ReportNo. 7139-TR CountryEconomic Report Trinidadand Tobago Towarda Programof PolicyReform and RenewedGrowth in Trinidadand Tobago Public Disclosure Authorized (Ir Two Volumes) Volume II: Sector Reviews April18, 1988 LatinAmerica and the CaribbeanRegion FOR OFFICIALUSE ONLY

( I

Document of the Worl k, ° "

Public Disclosure Authorized ' (_ MNCgoI

.3~~~~~~~~~~~~C Public Disclosure Authorized

Public Disclosure Authorized Thisreport hasa restricteddistribution and may be usedby recipients only in the performanceof their officialduities. Its contenitsmay not otherwise be disclosedwithout WorldBank authorization. CURRENCYEQUIVALENTS

Until December 1971

US$1.00 - TT$2.00 TT$1.00 - US$0.50

From December 1971 to July 1972

US$1.00 - TT$1.84 TT$1.00 - US$0.54

From July 1972 to June 1976

The TT$ was allowed to float in line with sterling.

As of May 1976

US$1.00 = TT$2.65 TT$1.00 - US$0.38

From June 1976 to December 1985

US$1.00 = TT$2.40 TT$1.00 = US$0.42

Since December 1985

US$1.00 - TT$3.60* TT$1.00 - US$0.28

* Except fqr imports of essential items which, until January 1987, were traded at the US$1.00 = TT$2.4 rate. FOR OFFICIALUS ONLY

This report is basedon the work of an IBRD mission to Trinidad and Tobago in October 1987 led by Mr. N. Ramachandran. Contributing to the report were Messrs. Auty (manufacturing), Atkins (agriculture), Brown (tourism),Payot (planningorganization), Ramsaran (publicfinance and fnancial sector) and Grdjic (statistics).

Thisdocument had a stcted distributionand maybe usodby recipientsonly In the perfomance of theirofficial dutis. Its contnts maynot otherwise be discloedwithout World ankauthoraton. INIDAD AND TOBAGOt VOLUME II

TABLE OF CONTENTS

Page No.

I* THE MANUFACTURINGSECTOR ...... 1

The StructureOf Production and Trade to the Mid-Eighties 1 Prospect for the Heavy Hydrocarbon-Based

Industries...... a.*...... a...... 4 Prospectsfor the Non-HydrocarbonManufacturing Sector 13 InstitutionalReform For IndustrialPromotion 18 23

II. THE AGRICULTURAL SECTOR 26

Agriculturein Context ...... 26 GovernmentPolicy 29 RecentTrends in MajorAgricultural Subsectors 33 InstitutionalStructure ...... 38 Conclusionsand Recommendationso ...... 40

III. TOURISM SECTOR REVIEW ...... 42

The Tourism Sector 9909009...... * 42 Recent Developments 44 Xarket Potentialand Prospects ...... 45 Policiesand Incentives4...... 47 SupportingPolicies ...... 50 Concluslbon 54 Recommendations...... 054

IV. INSTITUTIONAL STRUCTURE FOR PLANNING ...... 56

Planning Institutions ...... 56 Integrated Socio-Economic Development Planning ...... 58 Integrated Regional Development Planning 0*904000*0**0 59 National Planning Data ...... 59 Financing the Pre-Investment Phase 60 Standardizing Project Proposal Documents 60 Monitoring the General Economic Situation ...... 60 Technical Assistance Requirements ... 60 Conclusion 61 Chaiter I THU MAWNFACTURINGSECTOR

THE STRUCTUREOF PRODUCTIONAND TRADETO THEMID-EIGHTIES

1.1 Tnidad and Tobago's exporience as a long-established exporter of crud aendrefin ed hydrocarbons had imposed 'dutch disease" effects on the economy even before the first oil boom. As Table 1.1 shows,on the eve of the first oil shock,the non-oiltradables sactor (basically agriculture end manufacturing) was much smaller than the norm for a country of similar size and levol of development. In 1972, agriculturo and manufacturing combined generated 282 of non-oil output, compared with a norm of 422. The share in non-oil output of agriculture (an Important source of inputs in the early stages of industrialization) was below 62 and less than 40S of the norm. Although output in the manufacturing sector was almost 802 of tho norm, it was dominated by refined petrochemicals, whose markets were to decline sharply after the second (1979-81) oil boom. Moreover, manufacturingother than oil refining wa relctively uncompetitive end heavily dependent on protections like most Caribbean countries during the post-war period, Trinidad and Tobago has favored a strategy of Import substitution over competitive manufactured exports. 1.2 Industrial production expanded during the oil booms of 1974-78 and 1979-81, but its share of non-oil output shrank and its viability was uncertain. The contribution of the new large-scale gas-based Industries (notably steel, fertilizer and methanol), establisned with windfall investments during the booms, was disappointing, primarily because of chronic marketing problems that reflected a persistent overcapacity in the international steel and petrochemical markets. Moreover, their relatively meager expansion was offset by the sharp decline in oil refining, hitherto the dominant manufacturing sector. Meanwhile, the uncompetitiveness of the non-hydrocarbon manufacturing sector was exacerbated by the appreciation of Trinidadend Tobago'sreal exchangerate, especially during the secondoil boom. 1.3 Manufacturingvalue addedwas TT$1.43billion In 1986,accounting for 8.22 of GDP end 10.42of non-mining GDP. Food processing dominated (35Z), followedby assemblyindustries (23S) and petrochemicals(172), includinggas-based petrochemicals. 1 4 All three leadingmanufacturing subsectors are flawed,and none furnishesa sure foundationfor rapid expansion of production. Food vrocessina draws on a domestic agriculture that does not provide a competitivebase for sizablo and rapid exportgrowth and suffers from deficiencies in packaging. Some exportmarket niches have beon established in fruit juices, ethnic foods and fresh vegetables (which take advantage of the limitedsurplus air freightcapacity), but initiallythese gains are likely to be offsetby subsectorallosses through rationalization, notably of the extremely high-cost domestic sugar industry. The assembly -2-

Table 1.12 NON-OIL ECONONT PRE-SHOCKSTRUCTURE AND CHANGE, 1972-81 (Perc.nt)

Actual Share Chenery and Syrquin Norm al

Initial Conditions

Agriculture 7.6 16 Manufacturing 19.5 26 Construction 6.0 = 6 Services 66.9 52 (Mining) 20.5 2

Average Annual Change. 1972-81.at Constant Prices

Agriculture -0.31 -0.49 Manufactuting -1.03 0.20 Construction 0.37 0.05 Services 0.99 0.35

Dutch Disease Index b/

1972 +14.2 1972-81Change +10.5 Source: A. H. Gelb, 9WindfanlGains. A Blessinaor a Curse? A ComparativeStudy of Six Oil ExportingCountrios 1973-84,0 iimeo, World Bank,Washington, D. C., 1986,p. 14. a/ The norm is calculatedfrom H. C. Chenery,and M. Syrquin, Pqttepnsof Develoument1950-70, Oxford: Oxford University Press, 1975. bl Index - normal share of agricultureplus industryminus the actual share of agricultureplus industry.

industries are dominated by completely knocked down (CKD) autos (502 of subsectoroutput), which are of lowerquality and greatercost than are imported vehicles. CKD is a prime candidate for closure. As to petrochemicals, the mid-eighties' expansion of gas-based fertilizers and methanol was almost exactly offset by the collapse of refined oil product. Other resource-based industries (such as ceramics and wood processing), along with apparel and tourist goods, are perceived locally to present growth opportunities, but none Is sufficiently large to boost GDP significantly in the medium term. 1.5 Although there-areno obviousmanufacturing subsectors that can be targeted for growth, the recent performance of individual manufacturing firmsdoes providegrounds for optimism. Evidenceemerged during the post- boom periodof more productiveuse of infrastructure,plants, labor and freight. Policy measures thereforeneed to concentrateon the competitive environmentof the firm rather than,as hitherto,on the sector. -3-

Tabl 1.2: CBMNGINGSTRUCTURE OF TiE MANUFACTURIRGSECTOR, 1970-87 1970 1975 1980 1985 1987P

Value (TT8billion, currentprices) Total CDP 1.771 5.300 14.966 18.140 15.933 Non-oilGDP 1.643 3.445 9.090 14.460 12.715 Manufacturingt 0.397 0.792 1.338 i.676 1.941 Food,Drink & Tobacco 0.397 0.792 1.338 1.676 0.690 Textiles,Garments, Footwear,Readwear 0.015 0.026 0.073 0061 0.092 Printing,Publisblhg & Paper 0.013 0.026 0.046 0.109 0.167 Wood & RelatedProduct* 0.008 0.023 0.061 0.061 0.037 Oil Refining 0.166 0.319 0.416 (0.002) 0.155 Petrochemicals 0.032 0.045 0.078 0.280 0.241 OtherChemicals 0.041 0.088 0.222 0.292 0.037 MiscellanousManufacturing 0.008 0.021 0.025 0.031 0.052 vo!2" (1980-100) Total CDP 59.8 68.5 100.0 83.3 n.a. Non-oilGDP 59.3 65.9 100.0 83.3 n.e. Manufacturing 83.7 78.3 100.0 87.4 n.-. Food,Drink & Tobacco 56.3 83.2 100.0 87.4 n.o. Textiles,Garments, Footwear,,Hedvar 122.7 93.3 100.0 39.5 n.a. Printing,Publishing & Paper 93.6 108.5 100.0 79.4 n.o. Wood & RelatedProducts 42.6 66.7 100.0 56.3 n.o. Oil Refining 197.7 94.3 100.0 36.9 n.s. Petrochemicals 80.8 50.5 100.0 294.4 n.oe Other Chemicals 71.0 78.8 100.0 83.5 n.a. AssemblyIndustries 40.8 57.5 100.0 72.2 n.o. MiscellaneousIndustries 96.2 162.0 100.0 77.2 n.o.

P - Preliminary n.a. Nct available. Sourc-j NatlonalIncome of Tridad and Tob-eo1966-85, Port-of-Spain: CSO, 1987.

1.6 Unfortunately, the Impressive improvements in productivity generated by the more efficient post-boom use of resources have been associated with rising unemployment (Table 1.3). Particularly sharp dclines in employment occurred in textiles, garmnts, footwear and headwear prior to the mid-eighties' devaluation and in the assembly industries thereafter. However, the unemployment rate in the manufacturing sector was close to the national average of 172 In early 1986. This rate was significantly better than those for oll (262) and construction (342) but much worse than that of agrLculture (62). At that time, the manufacturing sector accounted for 12.2S of total eploymnt, or around48,000 joba (icluding an estimated 3,600 in oil refineriesnd 1,500in sugarmanufacture). -4

Table 1.3t EMPLOYMENTIN TIM MANUFACTURINGSECTOR, 1981-85 (thousands) 1981 1983 1985

Total Labor Force 435.0 449.5 465.0 Total Employment 389.6 399.4 392.2

Mining 10.7 8.5 5.3 Agriculture,Fisheries & Forestry 43.2 38.8 45.6 Construction 77.4 74.5 63.5 Manufacturing 52.5 54.3 49.5 Food, Drink & Tobacco 10.3 11.6 10.3 Textiles, Garments,Footwear, Headwear 9.2 8.1 9.3 Printing, Publishing,Paper 3.2 3.8 3.2 Wood & Related Products 0.7 0.7 0.9 Oil Refining 6.3 5.5 4.3 Chemicals and Non-metallicMinerals 5.7 4.3 4.3 Assembly Industries 4.2 5.2 4.0 MiscellaneousIndustry 12.9 15.1 13.2

Sources CSO The National Income of Trinidad and Tobajo 1960-85, CSO Port of-Spaint CSO 1961; pp. 276-77

1.7 A corolUAryof the oil booms was a shrinkage of non-oil exports: between 1976 and 1982, the share of domestic non-oil exports In GDP shrank from 122.6to 4.21 (Table 1.4). Food exports declined from one-thirdto one-tenth of all non-oil exports, while manufactured exports expanded significantly (in nominal terms), with chemicals rising to account for more than half such exports. Trade figures for early 1986 suggest that a sharp rebound was underway in the export of other manufactured goods, notably white goods, albeit from a very small base. The fact that imports during the same period show a marked swing away from consumer goods toward intermediates and capital goods also suggests that the combined impact of the post-boom contraction and exchange rate adjustments on the output and trade of the manufacturing se-tor (although not on employment) was beneficial. 1 8 The growth potential for manufacturing output, employment and exports is examined in more detail below, starting with the energy- intensive industries. PROSPECTSFOR THE HEAVYHYDROCARBON-BASED INDUSTRIES

1.9 A significant fraction of the oil rents went into industrial diversification via gas-based industries. Excluding infrastructure, the gas-based plants absorbed more than US$1.45 billion. This income, which had an ICOR of three, could have generated TT$1.2 billion of value added at the 2.40 exchange rate and a still higher level of net export earnings, all with fewer than 2,100 employees. Actual direct value added from the gas- based industries has, however, been less than one-sixth what was expected because of difficulties with plant start-up and unexpectedly depressed internationalmarkets. In addition,the anticipated(although never carefully researched)proliferation of linked industriessuch as component supplies and downstream processing was constrained by doubts concerning the viability of the gas-based industries. Tahle 1.4: RECENTTRES IN NON-OILTRADE, lSM aud 1989-6

1976 19#8 1962 1963 l96 Ia 19"1n6 199 196 Fitrta months

Doweetle Non-all Exoort cTaw 466.9 580.4 570.B 66.5 788.7 875.5 989.6 1298.1 n.e. n.n. X Non-oil GDP 12.0 6 .6 4.9 4.2 4.8 6.1 6.6 9.4 n.n. n.e. X Non-o1 I Exports Food A Live Animas n.n. 82.4 27.1 15.8 18.9 11.1 9.8 n.e. 19.7 12.6 Beverage I Tobacco n.n. 4.8 8.7 4.6 8.1 2.6 2.5 n.e. 2.8 8.8 Crude Materials(Excl. Fuel) n.n. 0.8 0.1 o.o o.9 o.6 o.6 n.o. 1.6 1.9 Oil* and fats n.n. 9.8 0.1 o.o 0.0 o.o *.o n.n. 6.J 0.0 Chmicels n.n. 46.0 49.2 55.8 90.6 64.2 72.7 n.n. 71.6 66.5 ManufacturedGoods n.n. 18.7 17.8 20.4 16.6 16.9 11.2 n.e. 10.9 22.0 MechineryA Transport n.n. 1.9 1.6 2.7 1.8 9.6 9.6 n.n. 0.8 6.9 licelleneous n.e. 0.4 0.8 0.2 8.4 2.2 2.0 no. 2.0 2.2 Ocele 11_-o I reOa.rteaTnb) n.e. 4.798 4.787 0.56 ,.81 4.581 8.081 n.e. 1.779 2.271 1 Non-o I ports ConsumerGoods n.a. 24.2 27.7 28.2 27.8 81.7 89.1 n.e. 28.6 21.7 Intsrmedlete n.a. 88.9 88.6 89.8 84.2 87.0 8C.5 n.A. 84.0 87.0 Ra Materials n.e. 6.4 7.6 6.8 6.7 8.0 7.0 n.n. 7.8 6.a Capital Goods n.e. 86.4 61.1 40.2 82.7 28.2 27.2 n.e. 28.9 84.1

Source: CSO, Review of the Econoevw Port-of-Spint: CSO, 1987, Appendice 75.70. -6-

1.10 The disappolntingexperience of Trinidadand Tobago'. diversificationInto gas-basedIndustries parallels that of otheroll- exportingcountries. The start-up of such new capital-intenslve,scale- sensitiveplants in developingcountries exhitits a distinctivetime trajectory,measured in term of directadded value end indirect(linked) activities(Figure 1). The initialstimulus to the domesticeconomy takes the form of a construction-relatedblip. Next thero Is a periodof muted activityin whichthe viabilityof the new gas-basedenterprise may be in doubt. Finally,there is the high probabilityof a reboundin domestic outputfollowing retirement of the debt. Consequently,the long-term benefitsto the economymay be substantial,but come only aftera disappointingstart. The gas-basedindustries of Trinidadand Tobagoare still in the secondstage shown in Figure1. The criticalquestion is whether the rebound will come, and when.

1 11 Table 1.5 summarizesthe importantcharacteristics of Trinidad and Tobago's gas-based plants. Although cost overruns and teething problems were especially severe in the case of the steel plant and moderatelyso for the Fertrin amonia plant, all the Trinidad and Tobago gas-based plants are technically efficient and (with debt restructuringIn steel), they are all potentially competitive at prices covering the replacement costs of an efficient new producer. The joint-venture ammonia plants already generate profits; the wholly state-owned methancal and (less so) urea plants can cover their variable and most debt-servsce costs except In times of acute price declines (as occurred in 1986); and ISCOTT is moving strongly toward break-even,albeit after accumulatingsizable operating losses.

1.12 The gas-based Industriesof Trinidad and Tobago have considerable potential for a rebound In their contributionto both GDP and export earnings for three reasons:the eventual attainment of long-term equilibrium prices will raise revenues and ease debt retirement; . larger post-debtcash flowwill facilitatelow-cost capacity expansion; 4md their improvedviability will trigger investmentsIn linkedsupply and lownstream processingindustries. Since there are also prospectivegains from the rationalizationof the oil refinerysector, the 1986output level in hydrocarbonprocessing (i.e., oil- andgas-based industry combined) is significantly below potential. A rebound in output would boost Trinidad and Tobago's total exports significantly,since petrochemicalsand steel generated202 of Trinidadand Tobago'sexport earnings in the mid-eighties, comparedwith 752 from crudeoil and 5X for agricultureand the non- hydrocarbonmanufacturing sector. Unfortunately,the timingof the rebound cannot be accurately ascertained, nor is its occurrence guaranteed.

