3.4 Trends in agribusiness investment, 1991-2000

From late 1991 to December 1999, the Investment Council approved a total of 1 613 investment projects in all sectors. The rate of approval of projects in this period was of about 16 projects per monthly session of the Council. The total approved investment was SP352.7 billion, roughly equivalent to 7.67 billion dollars (the official rate of SP46 per dollar is used for this conversion). As the figure covers little more than eight effective years (the Investment Law was promulgated in mid-1991), this implies an average committed investment of US$0.95 billion per year. On an average GDP of about US$13 billion in the period, it would amount (if materialized) to some 8 percent of GDP per year. The evolution of approvals over time is showed in the following table.

Table 3.1 Projects approved and capital committed by sector, 1991-1999

Note: In 1999 a number of transportation projects were cancelled or adjusted, resulting in a negative net commitment of capital in that sector.

Source: Investment Office.

The 1 613 projects approved over the decade of the 1990s committed a total SP352.7 billion, equivalent to about US$7.67 billion at a rate of SP46 per dollar. Agricultural projects are few (3 percent), including mostly production of ancillary inputs such as irrigation pipes, or projects involving plant or animal production in view of some ulterior industrial development. The Investment Council, in fact, has not favoured direct investment in agricultural production under Law No.10. The vast majority of the amounts committed were for projects in the industrial sector (about 85 percent of total investment). Transportation projects where very numerous, about one half of the total, but of lesser size, so that they represent only 12 percent of total investment.

The following tables show the details of the projects by sub-sectors as well as the committed totals of investment in foreign currency, investment in imported equipment, and new jobs.

Approved projects included a programme total of SP204.86 billion of equipment to be imported, which means about US$4.45 billion, at a rate of nearly 550 million dollars per year. One salient feature of the precedent table lies in the final columns. The creation of nearly 100 000 new jobs by means of a total investment of 7.67 billion dollars means that the cost of one additional job is US$76 705 on average, mounting to almost US$100 000 in the manufacturing sector and up to US$249 112 in some specific sectors like “Non-metal products and building materials”, concerning mainly cement production plants. Agricultural production and processing shows somewhat lower average figures, at US$65 866 and US$78 818 per job respectively, but still quite high even for mechanized modern agriculture and high-tech agro-industry.

Table 3.2 Projects approved by the Investment Council, 1991-1999

Notes: (*) Most projects in this group include also livestock activities and related processing plants (e.g. olive trees and olive oil factory; olive trees and raising sheep). (**) Most dairy and livestock projects include related processing plants (e.g. milk and processed dairy products). (***) Includes agricultural production plus the production of agricultural equipment, inputs and services. (****) Includes some projects for producing agricultural inputs, breeding animals or providing services to farms, which should have been classified in the agricultural sector for the sake of consistency.

Source: Investment Office. Percentages may not add up to 100 because of rounding.

Table 3.3 Programmed imported equipment, expected employment, and planned capital/labour intensity: Approved investment projects, 1991-1999

Notes: Rate of exchange used: SP46 per US$. See notes of the precedent table regarding the classification of projects by sector.

Source: Based on data from the Investment Office.

As estimated before, the proposed investments would represent (if executed) about 8 percent of GDP per year, and aim to create about 10 000 jobs per year on average. With a labour force of about 4.5 million in 1999, this involves a 0.22 percent direct increase in overall employment by investing 8 percent of GDP, or a direct investment elasticity of employment of about 0.028 percent, a very low direct impact indeed. Even allowing for a reasonable employment multiplier in other sectors, both backwards and forwards, say a multiplier of 2 or 3 which would be quite good, investing 1 percent of GDP in this kind of projects would entail a (direct plus indirect) increase in overall employment of about 0.056 percent (with a multiplier of 2) or 0.084 percent (with a multiplier of 3). Investments authorized under Law No.10, therefore, have a very low expected impact on overall employment.

The low employment impact of these investments should be a matter of grave concern. Such investments should create vastly more employment, especially in a country with a growing population, an abundant labour supply, and a severe scarcity of capital, where moreover local capital is fleeing the country and foreign capital seldom comes except when given exceptional incentives. But it is not so. The projects are programmed to have little effect on employment. This calls for some explicit considerations in order to explain the high capital intensity of the projects approved.

The first consideration is that the figures concern planned investment, not actual investment. Some projects may have invested less than programmed, or may have made economies when actually purchasing the buildings and equipment required. However, almost all the companies interviewed for this study declared that they had invested as much as programmed, and in some cases even more. Though the survey did not involve any attempt to audit the investments, it is noticeable that seldom a company appears to be investing below its allotted authorization. It may well be that some companies may have overstated their investment needs to get a safe level of authorized tax exemption, since the amount they could subsequently invest without taxes is determined by the investment authorized at the time of approval. If they ask for a lower amount, they may face problems later when their actual investment must be higher than the authorized level. Anyway, it is conceivable that part of the tax exemption may have been used to purchase goods not directly necessary for operating the company, or that some investments may have been overstated, and these factors may have contributed to the high capital/labour ratios apparent in the investment schedule.

A second consideration is that, if the above suspicions are untrue and thus planned investments reflect the true level of capital intensity of the projects, then the existing investment framework must be encouraging an exceedingly high level of mechanization at the expense of creating employment, which is hardly a desirable policy in a country with an abundant and rapidly growing labour force. One possible explanation could be that the incentives granted by the Investment Law are determining that investments are disproportionately capital-intensive at the expense of the creation of employment. But that cannot be the whole explanation. The Investment Law allows for importing equipment at a zero tariff, but that hardly compensates for the very low dollar-equivalent wage rates prevailing for industrial workers in the country (significantly less than one dollar per hour in most cases). The machines imported in Syria under Law No.10 are usually the same expensive machines operated in Europe by workers earning ten or twenty times more than in Syria. A rational choice of techniques of production should never lead to the adoption of heavily capital-intensive technologies, even if no taxes are levied on the imported equipment.

