Industrias La Constancia: Dynamizing El Salvador`s Economy

Industrias La Constancia:
Dynamizing El Salvador’s
Economy
April 2012
Industrias La Constancia:
Dynamizing El Salvador’s
Economy
Contents
• The dynamizing power of
Industrias La Constancia (ILC) in El Salvador’s Economy
2
• Opportunities for positive
interaction between the academy
and the enterprise
5
• Introduction
9
1. Analysis of economic
environment
13
2. Significance of ILC in the
Salvadoran economy
25
3. Main findings
35
• General conclusions
45
• Bibliography
47
ISBN: 978-99923-62-23-5
This document is an outline of the
investigation made by the Centre of
Public Policies, ESEN, for ILC.
Investigation team:
Director: Carlos Alberto Carcach
Luis Eduardo Morera Lépiz
Magdiel Guardado
Alan Rico
Text editing, design, and printing:
Alejandría Comunicaciones, S.A. de C.V.
www.editorialalejandria.com
PRESENTAT ION
BY
IL C
P R ES E N TATION
B Y
I LC
The Dynamizing Power
of Industrias La Constancia
in El Salvador’s Economy
The role of private enterprises in development includes several aspects. These
aspects generally comprise the role of enterprises in employment generation,
fiscal contribution, investments in productive assets, or the incorporation of
new technologies and innovation.
Even though less discussed, yet equally important, is the role of private
enterprises in the provision of goods or services that cover the needs or
expectations of individuals, communities or institutions. In the case of ILC, this
is equal to recognizing the role of our beverages in hydration, socialization, as
well as their unique role as a means to share important moments with family
and friends.
And the discussion regarding the role of the enterprises in terms of its joint or
individual contribution in a national economy is even much less common. It was
under that perspective, that ILC, a subsidiary of SABMiller, became interested
in knowing what was their importance within the Salvadoran economy, so that
it may then be possible to have a clear picture of the possible impact that its
growth as an enterprise may have in the growth of El Salvador’s own economy.
We acknowledge that this project was not a simple task. However, following
the method of recent experiences of other SABMiller subsidiaries in Europe,
South Africa, Ghana, Uganda, Honduras and Panama, we embarked ourselves
2
in an investigation process that was based on objectivity, preciseness,
methodological solidity and impartiality of the data collected as a main premise.
We therefore feel very pleased of the work developed by the Escuela
Superior de Economía y Negocios (ESEN), which was commissioned to carry
out the present survey as result of the evaluation of different supplies.
A fundamental element of ESEN’s investigation, which is summarized in the
document presented herein, is the use of the Input-output Matrix (Matriz Insumo
Producto MIP) elaborated by the Banco Central de Reserva de El Salvador.
The Input-output Matrix, which granted its creator Wassily Leontief the Nobel
Prize in Economics, is a macroeconomics instrument used internationally to
measure the impact of the activity of a sector of the economy – in this case of
an enterprise – to boost other sectors.
One of the main results of the survey points out that an increase in the sales
of ILC sees itself multiplied up to 4.8 times in the Gross Domestic Product of El
Salvador. We acknowledge this discovery with much pride at ILC, but above all
with much responsibility.
We are pleased to know that our enterprise model, with a clear approach
on sustainable development, is giving positive fruits to sectors that go even
beyond our immediate value chain.
3
PR ESENTAT ION
BY
IL C
Moreover, we are aware of the significant responsibility implicit in this, which
forces a constant need for improvement upon us, seeing as great benefits for
the country’s environment stem from this constant search for progress. Such
responsibility, that we can now validate thanks to the underlying methodological
solidity of this survey, will continue marking the way of how ILC does business
in El Salvador.
We believe that this type of survey could be used by other enterprises or
industrial sectors, which would contribute to the constructive dialogue between
the Private Sector and the Government to join efforts in the great common
challenge of reactivating the economy and raising the quality of life of many
Salvadoran families.
P R ES E N TATION
4
E S E N
Opportunities for positive interaction
between the academy and the enterprise
The present survey is irrefutable proof of the trust placed by such an important
enterprise as ILC on the investigation capacity of the staff of professors at ESEN
and an acknowledgement to the reputation of academic excellence that ESEN has
achieved from its foundation.
El Salvador has competent professionals to carry out joint investigation
projects between the academic and private sectors, based on the characteristics
presented by our national reality. This is one of the reasons why the investigation
applied locally is fundamental to construct scientific knowledge from the analysis
of national experiences, aiming to develop technological options guided to solving
priority issues for the private sector.
The main findings of this survey describe the contribution of ILC to El Salvador’s
economy in terms of two multiplying effects:
Carlos Habencio Fernandez
President of Industrias La Constancia
B Y
Quantitative Multiplying Effect
Due to the significance of ILC in the Salvadoran economy, which was
measured by examining the contribution of the enterprise to production,
exports, hiring of staff, payment of salaries, fiscal contributions, connection
with suppliers and with the distribution and commerce network, a growth in
ILC will invariably produce a multiplying effect that will eventually lead to the
expansion of productive activities related to the increase of the country’s
purchase capacity (more salaries, more taxes).
Qualitative Multiplying Effects
These can be seen in the transmission of good management practices to
businesses belonging to ILC’s value chain; and it references the positive
5
PRESENTAT ION
BY
ESEN
P R ES E N TATION
B Y
E S E N
From its foundation, ESEN has placed high importance on a theoreticalpractical balance for the holistic formation of future leaders for the country, which
grasp the needs of the enterprise sector and of the country in general.
The present work shows the opportunities of positive interaction between the
academy and enterprise, also allowing for professors to investigate about topics
that then contribute to include a wider range of topics in classes, which in the end
benefits the students.