Table 1 5: CHARACTERISTICSOF TRINIDADAND TOIAGO'S GAU-BASEDINDUSTRY

Company Ownership Plant Cost Product Start-up Employment ( 2 State) (US$m) (Year)

ISCOTT 100 460 Steel 1981 1,150 TTMC 100 180 Methanol 1984) 148 TRINGEN1 51 107 Ammonia 1977) 425 FERTRIN 51 315 Ammonia 1981 270 TTU 100 190 Urea 1984 80 Figure 1. Typical Tim Trajectory For Direct And Indirect Added Value In Gas-Based Jnaustry

HIGH RISK PHASES + REDUCEDRISK PHAES ---

DlRECT AND kConstruct Dbt Retlkr*unt,+Capita + Low Cost Expalon*l INDIRECTAN n l3ip Technidal Accumultion Lnksge Prolfrlf a/ton ADDED VALUE Improvement AgglomeratIon Son.r. //

ACTUAL TOTAL DIRECT / > - AN9 INDIRECTIMPACT - - - __-__ TREND TOTAL DIRECT % _ y AND INDIRECTIMPACT / > TREND_<7 DIRECT / ~~~~~~~~~~~~~IMPACTONLY

TIME (YEARS FROM START-UP) - j

1.13 Each principalhydrecarbon-b.sed industry subsector is now examined in turn. The ISCOTT Iron (DRI)/SteelPlant

1.14 ISCOTThad an unusually protracted and difficultstart-up. Capacity utilisationdid not exceed292 duringthe first five yearsof operation, by which time accumulatedlosses approached TT$1.5 billion (Table 1.6). Althoughmarketing was the key deficiency,little progress was made in resolving the typical technical, labor and managerial teething probleme of a new plant. Plant closure was actively considered. By 1987 ISCOTT had accumulated operating debts of TT$1.8 billion, but from early 1986 on It has made solidprogress in solvingits problems.

1.15 A two-yearmanagement agreement with New HamburgSteel and Vorst Alpine comenced in January 1986, and within 19 months it had achieved significant improvements. Clear progress was made in Implementing a corporate plan that aimed for operational break-even by 1989 and complete self-financing two years later (Table 1.6). However, further fundingby the Trinidad and Tobago Government is needed until 1989, assuming the markets are no worse (and are no better) than at present. Total additional Government funding is projected ax an equity infusion of TT$279 million over 1987-88. ThereafterISCOTT should be self-financing. 1.16 The new ISCOTTstrategy is predicatedupon the attainmentof full capacityand a reorientationof the productmit from predominantlylow value mesh to predominantly high value wire rod products. This shift will capture the benefits of the plant's high technical specifications. The plan prudently assigns a minor role to the US market (less than one-tenth of sales) and looks to accelerate diversification into the major EEC and Par Easternmarkets. The new marketingstrategy is projectedto increasenet salesby 502 between1987-90. However,renegotiation of a previousagreement with a localsteel processor, Centrin, is required. In additionto successfulmarketing, the plan calls for executinglong-delayed technical and operationalimprovements. It is estimatedthat TT$69 millionin investments are neededfor the requiredimprovements through 1987-88. Table 1.6 summarises the cash flow projected under the ISCOTT plan.

1.17 The management contract is tackling the typical post-staLt-up improvements, but after a costly five-year delay. kIheplan's goals appear realisticand do not dependon a price reboundor devaluation(both of which would make the task easier). Some anxietyeenters around the renegotiation of the managementcontract at the closeof 1987tthe acquisitionof a majorityequity stake by a privatepartner is underdiscussion. The present managers are expected to take the equity stake, but whoever does so, it is desirable that they contributeto the capitalinfusion the plan requires, rather than entering gratis. This approach would help the Trinidad and Tobago Government and serveas an expressionof commitmentto future viability. Ta.Lb-l: ACTUALAND PROJECTED ZSCOTT CAIN FLOW, 196441 (TTSmillion)

1904 108S 1096 1097 196 1069 so0 11

Net Sales M.2 168.8 288.0 412.6 499.5 56.9 612.7 621.2 NIbtProfit (195.5) (216.0) (284.2) (106.9) (04.6) 21.0 78.2 0.2 Total Receipts 547.0 265.2 4675 64.7 64.2 6.5 676.6 617.2 Disburssmmnft: Government Advances ------48.3 Purchases 122.5 109.8 151.2 249.7 U49.6 822.8 3.8 8.0 Prineipal 80.3 68.1 194.4 n.6 106.o 159.4 10.6 66.6 IntOrost 48.e 43.2 51.1 48.2 89.9 81.8 22.5 14.9 Taxe 12.9 12.1 15.4 06.1 14.7 12.9 11.6 0.2 Labor 60.0 61.8 568.1 68.6 M5.2 57.1 67.1 57.1 Consortium - - 48.8 69.7 26.4 11.4 - - Other Cost - - 50.9 52.7 48.9 46.6 48.6 48.6 Capital lnveetmnt - - 0.7 42.6 26.0 - - - Total 864.8 279.6 476.1 678.2 072.7 566.6 57.0 567.7

Total LAegat 1181.6 1146.0 1163.4 1167.0 1168.8 1156.5 1951.4 192T.6 Current Llabiltlles 187.8 826.7 867.0 871.7 868.6 262.6 189.7 152.6 Long Term:Loan. 8456. 469.7 410.8 814.8 216.8 122.5 67.2 365. Govt.Advancea 578.7 716.2 245.7 891.1 524.3 524.8 624.8 466.9 Euro-Loan - - 48.8 145.8 200.2 218.6 218.6 2U1.6 Total LIablittles 1105.9 1604.6 1966.8 1221.8 1246.6 1143.6 M00.6 867.0

Net Worth: Capital Stock 1112.6 1112.8 1889 186.0 1688.9 18U.9 1686.9 1681.9 Retained Earnings (1087.6) (1477.6) (1784.6) (1686.0) (1919.2) (1606.4) (1778.8) (1666.8) Total Liabilities a Net Worth 1161.6 1139.5 1183.4 1167.6 1168.8 1195.6 195.4 1927.6

haurm: ISCOTT. - 10 -

1.18 The ISCOTT plan is sensible and, if successful,vili boost output (alreadydoubled in 1985-87)by a further 252. As the foreign debt is retired, ISCOTT should contribute significantly to both domestic value added value and net foreign exchange earnings. Subsequent expansion via new investment is not under consideration, unlike in the methanol and fertilizer subsectors.

The Trinidad and Tobago Methanol Company (TTMC)

1 19 As with ISCOTT, the methanol plant was constructed as a wholly state-owned venture, but the total lnvestment was smaller (US$180 million) and the cost overrun more modest (52). The plant av-ears technically efficient, although electrical outagos and initial chnical modifications delayed attainment of full capacity until 30 months after start-up. At full capacity in 1987, the cash costs are just over US$60 a tonne, of which gas priced at US$1.061MCFcomprises two-thirds. That a plant with such a competitive cost structure still faces problems is testimony to the extreme difficulties caused by the excess capacity in the international methanol market.

1 20 Unlike ISCOTT, marketing arrangements (long-term contracts with three firms for 851 of production) permitted rapid attainment of ftll capacity (in excess of 390,000 tonnes). Yet, even vith low operatingcosts and assuredmarket access,the prices prevailing in the mid-eightieshave not provided an adequate margin for debt service. TTMChas an outstanding bank loan of US$50 million and suppliers' credits of just over US$65 million. Its debt/equity ratio is around 2t1. Repayment of the interest and principal on the bank loan commenced in 1985, and it adds the equlvalent of US$33 to each tonne produced at full capaclty operations in 1987. Repayment of the principalon the suppliers'credit commences in 1988. Wlth associated interest charges, it will add almost US$40 to each tonne in that year, tapering off to US$28 a tonne in 1992, the final year of debt servicing. The break-even price needed to service the full 1988 debt burden is therefore US$135 a tonne, whereas the World Beak projects prices of US$ ll0/tonneinto the mld-nineties. This figure contrastswith projectionsof the World Bank of over US$30i a tonne ln 1982,when the Trinidad and Tobago plant was sanctloned. The differencereflects the failure of the expectedmethanol fuel market to materialize.

1.21 Nelther mothballlngnor lower output will reduce the expected losses. However, there is scope for cost saving through a one-third reductionin the price of gas (to the levels paid by ISCOTT); lower insurance;a one-third reductionln sales discounts (presently10 of revenues); internationalization of the administrative services presently supplied by NEC; and release of TTMCfrom its contract to pay freight rates 501 above spot prices in order to cover the capital recovery costs of three state-owned (and yen-financed) methanol tankers. These measures would permit the methanol plant to generate adequate revenues to cover its operating costs and debt service charges at prices of US$110 a tonne in 1988, when the debt service is most burdensome. - 11 -

1.22 Some measure of the volatilityof the methanol market is given by the fact that as recently as early 1986, expansionprospects seemed promising. At that time, the Governmentof Trinidad and Tobago and ICI were negotiating for the construction of a second methanol plant at Point Fortin. It was planned that ICI would take 302 of the equity and the Government 30S with the remainder financed by the CDCIIFC. The project was costed at US$150 million. Of that, an estimated US$17 million wss the extra cost of construction required if the plant was sited at Point Fortin rather than alongside the other plants at Point Fortin location (which the Government favored for social reasons) and also brought pressure to trim the price of gas. Agreement could not be reached. Although NEC reports continuing interest in a second methanol plant, as well as in downstream plants (including a 25,000 tonne acetic acid plant, a 30,000 tonne formaldehyde plant and an MTBE unit), investment prospects in methanol appear slim until the viabilityof TTMC improves,i.e., until the debt burden is relieved andlor prices become firm.

The Fertilizer Sector

1.23 Fertilizeris the most successfulof the gas-based industries. Witk the exceptionof the recentlyconstructed, wholly state-owned urea plant, fertilizer production in Trinidad and Tobago has been undertaken by or with foreign partners. The first ammonia plant was constructed in the late 50. by W.R. Grace to serve the countries of the Commonwealth Caribbean. In the mid 70s, that company built a second plant, Tringen, as a joint venture in which the Government held 51X of the equity. A third and larger fertilizer plant, Fertrin, was brought on-stream in the early 80s as a joint venture between the Government and AMOCO,the country's largest producer of crude oil and gas. A wholly state-owned urea plant absorbs some 401 of Fertrin's output at full capacity (400,000 tonnes). Finally, another ammonia unit, Tringen II, is scheduled to enter production In 1988 and will raise total ammonia capacity in Trinidad and Tobago from 1.03 million tonnes to 1.48.

1.24 Cash costs for anmonia production in Trinidad and Tobago are estimated at US$80 a tonne, about the middle of the global price range and around $20 a tonne cheaper than US producers. The country is well-located to serve markets in North America, Latin America and Europe, but low international prices in the late 80. limit expansion prospects. This situation is unfortunate, since there are significant benefits from any expansion of existing plants, as noted earlier and as Tringen II demonstrates. The initial Tringen plant was highly successful: Grace was responsib.le for sales on a take-or-pay basis, and as the debt was retired and prices firmed, the joint venture cash flow expanded, prompting Grace to propose Tringen II in 1983. Tringen I has retired its third-party debt, and the new project (costed at US$190 million) is financed from internal cash flow and loan capital. The cash costs of the new plant will be lower than those of its sister plant, even though it will pay more for gas, because it will use 201 less gas than Tringen I. Moreover, significant savings to the joint venture in lower labor and overhead costs are expected from the expansion. Nevertheless, Grcre reported that the sales it made on behalf of Tringen in 1986 were unprofitable, and, although the position eased in 1987, the parent company plans to sell its worldwide agro- chemicals operations. Grace cites low margins, which it attributes to the high level of participation by state enterprises in global markets. - 12 -

1.25 Even though AMOCO's joint venture plant faces a more difficult launch than those of Grace and is potentiallyhigher cost, it appears less skepticalabout market prospects. Its view parallelsthat of the World Bank, which expects significantprice firming through the mid-term. Fertrin experienceda 30X cost overrun that pushed its debt/equityratio in excess of 732. It speedilypursued productivity-enhancingimprovements, includingthe upgradingof both productionunits in 1984. Plans are under considerationto boost capacity by 14X while simultaneouslylowering gas consumptionper tonne. AMOCO handled marketing during the first five years, but Fertrinwill assume full responsibilityin 1988. The original loan was denominatedin US dollars and will be retiredby 1990, but low ammonia prices have required further loans from the equity partners in order to cover debt service (Table 1.7). The 1985 devaluationadversely affected the plant and necessitateda TT$153 million write-down an account of the US dollar-denominatedloan. Since the shareholderloans (wSich carry 12X interest)have become burdensome,consideration is being given to their conversion into equity.

1.26 The urea plant, managed by Fertrin, is technicallysound. But it encounteredmarketing problems that depressedcapacity utilizationto below 901 in 1986 and 501 in mid-1987. Although Fertrin supplies ammonia to the wholly state-ownedurea plant that was completedin 1984, it wisely declined direct investment. Urea sales are more volatile than ammonia sales since they tend to rely more on spot markets. Operating losses were TT$20 million in 1986. The Governmentproposed to merge the urea plant with a new joint-ventureammonia unit, using its investmentin the urea unit as equity. NEC is consideringa new US$250 million ammonia plant (capacity550,000 tonnes), but an equity partner that could market both the increasedammonia output and the urea had not been found as of mid-1987.

1.27 Recent price movementshave not only depressedvalue added and net foreign exchange in Trinidad and Tobago's most successful gas-based industry, they have also dimmed prospects for further investment that two years ago appeared promising. In the subsector as a whole, netbacks on gas (the margin per MCF of gas left after allowing for processing and freight costs but before deducting gas extraction costs) have fallen from the protections in excess .of US$3IMCF during the 1979-81boom to around US$11niR for ammonia and negative for steel and urea.

1.28 Nevertheless,rebound potential exists from new investment as well as existing plants. Trinidad and Tobago has proven and potentialgas reserves in excess of 18 trillion cubic feet, sufficientto expand existing product lines and to support an LNG project. More immediately,further investmentin gas extractionis requiredto meet present commitments through the early 90s. AMOCO is presentlythe leading supplier,but the Government of Trinidad and Tobago prefers to diversify its suppliersbe bringing in its own SECC fields. Under the most conservative estimate (assuming that only proven reserves are extracted and using a 141 discount rate), the long-runmarginal cost of extractionfrom the fields is US$0.81/MCF. That figure falls to US$O.26/MCFif credit is given for the extractionof probable as well as proven reserves and also for the revenues from the sale of the sizable condensateresources. Morgan Grenfell expects that it will be possible to raise the requiredTT$800 million on a project- financedbasis, with no Governmentguarantees. - 13 -

1.29 In the longer term, TennecolMidcon,which negotiatedfor a large LNG project with the Trinidad and Tobago Governmentduring the second oil boom, has once move expressedinterest in LNG. The recent overture is based on expectations that US environmentalistconcerns will place a premium on clean, safe offshore gas imports in the late 90*. Construction of the LNG plant would need to start around 1992.

The Oil Refinint Sector

1.30 The gains in GDP from the expansionof gas-basedindustries have been offset by the collapse of the other major hydrocarbon-basedindustry, oil refining,since the second oil boom. The rated capacity of the country'stwo oil refineriesmore than halved in the mid 80a, from 460,000 barrels per day (bpd),while combined throughputshrank to below 90,000 bpd. Annual losses of the refinery industrywere projected at over US$100 million in 1985, when the state-owned oil company, Trintoc, purchased the Texaco refinery.

1.31 There is no firm timetable (such as that for ISCOTT) for restoring the viability of the refining operations. It remains far from clear whether, without offshore investments in distribution facilities, the Trintoc refining complex can achieve viability. Closure of the Point Fortin refinery appears desirable and might be facilitated by establishing of an export processing sone thure to amelioratethe unemployment.

PROSPECTSFOR THE NON-HYDROCARBONMANUFACTURING SECTOR

1.32 The uncertainties surrounding the future of the export-dependent hydrocarbon-basedindustries underscore the benefits from diversification into other mr-ufactured exports. Yet the non-hydrocarbon manufacturing sector is strongly import-orientedt it generatesnegligible exports and is a large net consumer of foreign exchange. It depends heavily on the high- cost processing of overwhelminglyimported inputs and reflects the reluctance of previous administrations to wean the sector from infant Industry status. In particular, restrictions on competing manufactured imports and the rolling-over of infant industry incentives have assured good margins on domestic sales, so that the attraction of exports and competitivepressures are diminished. Reliance on captive demand had led to the neglect of marketing skills. Instead, public institutionssuch as the IndustrialDevelopment Corporation (IDC) have stressed technical matters. Private institutionshave reinforcedthe split between production of previously imported items; private importershave tended to contract domestic production out to affiliateswhose job was physical production rather than production and marketing combined. The cost of such a system has been borne by the consumer in terms of higher prices, lower quality goods and the higher taxation needed to offset the duty concessionsgiven to the manufacturingsector. However, the post-boom contractionis leading to shifts, spurred by the devaluation. They could be acceleratedby Government reform of incentivesand the support institutions. Table 1.7 ACTUALAND PROJECTED fERTRDN PERFORMANCE, 1091-U2 (TTS MlIllIon)

AstuaI Ppei.etad 1061 1902 1098 1984 1986 1986 1907 1098 1909 1990 1061 1092

Not Sales Revnue 16 128 212 NO 264 277 Y7 321 888 846 875 Op.ratin Cost 15 181 169 166 167 240 248 256 289 262 298 Operating Project/(Loee) 8 (8) 48 119 97 87 64 68 84 64 67 69 InOeret Exp 9 68 67 64 69 75 68 27 24 19 17 14 OtJoe Incoce/(Lon) - 4 12 O (146)a/ 6 4 S 4 4 4 4 Tax ------* S 27 48 47 Nbt IncomsLose (6) (87) (82) 42 (116) (82) (15) 86 41 22 11 12

MemoItems Sales (Thomsndteneo) 6 8M9 667 738 760 09 780 770 776 77f 770 77 Productlon (Thoumandtonnes) 56 870 n14 789 782 708 m 770 770 77n 776 776 ShareholderLoens (CT MIII.on) 87 9 1i6 - S9 158 14 n.o. n.o. nos. n.o. n.e.

