Think Tank April 2014

Think Tank

a publication by the Caribbean Policy Research Institute

April 2014

Allowed a free rein, public entities have been very p 12 costly to Jamaica

p

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Surpluses, debt reduction in sight, but fiscal rules lack oomph

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Jamaican agro-parks should move up the value chain

about Capri The Caribbean Policy Research Institute (CaPRI) is a not-for-profit, public policy think tank based at the University of the West Indies, dedicated to the provision of impartial, evidence-based knowledge to inform economic and social policy decisionmaking in Jamaica and the wider Caribbean.

To read any of our published output in full, please visit www.capricaribbean.org/research.

Contact us at: info@capricaribbean.org or by telephone at (876) 970-3447 or (876) 970-2910.

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Editorial New Fiscal Rules Legislation: An Opportunity to start getting fiscal policy right Jamaica’s public debt level at about 140% of GDP (among the highest in the world), is a major drag on the capacity of the economy to grow. GDP growth has averaged approximately 1% per annum over the last 40 years; below the rate of population growth thus resulting in lower living standards. Much of the growth in the public debt came from the growth in contingent liabilities of public bodies. The use of deficit financing to offset weak revenue performance also played a role, along with chronic policy implementation failures across the public sector.

Public debt above a level of 70% of GDP generates a lack of confidence in both potential investors and creditors and leads to an overall higher cost structure across the economy. Despite these crippling disadvantages, leaders have failed to act decisively over the years. This failure has led to the current desperate state of affairs. Jamaica has no choice but to drastically reduce the degrees of freedom available to the government to create debt. The use of discretionary powers has failed so now strict rules have to be applied.

The drastic reduction in the debt/GDP ratio to 60% by 2025/26 is the objective of the recently passed Fiscal Rules legislation. The coverage of public debt includes specified public bodies which were largely responsible for the growth of contingent liabilities. The fiscal balance is the policy instrument to be used and there will be broad targets set as quantitative ceilings. The Auditor General’s Department will play a critical role in monitoring the implementation of this legislation. That Department along with the Ministry of Finance requires significant strengthening to play their given roles.

Institutional deficiencies could put this aspect of the reform at risk. Further, there is weak public support for curbing public spending and limiting the debt. Thus Think Tanks and other research institutions can help in building the awareness for fiscal prudence. This watch dog role is critical given the built in escape clause of the Act, and the possibility of extending the timeline to account for major shocks.

This legislation, if fully implemented with broad support, could result in Jamaica setting sail away from the historic path of fiscal profligacy.

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Surpluses, debt reduction in sight, but

fiscal rules lack oomph Jamaica has not seen a fiscal surplus in more than 17 years. During that time, the government spent close to J$700 billion more than it collected in revenue. Needless to say, the country’s public debt as a proportion of GDP now stands at around 140%.

Therefore, the introduction of fiscal rule legislation in 2010 to achieve medium and long-term budgetary targets and amendments made in March 2014 are clearly steps in the right direction.

In particular, the amendment of the Financial Administration and Audit Act to include a debt rule (DR), which targets a debt-to-GDP ratio of 60% by March 2026, and a budget balance rule (BBR) aimed at targeting a fiscal deficit by March 2018 that will allow the debt target to be achieved, are good starting points.

But studies show that more stringent and encompassing rules are more strongly correlated with improved fiscal performance.

As such, adjustments to the present rules are needed to improve fiscal performance.

To increase the effectiveness of fiscal rules there are some fundamental features that must be present especially in a national context of weak public finance and macroeconomic uncertainties.

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These features include: the section of government covered; the level of legal binding or basis of the rules; the supporting arrangements and institutions that facilitate the implementation and monitoring of the rules; the level of enforcement and sanctions; and the level of cyclical flexibility.

A fiscal rule that binds the entire public sector fits neatly with Jamaica’s historical experience (see related story on page 12). Also, making them statutory or constitutional adds stability to the economy, given that it would thereafter be difficult to change by policymakers.

However, the latest amendments, which were tabled in parliament in March 2014, allow for the exclusion of the liabilities of certain public bodies, such as the Bank of Jamaica and entities deemed to be commercial ones that do not primarily provide government services, from overall public debt. They also do not speak to operating balances of public sector entities.

What’s more, the rules lack necessary measures, which ensure that the cost to the offender of breaking them is higher than the benefit if they are to succeed in achieving its objectives.

Effective enforcement must therefore be accompanied by sanctions that can take the form of credit restrictions, personal fines, dismissal and prosecution, or at least the public loss of credibility.

They must also be impartial and clearly defined for all public servants including the Minister of Government in charge of achieving the targets of the fiscal rules.