We appreciate the trust placed on ESEN by ILC to develop this survey, which
we hope can encourage other investigations of interest for the country.
Carlos Carcach Director of Centre
for Public Policies
ESEN
Everardo Rivera
General Director
ESEN
impact in the overall business culture which ILC transmits to the economic
agents involved, as well as the benefits received by the communities in the
enterprise’s area of influence.
ILC looks for businesses that are both profitable and long – term,
meaning that the time span involved in the decision making process and
the guidelines of the 10 Priorities for Sustainable Development, make it
possible to give up illusory short – term earnings which may jeopardize
the enterprise’s development, for a profitability which instead rests in
the promotion of responsible use, an interest in the environment and the
constant search for higher productivity levels.
This search for sustainability in a ”Fair-play” manner is transmitted to the
members of the value chain of ILC, thus prompting a multiplying effect of
good practices in businesses.
6
7
IN TR OD U C TION
Contribution of Industrias La Constancia
to El Salvador’s Economy
• Introduction
The present investigation takes into account ILC’s impact within El Salvador’s economy
with a method similar as the one used by other SABMiller companies around the world1.
The impact is quantified in two ways: a direct way, gathered from staff hiring records,
payroll spreadsheets, supplies purchases and taxes; and another more complex way,
estimating the chain of impacts the company’s different decisions have within the rest
of economic activities of the country.
The survey itself is made up of three parts. The first presents an analysis of the
economic environment for the 2001-2010 period. It revises the impact of the international
economy on the Salvadoran economy; particularly, how the purchase capacity of the
population and the national macroeconomic stability were affected. The second part
analyzes the state of the beverage industry in El Salvador during the same time period
and carries out an estimate of the impact of ILC in the Salvadoran economy through its
contributions to the production of Beverages, to the Gross Domestic Product (GDP), to
the generation of employment and tax collection. Moreover, the business model of ILC
based on Sustainable Development is presented.
The third part estimates the total impact in El Salvador’s economy produced by
ILC’s growth through the sum of direct, indirect and induced impacts, whose calculation
1. For this survey, the South Africa, Uganda, Honduras and Panama case studies were reviewed
9
INT RODUCT ION
is obtained from financial and administrative reports regarding ILC’s employment
rates, a closer look on the value chain, and data from the 2006 Input-output Matrix
published by the Banco Central de Reserva de El Salvador.
The Input-output Matrix offers an organized record of the transactions made
between the productive sectors, meant to satisfy the procurement of goods for
final demands, as well as the assorted intermediate goods purchased and sold
between them. Hence, it becomes possible to show the correlation between the
different productive sectors and the direct and indirect impact that an increase
in the final demand has on these. The Input-output Matrix allows us to measure
production increases in any sector derived from the increase of any one of them
in particular.
This system was developed in the 1930’s by Wassily Leontief, winner of the
Economics Nobel Prize in 1973, for his work on the elaboration of the United States’
matrixes, which culminated in 1941.
The Input-output Matrix offers a detailed description of the route followed by
the goods and services from their production up to the final demand. This allows
businessmen a thorough knowledge; on one hand, of the sector in which their
buyers as well as their buyers’ clients are located, and on the other hand, their
relative participation in the market and possibilities for expansion.
A Useful Tool for the Government
For the Government, it is a very useful tool in different areas, which allows having
a solid statistics base for the analysis of economic and commercial policies. One
of the most frequent uses is the measurement of direct and indirect impacts in the
production as consequence of changes in the final demand.
10
PART
ONE
PART
ON E
Analysis of the Economic
Environment
International Environment
The impact of world economy in the Salvadoran economy can be analyzed by
taking a closer look at the commercial, financial and transfer channels.
The commercial channel examines the country’s openness to international
commerce, which rests on the world’s economic growth, transport costs, trade
barriers and changes in key world prices (exchange rates and raw materials).
The financial channel includes the possibility of having capital inflow guided to
finance the public and private sectors, as well as Foreign Direct Investment (FDI).
The transfer channel is relevant because of the additional purchase capacity
belonging to the sector of the population receiving remittances and the relevance
of programs related to donations being perceived by the Government.
Table 1 shows El Salvador’s economic openness indicator, providing a detailed
description of the importance of the United States, Central America, and other
countries. The figures reveal that the U.S. is El Salvador’s main commercial partner,
closely followed by the rest of Central American (CA) nations.
Regarding the exports sector, the significance is much higher for the United
States. In this area however, Central America has been assuming a more
predominant role with time.
12
13
PART
ONE
P R I PMAERRTA OPNAER T E
The figures also show the effects of the global financial crisis (mainly 2009)
which caused for the economic openness indicator to drop 13 percentage points,
which can be mainly explained by the decrease of imports and the implications to
demand and domestic production potential.
Table 1
El Salvador: Economic Openness and Significance of U.S.A. and CA
as commercial partners.
2001
2002
2003
2004
2005 2006
2007
2008
2009 2010
Economic Openness (X+M)/GDP
57.1
57.2
59.5
61.0
59.9
62.0
63.8
67.5
54.2
61.3
Significance of openness with U.S.A.
54.9
55.9
56.0
53.3
41.9
41.0
40.4
38.8
39.6
40.7
Significance of openness with CA
19.6
19.1
18.2
18.3
22.3
22.0
22.1
23.0
26.2
24.9
Significance of openness with other
countries
25.5
25.0
25.8
28.4
35.9
36.9
37.5
38.2
34.2
34.4
Exports as part of GDP (X/GDP)
20.7
20.9
20.9
20.9
20.1
20.1
20.0
21.7
18.7
21.2
Significance of X to U.S.A.