Rwenu (TTI/tonne) 876 SU U89 414 86 889 806 412 429 446 464 481 Revenue (ITS/tonne) 154 189 129 178 n.o. 6I .110 114 119 124 129 1S4

A/ Includes a loe of 1T165 million on US-dansinatedloens.

Srtw Ferbrlm. - 15 -

1.33 In the absence of clear target subsectors,measures to expand manufacturingoutput must be oriented toward individualfirms. In this context, the existing frameworkof institutionsand incentivesare critical constraints. Individualfirms in Trinidad and Tobago exhibitwide variations in behavior,with successfulcompetitive behavior being displayedby some of the least likely firms. Nevertheless,within Trinidad and Tobago, there is a general consensusthat non-hydrocarbonresource processing offers considerable scope for expansion, whereas labor-intensive and assembly industries do not. A comparison of these two subsectors follows; it qualifies these conclusions,illustrates the manufacturing sector's problems, and points to opportunities that enterprising companies are already grasping.

Non-HydrocarbonResource Processinft:Food Processing

1.34 After the gas-based industries, processing of non-hydrocarbon resources is widely perceived to offer the strongest base for expanding manufacturing output, employment and exports in Trinidad and Tobago. Food processing is perceived especially favorably, and important successes appear to support this view. Closer inspection reveals, however, that this success owes more to the initiative of specific individuals and firms than to an inherent comparative advantage. The performance of the sector as a whole has been disappointing:the food processing industry essentially engages in repackaging; it is a heavy consumer of foreign exchange;most inputs are imported (the sector is estimatedto import more than 80% of its inputs and to be responsiblefor one-quarterof total food imports);there are relativelyfew links to domestic agriculture;and extra-regional exports ran less than 5X of total sales in 1983. Packaging material in particular is Imported, since domestic production of cans and polyethylene film has been relatively Inefficient.

1.35 Food processors complain that domestic food supplies are unreliable, overpriced and of variable quality. In fact, domestic food production is overly diversified and relatively uncompetitive. It needs to concentrate on growing fewer crops with greater efficiency. At the same time, the country's packaging industry must improve its price, quality and product range. The suggestion has been made that large-scale agribusiness is required to supply some food inputs either by growing them itself or by coordinating the generally small farms of Trinidad and Tobago. The large state-ownedsugar producer, Caroni, could pay a useful role here, assuming certain reorganizationalchanges to put the company on a more efficient basis.

1.36 Nationalizedin two stages between 1970 and 1975, Caroni had a capacity of 220,000 tonnes that it never attained because of declining yields, deterioratingsucrose extraction,high absenteeismand arson. As output fell, costs soared, and Caroni became one of the world's highest cost producers. While the situationhas improved,Trinidad and Tobago will be fortunatein 1987-88to produce at US$6001tonne,three times the cost of an efficientproducer. Plans to divest cane productionto smallholdersas part of a redundancyscheme seem likely to depress both yields/hectareand sucrose extraction further. - 16 -

1.37 To reduce its financial dependence on the CentralGovernment and to play a more active role in lesseningthe food importbill, Caronihas been devotingan lncreasingamount of Its resourcesto the productionof food crops. Some are still in the experimentalstage. As part of the offort to work out its own survival,Caroni has of necessitybecome more involved In the agro-industrial business. Caroni, however, should not got a monopoly in tke field.

1.38 The rationalization of Caroni is likely to depress agro-industry in the mid-term, but there will be offsettingexpansion. For example, advantage has been taken of spare air freight capacity to supply fresh produce to the EEC markets, notably off-season fruits to the UK. One such manufacturer has successfully penetratedthe health food juice market in the United Kingdom and is preparingto move into the NorthAmerican market. A second food manufacturer, employing 400 workers, has expanded its share of the CARICOMmarket for confectionary, snack foods and cereals to around one-third of stles and has begun to enter the US market via Puerto Rico. Export incentives, including grants of 50S toward market research and tax offsets equivalent to 150S of export profits, were used. However, duty- free importsand negativelisting of rival internationalbrand name productsare consideredessential to maintainingthe highermargin domesticmarket. That a firmwith no clearcomparative advantage, but with high domestic value added can export into a highly competitive market, suggests the primacy of initiative, as the determinant of export performance.However, over the shortterm, the agro-industrysector may actually contract as gains by expanding firms are more than offset by the losses of firms responding to structural change. Non-Hydrocarbon Resource Processint: Construction Industries 1.39 The expected (but never carefully researched) linked investments In downstream processing from ISCOTThave been disappointing. The subsector is dominated by locally owned Dansteel, which is the parent company for two subsidiaries using ISCOTTproducts. The smaller subsidiary Is the TT$20 million Trinidad Steel and Wire Products Company Ltd., which has 36,000 tonnes of capacity and employs 157 workers in the productionof nails and drawn wire for the CARICOMmarket. The larger subsidiary is Centrin, which represents an investment of TT$120 million in a 90,000 tonne plant that transforms ISCOTTbillet into merchant hars and reinforcing bars. The plant employs 250 workers and exports 90S of its output, mostly to Puerto Rico. Mindful of US eati-dumping charges, Centrin shunned Government incentives and instead extracted an extremely favorable pricing agreementfor its key Input (steel)from the previousISCOTT management. 1.40 A pricingdisagreement between ISCOTT and Centrinhas been caught up in negotiationsover ownershipof the steelplant. Centrinargues against foreign owuership. ISCOTT management (also the prospective foreign equity partner) claims that Centrin's operations are at variance with the long-term plan for upgrading product quality and value and that vertical Integration is unnecessary, since Centrin is free to import billet at competitive prices. To the extent that this agreement prevents ISCOTT from sellinghigher quality products at higherprices, it depressesthe revenues of the main plant. If the Centrinpricing agreement is legallybinding, - 17 - the Trinidad and Tobago Government may hove to compensate one of the signatories so that the agreement is voided and the steel rehabilitation plan can be Implemented.

1.41 In 1982, price controls in the cement industry required a subsidy of TT$69 million. Even so, the inefficientstate-owned cement factory still lost almostTT$7 million,even with cheap electricityand gas supplies. In the following year, capacity doubled with the start-up of a new plant,and price controlswere easedand subsidiesphased out. In 1984,the expandedfacility received no subsidy,operated at 81% of capacityand recordedrelatively modest losses of TT$12.8million. However,as Table 1.8 show, the productivitygains and loss reductionwere bAltedby the sharp declinein domesticdemand that accompaniedthe up recession. Cement exports, which recommenced in 1986 in order to make the shortfall from the sister Barbados plant, are projected to grow to fivefold in 1987, as the Trinidad and Tobago plant uses this avenue boost capacity utilization and reach break-even. Still greater efficiency can be achieved through closure of the original kilnasand through greater energy conservation and labor productivity in the new units.

Tgble 1.8: PERFORMANCEOF TRIN!IDADAND TOBAGOCEMENT LTD., 1982-86 Jan-Jun. 1982 1983 1984 1985 1986 1987

Volume (thousand tonnes) Domestic Demand 457.9 485.6 410.1 341.5 319.3 152.7 500.0 Domestic Capacity 250.0 500.0 500.0 500.0 500.0 186.2 Domestic Production 189.2 389.5 405.4 328.1 329.9 Exports - - - - 9.5 26.1

Key Input Costs (TT$It) Labor 90.65 66.82 65.24 68.77 68.22 40.14 Electricity 3.26 1.57 9.47 9.18 8.06 9.00 i'95 Gas 12.80 6.06 14.39 13.81 19.88 Subsidy 363.99 11.40 - - - -

PerformanceIndicators Capacity Utilization (Z) 76 78 81 66 66 ?4.5 700 Output/Worker(tonnes) 350 620 703 593 611 (27.03) (40.29)* Profit (Loss) (TT$ltonne) - (49.41) (31.65) (17.24)

(C) Includes interest on government loans towards capital expenditure on the new plant which was comissioned in 1984 Source: Trinidad and Tobago Cement Ltd.

1.42 Other non-hydrocarbonresource-based projects under consideration include a joint venture with an Italian firm for the production of ceramic tiles for the US market; the productionof asphalt roofing tiles for the North American market; and the manufacture of teak furniture. There is also interest in processing Guyanese resources such as kaolin, taking advantage of Trinidad and Tobago's cheap gas as well as its political stability to attract investment in processing that is unlikely to be of attracted to Guyana, given that country's economic problems. Only one these projects was firm in mid-1987. - 18 -

The Assembly and AssociatedComgonent Industries

1.43 The assembly industriesare dominatedby the InefficientCKD automobileassembly firm. Some assembly activities,however, notably kitchen appliances,managed to expand their export sales to the CARICOH market after the devaluatio. The domestic assembly of automobileswas pushed in part because of the potentialto spin off componentmanufacture. The operation is high cost, produces an inferiorproduct and has spawned an Inefficient component industry.

1.44 The industry is plagued with surplus capacity. Domestic demand peaked at 24,000 vehicles in 1983 and is projected to contraot to 6,800 in 1987. While annual demand under Inormale conditionsis edtimated at 10,000 units, the hree domestic assembly firms could produce 30,000 units per year on a single shift operatingfive days a week. One assemblerhas closed, and there are plans to rationalizethe two remainingunits by reducing the number of models from the original 15 to 8, then to 5 and finally to 2. Plans to shift some domestic assembly capacity to buses and light vans are also being considered. Closure of the sector is presently ruled out by unemployment considerations.

1.45 The linkages generated by the assembly Industry, which include locally manufactured tires, paints and batteries,have been disappointing. One factory has manufactured tires since 1986, receiving duty-free Import concessions,negative listingof competingproducts and a 10-yeartax holiday. It produces a high cost, low qualityproducts even though Imported tires cost 25Z more than domestic ones (includingduty of 841), they are preferred. Profitswere made in the domestic rubber industry (which the tire factory dominates) during the boom years, averaging61 of total sales in 1980-82,of which one-thirdwas attributableto duty concessions. In the mid 80s, the tire plant operated at around 552 of capacity (it has never surpassed652 capacity),supplied just under half the domesticmarket and lost money. In the absence of managementchanges and considerable new investment,there is no possibilityof exporting.

1.46 The strategy of Increasing the sourcing car components is favored by the IDC, even though it has been very disappointing. Local sourcing has boosted the cost of cars: the car kit shipper makes a deletion allowance where local products are to be substituted, but the allowance is seldom more than a fraction of the local manufacturing cost. Some observers suggest that Trinidad and Tobago should opt for global sourcing by concentratingon a single component (springs,based on ISCOTT steel, were suggested)that it cou1d produce on a scale sufficientto capture the economies of long production runs. It Is unlikely that this approachwill be feasible. In any case, it is being overtaken by the switch--occasioned by ever shorter product cycles--from production line to flexible operation in industrialcount,{es. Such a technologicalshift may eventuallyrelieve tiny countriesof the disadvantageof a small domesticmarket, but that is a long-termprospect.

INSTITUTIONALREFORM FOR INDUSTRIALPROMOTION

1.47 Since subsector targeting has not worked, a company-level approach is presentlymore appropriate: Trinidad and Tobago firms show clear evidence of being able to flourish in specialitymarket niches ranging from - 19 - offehore engineeringequipment through sp¢cialitygarments to ethnic food. Initially there are opportunities to link underused domestic productive capacity and cheap (relativeto industrial countries) skilled labor to overseasmarkets. Already In post-boomTrinidad and Tobago, more productive use is being made of lnfrastructure, manufacturing plants, labor and spare freight capacity. Key Government institutions are still focusing too much attentionon the longer term goal of attractingnew invetment. Marketing 1nwledge and skills, rather than new investment,ore the Immediatebottleneck: the manufacturingsector of Trinidad and Tobago requires contact between domesticmanufacturers and prospectiveIndustrial country marketers/investors.

1 48 The new infrastructure,which appeared inadequateunder the boom conditions, Is more appropriate in the post-boom period, as the economy has contractod and initial teething troubles have been reduced. Significant I$provements have occurred In electricity generation and transmission;road congestionhas eased; telecomnunicationsare effective; and shipping turnaround times have been shortened, as port throughput has declined, with workers responding to the recession by accepting real cuts in wages and being more responsive to productivity Improvements. For example, a clay brick factory laid off 95 of its 410 workers over a single year without any loss of output; or again, the workforae In a plant manufacturing offshore oil Industry equipment instituted a bonus system that boosted output eight-fold and raised labor costs by only 402 in 1985-87. A CSO comparison (Reviewof the Economv, 1986, p 59) of change in the average weekly earnings and productivity of productiveworkers In Industry provides an overview of the switch. In 1984, wages increased 141, and productLvity grew by only 5S. However, in 1985, wages grew 51 and productivity 101, while In the first six months of 1986 wages declined 91 and productlvityjumped 311. The new equipment installed by mannfacturers during the boom Is now frequently underutilized, and the need to amortize it exerts pressure for =re efficient use which in turn gives a strong Incentive to seek out new markets.

1.49 Finally, turning to freight, the large physical imbalance between non-oil bmports and exports means that considerable spare export capacity Is available at attractiverates by both air and sea. Trinidad and Tobago's institutions, long preoccupied with attractivg new investment to an expanding captive market, need to move quickly to bolster the push to outside markets that post-boom conditions have launched.

Industrial Develonment Corporation

1.50 The Industrial Development Corporation (IDC) continuae to dominate industrial policy as it has for almost rhree decades. However, it has been slow to exchange its traditionally strong nationalistic and technology- oriented role as the promoter of local manufacturing production for that of the commercially orlented, outward-looklng seeker of foreign Investment and export markets that is now urgently required. In contrast, the comercially oriented agencies established to promote investment and exports (the Export Development Corporation and the Development Finance Corporation) are underfunded. Moreover, the Ministry of Industry and State - 20 -

Enterprises functions In the shadow of the IDC and is primarily a buffer between it and the legislature. The Ministry's potentially important monitoring and coordinating role appears to have devolved to tho IDC, which lacks the mandate, expertiseand authority to assemble the data needed to execute that task successfully. Some reallocationof resourcesbotween these institutionsand away from the IDC is desirable.

1.51 The IDC clarifiedthe incentiveftemework in a review document in August 1987. It also establisheda one-stop facility to reduce the bureaucracy required to process applications. While such moves are welcome, the review document is a compendium of past and present Incentives which fails to tackle the reductionin import substitutionincentives that must complementexport inducements. Moreover, its list of target Industriesis merely a cataloguethat avoids prioritizingthe options. In short, the document lacks well-informedinsight, shows little sense of urgency and--aboveall--displays no evidence that a clear timetable for industrialreorientation exists.

1.52 In addition to the usual package of incentivesavailable to new Investorsin many countries (such as the provisionof industrialestates, factory shells and soft loans for small investors),the IDC relies heavily on customs incentivesthrough reduced import duties on Imported inputs and tariff protectionof 45Z for final product manufactures. The incentive concessionsare reviewed at five-yearintervals and are usually renewed. More important,imports that compete with domesticallymanufactured items may be subject to a quota or be banned by being placed on the "negative list." While price controls are availableto prevent potentialabuae of any monopoly in the small domestic market, such controls are primarily directed at a few basic items. This combinationof near-automrtic incentive renewal and a heavily protected domesticmarket does little to encourage domesticmanufacturers to strive for greater productive efficiency,improved marketing skills and export expansion.

1.53 Progressivelyreplacing the negative list with tariff protection will build a more competitiveenvironment. A stamp duty will afford the roquired rate flexibilitythat CARICONpresently denies Individualmember countries. Subsequently,a phased reductionin tariff protectioncould be used to signal and promote an Increasedorientation to exports. It will also be necessaryto prevent traders simply runningtheir manufacturing investmentinto the ground and then revertingto importswith a high profit margin. Investmentand export incentivesfor manufacturershave a role to play here. In particular,greater use could be made of tax holidays for Industrialinvestors. It will also be necessaryto liberalizecompetition between importers,eliminating back-up sanctionssuch as the preference for manufacturersover traders in the allocationof foreign exchange and controls on import mark-ups.

