Think Tank May 2014

Think Tank

a publication by the Caribbean Policy Research Institute

May 2014

Reorganize to Recover: How New Laws Could Modernize Bankruptcy

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Answering the IMF Question: Prospects for the Jamaican Economy in 2014

Why Jamaica p 11 Wastes US$100 Million on Electricity Each Year p

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Editorial The sluggish pace at which legislative and regulatory processes move in Jamaica costs the country billions of dollars each year. The details tend to differ regarding specific matters, but it is apparent that a lack of social trust and cohesiveness in the development of policy frequently prevent meaningful progress.

It does seem that the government has been giving greater attention to the concerns of the private sector and other stakeholders when considering matters of national importance, but there still seems to be a palpable reluctance on the part of policymakers to defer to external advice.

It is broadly accepted that amendments to existing laws, some of which are more than a hundred years old, are needed. However, current efforts to introduce new bankruptcy laws that appear to have the potential to increase the contributions of local entrepreneurs seem to have ignored critical recommendations given by experts in the Private Sector Organization of Jamaica’s Insolvency Review Committee and members of the Institute of Chartered Accountants (see story on Page 4).

Closing this ‘trust gap’ appears to be a matter that should be addressed with some urgency. But urgency, or more accurately the lack thereof, is another impediment to developments in - and the development of - the Jamaican economy.

It should be fairly obvious that failing to meet deadlines regarding legislative reforms required by the IMF for its continued support will not increase the confidence it is likely to have in our decision-making, or in the likelihood of our eventual success at achieving other key milestones. That does not improve our negotiating position in current or future discussions with the international lending community, a cost that is real but difficult to measure.

But even when it has been relatively easy to measure the costs, as it is in other areas of activity, it has not meant that we have dealt with these weaknesses any more effectively.

actually done to solve these problems, and much time and money has been wasted (see story on Page 11).

We have observed that the government, the private sector, and the general public appear to be in the mood for talking to each other. All parties, however, must be equally inclined to listen. But improving the quality of stakeholder engagement, while necessary, is not sufficient in and of itself to accomplish desired objectives.

Having spoken, we must then act. While we must be wise, we must also be decisive.

Caribbean Policy Research Institute (CaPRI) The Caribbean Policy Research Institute (CaPRI) is a notfor-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 decision-making in Jamaica and the wider Caribbean.

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

Block H, Sir Alister McIntyre Building, UWI (Mona), Kgn 7, Jamaica WI Tel: (876) 970-3447,970-2910 Fax: (876) 970-4544 info@capricaribbean.org | www.capricaribbean.org

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We need look no further than the high cost of electricity for an example. Since the privatization of Jamaica Public Service Company (JPS) in 2001, much has been done to define the problems associated with high fuel costs and the inefficient generation of power. But little has been

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Reorganize to Recover:

How New Laws Could Modernize Bankruptcy As things now stand in Jamaica, even if the owner of an insolvent business gives up his home to pay the company’s debts, creditors are unlikely to recover more than 30 cents on the dollar in the liquidation process.

The Doing Business 2014 report showed that if you throw receivership into the mix you might squeeze another 10 cents out of a failed business. Of course, the ‘you’ here often won’t include the company’s shareholders. It certainly doesn’t include the employees, who probably saw their last pay cheques before the situation got to the point of bankruptcy.

The same report also showed that when reorganization is more frequently pursued (in 60 per cent or more of bankruptcy situations) than liquidation, as is the case in many Organization for Economic Co-operation and Development (OECD) high income countries, recovery approaches 90 per cent.

Indeed, poor practices used to address insolvency in Latin America and the Caribbean translated into a recovery rate of a little less than a third on all debt pursued. Unsurprisingly, OECD high income economies had the highest recovery rate in the world, at close to 70 per cent.

It appears that laws relating to individual bankruptcy and corporate insolvency should be focused on the rescue and recovery of distressed businesses, rather than punishing debtors. But that is not the case in Jamaica now.

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“Small businesses that may be struggling and that give rise to their owners’ individual bankruptcy, or companies that may be on the verge of insolvency and need a second-chance through rehabilitation and rescue, have no recourse.”