65.4
67.0
67.5
65.5
52.6
52.7
50.4
48.3
46.5
48.0
Significance of X to CA
25.2
24.7
23.9
24.9
34.5
32.7
34.2
35.7
36.5
35.9
9.3
8.3
8.6
9.6
12.8
14.6
15.4
16.1
17.0
16.1
Imports as part of GDP (M/GDP)
36.4
36.2
38.5
40.1
39.8
41.8
43.9
45.8
35.5
40.1
Significance of M from U.S.A.
49.0
49.6
49.7
46.9
36.5
35.4
35.8
34.3
36.0
36.8
Significance of M from CA
16.3
15.8
15.1
14.9
16.1
16.9
16.6
17.0
20.8
19.1
Significance of M from other countries
34.7
34.6
35.2
38.1
47.5
47.7
47.6
48.7
43.2
44.1
Significance of X to other countries
Source: BCR Foreign commerce database
Note: From 2005, “maquilas” (apparel industries) are recorded according to the country of destiny of the exports, or by the
origin of the imports. Before this, they were only accredited in the U.S.A. This explains the drop in significance of the U.S.A. from
2004 to 2005.
The United States low economic growth rates affected the Salvadoran economy
very negatively.
Furthermore, the tendency of higher costs in the commodities – outlined in the
majority of cases as an increase in input prices–, lead to higher production costs
for the economy in general and for ILC.
14
15
15
PART
ONE
PART
In regards to the financial channel, the country has not presented problems
in getting financing from the rest of the world, mainly the Government. Rather, the
potential problems are warned, on one hand, in the allocation of these funds and
their profitability or the country, and on the other hand, in the risk of exceeding
reasonable indicators of use of debt. Another problem is the low FDI, which was
$78 million in 2012, the lowest during the period of 2000 – 2010 and also less than
the average for the Central American region ($843 million).
The transfers channel considers the increase of the purchase capacity taking
place in the country, resulting from the inflow of remittances and donations from the
rest of the world. It is unquestionable that the remittances represent a noticeable
increase in the purchase capacity of the Salvadoran population, but these also
constitute one of the most immediate channels to transmit a crisis. The majority
of remittances are sent by individuals who work in the U.S.A., and who depend
on the activities that are most vulnerable to crisis, such as the construction sector.
Table 2 presents the figures of remittances and their significance in the Salvadoran
economy. The data shows the 2009 and 2010 crisis. The latter does not reach the
total received in 2006.
Table 2
El Salvador: Remittances in millions of dollars
ON E
NATIONAL ENVIRONMENT
In general terms, it is recognized that the growth of ILC depends on the population’s
purchase capacity as well as the country’s macroeconomic stability that allows for
a favorable environment for production and businesses.
PURCHASE CAPACITY
Higher capacity, reflected in the nominal and real GDP per capita with higher
salaries, higher number of persons with occupation, less unemployment and more
remittances, would form a scenario of higher purchase capacity of the population,
having more income availability. We analyze these variables in the country as follows.
Table 3
El Salvador: Nominal GDP, Population, GDP per capita,
Production and population growth
Nominal GDP
(Millions of dollars)
Total population
of the country
Nominal GDP
per capita
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
13,134.1
13,812.7
14,306.7
15,046.7
15,798.3
17,093.8
18,550.7
20,104.9
21,431
20,661
21,214.7
5938,146 5966,716 5989,089 6008,304 6027,399 6050,455 6073,690 6099,630 6122,413 6150,953 6181,405
2,212
2,315
2,389
2,504
2,621
2,825
3,054
3,296
3,500
3,359
3,432
1,268.2
1,283.7
1,308.9
1,334.7
1,355.1
1,398.3
1,447.1
1,496.6
1,509.2
1,455.3
1,468.8
Remittances
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
tal in millions of
dollars
Real GDP per capita
(1990 dollars)
1,751
1,911
1,935
2,105
2,548
3,017
3,471
3,695
3,742
3,387
3,431
2.2
1.7
2.3
2.3
1.9
3.6
3.9
3.8
1.3
-3.1
1.4
ToIn % of the GDP
13.3
13.8
13.5
14.0
16.1
17.7
18.7
18.4
17.5
16.4
16.2
Economic
growth
Population
growth
0.57
0.48
0.37
0.32
0.32
0.38
0.38
0.43
0.37
0.47
0.50
Source: BCR and Executive Secretariat of the Consejo Monetario Centroamericano (SECMCA) (Central
American Monetary Council)
As for donations, their significance is less, as they do not reach 1% of the GDP.
The most significant example is represented by the Fomilenio (FUNDS OF THE
MILLENIUM) program, which between 2007 and 2012 will disburse approximately
$462 millions. The Salvadoran Government will in turn sign a new Fomilenio program
as part of the cooperation provided by the U.S. Government.
16
Source: Self-elaborated based on data from BCR and Encuesta de Hogares de Propositos Multiples, EHPM (Multi-purpose Household Survey)
Table 3 presents the nominal GDP, population, nominal and real GDP per
capita, and economic growth, together with the population growth. If the analysis
is focused on the nominal and real GDP per capita, it is found that both suggest an
improvement in the purchase capacity of the population when comparing the 2000
and 2012 course.
17
PART
ONE
PART
ON E
However, the figure for 2012 is lower than that of 2008 for the nominal GDP
per capita and lower than that of 2007 for the real GDP per capita, reflection of the
recent recession that caused the country a setback. The economic growth in the
period of 2000 – 2012, has been 1.9% on average. During the same time period,
the population has been growing 0.4% on average, according to the 5th Census of
Population and Housing, which shows the result of a positive growth per capita close
to 1.5% on annual average.