1.54 Since the IDC investmentpolicy document has not produced a phased industrialreorientation strategy, there is a case for setting up a special task force. It could functionas part of a transfer of the industrial policy formulationmechanism to the Ministry of Planning or to a streugthened Ministryof Industry and State Enterprise. - 21 -

1.55 The export Incentivesfor manufacturoreIncludes tax reductions equivalent to 1501 of export saleml market development grants covering 502 of expenses; export creditinsurance; and preferentialaccess to foreign exchange. The productivity drive and surplus capacity created by post-boom conditions is raising Interestin such incentives,but, unfortunately, their effectiveuse 4s bluntedby inadequateinformation on exportmarket opportunitiesand by the underfundingof exportsupport institutions. Havingclosed its overseasoffices in New York and Torontoand also neglectedEEC opportunities,the IDC proposes to make greator use of Trinidad and Tobago'.overseos embassies and consulatesto Identifyexport opportunities. This approach, which reflects a preference for relying on state involvementand *growingyour own,'which is likely to be too slow and cumbersome. An alternative strategy would be to hire experienced foreignmarketers (individuals and consulting firms) whose job would be to link existintunderutilized manufacturing capacity in Trinidadand Tobago with prospectiveImporters (including investment partners) in target marketssuch as North America,Western Europe and the Far East. The consultingfirms might be encouragedto hire localswho couldsubsequently establishtheir own marketingenterprises, so that Trinidadand Tobagocan acquiremarketing skills and institutionsover the long term. Hiring establishedexpertise offers a flexible approach capable of rapid expansion and, if required, contraction. Export Development Corporation 1.56 The Export Development Corporation (EDC) was established in April 1984 as a largely, autonomous government agency for the promotion of exports. The EDC's activities, which have been underfundedincludes the maintenance of a data bank on market opportunities; publicity for export achievements; promotion of overseas export fairs; the establiashment of an export trading company to market for small traders who cannotperform that function for themselves; and administration of the Market Development Fund, which disburses grants equivalent to 501 of the expenses incurred in developing new markets. Between November 1985 and December 1986, the EDC gave 69 grants totaling TT$634,000 under the Market Development Fund. Twenty-sevenof the applicantsdeveloped some exports,but two (the steel fabricator,Centrin, and AngosturaBitters) accounted for all but TT$3.5 millionof the TT$40.6million total exports generated. In responseto the underfunding,EDC has appliedto the EEC under the Lome Conventionfor two loanstotaling 2 millionEcus. It is difficultto evaluatethe effe_-tivenessof the EDC under such constrainedconditions. 1.57 EXICO (theExport Credit Insurance Agency), which is under EDC, providesexport finance insurance to a smallnumber of exporters,mostly in the CARICOMmarket. It has a staffof only two and TT$200,000in funds. It is allowedto insureup to 35 times its shareof capital,l.e., up to TTS7 millionat present. EXICOhas requesteda tenfoldincrease in its share capital and permission to offer preshipment insurance (input purchase Insurance), whichwould be particularly beneficial to manufacturers. Its experienceparallels that of the EDC and underscoresTrinidad and Tobago's failureto reorientswiftly away from Importsubstitution toward export promotion. - 22 -

Development Finance Coruoration 1.58 The DevelopmentFinance Corporation (DFC) we establishedIn 19i%' to providelong-term funding to manufacturingin the face of a risk-averse domestic private banking system. It draws 502 of its funds mostly from the European Investment Dank, with the balance made up from Government loans, which seem unlikely to be renewed. The DFC le relatively small, with a nominal portfolio of TT$250 million, of which 782 comprises long-term loans and most of the remainder short-term financing for raw material purchases. 1.59 The role of the DFC In Industrial finance io small in relation to that of the CentralBank. D'C Interestrates are not subsidised,although on the long-termloans they iroslightly below commercial rates for short- term financing and are at onardraftrates. The DFC we advorselyaffected by the boom: its loano peaked In 1982 and were heavily skewed toward the construction Industry (and within that sector, toward quarrying), which we especially severely hurt by the recession. Other sectors that performed badly includedlarge-scale clothing maufacture and smallbusinesses. One- third of DFC's loans are non-performing. The more secure loanshave been to the larger and more diversified companies with little dependence on Government spending, which possess the flexibility to adjust to market upheaval. Virtually none of DFC's loans support exporting firmos although some clients were considered capable of exporting, they lacked the incentive to do so. 1.60 The DFC appears to be a commerciallyoriented agency rather than an arm of the bureaucracy. Its 12-man board contains no Government officials,although four have had long experienceIn the civilservice. Nevertheless, the DFChas come under pressure to support state enterprises, pressure it has resisted for fear of orsening its portfolio performance. It is seeking to strengthen its role as a long-term lender to the manufacturing sector and will concentrate on loans that boost employment and exports. The DFC Is directing viable projects that do not meet these criteria to the commercial banks. It is also seeking to sell to the commercial banks some of its performing loans that are of low national priority, notably In the printingsector. The DFC considersitself technically well-equipped to conduct economic appraisals of projects and benefits in terms of data quality from the confidentiality It can guarantee to clients. It also feels it can help fill gaps In the marketing skills of domestic manufacturers. However, somewhat ominously, the DFC had few export-oriented projects under study in mid-1987. 1.61 The strongly nationalistic policies of Trinldad and Tobago during the two oil booms shrank foreign participation In the light manufacturing sector and Inadvertently diminished an important post-boom conduit for marketing expertise and investment. The IDC industrial policy document notes a preference for joint ventures, but will permit up to 1002 foreign ownership where the enterprise relies wholly on foreign capital and/or Is totally oriented to the export market. These requiremonts may be eased where extensive use is made of local raw materials or i ere significant employment is promised. Foreign purchase of local fims is allowed up to a max,mum of 202 before an 'Allen's License* is required, and favorable consideration Is given for applications for external capital needed to - 23 -

avert business failure or to carry out a significantbusiness reorientation. However, many businessesare reserved for local investors. The fears behind the nationalisticlegislation are understandable,but measures to encourage foreignparticipation are needed. The disincentive to foreign Investmentlingering from past policieswill take time to recede.

1.62 The IDC industrialpolicy document notes that an Export Promotion Zone (EPZ) Is being incorporated into the Piarco Airport development plan and that a second zone may be considered at Point Fortin. The report e- resses reservationabout the long-termimpact of these zones, although substantial short-term (employment) gains are anticipated. In Trinidad and Tobago, it is generally believed that labor is too expensive to compete with alternative Caribbean locationst wage rates in Barbados are estimated to be 852 -f those in Trinidad and Tobago,while those in Jamaica are 40%. However, Trittdad and Tobago has excellentaccess to European and North American m&rlkts and is politicallystable. It should capture market niches rtothe industrialcountries now for its more skilledworkforce as a first step ia realizing its potentialfor efficienteconomic management and an increasinglyproductive manufacturing sector.

1.63 The two major problems for Trinidad and Tobago are the present dearth of marketing expertise and the absence of a clear strategy for shifting emphasis away from import substitution to export production. The key Government agencies recognize the need to shift priority toward competitive export manufacture, but they have been slow to do so. The newer export institutions have been starved of funds, while the older ones, which dominate the available resources, are burdened by past practices (and in the case of the DFC, the financial burden thereof). A task force with a strong commercial orientation, perhaps could be setup under the Ministry of Planning. Its functionwould be to plan a phased shift towards export orientation. It should clearly distinguishbetween two taskss first, the urgent short-termneed to link underusedproductive capacity with external markets (drawingheavily on foreign expertisein the first instance)and, second, the long-termgoal of triggeringnew export-orientedinvestment. The task force should address the incentivesystem and consider carefully the relationshipbetween manufacturersand traderst inducementsto the former may require reinforcementthrough disincentivesto the latter.

CONCLUSIONS

1.64 Boom conditionsaggravated the structuralweaknesses in Trinidad and Tobago's non-hydrocarbonmanufacturing sector, renderingit more inwardlyoriented and uncompetitive. The gas-based industrieshave a long gestationperiod and their prices move broadly in line with energy prices so that they representonly a minimal shift away from dependenceon hydrocarbons. They are potentiallycompetitive at prices set by the replacement costs of efficient new producers. As the usual technical and managerial post-start-up improvements take effect, existing plants can cover their cash costs at prevailingdepressed prices and also make some contributionto debt service. The most problematicplant, ISCOTT, is embarked on a prudent productionand marketing strategythat promises,on a - 24 -

sunk cost basis, to make the plant self-financing after 1988. If its plan succeeds, it vill boost manufacturing value added and net foreign exchange earnings. The other gas-based plantscan augmenttheir rebound as debt Is retired and prices improve. The resulting boost to their long-term viability will open the way for further lnvestment in expansion and also in linked industries. Unfortunately, the timing (and even certainty) of a price rebound cannot be accurately forecast, while depressed pricea have postponed the modest new project investment in ammoniaand methanol that was widelyanticipated less than two yearsago. 1 65 The non-hydrocarbonmanufacturing sector also showspotential for rebound. The devaluationhas improvedcompetitiveness. The post-boom recession(together with the resolutionof initialteething troubles) has reducedinfrastructure congestion; coaxed productivity Improvements and realwage cuts fromworkers; spurred manufacturers to seekmarkets for idle plants; and led shippersto offercheap rates for idleoutbound freight capacity.

1.66 There aro unlikely to be any sizable imnediate new investmentsin the manufacturingsector, and, althoughthere is c^^siderablemedium- to long-tormpotential for both a reboundin outputand enhancedexport earnings,non-hydrocarbon production may initiallyfall further,while manufacturingemployment will almostcertainly shrink further. Speedy reform of the industrial incentives and measures to preserve the 1985 devaluation edge are an immediate priority. A flexible exchange rate policy, supplemented by appropriate policies, would further augment competitiveness.

1.67 A task force should be established to reorient industrial policy and set concrete goals for reform of the non-hydrocarbon manufacturing soctor. Since industrial targeting has failed in the past and there are no manufacturingsubsectors with a clearcomparative advantage, Government supportmust encourageenterprise initiatives by individualfirms The incentiveregime requires reform as part of a bold, incislvereorientation strategythat clearlyrecognizes the need to switchemphasis away from domestic to exportmarkets; from long-terminvestment toward short-term use of idle capacity; and from production technology to commercial marketing. Assuming that the resources for this task are fixed, then more resources will have to be givento thoseinstitutions that are responsive to these needs,notably the EDC and EXICO. The deficiencyIn marketingexpertise should be addressed as quicklyas possibleby hiringindividuals and firms from abroad.

1.68 Besides bolstering export initiatives, it is necessary to reduce the attractionof the domesticmarket. To do so, the negativelist must progressivelybe replacedby tariffsupport using a stampduty and other measures to circumvent the inflexibility that membership of CARICON imposes. To discourage manufacturers from running their plants into the ground and substituting lucrative trading monopolies for production ones, complementary measures are required to increase competition and control margins in the import business. - 25 -

1.69 Tabl* 1.9 shows t'&at TT$650 million in new loans wee made from revenue received by public companies during 1986, mainly utilities, and pushed the cumulativetotal to TT$6.205 billion. The reduced role for the Governaent In directly productive lavestment (forcedtonit by constrained financial circumstances) is welcome provided the breathing srce is used to improve the efficiency of the state-ownedsector.

TABLE 1.9: NEWLOANS TO PUBLIC CORPORATIONWIN 1986 (TT$ Million)

Corporation Loan

Farm"n, Forres Park Ltd. 0.269 Caroni (1975) Ltd. 115.000 Food and Agriculture Corporation 0.832

Nanufecturfin National Energy Corporation 7 375 Trinidad and Tobago Electronic., Ltd. 2.000 ISCOTT 57.822

Transportation National (Secondary Roads) Development Company, Ltd. 7.224 Port Authority of Trinidad and Tobago 66.510 Public Transport Corporation 132.322 Trinidad and Tobago (BIIA International) Airways Corporation 18.000 Chaguramas Development Authority 0.832

Utilities Trinidad end Tobago Electricity Commission 39.268 Trinidad and Tobago TelephoneCo., Ltd. 29.981 Water and Bewerage Authority 168.029

Other 3.037

Total Loans made in 1986 650.361 Cumulative Total Loans to December 31, 1986 6,205.284

Sources Renort of the Auditor General on the Public Accounts of the Republic of Trinidad and Tobaao. Year Ended December 31. 1986 mimeo, Port of Spain, paras. 5.08 and 5.09. - 26 -

Chaiter II

THE AGRICULTMRULSECTOR

AGRICULTUREIN CONTEXT

2.1 Before the developmentof petroleumexports, agriculturewas the principal earner of foreign exchange in Trinidad and Tobago, but in Trinidad'spost-World War II oil-and gas-basedeconomy, all of the traditional export crops hav, experienceddeclining outputs and exports. Agriculture is now a relatively small sector in the economy. In 1986, it produced about 5S of the GDP and employed 112 of the labor force, and It is no longer a major source of foreign exchange (Table 2.1). Sugar Is the only significantexport crop, with about 1X of foreign exchange earnings in 1986, but it is kept afloat only by massive domestic and foreign subsidies.

2.2 Despite its diminished status in international markets and its small size, agricultureis accorded a prominentplace in policy discussion, as it is expected to perform several Importantroles: (i) to achieve food security for the country; (ii) to employ the existing farm population at decent incomes; (iiI) to act as employer of last resort for the unemployed In other sectors of the economy; (iv) to earn foreign exchange; (v) to provide raw materials for industry, and (vi) to perform certain environmental tasks. Numerous analyses of the sector have been made in recent years, and Governmental expenditures on agriculture are relatively large, reading approximately US$175 million in 1986, equal to about 67Z of value added in agriculture.

Comparative Advantate

2.3 Despite numerous studies, little analysis has been done on which, if any, crops and agriculturaltechnologies have potentialcomparative advantagein the medium to long ternm. The export data indicate that Trinidad and Tobago generally lacks comparative advantage in agriculture at the prevailingexchange rate. Table 2.2 lists the 10 three-digit agricultural and agro-processed exports with more than TT$1 million in export revenues in 1985 (in order of value): sugar, rum, cereal preparations(mostly biscuits), coffee, cocoa, food preparations,aromatic bitters, non-alcoholicbeverages, citrus juices and chocolatepreparations. These 10 exports accounted for 94.52 of total food and beverage exports, the total of which, however, accounted for only 2.1Z of total exports.

2.4 Aside from sugar, coffee and cocoa (all heavily subsidized),there were virtually no crop exports. Only aromatic bitters and rum, both processed items, were exports of any size (minor) in which Trinidad and Tobago clearly demonstrated competitiveness In the world markets in 1985. Within CARICONWstariff walls, Trinidad and Tobago's most significant agricultural or food export, biscuits, was based almost entirely on imported inputs, as were all but one of the five items primarily exported to CARICON. nuiLt _Ium JZDIbsm I^lam ICInLrW tom o

ma. ...an p m tam.. s.l" tam tamlo Produe. CUPert Prod... bxport_ h.oet pro". eporte Prodc. 15torts Prod... Eaporte Pro.. bport Prod.. ftpor Prod... _t Prod..

51.0 62.2 .0 64.1 114.8 86.0 U9.4 57.2 12.4 110.6 112.1 64.0 0.S 6.6 79.9 u1.0 77.4 uier t('000 to°) 12. 57.2 n.4 - 79.9 U.0 77.4 6.2 9.7 64.1 0. M.-.0 LocaI C 12.6 10.6 112. 6.0 9.o 66.7 - 87.4 - 5.0 - - - - - 16. - 80.4 Imported RawSber ------1860 1501.1 147 165.0 19. 1.0 16.0 16.0 1100 17A 1860 16.0 Come D.... (tm) 8060.0 47.0 230.0 2111.0 8148.0 2910.0 8.0 14.1 m.0 100.0 1.7 16.0 109.0 682.0 ne 2141.0 75.0 180.0 Coffee Sesi, (ton) 44.0 81a.0 m20. 660.0 240.0 1016.0 A.S. n.e. 661.0 'm.0 1267.0 210.0 Ion.0 OrePG (tur) 1664.0 041.0 1716.0 4.0 n.e. n.e. - 49.0 - 0.0 - 4.0 - 6.0 - WleI fruit (taft.) - 686. - 18.0216.0 - 297.0 - 10.0 n.n. n.-. - 760.0 - 760.0 - 311.0 Juice ('000 lIter) - 1200.0 - 16.0 - 106.0 n.e. n.r. 71.0 2514.0 1997.0 1629.0 2740.0 Graweflts (to") 66.0 409.0 298.0

- as - *. n.e. n.n #8.0 - 72.0 - 2.0 - no WWI- fruit (ton) 665.0 276.0

- 66.0 - 40.0 n.s. n.e. - 142.0 - 178.0 - 8e.o Juice ('o0o liters) 107.0 818.0 129.0 5.1 8.9 6.8 5.6 4.5 4.8 Copra ('00 tons) 6.9 4.1 5.2

tobl UD" (to) 26.6 1.5 70.7 .6S 82.0 41.2 61.4 43.5 T _b..o.(tiet) 165.7 no 14.1 na 46.0

a.. Oat ovallbleb..

Sours Cwitral Statltstcal Office. Table 2.2s EXPORTSOF MAJORFOODS, FOOD PREARATIONS AND BEVERAGES, 1986 (TT6Wgm

Export Cateory Destination 8-digit SITC (Rev. 2) Categories with More Than TTM Ml1. In Exports CARICOM Internatlonal Total

Unebseidizd, Sold Primrily on World Markete 112 Aromatic Bitters (112.-49.8) 81S $,13 8,448 112 Alcohollc BerNages (exCl. 112-49.6) Primartl, Rima,U * ,1u7 10,940 Subtotal 3,413 16,986 29,

Subeidixed, Sold Prim_rilyOn World Markets 071 Coffee 1,79 6,84 7,668 971 Coco 2 7,211 7,218 Subtotel 1,7m 18,09S 14,666

Subsidized, Sold Primrily In RuotaMarkets M61Sugar andkolosese 119 52,564 52,688

Sold Primrily in CARICOMMarkets 846 Cereal Prparations (inl. 9.46 A 047, Flours, Primarily Biscuits) 6,113 164 6,297 56MFruit (Primrily Orangeand Grapefruit Juice) 1,632 62 1,694 a7S Choolat Prepratlons 817 S6 1,324 M99Food Preparation, N.E.S. (ln¢.a *ple 075, Primarily Tomato, Kethup A Sauce, Baking Powder, PepperSauce and Curry Powdr) 2,7 1,024 8,784 111 Non-Alcoholl Beerages 2,177 748 2,926 Subtotal 15,499 2,525 18,024 TotalThese Exports 29,839 65,129 195,969 (Otherthan Supr and Moloase) (2,t720) (82556) (58,276) Total All Food and Beverage Exports (SITC Categorlee 0 A 1) 28,7M3 68,481 112,184 (Otherthan Sugar andMolaese) (28,854) (36,867) (59,451)

5um: Central Statistical Offlce,Overseas Trade, 1965. MatazThere were no crde agricultural mterials or any other thredigit agricultural dEportsaboe TT81 *illion outide the food andbeerage c.tsgorile. a RumIs unsubsidizedIn the sense that the sugar-4aaed raw materials ued in Its mnufacture, though subsidlzed, ar more cosly than It importe. - 29 -

2.5 The overall picture is of an agriculturegenerally unable to compete in the world markets. The agro-processingindustry, however, did secure a small foothold in both regional and internationalmarkets. It would be difficultto predict, however,what real exchange rate would permit significantexports of agriculturaland agro-processedproducts (using some local agriculturaloutputs) in either the CARICOM or world markets. Agro-processingindustries are likely to emerge first, as the real exchange rate increases. Some relativelylabor-unintensive crop exports (requiringsignificant technology and managementinputs) could possibly also emerge at higher real exchange rates, but there are no obvious candidates,other than perhaps hybrid cocoa and shrimp. In addition to any competitiveexports that might emerge at higher real exchange rate levels,natural trade barriers,such as transportationand perishability,would probably allow some competitivefresh vegetablesand perhaps poultry subsectorsto survive internationalcompetition.