“It is estimated that 10 per cent of businesses in a modern economy fail every year,” said Caribbean Policy Research Institute (CaPRI) Co-Executive Director Damien King at a forum recently held by the policy think tank and the Private Sector Organization of Jamaica (PSOJ). “If 10 per cent of your businesses are failing, and you have untidy and ineffective insolvency procedures, you are locking away a significant quantity of your economy’s resources – making it unavailable for new productive activities.

“And tying up capital is not even the most detrimental problem. The most important economic resource that is tied up and locked away is the entrepreneur, who represents the driver of economic activity.”

The Bankruptcy and Insolvency Bill 2014 (The Bill) currently under consideration aims to address limited provisions in the Companies Act (2004) for corporate rescue.

Presently, the only measures available to save financially troubled companies are schemes of arrangements. But bringing together the majority of creditors to vote in favour of one, and getting the court to sanction the various actions to be taken, is time consuming and costly.

What’s more, they provide no protection for the company during the period of financial distress.

Nevertheless, the liquidation and winding up a company, which contemplates its death, is seen in Jamaica as the primary remedy for insolvency. The other alternative to rescue, a receivership, is limited to creditors’ interest.

“There is little doubt that the existing legal regime relating to bankruptcy, which dates back to 1880, stifles economic growth,” said Suzanne Ffolkes Goldson of the University of the West Indies Law Faculty. “Small businesses that may be struggling and that give rise to their owners’ individual bankruptcy, or companies that may be on the verge of insolvency and need a second-chance through rehabilitation and rescue, have no recourse.”

The Bill introduces a more modern and less arbitrary approach to defining “acts of bankruptcy” which may be used as justification for a creditor to take someone to court over a debt. It also formalizes another mechanism for rescue and rehabilitation called a “proposal” which can call for an extension of time, among other things.

The PSOJ’s Insolvency Review Committee (IRC) presumes that the provision for proposals covers “looming insolvents”. These are persons who are not yet insolvent but will become so within a year if no corrective action is taken, whether there is an intervention or not. It also wants to see that looming insolvents are not deemed bankrupt, should the court decides that their filed proposal has failed.

But the Bill should go further in protecting debtors by including provisions for debtor in possession (DIP) financing, which allows for much needed funding for companies during periods of financial distress, according to IRC Chairperson and Attorney-at-Law Hilary Reid of Myers, Fletcher & Gordon.

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The committee also recommends the inclusion of homestead exemptions where the homes of bankrupt or insolvent persons are protected from creditors. Alternatively, the sale of the family home could be delayed. In Jamaica, informal or unincorporated businesses are very common and individuals and their dependents can be exposed to devastating personal loss.

Stakeholders in the insolvency law reform process also recommend that the rights of secured creditors under current legislation should be preserved, while being subject to the proposals for rehabilitation of insolvent persons.

“A proposal for a scheme of arrangement may require the debtor to obtain new financing,” explained Wilfred Baghaloo, director of PriceWaterhouseCoopers. “Providers of such financing would need to be assured of the priority of their repayment ahead of the existing creditors.”

The Bill could do more to provide greater certainty in cross-border insolvencies, and the IRC has made recommendations that include the types of ancillary orders that may be made by the court, the criteria upon which the court’s discretion may be exercised, and the publication of foreign bankruptcy proceedings.

Other IRC recommendations to be considered include: Voluntary court filings. Removing the requirement that schemes of arrangements must be filed in the courts would make it less costly for creditors, debtors, and the judicial system.

The use of Insolvency Practitioners (IPs) instead of the courts, as recommended by the Institute of Chartered Accountants of Jamaica (ICAJ), once creditors waive the need for court approval.