This growth per capita rhythm would cause very slow changes in the country’s
development process. In fact, it would take approximately 47 years for El Salvador to
duplicate the real GDP per capita if the growth rate remains as it is.
Table 4
El Salvador: Labor Market Indicators
EAP*
2001
2002
2003
2445,467
2366,969
2450,081
170,298
147,366
169,427
2275,169
2219,603
2280,654
7.0
6.2
6.9
6.8
28.1
29.8
36.4
34.6
Unemployed persons
Employed persons
Unemployment %
Underemployment %
2004
2005
2006
2007
2008
2417,670 2461,187
2501,328
2464,400
2495,908
177,634
164,237
156,079
146,858
2253,645 2283,553
2337,091
2308,321
2349,050
7.2
6.6
6.3
5.9
7.3
7.1
32.1
36.9
28.4
32.1
34
28.9
164,025
2009
2010
2551,667 2580,284
187,088
181,806
2364,579 2398,478
Source: EHPM, several years.
*(Economically Active Population)
Table 4 presents a summary of the labor market indicators. The data shows
that there is some degree of stability due to the relatively insignificant variation of
unemployment, which ranges between 5.9% and 7.3%. The information indicates
that the number of employed and unemployed persons has been growing in very
similar percentages. Nonetheless, two situations must be clarified:
1. Even though the data of the EHPM shows an increase in the number of
employed individuals by 2009 (year of strongest impact of the international
economic crisis in the country), the contrast with information from sources
18
19
PART
ONE
PART
such as the Instituto Salvadoreño del Seguro Social (Salvadorian Institute
of Social Security), ISSS, reveals that the number of active contributors
decreased that year, without recovering in 2010 the levels displayed in 2008.
2. The number of unemployed persons in 2009 is the highest in recent history.
The unemployment rate reflects this in an increase of 1.4 percentile points.
In addition to this, the increase of underemployed persons revealed by the
increase in the respective rate.
The data from Table 5 shows a positive tendency in the nominal salaries,
which suggests a stronger purchase capacity of the population, even though
this fact must be adjusted due to the drop in income recorded by 2009 in the
GDP per capita and in the data reported for income and remittances in the
EHPM.
In graph 1, the ISSS wage is considered and is adjusted by inflation and by the cost
of the urban and rural basic needs baskets. By 2010, that wage would purchase
between 8% and 9% less than 2001, according to the urban basic needs basket cost
and inflation. Instead, the same purchase capacity remains almost constant regarding
the rural basic needs basket.
Graph 1
El Salvador: Purchase capacity indicators according to ISSS wage adjustment to inflation
and to urban and rural basic needs basket
120
110
100
Table 5
El Salvador: Indicators for Wages and Income
(Monthly data in nominal dollars)
2004
2005
ON E
90
80
70
60
2006
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Monthly data
2000
2001
2002
2003
2007
2008
2009
2010
Average wages for ISSS contributors
308.7
304.6
308.0
311.6 314.3 321.3 335.6 342.4
355.7
370.0
377.6
Minimum wage
N/D
144.0
144.0
158.4 158.4 158.4 174.3 183.0
192.3
207.6
207.6
GDP per capita
184.3
192.9
199.1
208.7 218.4 235.5 254.5 274.7
291.6
279.8
285.9
Income according to EHPM per household
421.8
420.8
429.2
404.3 417.8 435.3 442.4 483.1
504.9
498.1
479.2
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Growth rate
1.7
2.2
1.8
1.9
3.6
3.9
3.8
1.3
-3.1
1.4
Remittances according to EHPM per household
120.8
141.3
150.7
152.7 160.9 158.6
176.2
171.5
165.6
Inflation
1.4
2.8
2.5
5.4
4.3
4.9
4.9
5.5
-0.2
2.1
Fiscal deficit as % of GDP
4.1
3.7
2.5
2.4
3.0
2.9
2.0
3.2
5.7
4.3
Deficit in current account as % of GDP
1.1
2.8
4.7
4.1
3.6
4.1
6.1
7.1
1.5
2.3
34.4
39.2
42.3
45.8
44.2
44.1
42.5
44.9
53.6
55.0
165 159.9
Source: ISSS records, EHPM of several years, and BCR
However, when considering inflation, it is found that in all cases the indicators for
wages or for nominal income have undergone a growth that is less than the inflation
rate. This has even occurred in an environment of relatively low inflation. During the
period analyzed, the inflation records an average of 3.4%, with periods of low inflation
such as those that occurred between 2001 and 2003 and episodes that exceed 5%
(2004 and 2008).
20
Real wage index
Urban basic needs basket index
Rural basic needs basket index
Source: ISSS and EHPM several years.
Table 6
El Salvador: Macro stability indicators
Indicators
Public debt as % of GDP
Savings rate
15.6
13.6
12.3
12.1
12.4
12.7
10.3
8.1
12.0
11.0
Investment rate
16.7
16.4
17.0
16.2
16.1
16.8
16.3
15.2
13.4
13.3
Country risk indicator (Moody’s)
N/D
N/D
Baa3
Baa3
Baa3
Baa3
Baa3
Baa3
Ba1
Ba1
Source: Self-elaboration based on information available from BCR, Executive Secretariat of the Consejo Monetario Centroamericano (SECMCA) (Central American Monetary
Council), and Dirección General de Estadísticas y Censos (DIGESTYC) (General Directorate of Statistics and Census)
21
PART
ONE
Analysis of Macroeconomic Stability
Macroeconomic stability is an important asset that enables the business environment and favors decisionmaking with a long-term view. Table 6 presents a group of key indicators that show the conditions of El Salvador
in this aspect.