Structureof Agriculture

2.6 The structureof farms in Trinidad and Tobago is heavily skewed toward small holdings,which grow numerous types of crops and livestock, but there is also a plantationsector of some size (Table 2.3). According to the latest agriculturalcensus (1982),89Z of the 30,500 private holdingswere less than 5 ha, and they contained401 of the total area (both public and private)was either in public holdings (mostlythe huge from huge parastatalsugar plantation)or private-holdingsof 50 ha or more. Privateownership is widespread (782 of the area in 1982), but 53Z of private holders, farming 351 of the land in private holdings,either rented, squatted,or obtained their land in some other way than ownership. Demographically,private holderswere relativelyold, with 631 of them over 45. This structureof many small, poorly educated,older farmerswould have to undergo wrenchingchanges if the protectivebarriers were lowered and efficientspecilization becase the order of the day.

GOVERNMENTPOLICY

2.7 Despite the uncompetitivenessof most of agriculture,there is virtuallyunanimous opinion that an agriculturalsector of some significant scale is desirable,even at the cost of significantsubsidies from consumersand the Government. Currentpolicy to protect agricultureis designedto maintain the employmentof existing farmersand also to preserve agricultureas the employmentsector ef last resort for those unemployedin other sectors. Alternativemeasures to ensure the welfare of the farm populationand to assist the unemployedwill, therefore,be necessary,if agricultureis to become significantlymore competitive.

The ProtectiveStructure in Agriculture

The Cost of Protection

2.8 The cost of protectionis a second major analyticalquestion that remainsunanswered, despite the number of studiesof the agriculture sector. Given the determinationof the Governmentto protect a large number of agriculturalsubsectors, it becomes importantto systematically assess the social cost of protectionof each subsector. The cost is - 30 - twofoldt that borne by consumersin terms of higher prices and lower quality (comparedto imports),and that borne by the Governmentthrough input and output subsidiesand through its coverage of the losses of Governmentcorporations. In at least one case - wheat and other grains (exceptrice) -- the Governmenthas made a consciousdecision that the subsector is too costly to protect. In another subsector -- sugar -- the cost of protection and subsidization,while not preciselymeasured, is understood to be unsupportablyhigh. The Government is considering significantameliorative measures. These cases are the exceptions, however. The cost of protectionof other agriculturalsubsectors has generallybeen neglected as a problem, and measuring this cost quantitativelyhas not been attempted.

Table 2.8:STRUCTURE OF AGRICULTURALHOLDINGS, 182

1 Type of Organization (ha) M3) Private - 70.3 Public -- 21.7

2 Tenuro (Private Holdings) Own Rent/ Squst/ Own Lease Other

Numbr of Holders(S) 47.0 86.1 16.9 HectarageIn Class (S) 64.7 22.0 12.5

a SIko Distributions: (2 2(5 5(60 10(

4 Private Holders -Age (26 26-8 4 45.54 55C Numberof Holders (5X) 8.9 12.2 21.4 25.8 88.6

t PrivateHolders -- Education 8-4 Yr. >5. Yr. So. Sam Other Primary Priery SecondaryUnilver. Numberof Holders(X) 25.9 62.8 9.5 .9 1.8

Sourc: Central StatisticalOffice, 182 Agricultural Census.

2.9 Quantitativemeasurements of the cost of protection in each subsectorwould allow the Governmentto: monitor the cost of protectionto both consumersand Governmentand warn if it was reaching an unacceptably high level; compare the costs of alternativeprotection schemes;provide the analyticalbasis for a de facto tariff scheme; see what has happened to the cost of protectionover time; and provide a measure of the resources that might be applied to substitutewelfare mechanisms.

ProtectionMechanisms

2.10 The protective scheme for agricultureinvolves a set of controls and budgetary subsidiesin five parts: (i) exchange controls on all commodities(administered by the Central Bank); (ii) import controls on an extensive 'negativelist" of agriculturaland other commodities (administeredby the Ministry of Industry,Enterprise and Tourism,MIET); (iii) import taxes, based on the CARICOM Common External Tariff and - 31 - supplementedby a 12.52 stamp duty (administeredby the Controllerof Customs and Excise); (iv) subsidizedsupport prices for some commodities (administeredby the Ministry of Food Production,Marine Exploitation, Forestry and Environment,MFPMEFE, and other agencies);and (v) Input subsidies (administeredby MFPMEFE and other agencies). For most agriculturalcommodities, the heart of the protectivescheme is the virtual import ban--throughforeign exchange licensing--onitems for which the country produces close substitutes.

2.11 In the recent past, a system of guaran,eedprices for 20 commoditieswas also in place, but it proved unworkableand became inactive for most commodities,mainly exports or significantimports, where the unwanted impact of internationalprices is unavoidable. In the case of exports (sugar,cocoa, coffee, copra and citrus),payments are usually made through industrybodies and financedby subventionsfrom the budget. Without these payments,exports would cease. In the case of subsectors where significantimports competewith domestic production (rice,milk and hatching eggs), producersare also provided support prices above internationalprices. For rice, Government import monopoly (NationalFlour Mills) allows the cost of the subsidy to be passed on to consumers in the form of higher rice prices. The monopoly profits from importedrice are used to finance the subsidy to farmers. For milk and hatching eggs, which also have substantialimports, no institutionalmechanisms for passing the price of the subsidieson to consumershave been put in place, and the subsidiesare financed through the budget.

Manatinftthe ProtectiveStructure

2.12 For a small, open economy like Trinidad and Tobago's,the tariff, when it can be used, is the least costly type of protection for society as a whole. Tariffs have severalwell-known advantages over quantitative restrictions. Unlike the-latter,the level of tariff protectionis limited, stable, transparent(for primary products)and relativelynon- discretionary. Again, unlike quantitativerestrictions, tariff revenue provides a benefit to society as a whole that partiallyoffsett the cost of protectionborne by consumers. When quantitativerestrictions are applied, what would have been tariff revenueunder a tariff system is earned instead by foreignexporters or by elementswithin the import distributionchain.

2.13 The authoritiesrecognize the benefits of moving to a tariff-based system and view the currentnegative list arrangementas temporary. However, shifting to a tariff-basedsystem will not be easy, as Trinidad and Tobago does not control its own tariffs. CARICOM imports are, however, now being allowed in and the 12.5X stamp duty on CARICOM importshas been eliminated (excepton imports from Barbadosbecause of a lack of reciprocity). This salutory developmentis welcome as it subjects Trinidad and Tobago agricultureto a certainmeasure of regionalcompetition. In turn, Trinidad and Tobago will gain from the opening up of the CARICOM market for its own industrialexports. - 32 -

DisDositionof the Sugar Industry

Dimensionsof the Problem

2.14 Trinidad and Tobago supports a seriouslyobsolete sugar industry that produces sugar at about 10 times the world price. This industry is a particularlygood example of an agriculturalprotective structurecarried to the extreme. The industry is dominatedby a large parastatal corporation,Caroni, Ltd., which produces two-thirdsof the country'ssugar cane output and processesand markets all of it. The remainingone-third is produced by small farmers,many of whom lease their land from Caroni, Ltd.

2.15 Retainingthe sugar industry costs the country about US$120-160 million annually,over US$100 per capita and in excess of US$10,000per sugar worker or farmer. Consumerspay approximatelyUS$50 million a year of the total in higher than necessarysugar expenditures,and the Governmentpays about US$70-110million annually in subsidies and outlays to cover the losses of its sugar parastatal.

2.16 Satisfyingpreferential quota tonnages is also very costly for Trinidad and Tobago. Productioncosts are far higher than the roughly US$500 price per ton receivedunder EEC And US quotas. It is difficultto calculate from published financialdata how much it currentlycosts to produce a ton of sugar in Trinidad and Tobago, but an approximatefigure can be derived from Caroni, Ltd.'s publishedcost estimateof US$2,600per ton for the 1984 productionyear. With the devaluationof 1985-86 and improvementsin efficiency,this figure may have fallen significantly, perhaps to US$1,800. Using these figures, it appears that Trinidad and Tobago is paying net about US$1,300-2,000per ton for the privilegeof exportingsugar under quota, or in total, about US$65-100million a year.

Dimensionsof the Solution

2.17 Since 1978, four major studiesof the sugar industryhave concludedthat the basic cost and productivitysituation of the industry is structurallyunviable. (The World Bank Economic Report of 1983 reached a similar conclusion). All studies proposed restructuringthe industry to alleviatethe problem, but none proposed shutting it down for social reasons. In each case, therefore,the recommendationsimplied continuing large (although,under their projections,reduced) subsidies. The reports all suggestedthat the appropriatescale for the industry should be at least the 60,000-70,000metric ton domesticmarket, and most recommended continuedproduction for the EEC and US quota markets, despite the huge losses.

2.18 As it appears the industrycannot be rehabilitatedon a competitivefooting, it has to be phased out on an agreed schedule. The pace of this operationwill clearlydepend on the developmentof viable alternativeeconomic activitiesand by the imperativeof not exacerbating unemployment,which has reached22Z. - 33 -

RECENTTRENDS IN MAJOR AGRICULTURALSUBSECTORS

Decresas in Suuuort Paiment. and Innut Subsidies 2.19 The extensivesystem of guaranteedprices and inputsubsidies in place In recentyears hes been largely eliminated in favorof the protectivestructure outlined above. Zven in nominal TT dollars,all subsidiesexcept for milk have been scaledback significantlysince 1983 (Table2.4). Not includinglosses and capitaltransactions of Government entities,agricultural public works and cortain other items,total subsidy ibligationsdeclined from TT$62million in 1983 to TT$12million in 1986. A decrease in supportpsayments to cocoa and coffee growers-- from TT$39 million in 1983 to TT$l millionin 1986 --was the most importantreaon for the decline. Input subsidies also dropped substantially, from TT$18 million to TT$2.5 million. Milk subsidies failed to decline, however, and in the contextof generally declining subsidies, rose from 82 of the total in 1983 to 702 In 1966. Tree Crop Production 2.20 All major tree crops (cocoa,coffee, citrus and coconut)have been affectedadversely for several decades by the factors that have rendered Trinidad and Tobago9s agriculture internationally uncompetitives the high exchange rate derived from petroleum exports; vigorous demsnd for labor in other economic sectors resulting In high wage rates; and the emorgence of incroased low-cost output in other developing countries% Government subsidy and rehabilitation program have not Increased profitability enough to arrest the slide in the tree crop subsector, and significant hectarage has been abandoned. 2.21 In a few cases, the emergence of a protected domestic market for fruit (citrus fruit and green coconut) and for agro-proc-asing (citrus fruit) has produced new components of demand. The recent devaluation of the TT dollarand the influx of young unemployed workers into the agriculture sector at reduced wages have also created somewhat different conditions than in the past for the tree crop subsector.Under these conditions, greater harvesting and some modest rehabilitation of existing cocoa, coffee and citrus orchards may be taking place. Rice Industry 2.22 Although approdlmstely 90Z of the rice consumed in Trinidad and Tobago is imported, the Government has indicated in principle a desire to attain self-sufficiency in rico. A preliminary estimate of the subsidy required to support a self-sufficient rice industry producingTrinidad and Tobago'sannual consumption of about 40,000metric tons is aboutUS$21 milliona year. Evenwithout self-sufficiency, as at present,a subsidyof this level would have to come from consumers, unless ths Government's monopoly parasttal Importer is given clear guidelines to avoid it. 34 -

aaIII .4 ACLPR SR IES, 1906-19"

liii 1961 1982 19U 19W4 KMS 1980 aus

Cocoa & Coffee (C.C.Z.B.) 6 a 19,608 89,347 'l,65 12,698 1,124 8,5U0 Other Coffe 1US 146 S 11 * 22 6 67 ml111 480 6,$41 8,64 6,601 7,01U 9,147 3,670 0,116 Lan Prepration 2,784 2,481 1,79 4,275 1,004 1,188 094 2,024 FertilIIer 1,60m 1,944 1,894 0,664 1,0W4 872 290 970 MachineryA Equip. m 984 461 2,44i 1,5 585 C28 2,562 Sprayng Equip. & Chm. VS 914 629 1,906 1,629 696 409 1,659 Veihclee 9? 642 462 1,875 70 415 146 1,611 Smut Control 6 2,34* 6 a 0 6 6 Fishing Boat 849 268 190 521 479 8 9 SW Froghopper (Caront Ltd.) 6 1,m9 012 0 6 6 1 0 Water for Agriculture s4 829 129 8U9 217 18 62 844 Orange/Gr.petruit 0 447 * e 6 0 6 6 Limes * 6 281 61 49 85 18 Livestock Housing I1 71 19 116 0 46 C 167 Oth r 170 1 as87 so 8C 46 291 TO" l 6,852 16,566 23,659 62,494 20,009 25,238 12,818 22,672 Late 1908 Subsidy Paymentsto Farre i 1966 2,488 - Agric. Devel. Bank 1,487 n.n. Total Including Certain1986 Non-comparableIteme 08,2 16,6t6 26,506 62,494 26,918 26,238 16,288 22,872 929Vur Ministryof Food Production, MarineExploltatlon, Forestry and Environment. Notes TW subsidie In this t-ble do not include los coverage for Qovermont entitles or agricultural work.. Ve2etable Subsector

2.23 The vegetables subsector is one of the most vigorous in Trinidad and Tobago agriculture. It is dominated by small farmers, especially those in the Arangues area, who farm intensively and market with Increasing sophistication. With the exception of tomato paste, virtually no fresh or processed vegetables of the type produced in Trinidad were Imported. In contrast, root crops are dominated by imports, by weight about half from CARICOE and half from North America. Beans, peas and other dry legumes are also Imported from outside CARICOM in the main, except for pigeon peas, where local production provides two-thirds of consumption under a negative list protection.

Livestock and Dairy Subsectors

2.24 The production of fresh meat and eggs remained largely stable in the 1980s. The most notable exception was the 1986 decline of 252 in broiler production, the result of the price and income effects associated with the reduction In subsidies, the 1985 devaluation (which raised Imported feed prices) and the current economic downturn. In contrast to the situation in the rest of the livestock industry, milk production has Increased by 1302 since 1980 (Table 2.5). - 35 -

2.25 High-cost Import substitution of animal products has bon the GQverment's policysince the 1970. Technically,Implementation of the policy has been unsuccessful for poultry, eggs and fresh pork (including ham and bacon), but not for beef and milk. Despitetwo decadesof import substitution policy,imports of animal products and of feed still account for 8^ of total commodity Imports.

2.26 No estimatesof the coat of protectionare availablefor the various livestock subsectors, but that of the small and unewonomic dairy subsectoris probably the highest on a per unit output basis. The eplicit budgetary subsidy alone was equal to TT$8.7 million In 1986. BeCause milk production has been expanding, this subsidy has also been expandings in 1986 it constituted 701 of explicit Governmont subsidiesto agriculture (not countingthe loss coverage of Government entities) and was triple the 1980-1982 average. The Government should consider whether the apparent magnitudeand growthof the cost of protection for the dairy subs-ctor makes it, along with sugar and rico,a prime candidate for phase-out. !isheriesand Forestry

2.27 Most of Trinidad and Tobago's catch involvos the productionof a sizable,highly protected group of about2,000 artisanal fishermen using piroguesand single-linetechnology. No estimate of the cost of protection in the fisherysubsector is avallable,but it is probablyhigh becausethe subsectorreceives a TT 67c dieselfuel subsidyand negativelist protection.Another section of the industry,shrimp trawlor operators, who also producea fish by-catch,may be economicenough to supportan export industrywithin Caribbean Basin Initiative barriers. National Fisheries Co. , Ltd. is planning to expand its exports. 2.28 Despitethe high demandfor wood productsin the previously booming construction industry, timber outturn has declined by 75Z since 1975. This inabilityto substitutefor imports,even duringa construction boom, suggeststhat even the recentdevaluation may not have been sufficient to restore it to profitability,let aloneto allowexports. Axricultural Resources 2.29 The resource problems of Trinidad and Tobago agriculture are mainly the result of low profitability. The Government has triod to shield the sectorthrough protection and subsidies,but, exceptfor broiler,dairy and vegetableproduction, it has not been willingto do so handsomelyor consistentlyenough to resultin sustainedprofitability. The soctorhas consequentlygenerally not been able to pay going prices for capital, managementand laborand thus to competefor them with other soctors of the economy. With laborsupplies recently available at lowerwage rates, certainproviously abandoned activities are being resumed,as marginal revenuescome to exceedmarginal coots, but largenew private-sector investmentsin agricultureshould not be expected In the near future. - 36 -

TsbLe2.St PRDUCTIOIAUD DEORTS OF LIVESTOCKPRODCTS, 1986

Type Unit Production Imports

BroilerMeat St 20,500 0 Pork Mt 2,885 602 Beef and Veal mnt 1,233 8,965 Eggs 000 Doz. 3,077 0 Fresh Milk 000 Liters 11,325 n.a

n.-. Not applicable Sources Central StatisticalOffice.

2.30 While shortages of capital and labor are not really resource problems that can be fundamentally affected by changes in resource policies, such is not the case with land, where currentGovernment constraints on tho markets prevent land from being directed toward its,most profitable uses. Most importantly, agricultural land near urban areas is underpriced because of soning restrictions. For instance, In the Port of Spain-Arim corridor, agriculturalland sells for TT$5,000-10,000per acre. However, residential land In the same areas sells for TT$10-15 per sq ft, equivalent to TT440,000-650,000 per acre, 100 times as expensive. The restrictions that cause such uneconomic price differentials also cause significant rigidity in the land markets; small parcels are held speculatively in anticipationof de facto relaxationof the restrictions. A second large factor contributing to the rigidity of land markets is the Government'sownership of 36 72 of the land in agriculturalholdings. Only rarely is this land traded in land markets.