The establishment of a Joint Insolvency Committee (JIC) to supervise insolvency and oversee the licensing of IPs.

legislation tracking Anti-gang legislation to suppress and disrupt organized criminal activities

Integrity Commission Bill to establish single anticorruption entity

Passed in March

Tabled in March

Bankruptcy and Insolvency Bill

Tabled, but key recommendations from the public excluded. Two target dates for enactment missed 6

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Flexible Work Arrangements Bill

Tabled in March

Micro Credit Bill establishing regulatory framework for privately-owned moneylending institutions currently unsupervised by authorities

Cabinet has approved the issuing of drafting instructions

Banking Services Bill to merge regulations of all deposit-taking institutions

Tabled, but enactment misses imf deadline

Legislative reform establishing Bank of Jamaica responsibility for financial stability

Now being drafted

op ed column Answering the IMF Question:

Prospects for the Jamaican Economy in 2014

by Dennis Chung, CEO, PSOJ

The IMF program is different, fundamentally, from the previous thirteen. We are now required to make the legislative and fiscal adjustments needed to develop and sustain a more competitive economy. These adjustments include (1) tax legislation which removes discretionary waivers, among other things; (2) new fiscal rules; (3) reforms to insolvency laws; and (4) a Security in Personal Property Act.

The question to be answered is this: “After we have made these adjustments, will there be a light at the end of the tunnel -this time?�

The global recession in 2008 which forced a radical shift in our fiscal management was a turning point for Jamaica’s economy.

The global slowdown impacted tourism, bauxite, alumina and remittances: resulting in a significant contraction in our foreign exchange earnings, and limiting access to capital markets as investors in emerging economies like Jamaica opted for the safety of the US dollar.

We were no longer able to satisfy our hunger for consumption without production. For the first time in our history, we were forced to make the necessary adjustments to live within our means. We faced reality: a reality which includes an IMF agreement.

This IMF agreement requires us to make certain legislative and fiscal adjustments, to address credibility issues related to the 2010 agreement, before we can access much needed loans.

These have resulted in some hard fiscal and monetary decisions being made in Jamaica, causing hardship to many in an environment where much of the physical assets and human resources are not productive enough to be globally competitive.

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The country has been told repeatedly that we need to deal with bitter medicine in order to improve, and we have been doing so for the better part of forty years. So what is different now? The IMF program is different, fundamentally, from the previous thirteen.

We are now required to make the legislative and fiscal adjustments needed to develop and sustain a more competitive economy.

These adjustments include (1) tax legislation which removes discretionary waivers, among other things; (2) new fiscal rules; (3) reforms to insolvency laws; and (4) a Security in Personal Property Act. These adjustments should, in theory, encourage the development of an economy that is more competitive, both locally and globally.

The immediate effect of these adjustments (in particular a reduction in fiscal spending and increased taxes) has been the depreciation of the Jamaican dollar and a contraction of the local economy, exacerbated by an absence of the stimulus measures available in more developed economies with the fiscal space to use them.

This has led to reduced business activity and increased unemployment. We have passed the first four quarterly IMF tests, but are we on the verge of better economic times and increased income and spending levels?

Perhaps -but perhaps not.

I have seen improved business confidence levels, which hit a low in 2013. There has been a slight reduction in unemployment, and some improvement in company profits.

The financial sector is recovering from the debt exchanges and inflation is relatively low. Falling import demand has contributed to a reduction in the trade deficit.

But I have neither seen stabilization in the exchange rate, nor any significant increase in exports.

Why not? Because the adjustments have been forcefully reducing the demand for goods at a faster rate than earnings can be adjusted upwards.

I would normally expect to see, in the next stage of the adjustment, companies seeking out new markets (exports) and in doing so closing further the trade and current account deficit, as capital returns to the market with increased confidence.

The natural expectation is for growth to occur in an economy as it becomes more competitive and more productive. But this expectation cannot materialize if we do not address structural impediments to productivity and competitiveness.

Our greatest recovery risk is that of labour. Our labour force is not prepared for greater competition, which could result in economic growth without a corresponding increase in income levels. The productivity of Jamaican labour has been declining steadily, and is unlikely to improve without significant reform of existing labour legislation. Flexible working hours, and accountability, are needed.

It is challenging to compete globally with a labour force that is under-qualified to do so. But it is impossible if the laws will not permit it.

Public sector bureaucracy remains a difficult problem. The changes in Tax Administration and the introduction of the ‘Super Form’ have been welcomed. But the real issues with the public sector have not been addressed. These include a lack of accountability and the promotion of persons based on tenure rather than merit – routinely stifling much of the talent in the various public sector agencies and organizations.