The macroeconomic indicators in Table 6 point out that the low growth, the increase in debt indicators and
the low savings and investment rates, even achieve reverting favorable elements such as those that represent
a relatively low inflation rate and the drop in the current account’s deficit. This weak macro stability has lead to
a decrease in the country risk result. In 2009 the investment degree awarded by Moody’s was lost and in 2011
another drop is experienced in the result2.
These indicators affect not only at a macroeconomic level, but the companies themselves, for when macro
stability is lost and the country’s ranking is no longer favorable, a cost is imposed on them at present or in the
future which may rise due to a higher financial cost when interest rates rise; less available funds if it becomes
more difficult to access global financing; and less profitability if taxes are increased.
PART
ON E
CONCLUSIONS
Analysis of the economic environment
The first stage of this survey was focused on the analysis of conditions of the country’s economic environment.
The findings coincide with those identified by other institutions.
International Environment
• In El Salvador, the financial crisis effects of the past years have been reflected in a decrease of the
economic openness indicator.
• Due to the importance that the United States represents for trade in El Salvador, the projections for
commercial growth are moderate.
• Even though El Salvador continues having access to foreign financing, the debt indicators point out a
potential risk that might make its availability difficult in the future.
• FDI still shows very low levels, especially when establishing the comparison with other Central American
countries.
• Remittances have started with a slow recovery, contributing to sustaining the acquisition power of
Salvadoran families.
• Donations received do not reach significant amounts for economic reactivation, despite of what
FOMILENIO represents, such an important project for building infrastructure and opportunities in the
Northern area of the country.
National Environment
• The nominal and real GDP show improvement during the period of 2000 – 2010; nevertheless, the growth
levels continue being very low as to cause any significant changes in the country’s development.
• Even though a positive tendency has been observed in nominal wages, their growth has occurred in less
degree than inflation, affecting the population’s acquisition power.
2. In a Moody’s press release, result Ba2 is printed on June 15, 2011, justified by “the country’s weak economic strength and its moderate susceptibility against risks”
22
23
PART
T WO
PART
TWO
Significance of ILC on the
Salvadoran Economy
To show the importance of ILC in El Salvador’s economy, the first step would be to
analyze the significance and efficiency of the beverage sector; while the second
step would be to analyze the significance of ILC on the economy itself and its
contribution to tax collection and employment, under its business model based on
the sustainable development of El Salvador.
Significance of the Beverage Sector on the Economy
The significance of the beverage sector on the manufacturing industry and on the
GDP during the period of 2000-2012 is rather stable, especially in regards to the
GDP. This shows that we are dealing with a sector that moves in accordance with
the economic cycles, as shown in Graph 2.
10 %
Graph 2
El Salvador: Significance of the beverage sector in regards
to the manufacturing industry and GDP
8%
6%
4%
2%
0%
2000
2001
2002
2003
2004
2005 (p) 2006 (p) 2007 (p) 2008 (p) 2009 (p) 2010 (p )
Beverages / Manufacturing
Beverages GPV
Source: BCR Database
24
25
PART
T WO
PART
Added Value and Efficiency of the Beverage Sector
The efficiency of the productive process can be analyzed from the information
offered by the Input-output matrix. The technical coefficient (purchase of inputs
at the Gross Production Value, GPV) is estimated as an indicator of the efficiency
that can eventually predict profitability of the industry surveyed. A higher efficiency
could contribute to a protection against supply shocks facing higher input prices.
Unfortunately the Input-output matrix is updated only up to 2006.
Table 7
El Salvador: Breakdown of Beverage GPV according to Added Value and
Purchase of Inputs (in millions of dollars and percentage of the GVP)
2000
2001
2002
2003
2004
2005
2006
Gross Production Value (GPV)
280.2
295.2
303.4
293.2
323.3
339.70
359.71
Added value
197.6
208
216.5
206.7
223.2
234.9
249.4
82.6
87.2
86.9
86.5
100.1
104.8
110.3
Added value / GPV in %
71
70
71
70
69
69
69
Average consumption / GPV in %
29
30
29
30
31
31
31
Intermediate consumption
Source: BCR Database
TWO
represents approximately 70% of the GPV is taken as proxy, as average of the
period referred to.
This results in an estimation of the possible added value of ILC and it is found
that the contribution of ILC to the economy of El Salvador has been close to 1% (see
Table 8). These data should be considered as top limit, meaning, the maximum
possible significance that ILC could have on the economy of the country3.
The Table also shows the significance of ILC on the Manufacturing Industry
and the Beverage Sector. In regards to the industry, it is seen that the growth has
been very similar. Regarding beverages, their growth has been higher than that of
ILC.
Table 8
ILC: Added value and significance on Beverages sector, manufacturing
industry and GDP (nominal data in millions of dollars and percentages)
2006
2007
2008
2009
2010
Gross Production Value
246.9
259.0
261.5
264.9
268.2
Added Value (AV)
172.8
181.3
183.0
185.4
187.8
69.3
63.9
62.2
60.1
58.0
4.6
4.5
4.3
4.7
4.6
0.97
0.95
0.90
0.93
0.92
ILC AV as % of beverages sector
ILC AV as % of manufacturing industries
ILC AV as % of corrected GDP
Source: ILC information and BCR database
Even though the figures from Table 7 show a positive tendency (interrupted in
2003), a slight variation in the composition of the GPV has occurred, making the
added value drop approximately two percentile points. This reflects a profitability
drop of the industry. However, with the information limited to 2006, the direction of
profitability for the past recent years cannot be established.