On the other hand, enforcing sanctions requires that information used to make projections is accurate and dependable. Adequate technical capacity in forecasting and reliable and available data are therefore critical to reducing large deviations from numerical targets.

Jamaica’s challenges with corruption and institutional inadequacies within the public sector require the use of an independent body, transparently chosen for its technical competence, to monitor the implementation of the rules and the execution of the budget.

There is also the need to produce timely reports to the public to quickly highlight deviations for correction. The inclusion of clearly defined automatic correction mechanisms in the March 2014 amendments brings the fiscal rules closer to a meaningful set of rules that will secure future fiscal and debt targets for Jamaica.

CAPRI Recommendations for Fiscal Rule Incorporate revised fiscal rule in legislation Fiscal rule must bind entire public sector Information, technical capacity of public sector needs strengthening

Budget presentations should include multi-year forecasting Independent technocratic committee should oversee the budget process

Sanctions against all responsible officers for deviations from targets should sufficiently deter such occurrences

Laws should state procedure for correcting deviations from target Budget targets should take cyclical nature of economy into account to improve flexibility Fiscal rule escape clause should be guided by independent oversight

In particular, the amendment of the Financial Administration and Audit Act to include a debt rule (DR), which targets a debt-to-GDP ratio of 60% by March 2026, and a budget balance rule (BBR) aimed at targeting a fiscal deficit

by March 2018 that will allow the debt target to be achieved, are good starting points.

However, while well defined escape clauses assist in providing some degree of flexibility to fiscal rules, the checks and balances for the formal escape clause for Jamaica’s BBR and DR still fall short.

Indeed, stipulating that an event must have a fiscal impact of one and a half per cent of GDP or more for the fiscal rules to be suspended and including the Auditor General and parliament in the decision-making process are leaps ahead of the original rules that would allow the minister to interpret the escape clause without explicit voting requirements for the interpretation and triggering of the clause specified.

Still, it might be better to have an independent monitory body provide oversight for such rules, while simple parliamentary approval might not go far enough, given that the political party in power in Jamaica currently has a two-third majority in parliament.

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Fiscal Balance (Expressed in JMD Billions)

April 2013 - Jan 2014

Primary Surplus

Note: The fiscal year is the 12-month period from April 1 to March 31 of the following year.

The last fiscal year ended March 31, 2014. The table above shows that for the 10 months (April 2013 to Jan 2014) the government built up a primary surplus of J$67.5 billion.

The target for the full fiscal year is J$111.6 billion, which means the government has to build up the primary surplus by another J$44.1 billion between February 1, 2014 and March 31, 2014. Similarly, the fiscal deficit up to January shows that the government’s expenses exceeded revenue by J$22.9 billion during the 10 months (Apr 2013 to Jan 2014).

Target

67.5

actual

Fiscal Deficit

-1.3

Target

The target for the full year required that the government collected J$21.6 billion more than it spent between February 1, 2014 and March 31, 2014.

-22.9

actual

6

111.6

The primary surplus represents the difference between government revenue and its expenditure on non-debt items (such as wages and salaries). Put another way, it is what is left from revenue collections to pay for interest payments after other expenses are paid.

The Caribbean Policy Research Institute (CaPRI)

April 2013 - Jan 2014

The fiscal deficit represents the difference between government revenue and all its expenses. Put another way, it is the amount of money that the government still needs to find after exhausting all its funds paying all expenses, including interest payments.

That is, a government with a fiscal deficit has to borrow money to make up the revenue which is not enough to cover all its expenses.

tourism

Stopover arrivals (no. of persons)

Cruise passenger arrivals (no. of persons)

138,395 148,512

146,050 160,076

192,158

nov 2013

nov 2014

161,455

169,280

201,347

dec 2013

dec 2013

jan 2013

100,239 99,000

jan 2014

2013

dec 2014

nov 2013

dec 2014 179,910

160,921

jan 2013

jan 2014

nov 2014

12-month inflation (%)

2014

9.69

8.9

8.16 8

feb

feb DEc

DEc

8

8.37

The Caribbean Policy Research Institute (CaPRI)

jan

9.47 jan

op ed column Jamaican agro-parks should

move up the value chain In the Memorandum of Economic and Financial Policies filed with the IMF in support of its arguments for a loan agreement, the Jamaican Government outlined its commitment to partnering with the private sector for the establishment of nine agro-parks to “stabilise the agricultural supply chain, deepen inter-industry linkages, increase competitive import substitution and activate unutilised rural land and labour”.

As a result, the government has committed approximately J$1.1 billion for investments in these parks and to date, seven of these nine agro-parks have reportedly started productive activity. The government has also promised that before March 2015, two other parks will be brought under production.