Labor

2.31 Shortages of harvesting labor have been cited as a major constraint on agricultural development. The phenomenonmlght better be interpreted as the inability of the agricultural sector to pay the going wage for unskilled labor. The sector relled, instead, on the existence of a dual labor market for unskilled labor. When it dried up during the constructionboom, activities were abandoned. A public employment program (the DEiD program) has even beon In competitionwith agriculturefor unskilled workers. Following t3no devaluation, the real wage for field labor appears to have declined significantlyin 1986 and 1987. Wage rates of TT$100 per day a few years ago, equivalentto about US$50, appear to have dropped into the TT$35-50 a day range this year, or US$10-15 a day at the current exchange rate, a large drop. With greater labor supplies available at this wage rate, certain previously abandoned agricultural activities are being resumed.

2.32 The short supply of human capital, particularly farm management skills, is the most glaring problem in Trinidad and Tobago agriculture. Educationat levels are low, farm sizes are small, Intensity of cultivation is, with some exceptions, low, and, for the most part, agriculturehas done without effectivemanagement skills With Governmentemployment frozen, some movement toward agriculturehas been occurring among new university - 37 -

TRINIDAD AND TOBAGO- COUNTIESAND WARDS

TRINIDAD SCALE5 I 64d080 Miles

?aat 5 '10to15 20 25 Kilometres ,c < HCHls~~~~~StSEU|SE DAVID

DIEGOMAIN X ST. VA N MEORGEMATURA StOBAGO ^ A } t Por of s ANMI(

|TOIBAeGO040 MANZANILLA8

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ALa 8AfAARIMA | A~~ORTOIRtE A

ST PATRICK MpRO =f- Kb~~~~~~~~~~~~M NT - 38 -

2.33 Bank credit has been avallablo to agro-processing through at least one commercial bank in Trinidad and Tobago (Republic Bank),but formal medium-term credit to agriculture itself is provided almost exclusively by the Government's Agricultural Development Bank (ADB). Current Government policy, however, does not allow for the ADB routine budgetary support. It has al£0 started a new program to attract deposits, with new loan rates (10-122)closer to moneymarket rates. Technolozv 2.34 Trinidadand Tobagofarmers are sensitizedto the benefitsof using new technology.The most difflcultproblem is that, even with Improved technology, many agricultural activities remain unprofitable. Most new technologyis transferredto farmersIn Trinidadand Tobago throughcomuercial agro-chemical and pharmaceuticalchannels, rather than throughthe Government'sextension service. INSTITUTIONALSTRUCTURE

2.35 The structure of institutions affecting agriculture is highly complex because of the Import-substitution thrust of agricultural policy. The complexity arises from the need to manage:the macroeconomicand trade policiesthat determinethe real exchange rate and the protectivestructure of agriculture; the subsidy system; service provision for an industry that is overly complex for its size; and land, marine and environmental resources. Without fully abandoning the Import substitution strategy, each of these tasks could be significantly reduced in complexity by the actions suggested in this review. Extension

2.36 KPPlEFE's Extension Division is not effectively carryingout its training and teehnology transfer functions. The extension service has enough personnel, with an average of about 1 extension officer per 200 farmers. The problemis thatmost of those who are formally assigned to the Extension Division are not doing district-level extension work. Instead they are either supervisors or are assigned to handle land problems. Those doing district-level extension work are typically responsible for servicing 1,000 to 2,000 farmers and are consequently not able to visit farmers' fields at the scheduled times. 2.37 District-level extension workers are assigned other tasks that take up much of their time. In past years,and continuing into the present to a significant extent, the district-level worker functions as the de factoMFPMEFE district representative. He is expectedto handlesubsidy payments,arrange tours, take fire damagesurveys, etc. Some of the complexityof MFPHEFE'soperations Is hiddenby landingall fieldtasks onto extension workers. The extension officer's de factorole as MFPMEFE field representative needs to be transferred to other MFPMEVEpersonnel. 2.38 Perhapsthe greatest failing of the present system is that there is no provision for strong, two-way communications between farmers, extension and research. The extension service Is not performing its function of linking farmers to research results. This problemis widely -39 - recognized, and a proposal has been made to recruit a cadre of subject matter specialists within the service. Because of the small size of the extensionservice, this proposal needs to be treated cautiously. The number and quality of these specialistswould be greator if they retained their primary links to the research institutions As it is, given that Trinidad and Tobago is a small country, farmers often visit universityand other research workers in search of specific information,particularly from plant pathologists,who already spend a lot of time doing extension work outside extension channels. Thus, an alternativeapproach ould be to formalizean arrangementwith the research institutionswhereby tho researchworker doubles as a subject matter specialistand takes responsibilityfor training extensionworkers.

Research

2.39 Despite the existenceof five major agriculturalresearch organizationsoni Trinidad, they have done little work of real relevanceto the country'sagriculture. The natural specializationsthat would emerge were research responsiveto agricultureand regional and international market forces have not emerged. Researchers,thus, have not been given the guidance that market forces naturallyoffer. A second major reason that research has been mostly irrelevantto the needs of farmers is the extensionservice's failure to be the link between farmers and the research institutions.

2.40 One pressing researchneed of farmers is how to adapt and validate for Trinidadianconditions the technicalinformation offered by agro- chemical and pharmaceuticalmanufacturers or in seed eatalogues. This type of researchwould be among the most relevant to farmers. Research organizationsshould be organizedto produce it, and researchersshould be given the necessary incentives.

2.41 Non-traditionalcrops have found few niches in local farming systems. An approach used by the CaribbeanIndustrial Research Institute (CARIRI)appears promising for Trinidad and Tobago and should be used more often. CARIRI startedwith an agro-processingpackage--fertilizer, water, pest regime and processingtechnology, worked out with the potential processorsand analyzed for profitability. If Trinidad and Tobago is to develop regional or internationalcompetitiveness in agriculturalproducts, it will probably be in processedproducts such as the CARIRI passion fruit product, where human capital and technologycompensate for high labor costs.

2.42 Research coordinationhas been lacking almost entirely In the past* The approach of MFPMEFE to research coordinationwould appear to be sound -- appoint coordinatingcommittee for agriculturaltechnology (COCAT) within MFPMEFE, with representationfrom all research institutions, includingregional ones like the CaribbeanAgricultural and Research Development Institute(CARDI). Meetings of this committeewould provide MFPMEFE with a forum. MPPMEFE'smight also consider focusing its research budget. Perhaps the prime tool, however,would be to reorganizethe extensionservice to be a bridge between farmers' needs and institutional research capabilities. - 40 -

2.43 1flHEFE's a,n research unit needs strengthening in straightforward ways, In particular, by trnsfecrring of resources from wages to equipment and operating expenses. At the Aripo livestock research center, the emphasi on employment has been carried to such an extreme that there I. one worker for every 2.8 animls. At Centeno, basic research equipment has ben foregone to finance unneeded support staff.

Markoting

2.44 In genral, Government subsidy and marketing efforts, often merged In the past, have had a negative lnfluence on the quality of marketing in Trinidad and Tobago. The administrationof subsidy program and the operation of Government marketing enterprises have often suppressed the natural development of quality differentials. With the cutback in the subsidy programs, the private sector now has full marketing responsibility for most fresh vegetables, fruit and meat, for Inputs into agro-processing and for the outputs of that processing. A major role in the marketing area for HPPKEVE could be In the negotiations that will be necessary to replace the congested Central Marketing Agency (CHA) wholesale market in Port of Spain. A proposal to relocate it to the highway junctions near Valsyn Is under consideration.

2.45 MIPMEFE's market information operations could also be closed. Local markets are undoubtedly more efficient at co=municating price and maket information than the Ministry is. The operations of the Export Development Co. Ltd. (EDC) should be examined to see If Its market information capability Is worth the expenditures, the regional organization,CATCO, could provide regionalmarketing services.

CONCLUSIONAND RECOMMENDATIONS

2.46 Agriculture neods to become more efficient and competitive to play the significantrole to play in rocovery end diversificationthe Government envisages. An ongoing capabilityto measure the cost of protection In each agriculturalsubsector Is needed. Official policy should aim at switching as much as possible to tariff or de facto tariff protectionof agriculture and away from quantitativerestrictions. The openlqgup of the Trinidad and Tobago market to CAUCOMImports is a welcome atep that would subject Trinidad and Tobago agricultureto a certainmeasure of regional competition.

2.47 Effectiveeconomic analysis of the agriculturalsector, including measurementof the costs of protection,is best carried out prior to tive"tmentin infrastructure.

2.48 It is logical that the sugar industry should be phased out on an agreed schedule. The pace of this operation will clearly depend on the developmentof viable alternativeeconomic autho ities and by the lmperativeof not exacerbatingunemployment.

2.49 Agro-processing industries, particularly those where human capital and technology compensate for higher labor costs, could competewell In the export markets. A flexible exchange rate pollcy would stimulate the growth of these and other agricultural exports. - 41 -

2.50 Where possible, the complexity of Government institution supporting agriculture should be streamlined. In particular, the Government *hould end most of Its marketing activities. 2.51 The llak between extension and research should be strengthened and non-extension matters turned over to another isatitution then the Extension Division. Research coordination should proceed along the lines proposed by ICFIS. - 42 -

ChapterIII

TOURISmSECTOR EVIE

THE TOURISMSECTOR

3.1 Trinidad and Tobago it the moat southerly country In the Caribbean. Venezuela, the closest South American country, is under 15 miles sway from Trinidad at its nearest point. Flight times to Grenada and Barbados, the nearest Caribbean islands, are about 45 minutes. Miami is over 4 hours flying tine from Port of Spain. Tobago, 19 milos northeast of Trinidad, is leos than 15 minutes away, accessible via the regular inter- island jet service. 3.2 Trinidad,approximately 5,000 sq km in size, and Tobago,only some 300 sq km share similarphysical characteristics, vegetation and tropical climato. In addition to beautiful scenery, beaches, lush jungles, swamps and plantations, both islands possess a wide range of flora and fauna and historical and cultural attractions. There are also a number of nature centers, bird sanctuaries and historical fortifications (some restored). Trlindad is the only Caribbean country in which Christian cathedrals, Hindu teMles and Islamic mosques co-exist in close proximity. The islands are also the home of calypso and steelband music, which are bmportant cultural expressions and assets of the people. Carnival, which occurs In February/March each year, Is internationally renowned In the English- speaking world and attracts a large number of tourists. Sports, fishing, sea sports, golf and other ad hoc activities and attractions dr additional tourists but are largely undeveloped assets. Despitethe similarities,the two islands experienced different types and stages of economic development, and that factor has had an important influence on the development of tourism. Trinidad has seen rapid growth, particularly because of the development of oil and associated industries As a consequence, there has been rapid industrial and urban growth, together with significant licreases in real incomes and wages With a diverse, cosmopolitan population of nearly 1.2 million, Trinidad has, in recent decades, found itself the focus of business, visitingfriends and relatives (VFR) and cultural tourism. There has also developed a significant outward tourist market, particularly for shopping, business and education. While there are attractive areaswith tourism potential, particularly on the north coast, various constraints, Including a lack of physical Infrastructure, lack of resort accommodation, inadequate marketing and a policy that does not favor tourism development, have meant that Trinidad has not participated in the sun, sand and sea tourism enjoyed by the rest of the Caribbean. 3.3 Tobago'a population is only 44,000. While Tobago has traditionally been rogarded as the International holiday tourism destination of the country, with unspoilt beaches, fine scenery, coconut groves, the Buccoo Reef, etc., a variety of factors have led to only a low levol of development. - 43 -

3 4 Both islands have relatively few first class botel roomsand what there are generallydo not displayany Caribbeanambience. In general, relatively few International vacation tourists stay In hotels in Trinidad and Tobago, nor do the Islands attract a significant numbor of cruiseship passengers. It is worth addressing this situation, as Trinidad and Tobago can derive increasing economic benefits from a flourishing tourism sector. Size 3.5 Table3.1 showsthe breakdownof visitorarrivals in Trinidadand TobagoIn 1986. Table 3.1: TOTAL INTERNATIONALARRIVALS BY CATEGORY,1986 AND 1987 1986 1987 Arrivals Z of Arrivals S of ('000) Total ('000) Total Visitors Hotel Holiday 20 3.5 23 3.8 PrivateHoliday (VFR) 108 18.8 113 18.7 Business 60 10.5 60 9.9 Other 4 0.6 6 0.9 Sub-total (192) (33.5) 202 33.4 Temvorarv CruisePassengers 19 3.3 16 2.6 Other 85 14.8 75 12.4 Residents 228 40.0 261 43.1 TransitPassengers 45 7.9 47 7.8 Other 4 0.6 4 0.7 TotalArrivals 573 100.0 605 100.0 Source: CentralStatistical Office.

3.6 The threemajor arrivalgroups were: (i) residentsreturning from business,holidays or shoppingabroad (40S of the total);(ii) visitors not stayingat hotels,mainly the visitingfriends and relatives (VFR)segment (201);and (iii)visitors on business(11). 3 7 The more usuallydefined vacation tourists, together with cruise-ship passengers,amounted to less than 40,000a year,or 7n of totalarrivals. Markets 3.8 Of the of 64,000overseas hotel visitors in 1986,ovor 402 came from the US, 91 from Canada. Visitorsfrom Europecomprised 23Z, of which 14S percent(or just underhalf) cme from the UK. - 44 -

',ocalDestinations

3.9 Tobago ts the main destinationof the hotel holiday tourist, but specific events and attractionssuch as Carnival and the need to transit via Port of Spain generate a limitednumber of hotel holiday tourists in Trinidad.

Accommodations

3.10 Trinidad and Tobago have about 1,200 first class (or 'better quality")hotel rooms, of which 75Z are in Trinidad. Almost 700 rooms are contelnedwithin two city business hotels in Port of Spain. Trinidad and Tobago therefore suffer from an inadequate stock of good quality resort accommodations at beach sites.

3.11 In 1986, average hotel occupancy rates were under 502 but a 122 increase in visitor arrivals in the first half of 1987 indicates a recovery. This improvementIs largely the result of Improved management and marketing at several hotels in Tobago, although possibly at the expense of reduced room rovenue. While the trend Is encouraging,the fundamentalproblems of inadequate accommodations, limited air access and the general view in the international travel trade that Trinidad and Tobago represent poor value for money remain.

RECENTDEVELOPMENTS

3.12 Examination of visitor arrivals since 1978 shows, a static picture until 1987 where the first six months registeredan increase of 121 over the same period in 1986 (Table 3.2).

Table 3.2: ANNUAL CHANGES IN VISITOR ARRIVALS, 1978-1987

Visitor Arrivals Year (0008) X Chanae

1978 177 - 1979 190 +7.3 1980 199 +4.7 1981 187 -6.0 1982 184 -1.6 1983 189 +2.7 1984 192 +1.6 1985 187 -2.6 1986 191 +2.1 1987 202 +5.7

Source: Central StatisticalOffice.

In 1980, when 199,000visitors were recorded,there were some 33,000 hotel holiday visitors, versus 19,000 in 1986. - 45 -

3.13 It is believed that a varlety of factors, Including deterioration in basic services and utilities, air transportation, the standard of accommodation, services at Piarco airport and a major fiasco with a golf tournament in Tobago led to increasing dissatisfaction from consumers and the travel trade alike.

3.14 A positive trend is repeated with tho holiday hotel visitor, which showed a 12.4Z growth in the fist six months of 1987 over 1986. Overseas hotel visitors, who include bu tneosoen and vacationers also increasod by 23Z in 1986 over 1985.

3.15 Despite the increase in visitor arrivals during 1986, overall hotel occupancies fell by 5 percentage points to 36.82 in 1986. However, it is noteworthy that the occupancy rate for Trinidad fell by 4.8 points, while that for Tobago increased by 1.4 points.

3.16 Much of the recent increase in overseas hotel visitors came from Europe, the UK in particular, the result of increased marketing efforts by certain hotels.

3.17 Domestic hotel holiday guests rose 12.2Z in 1986 compared to 1985. This Increase was attributed to the devaluation, which made overseas travel for residents more expensive, and to the increased promotion efforts of the Tourist Board and the hotel sector. A large segment of the population still travels overseas for a variety of purposes, but the devaluation has changed their favored destinations of Grenada, Barbados and St. Vincent to Venezuela, which was devalued even more than the TT dollar, and to Curacao.

3.18 In terms of accv;mmodation, a number of new hotel projects have been discussed extensively but no new hotel has been built for many years. With the election over, and the Government committed to tourism development, a number of projects may proceed.

MARKETPOTENTIAL AND PROSPECTS

Market Potential

3.19 In 1986, over 8 million tourists visited the Caribbean a further 4 million Mexico and Venezuela. Some 3 million cruiseship passenger arrivals were also registered at Caribbean destinations. Over 300,000 overseas tourists were recorded visiting the islands of Aruba, Bonaire and Curacao, nearly 60,000 visited Gronada, and over 300,000 visitod Barbados, these islands being similar distances from the -ain source markets of North America and Europe. Apart from the traditional sun, sand and sea desA_nations, several Caribbean islands, including Dominica (24,000 visito-s), Montserrat (16,000) and Belize (50,000), promote different types of tourism, such as scenery and wildlife. A significantly smaller volume of visitors have gone to Central and Southern America, which offer a mix of tourism attractions, e.g., sun, sand and sea, historical, natural beauty, flora and fauna, adventure, etc.