Significance of ILC on the Beverage Sector, Manufacturing industry and GDP
The significance of ILC on the economy is obtained by comparing the respective
added values of the country and ILC. Based on national accounts, using figures
from Table 7, the figure indicating that the Added Value in the beverage sector
26
3. Another method to estimate the added value is from ILC’s information on sales and purchase of inputs, with which it can be
established that the significance of ILC on the Salvadoran economy was between 0.42% in 2008, when a strong increase in the
cost of inputs was experienced; and 0.6% in 2006. Therefore, by 2012 it could be established that the significance of ILC on the
Salvadoran economy is found between 0.52% and 0.92%.
27
PART
T WO
PART
Contribution of ILC on Tax Collection
The contribution of ILC on tax collection of the Central Government is obtained by
adding the payment of ILC in concept of net Value Added Tax; income tax for the
company’s profit and withholdings to employees; and selective consumption taxes.
The payment and collection according to different types of taxes are presented
in Table 9, which shows that the main contribution to the public treasury by ILC is
through the payment of selective consumption taxes. To sum up, taxes paid by ILC
represent 2% of tax collection of 2010.
Table 9
ILC: Tax payment and collection by 2010 (data in millions of dollars)
ILC
RT total
%
10.0
1,566.6
0.6
8.0
1,050.0
0.8
Selective Taxes
43.6
119.2
36.6
ILC Total tax payments and collection
61.6
3,070.3
2.0
Type of tax (ILC, Total Tax Collection)
Value Added Tax (net VAT)
Income Tax
Source: Fiscal Transparency webpage of Ministry of Finance and information submitted by ILC.
Contribution of ILC to Employment Generation
In 2010, ILC directly employed 1,635 persons. Indirectly, through its different operations,
ILC generated 61,253 more jobs4, out of which 35,416 correspond to business
owners. The figures are interesting because ILC operations support other companies,
stimulating the development of Micro and Small Enterprises (MSEs), which likewise
hire more employees.
Basically, ILC employed directly and indirectly 62,906 persons, meaning,
approximately 2.5% of the Economically Active Population (EAP). This figure shows
that ILC is a key agent to employment in El Salvador because of its own activities
as well as for the benefits produced by its distribution chain and the effects of its
operations on other industries.
TWO
Sustainable Development as a Business Model for ILC
ILC investments produce a series of positive impacts on the national economy that
directly benefit:
ƒƒ Its workers and their families
ƒƒ Members of the value chain, clients and consumers
ƒƒ Communities
As SABMiller plc subsidiary, ILC runs its operations through a Sustainable
Development Policy, which is based on 10 priorities that impact the social, economic
and environmental areas (see details on pg. X).
The compliance degree of the priorities is assessed applying the SAM
(Sustainability Assessment Matrix) methodology. Each is marked using a criteria
scale composed of five levels:
1. Minimum standard
2. Progressing
3. Developing leadership
4. Best practice
5. Leading edge
Each level has its goals and cannot move forward without fully complying with
the conditions demanded for in the former level. ILC has carried out the evaluation
during the past 3 years with the following results:
Evaluation
Score
Level
Year 1
3.0
Progressing
Year 2
3.4
Leading edge
Year 3
3.7
Leading edge
ILC is very positively identified as a leading enterprise in accordance with other
performance evaluations such as INDICARSE of FUNDEMAS, and the internal
surveys RADAR and BRAND TRACKER, implemented globally by SABMiller to
determine the reputation perception by different stakeholders.
4. According to estimations from the Survey to ILC Clients, carried out as part of this survey
28
29
PART
T WO
PART
TWO
CONCLUSIONS
Significance of ILC on the Salvadoran Economy
• The beverage sector in El Salvador represents 2% of the GDP, and its levels remained constant during
the 2000-2010 period.
• ILC’s contribution to the added value of the beverage industry was approximately 58% in 2010.
• Based on national accounts, the contribution of ILC to El Salvador’s GDP is close to 1%.
• The $61.6 millions paid by ILC in 2010 as taxes, represented 2% of the total tax collection of the country.
• ILC generates:
ƒƒ 1,653 direct jobs
ƒƒ 61,253 indirect jobs, out of which 35,416 correspond to small and micro enterprise owners, according
to the Survey of ILC Clients.
ƒƒ 62, 906 direct and indirect jobs in total
• ILC operations are managed by a Sustainable Development Policy that has performance indicators,
which are subjected to evaluation by different stakeholders in El Salvador, that currently show very
positive perception indexes.
30
31
PART
T WO
10 priorities. One future.
Our sustainable development policy is based on ten priorities that are focused on
four large commitment areas that impact the economic, social and environmental
fields:
Encouraging responsible drinking of our products
Employment generation and promotion of progress
Community development
Environmental conservation and protection
32
Discourage irresponsible
drinking
Encourage enterprise
development in our value
chain
Make more beer and
beverages using less water
Benefit communities
Reduce our energy and
carbon footprint
Contribute to the reduction of
HIV/AIDS
Promote the re-use and
recycling of packaging
Respect human rights
Work towards zero-waste
operations
Transparency in reporting the
company’s progress
33
PART
T WO
PART
TH R EE
Impact of the growth of ILC on
El Salvador’s Economy
The scenario adopted corresponds to the injection of one million dollars to the
economy coming from additional sales of ILC and the quantification of its direct,
indirect and induced effects. The methodological approach is the Input-output matrix.
Direct, Indirect and Induced Effects
The model adopted for the survey combines financial and sales information from
ILC, with data from the Salvadoran economy’s Input-output matrix. The input-output
analysis considers the intersectoral relations of an economy and shows how the
product of any sector flows to the rest in the form of input. This technique allows
tracing the economic interdependence of the producers of goods and services to
establish how an industry depends on another in its double role of buyer and supplier.