Energy costs are also a major concern. Our failure to reduce energy costs continues to limit our competitiveness and productivity, and will eventually lead to the outward migration of production facilities and investments.

Various administrations have tried, and failed, to arrive at long-term solutions to our economic challenge for the better part of forty years. One example is the cost of energy.

We must consider that much of our energy cost lies in its distribution. The efficiency of generation is a major contributing factor. The other is theft. We may, perhaps, be able to improve generation efficiency with new equipment and technology. Theft is another matter.

If we are unable to solve the related problems of crime and indiscipline in Jamaica, economic prosperity can only be a pipe dream.

And if we are unable to address our structural challenges, then the current IMF programme could cause much pain with little benefit.

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the rising fuel cost (Expressed in us millions) fuel cost US$ millions 1200

2012: JEP commissions additional 65.5MW 2011: OUR awards JPS owners 480MW bid (project company called South Jamaica Power Company (SJPC))

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2004: JPS agrees to add 40MW using diesel.

OUR provides guidlelines for future generation expansion

2005: New generation expansion plan sets target for additional 230MW net generating capacity by 2008 193mw of old plants (32-35yrs old) to be replaced; Wigton Windfarm adds 20MW of wind.

2008: OUR opens tenders for renewable energy - JPS wins award to add 6.3MW to hydro (commissioned in 2014) and 3MW wind (commissioned in 2010)

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2013: JPS unable to secure LNG within 3-month timeframe allowed

2007: OUR reviews generation expansion options 2006: JEP commissions additional 50MW. 2011: Gov ends Exmar arrangement following OCG probe, which questioned its validity; Cabinet determined that new company, (Jam Gas Trust) would handle purchase and sale of LNG

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2004: Government enters agreement with Trinidad for LNG supply

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2014: EWI fails to pay performance bond, license taken away

2010: OUR opens tender for addition of 480MW to base load; JEP agrees to intall additional 65.5MW ; Wigton expands by 18MW

2001: Government privatises jps, determines that future expansion must reflect least cost

2001: JPS agrees to examine natural gas and other alternatives for expansion

2013: OUR ends SJPC 480MW award in January 2013 and reopens tender in April; EWI wins award for 360MW expansion after Azurest/Cambridge (first preferred bidder) failed to pay bid bond.

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2006: Trinidad ends LNG agreement due to uncertainty of supply

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2009: Cabinet approves negotiation with Exmar consortium for establishing storage and regasification of LNG

2012: JGT chooses Samsung to build LNG terminal in July 2012.

Governement requests JPS to supply LNG in September 2012, following lenghty LNG supply tender process

2007: OUR identifies petcoke, coal as fuel alternatives, but preferred fuel type for Jamaica still not decided by Governemnt

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Why Jamaica

Wastes US$ 100 Million on Electricity Each Year The latest delay in attempts to cut electricity costs in Jamaica will likely tack another US$100 million on to the country’s fuel import bill over the next four years.

But the events that have led to Hong Kong-based Energy World International (EWI) being stripped of its licence to build a 381 megawatt (MW) facility by 2017 were set in motion more than a decade ago.

In 2001, when the Government sold an 80 per cent stake in Jamaica Public Service Company (JPS), the annual cost of fuel used to generate electricity was US$ 170 million (5% of total imports). It has grown to US$ 730 million (12% of imports) last year. This reflects Jamaica’s heavy reliance on oil. Over 90% of the electricity generated is derived from petroleum. The world gets 95% of its electricity from other sources.

The cost is increased by the fact that more than a third of the country’s electricity is generated by plants commissioned in the early 1970s. They burn at least 35 per cent more fuel than their modern day counterparts.

Even if alternative fuel sources were not introduced into the energy mix, just replacing those forty-odd year old plants with newer and more efficient ones would reduce Jamaica’s fuel import bill by US$100 million each year.

Those plants were supposed to have been taken offline six years ago in light of the Office of Utilities Regulation (OUR) 2005 expansion plan. The OUR had determined that 230 megawatts (MW) of net generating capacity would be required by 2008, when the 193 MW plant at Old Harbour would be removed from service.