3.20 Because of the development of oil and oil-related industries and the resultant high-cost economy, Trinidad and Tobago have a poor marketing - 46 -

Image with the travel trade and have been regarded as a poor value for money destination by tourists, a situation that has been partly mitigated by the devaluation of the TT dollar In 1986. 3.21 In some respects,Trinidad and Tobago may be regardedas possessingcomplementary tourism products, although the northcoast of Trinidadhas possiblylonger term potentialfor sun, sand and sea tourism. While Trinidadhas culturalassets and a numberof *ttractions,these are difficultto market,particularly in their awn right. 3.22 The viewpointis often expressedlocally that Trinidadand Tobago cannotcompete with othermore establisheddestinations for sun, sand and sea tourism. However,the generaltravel trade believes is that any destinationwhich offersthe requisiteattractions within a recognized tourismregion will succeed,almost irrespective of location.Based on this view of the market,and the attractionsof Trinidadand Tobago, includingclimate, scenery and beaches,the crucialneed Is to upgrads existinghotels and createnew resortaccomnodations. This need appltes particularlyto Tobagoin the mediumterm. 3.23 Marketsthat can be targetedinclude middle to upper-income families,particularly from the north east of the US but from the midwest, westernand other regionsas well. Cansdaalso providesa developing sourcemarket and Europe,particularly the UK, Italy,Federal Republic of Germanyand Switzerland,would be suitabletargets of marketingefforts. The UK and Italyare alreadyproviding some numbersof tourists,despite the limitedexisting stock of accommodations. 3.24 The attractionsof good accommodations,a variety of dining opportunitiesand the naturaladvantages of the countrycould, in our view, attractan incrrwed numberof tourists Furtherdemand can be expectedby developingspecial interest vacations related to naturalhistory (wildlife and scenery),scuba snorkelingand water sports,culture, fishirg, golf and other leisureactivities. 3.25 Trinidadand Tobagomight also be a part of multi-destination vacationsto other Caribbeanand SouthAmerican destinations. Both special interestand multi-destinationvacations should be promotedon the basisof sun, sand and sea tourismattractions of the islandsand be jointly marketed. A furtherpotential source of tourismdemand is cruiseship passengers,which couldbe generatedby providingbetter cruiseship facilitiesin Tobagoand in Port of Spainor Chaguaramas.With a strategic location,good bunkeringand water facilities,potentially good air access and firstclass rooms In Port of Spain,Trinidad could become a base port for cruiseshiplines if positivelydeveloped. 3.26 The prospectsfor tourismdevelopment are tied to the following: (i) improvementof the existinghotel stock and implementationof selectivelytargeted, joint marketirg program that promotethe tourismassets of Trinidadand Tobagoand/or other countries, e g., Trindad and Tobagowith Grenada/Barbados/Venezuela.A beneficialshort-term action could be to improvehotel occupancy ratesand profitabilityby improvingcoordination of the tourism - 47 -

agenciesin both Trinidadand Tobago,supported by a major marketingthrust, and by utilizing,in particular,the tremendous potentialof the country'sairline capacity;

(ii) concurrently,as part of a five-yeardevelopment progrem, we would envisage:

-- An increase In the supply of hotelaccomodations, particularlyin Tobago,In small and medium*iz- establishments(50-150 room), to providea total of 1,500 new room.

-- Major tourism and leisure development at Chaguaramasaimed at both international and domestic tourists.

-- A major increase in cruiseship passengers visiting both islands. (iiI) In the longer term, development of the north coast of Trinidad for both international and domestic tourists. 3.27 Exchange rate adjustment would greatly support this program, consistent with the needs of the overalleconomy. Developmentof the infrastructure, following an assessment, will also be required. Employment Generation 3.28 In 1986, some 4,500 people were directly employed in tourism- relatedindustries, as follows: Accommodations 1,560 Airlines 2,140 TouristBoard and TobagoHouse of Assembly 320 Other 4,020

3.29 As employment in hotels is partly related to occupancy, increased occupancies could result in employment levels approaching 2,000 in the existing hotels In the short term. If 1,500 new rooms were constructed over the five-year period, the resulting new direct employment opportunities would double the number of present staff to 4,000. Airline and Government staff would not increase commensurately, but there would be some increase both directly and indirectly. POLICIES AND INCENTIVES Policy Framework 3.30 Government tourism policy is in a state of fluz, with the policies of the previous administration largely superseded and now policy under preparation, subject to Government approval. It is apparent that the new Government intends to: assign to tourism a higher priority; promote Trinidad and Tobago jointly; focus attention on smaller scale up-market tourism develop tourism in Tobago; promote tourism by marketing culture, natural history, sport and other asoetsa provide the necoaary supporting infrastructure; and provide the necessary organisatlonal arketing and licentive frsmswrk to encourage the private sector to develop the necessary hotel accommodations and related facilitis.

Priority Areas

3.31 The following are possible Government priorities area for development and financial incentives:

In term of locations, the prioritles are likely to bat The north coast of Trinidad between Maracas and Blanchissoeue Tobago; Chagr#amas; Plarco Airport; and Port of Spain.

3.32 Additional opportunities for Investment have been Identified as a part of the national strategy to Increase the contribution of the tourism sector to tho economy ln the following areas: nature trails and wildlife reserves, cubadiving, deep se& fishing and water sports, golf, tennls, squash and other sports, group tours, entertairment, cultural attractions, crulses/boattours and production of souvenirs.

3.33 Incentivesinclude:

(1) a tax exemptionfor a period of not less than 5 yers and no more than 10 years with respectto the gains or profits accruing to the hotel operator and/or owner of the now hotelg

(il) an accelerateddepreciation of depreciabloequipment owned by the hotel operator and/or owner and used In the now hotel;

(ili) capital allowanceswith respectto approved capital expenditures related to new hotol construction;

(iv) repatriationof profits under the exchange Control Act, where foreign investorshave taken equity In the new hotel;

(v) double taxation rellef where applicable;

(vl) carry-overof losses incurredduring the tax exemptionperlod by the owner and/or operator;

(vii) tax exemptionon dividendsaccruing to the owner;

(vill) tax exemptionon the intereston an approved loan for a period of 10 years or the perlod of the loan, whichever Is lses; and

(lx) customs and excise duty exemptionson building materials and hotel equipment to be used exclusively in connectionwith the construction and equipment of a hotel project.

3.34 These incentives aro comparable to the incentives provided by many other Caribbean ecvratries. - 49 -

_ricinxPolicy and Costs 3.35 PricingIn the tourismsector Is largelyunregulated. There is no hotel classificationsystem and advertisedroom ratesmay be high given the qualityof the accommodations.However, most hotelsoffer special lower rates to domesticvisitors. Althoughassisted by the devaluationof 1986, otherlocal costs,partlcularly meals, beverage and localtrasoport, ore also regardedas uncompetitivewith other regionaldestinations. Much of the justificationfor the high priceshas been the high costs of laborand local maiufacturing and of transport for Imported goods. However, energy costs are relativelylow, with improvedvolumes of businesshotels and restaurants in the tourism sector could become more competitive. Financial Asgects of the Hotel Sector Operatinx Profitability 3.36 Hotel occupancies,on average,are low. Even Tobago, which has suffered less from the economic recessionand the loss of business visitors has occupancy levels jutst under 501. Average room ratesare also low, caused in part by the low level of demand and excessive discounting, and compounded by the low rates that have been offered to the domestic hotel visitor. With high fixed costs, particularly of labor, most hotels are not operatingprofitably, even beforedebt service. Nevertheless,analysis of the operatingcost parameters,including payroll, energy, food cobt, etc., Indicatesthat, with appropriatesize and facilities,levels of service, management, physical product and marketing, the hotel industry should be able to trade successfully in the local market. It will be necessaryto resolvethe differentialin the ratesfor local and internationalvisitors.

Construction Costs and Finance 3.37 Constructioncosts for new hotelsin Trinidadand Tobagocan range fromUS$30,000 per room to US$100,000and higher,depending on standards, location,extent of the infrastructurerequirements and other factors. While a range of standards should be enco.araged, trom deluxe to jungle retreats, it is important to relate the construction cost to the market to be targetted and the room rates that can be achieved. In this way, under- or over-building can be avoided. 3.38 The Development Finance Corporation, which is almostentirely state-owned, provides financing for projects, including those in the tourismsector. In principle it can become involved in any size hotel whose cost is aboveUS$150,000, lending up to 701 of the projectcost. Indicativeterms are 122 and repaymentperiod of 10-15years, with 2-5 years'grace, including construction. While relativelyhigh, they are not excossively so by Caribbean standards. 3.39 Of greater concern in the financing of projects the need to mobilizeboth localand Internationalcapital and to reducethe time and bureaucracyinvolved in processingdevelopment applicationf through the stages of Goverament approval. - 50 -

Future Incentive PolicX 3.40 The incentivescurrently availableare comparableto thoseat other Caribbeandestinations, while pricesand costs,although excessive in the past, appear to be somewhatmore acceptable now and shouldallow p-rofitable hotel operations. Therefore, the focus of future incentives policy should be related to: ($) consideration of Government guaranteos for funding priority tourism projectsl (ii) Identification and preparation of appropriate resort sites and development of joint ventures with the private sector, with land provided as equity by the Government; (ilI) site development and attractive rates for fuel and water for crulseship operators, particularly those having a base port in Trinidad; and (iv) faster processing of applications for funding and development by Government Institutions.

SUPPORTINGPOLICIES Air Access 3.41 In principle, air access to Trinidad and Tobago is among the best in the Caribbean, with scheduled services provided by Air Canada, Air Martinique, AIM, American Airlines, British Airway', British West Indies Airlines (BWIA), Cubana, Eastern Airlines, GuyanaAirways, KLM, LAV, LIAT, and Pan American. There are also a number of charter flights at peak periods of the year mainly from Europe in the summer. 3.42 The ccuntry has its own airline, BWIA,which operates 4 long-haul 250-seat jets, 3 mid-range 140-seat jets and 4 mid-and short-haul 120-seat jets. It operates 5 services to Europe, 9-12 services to New York and 5-8 services to Toronto, with a further 17-22 narrow body flights from Miami, Boston-Baltimore and New York, weekly. There is also extensive weekly sorvice to other Caribbean islands and 7-10 domestic daily flights between Trinidad and Tobago. Airline management sees a need to increase the fleet capacity with both wide- and narrow-bodied aircraft. Load factors on international routes vary between 75X to London and 50S to Boston- Baltimore, with the majority being in the mid-60 percent range.

3.43 While BWIA has a major presence in the tourism sector and is represented on the Tourist Boards there appear to be major conflicts around the following objectives: (i) the necessity to operate on a commercial basis; (ii) the need to cater to the tourist industry by offering more direct flights, packages, block bookings and making more seats available, particularly at peak tourist periods; - 51 -

(iii) the carrying of domestic touristsoverseas; and

(iv) service for the tourist industriesof other Caribbean islands.

PromotionalStrateyv and Budget and Tourism Ortanization

3.44 During the current period of economic recessionand given the reconsideration of tourism policies, promotional strategy and budgeting and tourism organization have generally drifted without any overall guidance.

Promotional Strate&y and Budiet

3.45 The promotional budget has fallen in recent years, while no clear indicationof the level of either of the 1987188 or 1988189 budgets has yet emerged. Total expendituresof the Tourist Board for the years 1985 and 1986 amounted to US$4.7 million, of which some US$0.4 million was spent on advertisingas follows: within Trinidad and Tobago, US$66,000;United States, US$163,000;Canada, US$73,000;UK/Europe, US$98,000; Venezuela, US$2,500; and Caribbean,US$10,000. These expendituresappear to be low and too thinly spread, there has been no monitoringto assess how effective they have been and whether targets have been achieved.

3.46 In the short term, marketing and promotionshould concentrateon the following activities aimed at improving hotel occupancy rates and filling the tiewrooms likely to come on stream in 1988189:

Mi) market research, particularly in North America and Europe, aimed at identifying market opportunities in conjunction with the travel trade, wholesalers,travel agents, airlin ., etc.;

(ii) joint Government/privatesectorlairline promotion in selected target areas identified above as having potential; and

(iii) promotion with cruiseship operators of Trinidad and Tobago as attractive destinations.

3.47 In general, because of the lengthy lead time required to construct and open a new hotel, the best shorter term marketing strategy would be to stabilize, coordinate and make effective the existing level of expenditures for promotion and, through market research, to identify areas for significantly increased promotion In future years.

Tourism Ortanisation

3.48 The main agency responsible for tourism in Trinidad and Tobago is the Tourist Board, a statutory board falling under the purview of the Ministry of Industry, Commerce and ConsumerAffairs. Tobago has a separate Tobago Tourist Bureau under the purview of the Tobago House of Assembly (in accordancewith the Tobago House of Assembly Act 37 of 1980, effective from 1982) and is responsible for the development and maintenance of the tourism industry in Tobago. The Trinidad and Tobago Tourist Board assists in marketing, promotion and facilitation for arranged groups visiting Tobago and is responsible for the overseas marketing of the island. - 52 -

3.49 Other organizationsare also involved in tourism, including' IndustrialDevelopment Corporation--responsible for administeringthe hotel incentivescheme, hotel constructionand promotion and for defining priority areas for hotel development;Development Finance Company- -responsiblefor the finance of hotel and tourist facilities;private sector organizationssuch as the Hotel Associationand Travel Agents' Association;BWIA; Airports Authority; Port Authority; and other tourism- related bodies. Coordination among these organizations has been weak.

3.50 Responsibilityfor tourism in Trinidad and Tobago is divided between Government departments and, at the political and administrative level, is a relativelysmall componentof the Ministry of Industry, Commerce and ConsumerAffairs.

3.51 Tourism developmentwould be better served if there were either a Ministry of Tourism or Minister of Tourism within an appropriate ministry. Tourism requires the close coordinationof many inter-relatedsectors and interestsand needs representationat the highest level if the inevitable conflictsand issues are to be satisfactorilyresolved. Further, tourism developmentneeds a less blurred Image and to be portrayed to the international travel trade as an important sector, if Trinidad and Tobago are to be put on the tourismmap of the Caribbean. This objectivewould also be furtheredby Improvedfinancing of tourism. Currently, it is supportedout of general revenues,with no real objectiveassessment of its required level. In certain other Caribbeancountries, the hotel tax is the basis of the tourism budget. In this case, increasesin the number of tourists boosts the budget and provides a built-in incentive for success. This option warrants examinationas part of the review of the organization of tourism in Trinidad and Tobago.

Local Transportation

3.52 With most tourists comprisedof business travellers,local transportationis expensive in Trinidad, particularly as the airport is nearly 20 km from Port of Spain, the capital and main destinationof visitors. The airport in Tobago is close to most hotels and taxis are more oriented to the vacation traveller. However, any expansion of the tourism sector will require an improved local transportationsystem, including:

(i) re-instatementof the hotel-airportbus system;

(ii) fixed prices, widely displayed,for taxis and/or the introduction of a meter system within urban areas; and

(iii) the use of cheaper medium-size vehicles as taxis.

Port and Airport Services

Port Services

3.53 The Port Authority is responsible for the berthing of ships, their infrastructure requirements and the operation of the ferry service to Tobago. Currently, cruiseships visiting Trinidad berth at Port of Spain, where visitors sightsee, shop and enjoy entertainment. The private sector - 53 - has proposed developingseveral cruiseshipberthing areas into a major tourist facility,to includeshops, restaurants,banks, etc., cruise vessels could be stationedthere, attractedby the location of Trinidad and Tobago on the cruise circuit and cheaper fuel.

3.54 Other cruise vessels prefer to visit Tobago. They anchor off one of the scenic points of the island and ferry passengers from the ship to land by tender. There are firm proposalsto develop a cruise pier facility at the capital of the island,Scarborough. The new facility would also cater to the inter-islandferry service. Currentlythere are two car/passengerferries, with a capacityof approximately700 passengers and 125 cars, with twice daily sailings in each directionon weekdays and one sailing in each directionon weekends. The 85-mile journey, which takes between 4-5 hours dependingon sea conditions,costs TT$26 return, a fare that is heavily subsidized. The passengerload factor for 1986 was under 40Z but there were still capacity problems at the peak periods.

Airport Services

3.55 The Airport Authority of Trinidad and Tobago operates Piarco airport, the main international airport of the country, and Crown Point airport, which serves Tobago. Almost all internationalflights arrive at Piarco, and passengers for Tobago then take a domestic flight there. Piarco airport can handle all wide-bodied aircraft, but the terminal facilities are poor, with slow processing of visitors, and are generally unsatisfactory fo- major passenger flows. Crown Point airport has, by contrast, a pleasant modern terminal that caters satisfactorily tor the domestic services it receives. Its runway will accommodate Boeing 727 aircraft,but it needs to be able to receivewide-bodied aircraft from the major source markets. Doing so will require extendingthe runway and remodelling the terminal.

Trainina

Currently, training for the tourism sector is confined to the efforts of individual hotels, restaurants and the Hotel Training School of Chaguaramas. The training school produces some 100-120 graduates per yeas, up to the chef and middle management level, althoughmost enter the lower staff levels. Only some 40Z of students enter the hotel industry,the rest being aeterred by salary levels lower than expected. The type of work and difficulthours also have an impact on loss of staff. The recent economic recessionhas, however, increasedthe standard of the students entering the training courses and has reducedthe wastage.