When ILC purchases inputs to its suppliers or sells products to its wholesale
distributors, these companies generate income and pay remunerations to their
employees. As a result of additional purchases by ILC, they could widen their
installed capacity and for this they would have to acquire goods and services from
other industries. Moreover, the consumption by direct and indirect workers from ILC
has a bearing on the purchase of inputs of those who sell them goods and services
that will probably at the same time, invest in additional capacity.
Figure 1 shows in general terms the chain of potential impacts, direct and indirect,
generated from an expansion in the production of ILC.
34
In 2010, ILC employed 62,906 persons directly and indirectly, which is equivalent to approximately 2.5% of the EAP in El Salvador.
35
PART
T HREE
C ON C L U S ION S
A typical characteristic of the survey refers to the total number of rounds
considered for the estimation of the induced effects. In contrast with other surveys in
which the calculation is made after three expenditure rounds, the present considers
six, following an estimate of the circulation speed of money in El Salvador5
Figure 1
El Salvador: Impacts sequence per activity of ILC



FIRST ROUND: DIRECT IMPACT OF ILC
The effects of the operations of ILC referring to the number of jobs
generated, investments in machinery, facilities and equipment,
billing, tax payment, and its economic effects on the distributors
and retailers.
SECOND ROUND: INDIRECT IMPACT OF ILC
The effects of expenditures of ILC on its providers and on its
providers’ providers.
SUBSEQUENT ROUNDS (six rounds):
INDUCED IMPACT OF ILC
The impacts generated by the consumption decisions
associated to ILC, its providers and its providers’ providers.
TOTAL ECONOMIC IMPACT OF ILC IN THE
SALVADORAN ECONOMY.
5. Data published by BCR indicate that the monetary multipliers M1 and M2 have values of 10 and 2, respectively. The circulation
speed of money was estimated as the simple average of these multipliers.
36
37
T HREE
Final demand of goods and services
Presents the final consumption, gross fixed capital formation, as well as the
variation of products in stock and exports.
Intermediate inputs
Records the needs that the productive sectors have in terms of national and
imported inputs. The values of the lines indicate the sales or distribution of
products between the branches of activity. The values in the columns show the
costs of inputs per branch or purchases.
Primary income generation
Provides the total gross production for each sector.Ins
38
TOTAL DEMAND
INVENTORIES
FBKF*
GOVERNMENT
HOUSEHOLDS
EXPORTS
INTERMEDIATE CONSUMPTION
Sector N
ILC
Sector 3
Sector 2
Sector 1
TOTAL SUPPLY
SALES MARGIN
ADDED VALUE TAX
Total supply of goods and services
CUSTOMS DUTIES
The Input-output Matrix is organized in four quadrants:
Including the value for the gross domestic production, CIF imports, customs
duties, other taxes related to imports and sales margins.
TH R EE
Figure 2
ILC in an Input-output Matrix Structure
IMPORTS (CIF)
Structure of the Input-output Matrix
The Input-output matrix is presented with a double-entry chart that describes the
intersectoral flows of production within the productive system and the exchange
of goods and services between producers and final users-consumers. The Inputoutput Matrix for El Salvador has the general structure shown in Figure 2. In contrast
to the official Input-output Matrix, this representation includes ILC as an additional
sector in the national economic structure.
PART
PRODUCTION (PP)
PART
Sector 1
Sector 1
Sector 2
Sector 2
Sector 3
Sector 3
ILC
ILC
Sector N
Sector N
INTERMEDIATE
CONSUMPTION
GROSS VALUE
ADDED
TOTAL
Quadrant I
Total offer
(at user
prices)
Quadrant III
Intermediate
inputs
(at user
prices)
PRODUCTION
OF GOODS
AND SERVICES
Quadrant IV
Primary
generation of
income
Quadrant II
Final demand
(at user prices)
*Gross Fixed Capital Formation, GFCF
39
PART
T HREE
2006 Input-output Matrix Processing
The present survey used the most recent version of the Input-output Matrix for
the Salvadoran economy, provided by the BCR for the year 2006, which contains
data on the transactions recorded at current prices between 45 sectors. The BCR
information was complemented with data provided by ILC, which allowed dividing
the Beverage Sector in three categories: ILC Beverages, Others’ Beverages, and
Liquors.
Moreover, ILC provided financial and labor data that was used to complement
the Input-output Matrix regarding investment, taxes, inventories and remunerations.
The use of the input-output analysis strongly depends on the degree in which
the matrix of technical coefficients is investible. The technical coefficients matrix
derived from the Input-output Matrix of 2006 did not have such property, for which
it was decided to group sectors according to the following criteria: affinity between
industries; low ratio regarding total of intermediate transactions; and large amount
of zeros or values close to zero in its lines and/or columns.
These operations resulted in a reduced version of the Input-output Matrix of
2006 with 31 sectors which, after breaking down the Beverage sector, complied
with the algebraic conditions required to invert it. Main Findings
Contribution to Intermediate Production
The first phase consisted in evaluating the impact that an increase of one million
dollars in the net annual sales of ILC at consumer prices would have on the
intermediate production of the Salvadoran economy. The data from Table 11 shows
the results for this exercise, indicating a multiplying effect in the order of 0.50 (see
cell 2-C) on the intermediate production. One additional million dollars of output
from the ILC Beverage Sector requires an additional intermediate production
valued at $590,651 (see cell 1-C).