Nevertheless, the concept of agro-parks has been questioned by many, including farmers who had expected to be beneficiaries of this concept heralded as strategic and self sustaining for rural life.

To address this issue, the Caribbean Policy Research Institute (CaPRI) warns against ignoring international best practices in developing these parks and carefully answers two questions: a) What is an agro-park as defined globally and by the Jamaican government? b) What are the benefits that can accrue from their creation?

A global view According to Sustainable Agriculture Education (SAGE), an agricultural park (or agro-park) is a combination of a working farm and a municipal park that can serve as a transition or buffer zone between urban and agricultural uses.

Agro-parks around the world have been designed for multiple uses that accommodate small farms, public areas and natural habitat. They allow small farmers access to secure land and local markets, provide fresh food, and are an educational, environmental, and aesthetic amenity for nearby communities.

The naming of the concept as a “park” is intended to convey the role an agro-park plays in open space preservation. While the term suggests the permanent land conservation and recreational use exemplified by the public park, it also evokes the traditional model of a business park, where multiple tenants operate under a common management structure.

Agro-parks in the Jamaican context In an attempt to provide the context for agro-parks in Jamaica, Minister of Agriculture Roger Clarke, in an article he wrote entitled Agro-parks: The Nuts and Bolts printed in the Sunday Gleaner dated May 26, 2013, defines an agro-park as “an area of intensive agricultural production which seeks to integrate every facet of the agricultural value chain from pre-production activities (irrigation, drainage, road and land-clearing acAgro-parks ar tivities) to production, post-harvest handling and have been desig marketing”. uses that acco farms, public a Similarly, Everton Spencer, Chief Executive Officer habitat. They of Agro-Investment Corporation (AIC), the Agriculfarmers acces ture Ministry’s investment arm, defines an agroand local mark park as “an area of intensive agricultural producfood, and are tion where the AIC seeks to integrate all the facets environmenta during the agricultural value chain, from pre-proamenity for nea duction, such as irrigation, land clearing, etc., to production, marketing, and post-harvest handling”.

These definitions are undoubtedly appropriate to the Jamaican context as they encapsulate the country’s particular challenges and the need as prescribed in the IMF agreement, to improve rural life through more productive value chain usage of agricultural land and labour utilisation.

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There will always be the temptation for government to provide subsidies and expect nothing in return creating long term negative consequences for taxpayers.

Agro-parks should also be integrated into critically needed land reform since Jamaica still has a major challenge with underutilised land due to no legal proof of ownership. The Land Administration and Management Programme (LAMP) should also be twinned with those areas included in the Agro-parks.

However, to ensure that these nine agro-parks are successful, the government must map the entire value chain process in each park so that farmers are trained in critical areas of land preparation, water management, crop production, reaping, transportation and storage while making sure that farmers’ output becomes the agro processors input to create high quality branded products for local and international markets.

Farmers who, for the most part are not formally trained but have learnt through a process of apprenticeship will therefore need technical support in all these areas as well as the infrastructure to complement the crop production process and the marketing of final output, which could be provided by agencies of Government such as the Rural Agricultural Development Authority (RADA) and the National Irrigation Commission (NIC). Furthermore, these agro-parks would need a strategy to integrate crops into further processing and storage.

round the world gned for multiple ommodate small areas and natural y allow small ss to secure land kets, provide fresh e an educational, al, and aesthetic arby communities.

Equally important to highlight is that agro-parks across the world have been developed and managed under a range of models and agreements.

In most cases, a public agency would usually have jurisdiction over agro-parks as a whole and then work with a partner that would have the role of development, management and/or operations of the park.

Although Minister Clarke highlighted in his 2013-2014 Budget Debate Presentation on May 8, 2013 that these agro-parks were being developed jointly using public-private initiatives, the Jamaican government would be well advised not to attempt to be managers of these agro-parks but rather to adopt global best practices of integrating the operations of these parks under a private public sector partnership arrangement especially since as history has shown, going it alone usually leads to waste and inefficiencies.

It therefore means that if all nine agroparks are designed and managed to meet public objectives of ecosystem function and agricultural interest as outlined above, then these hubs for value addition can: • Preserve farmlands • Increase public access to and education about food preparation • Provide assistance to farmers through access to land and or “farm incubation” and training possibilities • Act as a natural reserve area that provides valuable habitat and offers interpretive programming to educate about ecosystems, watersheds and environmentally sustainable agricultural practices • Provide ways of financing park operations through programming, farm leases, agriculture production and events

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11

Allowed a free rein, public entities have been

very costly to Jamaica

The combined losses of the three biggest loss-making public sector entities in Jamaica over the years are expected to surpass J$64 billion by the end of March 2014. Managers of the National Water Commission hope that an 18% increase in water rates imposed last October will translate into a small surplus for the utility, which hasn’t seen a profit in many years.