3.56 The training school is funded mainly by the IDC, with some revenue from course fees. It is apparent that the expansionof the tourism sector, with new accommodations,restaurants and other facilities,will require an additionaland differenttype of training facility. It will need to be: tourism-oriented;resort-oriented; capable of training a wider variety of staff levels and functions; and organized around courses that develop and promote inter-sectorallinkages, e.g., chefs' courses aimed at more local foods and more Caribbean/localmenus, and designer courses aimed at opening up the areas of soft furnishings,furniture, etc., to local or regional manufacturers. The school might be located in Tobago. - 54 -

Inter-Sectoral Linkaees 3.57 Linkages between the tourism sector and the rest of the economy are limited. Whil, the agriculturalsector supplies much of the fresh vegotable requirement, fruit and certain meat products are largely imported. Non-food requirements, including soft furnishings, furniture, chinaware, cutleryand, electrical equipment, are also mostly imported. 3.58 Because of the lead time for the production of new crops, short- term benefits from inter-sectoral linkages are unlikely. However, in the medium term, the development of tropical fruit crops and agri-processing industries appoars to have potential, but will need encouragement at all levels of both industries. The prospects for locally manufactured items to be produced locally for the tourism sector appear to be more difficult, although smaller scale hotels, constructed and equipped with traditional, local materials, offer some potential for increasing inter-sectoral linkages. CONCLUSIONS 3.59 Tourism-related activities, which constitute about 3X of GDP, have potentialfor considerableexpansion. Whereas in the past tourismhas been largelyneglected by the private sector and Government, a new consensus is emerging on the direction new tourism policies should take. The benefits of a sound tourism policy would be mainfold: increased generation of foreign exchange revenue; decreased loss of foreign exchange; increased employment, training and job opportunities; fairer distribution of social and economic benefits, especially between the two islands; development of a strong and profitable private sector; increased opportunities for vacation and leisure activities for the domestic touristg potential for inter- sectoral linkages; and diversification and strengthening of the general economy. 3.60 The major problems in the tourism sector are: the low number of tourists; small number of hotel rooms; low occupancy rates and generally low quality and low profitability of hotels; difficult access to Tobago from the major source markets; poor value for money; poor marketing image of Trinidad and Tobago of tourists and the travel trade in North America and Europe; considerable outward movement by residents and consequent loss of foreign exchange; lack of attractions, inadequate organization of those that do exist and general lack of tourism ambience in the country; lack of, and high cost of, infrastructureg and lack of supporting tourism facilities, including restaurants and shops. RECOMENDATIONS 1. Improvement of the hotel stock and selectivelytargetted, joint marketing programs that combine the tourism assets of Trinidad and Tobago and/or other countries, e.g., Trinidad and Tobago with Grenada/Barbados/ Venezuela are needed. Short-termactions to improvehotel occupancyrates and profitability will require much improved coordination of the tourism agencies in both Trinidad and Tobago, supported by a major marketing effort and utilization, in particular, of the tremendous potential of the country's airline capacity. - 55 -

2. Improvedsupporting policies including the following,are needed: (i) marketresearch into tho major source markets to be targetted; (it) improvedcoordination of the tourismagencies, and specifically lmproved,coordinated and selectively targetted promotion of appropriatesource markets; (iil) more directflights, packages, block bookings and increasedseat availabilityfor internationaltourists at peak periods;and

(iv) improved infrastructure, Including airport and cruise port developments in Trinidad and Tobago.

3. A concurrent five-year development program should include:

(i) an increese in the supply of hotel accommodations, in terms of hotel size and new small and modiumsize (50-150rooms) hotels, to provide a total of about 1,500 new rooms;

(it) major tourism and leisure development almed at both international and domestictourists at Chaguaramas;and (iii) a major increase in cruiseship passengers visiting both islands. 4. The longer term program shouldcover development of the north coast of Trinidad for both International and domestic tourists. 3 61 These measures are best supported by exchange rate adjustment, consistent with the needs of the overall economy. Further, tourism development would be better served if there wre either a Ministry of Tourism or a Minister of Tourism within an appropriate ministry, and not submerged in a major ministry. Financing arrangements for tourism should also be improved. 3.62 As to technical assistance, a tourism advisor and planninglimplemntation programs for the following three areas are needed: Tobago Tourism Development Study; Chaguaramas National Part Development Study; and Northcoast Development Study, Trinidad. - 56 -

Chalter IV

ZnSTITUTIORALSTRUCTURE FOR PLANIRO

4.1 Followingindependence, the Governmentcreated a Ministryof Planning In 1955 with responsibility for planning the country's socio- economic development. It carried out its role through a series of five- year plans developedin conjunctionwith the otherministries. In 1974, followingmajor changesin the economicenvironment, the Ministryof Planningwas abolished,its only trace beingan integratedplanning department within the Treasury, whose activities were focused mainly on public finances and the economy. In December 1986, the newly elected Government decided to set up a new Ministry of Planning and Reconstruction that would be concerned with all aspects of socio-economic development.

PLANNINGINSTITUTIONS

The Ministry of Plannins and Reconstruction 4.2 The new Ministryof Planninghas not been ratifiedby the legislature, and Its budget is so modest that it does not have adequate staff to undertake the task of organizing and integrating the country's socio-economic development. Moreover, when the previous Ministry was dissolved in 1974, its staff were reassignedto other Government departmentsand agencies and were not available to the new Ministry.

4.3 The staff of the new Ministry of Planning consists of personnel of the Planning Division of the Treasury, which has been moved to the Ministry; these personnel are essentially specialists in the economy and public finances. The new Ministry has very few or no specialists in developmentplanning, regional development and other key fields of planning (manpower,labor, education, etc.). As such there are doubtswhether it can carry out its mandate. Because of the budget constraints, it will be Impossible in the imediate future to fill a number of the positions identified for the Ministry. The 1987 budget appropriatesonly TT$32,716,639, or 0.8%of the projected national total, to the Ministry.

Sectoral Plannint Units

4.4 Eight of the 14 ministries and a number of the major public agencieshave theirown sectoralplanning units, some of them competentand well-staffed.These decentralized sectoral planning units grew gradually out of the void left by the dissolution of the Ministry of Planning in 1974, filling the need for planning at the sectoral and regional levels. Some units, already 10 years old, have accumulated valuable experience, and their contribution to general and national planning is significant. The ministries and public agencies that formed their own operational planning units after 1974 ares Ministry of Youth, Sport, Culture and Creative Arts; Ministry of Labour and Manpower Resources; Ministry of Education; Ministry of Healt - 57 - ronment; Ministry of Energy; Office of the Prim Minister (Decentralization);Industrial Development; Development Finane Company; and Tourism Office. The most fully developed planning units belong to the Hnisatriee oft Agriculture (Food Production,Marino Exploitation, Foretry and Environment);Public Works (Works, Settlementsand Infrastructure); Health (Health,Welfare and Status of Wmen); Education (primary,secondary and higher)l and Energy.

4.5 In the wake of the restructuring of the GoverAnet in December 1986, a number of the ministrie that had planning units reorganisedths to fit their new responsibilities(e.g., Youth nd Sport, end Labour and Manpower Resources).

4.6 Some Ministerial planning units need to be strengthened in terms of efficiency and effectiveness, and six ministries still have no planning staff. For example, the Ministry of Industry, has not had the opportunity to set up a planning unit, although upper level officials there are fully conscious of the need to do so. To this end they have begun serious discussions with the Office of the Prime Minister and Ministry of Plaaning and Reconstruction.

4.7 The Importance of planning units is illustrated by the differing experience of two ministries that received World Bank loans or lines of credits Trinidad and Tobago received the two loans in 1972, both to mature in 1989, for a total of US$4,333,000. These funds, administered by the Development Finance Company, were intended to finance industrial projects that were either wholly Government-owned or in which the Government had a majority holding. Only 21.81 of the total made availabl was Invested in projects of this type. Obviously, there Is a lack of capacity in both the governmental and mixed-economy sectors to absorb industrial development capital. This ahortcoming can be linked directly to the fact that the Ministry of Industry possesses nelthor a sectoral planning unit nor a division dealing with the technical and finacial appraisal of new projects. On the other hand, a World Bank loan of US$6 million to the Nfiistry of Health for the construction of six new medicla centers ws disbursed fully and satisfactorily within the scheduled time period. This Ministry possessest a sectoral planning unit; a division for technical and financial appraisal of new projects; and a division for monitoring project execution.

Intetratod Retional Devolooment Plannins

4.8 Each subregional authority in Trinidad and Tobago has its own planning division that prepares, coordinates end monitors all socio- economic development within Its territory. Considering the human and physical resources in a subregion, this responsibility is extensive and extremely diversified.

Decentralisation Planlnit Division. O!fflce of the Prime Minister

4.9 In 1983, what was then the Ministry of Community Development wa abolished and replaced by a Decentralization Planning Division Attached to the Office of the Prime Minister. The Division'sactivities and responsibilitiesare virtually the same a those of the former Ministry, almost all of whose staff were reassigned to it. - 58 -

4.10 The Division takes part in regional activities throughs 11 representatives to the regionsl 4 representatives on the City Councils of the major urban centers;7 representatives on County Councils; 8 district comsunitydevelopment officers. 4.11 The Division'srepresentatives participate whenever possible In villagecouncils, adult education, and the trainingof futurecommunity development workers. They olso help create new employment opportunities through the devolopment of small-scale non-industrial enterprises and cottage Industries end through the granting of loans for small development ventures. The district officers are responsible for comunity development in conjunction with locally represented Government departments. Community development also involves supporting cultural activities, competitions between villages, etc. 4.12 The foregoingapplies to Trinidad. Tobago,has its own particular legalstatus, and a somewhatdifferent system. INTEGRATEDSOCIO-ECONONIC DEVELOPMENT PLANNING 4.13 The Ministryof Planninghas been in existencetoo littletime to have been able to codify the work it does in conjunctionwith the various planning units. Instead, the Ministry is using working meetings as a means of sustained contact with the planning units and with those Ministries and publicagencies that stilldo not possessone. The objectiveis to work patterns, information channels, and steps preparatory to decision-making, as well as to standardize all systemsand proceduresand the documentation accompanyingthem. Shortcominasin General Socio-economic Development Planning 4.14 The weak pointsin socio-economicdevelopment planning, the outcomeof the factorsoutlined above, are as follows.

Ministry of Plannint and Reconstruction 4.15. The first shortcoming, and the most serious one, is inadequate staffing. Qualifiedstaff are neededso that the Ministrycan satisfactorily discharge its responsibilities. Between the dispersal of the staffof the old Ministryand retirements,the stock of know-howin national socio-economic devolopment planning has largely vanished. Purthermoro, during this long down period, no specialists were being trainedin the various facets of national planning. 4.16 A socondshortcoming is the many decentralizedplanning units. The new Ministry is In no position to question or quickly modify these extremely varied structures without jeopardizing or halting ongoing developmentefforts.

4.17 A third shortcoming relates to the disparities in the human, financial and physical resources of the various planning units The Ministry itself does not have a large enough budget to fund new activities or the rapid growth of old ones. - 59 -

4.18 A fourth, the Ministry's role and responsibilities have not yet been clearly and officially defined. However, this situation could prove beneficial. During this transitional phase, the NMieitry may be able, based on its experience, to determine its place in the scheme of things and orient its activities towards (1) taking advantage of what alre"dy exists; (11) Resolving perceived weak pointsin sectoral and regional planning; (iii) helpingto createnew planningunits; (iv) takingup fullythe role of coordinatorand prim mover socio- economicdevelopment, a role that clearly belongs to it. In doing so, it would logicallyrely on existingsectoral and regional planningunits While recognizingthat the planningunits in the individualministries are important,the Ministryof Planninghas to play a greatercoordinating role. Doing so will requirethat specificstructures be put in place and that therebe a clear politicaldirection; and (v) reinforcingits coordinatingfunction. For instance,loan applicationsto externalsources could be coordinatedthrough the Ministry, working In collaborationwith the Ministryof Finance. Technicalassistance could be vettedin and channelodthrough the Ministryof Planning. SectoralMinistries 4.19 As pointedout earlier,three of the oeghtministerial planning units need to be strengthened and the six ministrieswith no planningunits need to establish them. The Ministryof Industryis currentlyworking with the Ministryof Planningtoward that end. Finally,all Ministriesneed to developa systemof work organizationthat all can profitablyfollow.

INTEGRATEDREGIONAL DEVELOPMENT PLANNING 4.20 The island of Trinidad has achieved good results In this area. The same is not true of Tobago, where much remains to be done. One problem is that staffing, financing and physical resources are not available on a scaleto meet needs. NATIONALPLANNING DATA 4.21 Threepoints are worth notinghere. First,there is no central data bank equippedto processand generateall requirednational planning data, althoughthe CentralStatistical Office does amass considorable statistics.It would be advisable to consolidate these resources by settingup a data processingunit withinthe Ministry of Planning to work in areassupplementary and parallelto thosehandled by the CSO. Second, the lack of a projectdata bank affectspreparation of the forthcoming plan. It would be advisableto createsuch a resourcefrom pre-project - 60 - documentation,initially from identificationstudies but ideally from pre- feasibility studies. This approach would allow projects under consideration to be incorporated in the Development Plan. Third, a computerized central project register should be set up so as to facilitate monitoring of the various phases of any project (e.g., preinvestment, investment, comuencement of operations, comparison of actual and projected results, and explanation of shortfalls and gaps observed). It would also be a major help in drafting annual project progress reports that provide a comprehensive statement of forthcoming activities and propose any remedial actions the authorities need to take.

FINANCINGTHE PRE-INVESTHENTPHASE

4.22 There is no official national fund for pre-investment financing, although a ntmber of contacts have been made and some preliminary work done to this end.

STANDARDIZINGPROJECT PROPOSALDOCUMENTS

4.23 In studies relating to the identification, feasibility or evaluationof projects, local authoritiesganerally use documents provided by the agency or bank handling the financialpackage. Since the methods and documents are not standardized,it is difficultto compare one project with another in any particularsector when the financing arrangements are made by differentsources.

MONITORING THE GENERAL ECONOMIC SITUATION

4.24 Regular and systematicmonitoring (for instance,every half-year) of major socio-economicindicators and macro-economicbalances, together with analysis of the current situation,have not yet been instituted.

TECHNICALASSISTANCE REQUIREMENTS

4.25 In the interest of dealing as rapidly aa possible with the urgent needs noted, the Government is well-advisedto seek a program of technical assistance. The kind of planning assistance requiredmight be as follows.

Assitnment of Experts

4.26 Given the gaps in training and lack of practical experienceof staff involvedwith national planning, it would be advantageousto assign a small team of resident experts for a certain time. In addition to technicalassistance per se, they would provide on-the-jobinstruction and training for local personnel. The team could consist of the following: a project manager, would be responsible for helping the Ministry of Planning prepare the next National Socio-Economic Development Plan and set up liaison and decision-making structures and mechanisms to improve the operations of the whole planning operation (24 man-months). An expert with sound knowledge of sectoral development and project feasibility and evaluation studies would assist in strengtheningthe sectoral planning units without adequate staff and equipment. The expert would also provide the authorities on the establishment of new sectoral planning units in the ministries and public agencieswithout them (a minimum of 12 man-months). - 61 -

An expert in integrated regional socio-economic development and planning might be included on the team (12 man-months). It should be possible to obtain the services of more highly specializedexperts on a consql1ting basis in such areas as: manpower and employment; the different bxonches of Industry and rural development;tourism; etc.

Training Assistance

4.27 Fellowshipsfor qualifiedstudents or individualsalready In service and interested in specializing in general national development planning are needed, as is short-term training for personnel attached to and designated by the Ministry, locallyor abroad. This training could take the form of: specializedseminars in any subject area bearing on national problems; and traineeships in Goverrment departments or agencies in other countries that face or have found solutions to problems similar to those in Trinidad and Tobago.

4.28 Working seminars on major issues raised by the domestic planning process would also be beneficial. Examples aret two seminars, a year apart, on project feasibility studies and different working methods (two- week duration); one seminar on the advantages of a central bank for internal and external socio-economicdata, in conjunctionwith the Central StatisticalOffice (four-dayduration); two seminars, a year apart, on development project appraisal and ex post evaluation, based on a study of specific cases (two-weekduration); and one seminar on differeatmethods of generating short-, medium- and long-termforecasts and projections,and on the advantages of a long-ternmmaster plan (two-weekduration).

Assistance in establishinga national fund

4.29 It would be used to financepre-investment studies of development projects geared to National Developmeat Plan goals.

Equinment

4.30 Needed equipmentincludes: a computerhardware (personal computerswith various data input terminals,and also on-line or off-line access) to be compatiblewith that already in use, in particularthe hardware of the Central StatisticalOffice hardware; and photocopying equipmentthat would allow very rapid reproductionof documents and graphic materials for immediatedissemination to interestedGovernment departments and agencies.

CONCLUSION

4.31 Despite the dissolutionof the Ministry of Planning in 1974, the principle of planning economic and social activities survived in the form of sectoral planning by units in different Ministries and integrated regional socio-economic development planning by the former Ministry of Community Development, later transferred to the Decencralization Planning Division of the Office of the Prime Minister.

4.32 The new Ministry of Planning and Reconstructionis in its early stages of development. It has not had time to: (i) dovetailwith the sectoral and regionalplanning units, so that it has not succeeded in - 62 - playing its proper role a prime mover and coordinatorl (ii) makeoa serious start on the new National Development Plan because suitably qualified and experienced personnel -- nationals proficient in the disciplines associated with integrated national *ocio-economic planning -- are rare; and (iII) inadequato data base and computer facilities needed to carry out the types of work within its sphere of responsibility.

4.33 Another problem is that the sectoral and regional planning units vary as regards financing and staff, and In some areas--theMinistry of Industry,for example--nounits have yet been formed.

4.34 Other problems affect the formulationand monitoring of the National DevelopmentPlan and monitoringthe local socio-economic situation. As yet, there Is no developmentproject; it is Indispensableto have one for the preparation of the next Plan. Arrangementsare not yet in place for regular and systematic tracking (on a half-yearlybasis, for listance) of the major socio-economic indicators and changes in macro- economic balances, and analysis of the current situation. There is no central project register to allow monitoring and follow-up of progress and identification of deviations from plans and schedules essential if useful annual planning reports are to be put together. Working methods for project feasibilityand appraisalstudies have not yet been standardized,a situation that precludesvalid comparisons. A national fund to finance project pre-investment work Is envisaged but does not yet exist.

4.35 To deal rapidly with the needs identifiedabove, the Government ought to seek a comprehensive program of technical asistance and training. NOTES

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