40
PART
TH R EE
Induced Effects
They result from considering households as one more sector in the structure
of interrelations generated by the Input-output Matrix. This requires that the
households be included as a sector that supplies workforce services to the rest of
the sectors and that likewise demands goods and services from them. The effect
is equivalent to allowing that once the injection of $1M is absorbed by the circular
flow of the economy, the households spend it.
The data in Table 11 shows that the injection of $1M would generate
approximately $2.6M in intermediate production (see cell 2-D) due to induced
effects.
Impact on Employment Creation and Taxes
The injection of $1M from ILC would generate a total of 955 jobs per year (see
cell 6-E), 97 corresponding to direct jobs (see cell 6-A). The total jobs generated
represent gross salaries for a total of $3.8M (see cell 7-E).
The job multiplier, in terms of direct jobs, is 9.8 at all the economy’s level (see
cell 8-E).
Aiming to keep the direct, indirect and induced effects, ILC would generate
a total of 51 jobs per year (see cell 9-E). This figure results in an employment
multiplier of 18.7 for ILC (see cell 10-E).
Furthermore, one additional million would generate fiscal revenue for a total of
$0.42 M, which is 6.6% corresponding to taxes generated by ILC (see cells 14-E,
and 19-E).
Contribution to GDP
Finally, the initial injection for additional sales of $1M results in a multiplier of the
GDP of $4.8 M (see cell 21-E).
41
PART
T HREE
TER C E R A
CONCLUSIONS
Table 11
Impact of $1M sales of ILC on the Salvadoran economy ($USD)
A
B
C
Impact of the Growth of ILC
on the Salvadoran Economy
D
DIRECT IMPACTS
E
Impact
Direct
Indirect
Total
Complete
economy
Induced
Contribution of ILC to the economy:
Employment generation, salaries, purchase of inputs and tax payment.
INDIRECT IMPACTS
At consumer prices 1,100,257
Product per industry (intermediate consumption at final user prices)
1
Total product at consumer prices
2
Multiplier of the product
Repercussion of ILC on entities providing and distributing their products.
337,405
253,246
590,651
2851,855
3442,506
0.3
0.2
0.5
2.6
3.1
37,520
87,510
422,526
510,035
Capital requirement
49,989
3
Total requirement
4
ILC requirement
139
11
149
369
518
5
% ILC
0.3
0.0
0.2
0.1
0.1
Jobs and labor income
6
Number of jobs-year
7
Labor income (gross)
8
Employment multiplier (in terms of direct jobs)
9
Jobs generated by ILC
14
10
ILC employment multiplier
6.9
11
Total taxes
12
Direct taxes (10% of salaries)
13
Indirect taxes (1% of the production value)
14
Government revenue
15
Taxes generated by ILC
16
17
97
73
170
785
955
391,397
292,900
684,297
3162,326
3846,623
1.7
8.1
9.8
1
15
36
51
73
11.3
21.8
18.7
Fiscal revenue
39,140
29,290
68,430
316,233
3,374
2,532
5,907
28,519
34,425
42,514
31,822
74,336
344,751
419,087
Direct taxes
4,522
352
4,874
12,047
16,921
Indirect taxes
2,879
224
3,103
7,670
10,773
18
Government income
7,401
576
7,978
19,717
27,694
19
ILC contribution %
17.4
1.8
10.7
5.7
6.6
384,662
472,955
354,986
827,942
3997,571
4825,512
0.5
0.4
0.8
4.0
4.8
Economy multiplier
42
20
GDP (economy)
21
GDP multiplier
PART E
INDUCED IMPACTS
Boost of the economy due to the purchase capacity created through
the direct and indirect impacts.
$1 million dollars in additional sales
Of ILC would cause a growth in its beverage production,
which would impact on the economy through:
955
$3.8
$420
new additional jobs (direct and indirect) in a year
millions of gross salaries per year
thousand in fiscal revenue
An increase in sales of ILC generates a multiplying effect on the GDP of
4.8
18.7
And increase in sales of ILC generates a multiplying effect on employment of
43
B PI A
BR
L ITO T
G HR RA EF E
ÍA
C ON C L U S ION S
GENERAL CONCLUSIONS
Industrias La Constancia:
Dynamizing El Salvador’s Economy
The present survey was developed based on financial and commercial information of the company, and the
Input-output Matrix, elaborated by the Banco Central de Reserva de El Salvador.
Carried out by the Public Policies Centre of the Escuela Superior de Economía y Negocios, the survey
represents a successful exercise of university-enterprise collaboration under the responsibility of high-ranking
professionals; and that shows the capacity and potential to carry out investigations which generate useful
knowledge for decision-making both for the public and the private sectors.
The importance of Industrias La Constancia for El Salvador’s economy is established by employment generation
and execution of projects that benefit micro and small business entities, improve the quality of life of the
communities and generate revenue for the State through the value chain.
Even in a low-growth environment, companies such as ILC are capable of generating positive impacts on the
economy, for which their actions constitutes them as dynamizing agents for the country’s economy.
The business model promoted by SABMiller in the world and adopted by ILC starting 2009, intend for the
company’s operations being implemented to be economically, socially and environmentally sustainable.
This philosophy hopes to promote the creation of a higher value system within El Salvador’s economy, providing
multiple benefits for employees, clients, distributors, communities and the society in general through investment
projects aimed to promote culture, art and sports. Finally, the Salvadoran Government will also reap some
benefit from this in the form of resources transferred to its central arks by way of taxes being paid.
The impact is quantified in two ways: a direct way, from the record of hiring of staff, payment of salaries,
purchase of inputs and taxes; and another more complex way, estimating the chain of impacts of
different decisions of the company in the rest of the economic activities of the country.
44
45
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