No reward for driving up the median

 

 

The essential goal of production, growth, and development is to provide an important source of wealth to a nation. This is a constant debate, and economists measure the effective use of three base factors, namely, land, labour, and capital. Labour and capital are factors that are easily measured and compared through data capture over several years, decades or centuries.

Land seems to be more difficult as the measurement has many ingredients. Firstly, land is usually finite (unless it is reclaimed from undersea). Secondly, the land value may be based on size measurements (hectares or square kilometres or miles). Thirdly, the value may be improved or unimproved value. Fourthly, the value may lie in the content and mineral value.

These four measures speak to wide ranges of future values, and in a country like Jamaica, land valuation and utilization are important for future value. For Trinidad and Tobago, the ownership of land under the sea has been more beneficial to economic growth than dry land. In their case the value lies in the oil and gas contained in that land and the cost associated with exploiting those natural resources, and selling them for a profit.

By comparison, in Jamaica’s case, our largest mineral wealth is bauxite deposits, and we must be aware of the relationship between local mining costs and world prices. Mining costs are factors within our control, and the relative efficiency in extraction and refining are the key ingredients in productivity measurement and competitiveness . World prices however, are beyond our control, and are factors of world supply and demand and influenced by supply and demand in some heavy manufacturing and construction.

.Therefore, in the case of Trinidad and Tobago, and Jamaica, any technological disruptions that substantially change the demand for the major end uses of the final product can be devastating (renewable or alternative energy; or new construction materials) and can suddenly affect future value.

Jamaica is seemingly engaged in a debate for a new bauxite deal that is considering changing the current levy structure to a profit sharing model with an external partner. This poses some questions for measurement, efficiency, and risk in an external environment that is outside of our control. We are not the dominant player.

The local bauxite “boom years” of the late 1950s and 60s seem to be more closely related to construction of the plants and the short-term employment of labour associated with that process. Growth fell after completion as the labour and capital employed post-construction were considerably less than during construction. It was a windfall; not a sustainable investment.

This suggests that the local spin-offs were less than we had anticipated. The companies involved at that time capitalized on the demands fuelled by new housing starts in North America; motor vehicle manufacturing; and the aircraft industry. In the 1970s onwards, much of that demand was replaced by improved plastic technologies thereby affecting demand for aluminum.

The efficiency factor became more important and we lost a lot in the productivity comparison. Operations closed, plants changed hands, some were mothballed; and we resorted to desperate measures, involving partners of questionable character.

Since then, bauxite earnings have dwindled in comparison to tourism and remittances. Any reconsideration of a new formula must therefore ensure that the risks, as previously experienced, must be understood fully, and a greater weighting be placed on our returns from profitability.

In the past, either as major or minor shareholders, our continuing subsidy of losses, or our share in funding new capital equipment, have never been to our economic advantage (although some may claim political capital improvements). Talk may be cheap, but money invested in poor or no returns is not. The risk factors must be compared with the fixed payments of the levy. In addition, the expectation of future pricing and North American growth must be calculated.

A basic observation is that mining is a depleting activity. Whether we are paid a levy, receive dividends, or participate in losses, our valuable resource will be diminished. If that fact is accepted, then we should not give up millions of tons of irreplaceable raw materials without a certainty of being paid appropriately.

Similarly, the revelation that our oil refining capacity is to be funded by the investment by a company from China is a cause for a much keener look. The admission that the process used by our refinery is outdated and inefficient is a further warning sign for due diligence. Technology has passed our refinery by for over 30 years, and this simply means that we have been paying too much for gasoline, diesel, and cooking gas for a very long time.

Oil costs feature significantly in public and private transportation, the price of water and electricity, and of industrial and domestic cooking. Investments that require significant capital injection, especially for new equipment, tend to be directed at long-term pricing and incentives that should guarantee a return regardless of external conditions. This creates a monopoly that does not guarantee the consumer a fair choice. So the consumer finances inefficiency while guaranteeing a return and tax incentives to foreign firms that are not available to local companies, and which are funded by the Jamaican taxpayer.

Joint venture agreements usually come with a clause defining the responsibility of the shareholders to participate in future investment needs in a manner that is proportional to its shareholding. Thus profits, losses, and capital calls remain with each party. These two latter circumstances may drag us into severe deficits and leave us holding the empty bag again.

At some time the performance of these companies must be their own expense, and the role of government is to regulate fairly. The public has no loyalty to either the refinery or the bauxite company, and has no profits to gain, but shares the losses of the public purse.

Either we divest and regulate, or we must run them ourselves and be competitive. There is no reward for driving up the median.

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