Monday, December 25, 2006

The importance of private sector efficiency

Over the past few weeks there has been much optimism about the Jamaican economy. It is felt that with the lowering of interest rates and increasing business and consumer confidence that the economy is poised for stronger growth, and with much justification. Agriculture and Tourism both seem to be at a point where significant contributions will be made to the economy, and this is good as both sectors have the greatest potential of absorbing our highly unskilled labour force.

In addition to this it seems as if we will be ending close to our fiscal target, and this will further set us up for improved confidence and growth in the following year. When investors make strategic investment decisions they do so for the long term, and so it is very important not to upset this confidence.

With all the emphasis on the government’s policies, however, it seems as if we have forgotten about the importance of the private sector in making this growth happen. After all the government should only create the correct investment environment but it should be up to the private sector to make growth happen. What this means of course is that the private sector should ensure that once the government does what is asked of it then they should be in a position to take the maximum advantage of the growth opportunities. The private sector will have to compete with international standards and this of course means that companies must be efficient else the creation of an investor friendly environment would have been fruitless.

Jamaica Public Service Company
This thought came to mind recently after being confronted with two situations. The first is the Jamaica Public Service Company (JPS), which seems to be still suffering from the monopolistic blues. The fact is that they still behave in many respects like a monopoly and this has far reaching implications, not only for individual consumers, but also the productivity of companies. Electricity is a very important cost component of any modern business and if we cannot keep the generation costs as low as possible then we are behind the eight ball when it comes to competing internationally.

The cry may be that oil prices worldwide are high, and this is true, but isn’t the cost high for everyone around the world. So what we should focus on when competing is not just the absolute costs but more importantly the relative costs. This relative cost difference is caused because one company is more efficient (productive) than another, and this is one of the driving elements of marginal costing.

JPS has in the past lamented the high cost of illegal connections, in terms of lost revenue, and this cost obviously has to be borne by the legal customers, whether directly or because it restricts us from receiving a lower rate. Well one year ago I reported an illegal connection to the JPS, by calling the then President’s office, calling the customer service centre, reporting it to persons who came to inspect the premises, and writing through the complaints section on the website. On three occasions the servicemen visited to turn off the electricity because the bill was not being paid, and each time it was illegally reconnected but the JPS did not have the common sense to see the criminality in this and address the problem.

Well one year, and one administration later, I emailed the five senior managers at JPS. I received a message the next day from one of the administrative assistants to say that the matter would be addressed the following day. Well two weeks later the following day has not yet arrived. Apart from the lost revenue over the year, the cost of generation, the lost man hours, and the fire hazard, all caused from the illegal connection. JPS runs an expensive advertising campaign in the media advising people of the hazards of illegal connections and requesting that we report them. Yet when it is reported nothing is done.

The consequence of JPS’s inefficiency is that these added costs are heaped on the public, thus creating cost inefficiencies in delivering services and products to the consumer, and international market. This makes Jamaican products uncompetitive in relation to other countries.

Business Ethics
The second incident relates to the necessity of maintaining ethics in business, as it leads down to a breakdown of trust, and can affect our international business image. Recently a friend communicated an idea to another company, which the intention was to engage that company’s services in assisting him to deliver a product to the market. What happened was that the company, whose services were being sought, went directly to the supplier in an attempt to steal the deal away from him. Getting a share of the pie was not enough, they needed the whole hog. Information garnered after the fact was that this was not the first time that such an incident occurred with this company, so obviously it is a habit.

Even in competition there must be rules of engagement. In athletics drugs are banned so as not to create an unfair competitive edge and honesty is encouraged amongst sportsmen. Can you imagine if every one sought to stab someone else in the back what the outcome would be? There would be grid lock as ideas would not flow freely and so progress would be slowed.

It is extremely important that not only efficiencies are created in businesses but that trust is established. One of my fundamental principles is that someone’s word must mean more than a contract. It is because of these instances why we need contracts in the first place, thus adding additional costs to businesses.

These two examples illustrate simplistically, how important the operations of private sector companies are to economic growth. We are competing with international companies which every day strive for greater and greater efficiency and so must operate in the same manner if we are to truly compete and grow our economies. This means that high standards need to be adapted for individual performances, as well as operational efficiencies. There are too many examples of companies that fail to grow to their true potential because they are limited by the inefficiencies within their organization.

If we even look at the larger, more profitable companies in Jamaica, the things that are clearly recognizable are (1) good management; (2) high employee productivity; (3) good technology systems; and (4) structured operational processes. Without these the organization reaches a plateau and fails to grow any further. Any attempts at growth above this level often leads to reduced profitability, as the marginal cost of growth outweighs the marginal revenue. So while emphasis is placed on revenue enhancement, just like economic growth, if one does not have the capacity to grow then the cost of achieving the growth will always outweigh the added benefits.
It is therefore very important for us to remember that while the government has an integral role to play in creating the right environment for investment, the private sector must ensure that they are properly organized to be internationally competitive in order to see Jamaica grow.

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