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But in 2004, the regulator had provided guidelines to be used for future expansion. They required, among other things, that projects for power plants rated above 15 MW would be subject to an open bidding process.

By 2008, JPS had already put forward two project proposals for approval, but sole tenders could not be considered under the new guidelines.

In 2010, six years after first introducing the open-bid requirement, the OUR finally issued its first request for proposals for the construction of 480 MW of base load generation. JPS emerged as the sole bidder, and was approved in 2011. The OUR withdrew their approval in early 2013.

The bidding process began again. Azurest/Cambridge won the bid, but failed to post its bid bond.

It is 2014, and EWI, the second option, has also failed to post its bond.

There has been some expansion over these ten years.

Jamaica Energy Partners (JEP) has commissioned over 115 MW of new generating capacity (using heavy fuel oil and diesel) since 2006. More than 40 MW of wind, and 6 MW of hydro, from Wigton and JPS have made Jamaica’s fuel bill a little lighter.

In 2001, when the Government sold an 80 per cent stake in Jamaica Public Service Company (JPS), the annual cost of fuel used to generate electricity was US$ 170 million (5% of total imports). It has grown to US$ 730 million (12% of imports) last year. This reflects Jamaica’s heavy reliance on oil. Over 90% of the electricity generated is derived from petroleum. The world gets 95% of its electricity from other sources.

But other attempts by the Government to reduce electricity costs may have been counter-productive.

In an agreement with Trinidad for the supply of liquefied natural gas (LNG) a decade ago, it assumed responsibility for sourcing fuel. The Government maintained that position in 2006 in natural gas discussions with Venezuela, after Trinidad withdrew from the arrangement.

In 2009, three years later, the Government began negotiations with a consortium led by Belgian engineering firm, Exmar to build a LNG terminal where the fuel would be received and piped to customers.

In 2012, the Government selected Korean-based Samsung C&T to build the LNG terminal. But it had failed, after a lengthy bidding process, to find an LNG supplier. The Government then required JPS to source the LNG for the project. Three months later, the OUR withdrew the JPS approval - because the power company had not yet secured a supplier of LNG.

In 2011, following investigations by the Contractor General’s office, the Government ended talks with Exmar and sought to create the Jamaica Gas Trust to handle the purchase and sale of LNG.

Now, thirteen years later, we are right where we were then. Apparently, the fuel and technology to be used will be options left open to the company to win the next bid. This was also the case in 2001. Now, perhaps, we will take the opportunity to build out Jamaica’s energy expansion within the constraints of a least cost model.

The OUR approved the JPS 381 MW project the same year.

In 2001, the Government and JPS agreed that future generation expansion should reflect the least cost for electricity, based on the energy options available.

In terms of policy, the events suggest that:

Regulatory bodies, and the regulatory framework, should be independent and robust.

Electricity generation expansion should be Minimal Government involvement is based on procuring the recommended in the sourcing process. most economical fuel and Independent oversight, technology combinations transparency and coherence are currently available,with essential to the procurement due consideration to process and project success. environmental effects.

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Current Structural Benchmarks Revise relevant legislation and adopt fiscal rules to ensure a sustainable budgetary balance.

To be incorporated in annual budgets as of 2014/15

Make e-filing of General Consumption Tax (GCT) and Corporate Income Tax (CIT) mandatory for Large Taxpayer Office (LTO) clients

Submit proposals, in consultation with Fund staff, for a distinct treatment of retail repo client interests in the legal and regulatory framework

Deadline met, but work remains on the legal framework required to strengthen the sanctions regime and the credibility of the rules

Finalize review of public sector employment and remuneration Deadline met

Reform legislation on unlawful financial operations in accordance with Fund Technical Advice (FTA) provided in July 2010

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Deadline met

No public record confirms that proposals were submitted by the March deadline

Enact FTA-compliant Omnibus Banking Law to facilitate effective supervision of the financial sector

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March deadline missed.

Still outstanding

Bill tabled. The IMF deadline for enactment not met

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