of whatever good or service is being produced. If for example the contractor that has been contracted to repair the fibre optic cable has to pay hundreds of millions of dollars in duties on his equipment to be used in repairing the cable, then that cost is not going to be absorbed by the contractor. It is going to be passed on to the government.
This will increase the cost of the project and consequently the burden on the treasury or wherever else the funds are coming from for the project.
In this context one has to correct the mistaken view that the offering of concessions to investors represents a transfer to the beneficiary. This is not always the case because these concessions are often used as means of keeping down the cost to the government of the project.
Without the concessions there will in most instances be no business. So it is not a case of a loss of revenue at all.
Of course, some investors are able to extract concessions on things which are not directly related to the projects.  There is a tendency for example, for investors to demand duty free concessions on luxury vehicles.
This is a practice that should be discouraged because these vehicles are hardly used for the purposes of pursuing the investment but are instead used to benefit individuals concerned with the investment.
These types of concessions should be outlawed.
However, other types of vehicles such as trucks are often needed for carrying out the actual investment and if the investor had to bear the duty on these vehicles it would prohibitively raise the cost of doing business.
This is especially so since Guyana still has high tax rates.
Concessions are also extremely helpful in the initial stages of a business when there are high start-up costs. These costs can end up crippling the prospects of the business. Concessions are one way of allowing the business the opportunity to grow.
We therefore have to be careful that in an attempt to highlight a poor contract, that we do not demonize concessions which are necessary to attract, facilitate and reduce the costs of large investments.
We should be careful that we do not demonize concessions. Nor should we fall prey to deeming all concessions as transfers to the investors. This is not supported by economic theory or by investment history. Concessions should instead be linked to performance and to encourage reinvestment in Guyana.

---

---