But the other major drains to the public purse – the state-run bus company, Jamaica Urban Transit Company (JUTC), and the holding company for the government’s stake in the Jamalco alumina refinery, Clarendon Alumina Production (CAP) – are expected to collectively incur J$3 billion in losses this fiscal year.

The government recently committed to stop supporting CAP financially as a condition under the latest loan arrangement with the International Monetary Fund.

But that was after it assumed US$162 million (J$17.8 billion) of the alumina holding company’s debt last September to facilitate a forward sale agreement to Hong-Kong based Noble Resources.

Additionally, the government spent J$16.5 billion of taxpayers’ dollars to meet other CAP obligations since 2008, while proceeds from the most recent forward sale – US$120 million for the supply of 3.4 million to 6.1 million tons of alumina over 12 years, depending on market price – was largely used to repay amounts already owed to Alcoa.

JMD

$3.6 billion

of taxpayer dollars used to support the Sugar Company of Jamaica between 2006 and 2011 12

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Indeed, it is not the only case where government has been sluggish or demonstrated a lack of prudence in addressing losses incurred by public entities.

After not realizing a profit in all but two of its 42 years of operations, Air Jamaica received J$30 billion in financial support since 2004, when full ownership returned to the government. The ailing airline was finally offloaded three years ago.

Similarly, J$3.6 billion of taxpayer dollars was used to support the Sugar Company of Jamaica (SCJ) between 2006 and 2011, during which time J$11.1 billion of the debt owed by the aged, loss-making factories was absorbed by central government before the assets were divested.

Going back even further, between 1996 and 2003, the central government absorbed public entity liabilities of over J$180.2 billion, of which FINSAC represented the largest proportion of 77.4%, followed by the debt owed Air Jamaica and NWC, according to a 2008 study conducted by the Caribbean Policy Research Institute (CaPRI). Consequently, Jamaica’s national debt climbed by 71 percentage points over that seven-year period.

It reflects a long running problem in Jamaica, where deficits of public sector entities have not been capped, which emphasizes the importance of imposing a binding fiscal rule that spans the general government.

Meanwhile, a solution to make JUTC profitable is yet to be seen. Persistent deficits over the last 10 years led the government to provide J$6.8 billion in grant funding to the entity, outside of the additional billions of dollars used to acquire vehicles and equipment, which the state-run bus company is unable to finance on its own.

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Current Structural Benchmarks

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Revise the relevant legislation for the adoption of a fiscal rule to ensure a sustainable budgetary balance, to be incorporated in the annual budgets starting with the 2014/15 budget.

31 Mar 2014

Government to finalize a review of public sector employment and remuneration that serves to inform policy reform.

31 Mar 2014

Government to table in parliament a budget for 2014/15 consistent with the program.

30 Apr 2014

Government to table in parliament a comprehensive Public Sector Investment Program.

30 Apr 2014

Government to make e-filing mandatory for LTO clients with respect to General Consumption Tax (GCT) and Corporate Income Tax (CIT)

31 Mar 2014

Government to implement legislative changes regarding unlawful financial operations, consistent with Fund TA advice provided in July 2010.

31 Mar 2014

Government to submit proposals for a distinct treatment for retail repo client interests in the legal and regulatory framework in consultation with Fund staff.

31 Mar 2014

Enact Omnibus Banking Law consistent with Fund Staff advice to facilitate effective supervision of the financial sector.

31 Mar 2014

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legislation tracking Flexible work arrangments (Five Bills)

description To make necessary amendments to legislation that will be enacted to remove impediments to the implementation of flexible work arrangements.

status update

Time Elapsed

Based on drafting instructions issued to the Chief Parliamentary Council(CPC), the necessary amendments to legislation will be enacted

by September 2014.

21 months

Building Bill To improve the efficiency of the building approval process and provide a framework for the effective management of the building industry.

Government to implement a new tracking system for contruction permits across all parish councils by December 30, 2014, while it is examining the process for permit approval with a view to reducing the time for issuing them to 90 days (details expected after next IMF review).

Fiscal Rules (Two Bills)

To effect the necessary legislative amendments for additional fiscal rules to achieve an enhanced rules-based framework for fiscal governance in Jamaica.

Amendments passed without the inclusion of sanctions or penalties for breaking the fiscal rules. The government is to consider legal options for strengthening the sanctions regime to enhance the credibility of the fiscal rules, but no set timeline has been set.

63 months 46 months 16

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