If that previous explanation is thus not fully convincing, then other explanations should be found, such as the hypothesis outlined before about overstatements of investment needs. One of the promising avenues for research is to ascertain whether the existing investment framework contains incentives for overstating the amounts invested. Those amounts may be overstated through over-invoicing the capital goods purchased for the project, or by illegally selling part of the imported goods to other companies that do not enjoy the tax exemptions granted by Law No.10 (a transaction forbidden by Article 30 of the Law), or by diverting part of the goods purchased under the tax exemption towards other purposes (e.g. diverting vehicles, ostensibly imported for car-rental or taxi companies, towards private use).

Apart from the case of making gains from selling tax-exempt items at much higher domestic prices, such overstatement may serve also the purpose of justifying eventually a higher amount of profit remittances and capital repatriation (thus facilitating future capital flight). Another similar purpose may be to legitimize the possession of undeclared capital held abroad, by way of declaring an investment higher than the actual cost of the imported equipment brought into the country. This purpose might be attractive to some Syrian investors with capital held abroad. The Syrian authorities apparently do not perform any audit on the actual value of the equipment imported for the approved projects, and they probably do not have the means to perform such checks on so many projects. If this kind of explanation were true, then the actual relative impact on employment of the investments effectively made by the authorized companies may be higher than it appears to be. This matter should be studied more closely, and in the meantime a recommendation is in order for the Investment Office: it should intensify its efforts to audit the value of the equipment and infrastructure invested in the projects. It should also enforce the rule that projects be prioritized according to their impact on employment, as stipulated by the Investment Law. Another sensible recommendation is to revise the set of incentives established in the Law in order to avoid excessively encouraging projects with high capital/labour ratios.

Agribusiness projects. About a third of the industrial and agricultural projects are in the agribusiness sector. The most frequent category of agribusiness project is the production of edible oils, including olive oil and other vegetable oils. Second is the dairy sector, including dairy farms and dairy processing. Vegetable processing and marketing is also important. Surprisingly, fruit processing is not that important on the whole. At the beginning of the 1990s, most of the initial projects for processing farm products were primarily concerned with fruit juice production (since there was interest to absorb the current and expected citrus output surplus), and also sorting, packing and cooling fruits and vegetables, and with the production of pasta and canned food. Such projects were reserved to the public sector before the issuance of the Investment Law, as was also the case of vegetable oil from cottonseeds. Many of these initial projects, however, did not continue because local markets were soon saturated and there were no accessible foreign markets to absorb the surplus, especially in citrus and the fruit and vegetable sectors. As a result, agro-related investments shifted to dairy products, olive oil and milling cereals. The latter, however, has lately stopped because the installed milling capacity already exceeds Syria’s current needs. The following table shows a distribution of 227 agriculture-related projects approved up to 1998.

Table 3.4 Approved agricultural production and processing projects, 1992-98

(*) For fruit and vegetables.

Source: Investment Office.

The process of having a project approved and operating is a long and complicated one. As a result, many projects drag on for years before they are fully operational.

Table 3.5 Implementation of approved agricultural and industrial projects (as of 31 Dec. 2000)

(*) Partial or total industrial license as of December 31, 2000.

Source: Investment Office. Excludes transportation projects.

From the available data it could be estimated that among the projects that have started the procedure towards becoming operational after having been approved by the Investment Council, 41 percent remain mired in the administrative process after two years of struggle, and 33 percent are still in that situation after three years of initiating the process^[32]. The fact that a project does not advance may also be due to voluntary reasons. Investors have indeed abandoned some of these projects, as a result of delays and the changing investment climate alluded above. Following initial enthusiasm after promulgation of the Investment Law in 1991, investor optimism ebbed after 1993, possibly motivating some to abandon the projects or to delay them indefinitely. Stalled growth in the late 1990s should not have given them more encouragement.

The main feature transpiring from these data, then, is that 44 percent of the projects never went beyond the approval stage, and a large number of projects that initiated implementation were not yet operational by the end of 2000. In addition to no-starters, by the end of 2000, there were still projects from all the years back to 1991, that had initiated the administrative procedures for implementation after the Investment Council's approval, but were still stranded at some point in the many-step process described above, and probably abandoned by the investors long ago.^[33]

The Investment Office has not prepared a table showing the amount of committed capital corresponding to implemented and non-implemented projects, nor does it monitor the actual process of investment in the implemented companies, thus the amount of capital actually invested under Law No.10 is not directly known. However, based on the number of projects involved, it can be estimated that only about 31 percent of the committed capital had been invested by the end of 2000 (this assumes that small and large projects have the same likelihood of being abandoned or delayed).

The total committed investment from projects approved up to 1999 was about US$7.67 billion, of which US$6.73 billion were industrial and agricultural, with a rate of execution of 31 percent. Assuming the implemented projects are of average size, this means the implemented investments amount to about US$2.11 billion. The 811 projects in transportation (with a few also in other sectors), with a committed capital of US$0.93 billion, have a rate of execution of 70 percent. Thus the presumed effective investment resulting from projects approved until 1999 under Law No.10 should be about US$3.05 billion, or an average of US$338 million per year from 1992 to 2000. The agricultural and industrial projects alone would have generated a total investment of US$235 million per year along the 1992-1999 period.