Friday, February 02, 2007

The problem of capacity

If a car is built to go at a top speed of 150 kilometres per hour (kph) then we all know that it is highly unlikely that it will get to 200 kph. Similarly if a tree does not have an adequate root structure to support its branches then it will fall at the first wind. This came to mind as I attended the Air Jamaica Jazz and Blues festival last weekend.

There is no doubt that the festival has a large, and a much greater possibility of a larger, impact on the Jamaican economy. Not only does it provide substantial revenues for the organizers but when one thinks of the demand for accommodation, food, entertainment and products, emanating from the festival, the multiplier effect is tremendous. This is especially important as the festival comes at a time when the tourist season is off its peak, thus creating revenues for the tourism capital in a time when many of the assets would have been operating close to or below breakeven.

Maximizing assets
The foresight to have created the festival at this time is indeed a lesson in good management, as it was deliberately created to give a return on underutilized assets during a down period. This is typically an easy way to maximize return on investments. In other words, if you have already incurred the cost of the assets and operations then selling the product or service below the normal price during the slow period can actually bring greater profits. Accountants analyze this using what we call marginal costing.

The concept behind this music festival (deliberately called so because I don’t think it has much to do with Jazz and Blues anymore) should definitely be replicated in other areas to bring even greater revenue flows. It is this creativity of thought that drives markets as I mentioned in my article last week in relation to capital markets. What the various music festivals have shown us is the powerful revenue generating capacity of Jamaica and our culture, which we have not really made any serious attempt to maximize.

The main problem that we are faced with, which was demonstrated at the Air Jamaica music festival, is one of capacity. The failing of the festival is that we were not able to maximize the possible economic benefits. This is a direct result of our weak infrastructural support, which prevents us from maximizing our growth. Someone said to me that the Jazz festival was a success, which it might well have been, however we need to also look at success not from the point of view of what we are satisfied with but what could have been, in other words the opportunity cost or value.

As an example, I attended a football match in the United States where there were some 90,000 persons in attendance. Even with so many persons attending we arrived to the stadium from where we were staying in ten minutes. This of course was as a result of their infrastructure as well as organization. These two were missing at the recent music festival. First of all we do not have enough rooms and the road network to handle significant numbers. Secondly, I believe that the organizers should have taken a much more proactive approach to handling the traffic, and if they had done this might not have lost the estimated 4,000 persons that did not attend on the Saturday night as a result of the Friday night. This 4,000 times US$80 per person (J$21.6 million) is the direct opportunity cost of not having the infrastructural support and the organization. I say direct because there is the indirect revenue lost to the surrounding businesses in the Montego Bay area.

I have heard a lot of people say that they will not be going back to the festival next year because of the lack of organization. Before any of the organizers say that the event was well organized let me say this. When one is marketing a service it is much more than the point at which the service is delivered. It is the whole experience, which in this case would mean arriving into Montego Bay, whether by air or car; the food experience; the entertainment facilities outside of the show; the ease of transportation; the experience with the people; and finally the show itself. When one spends three hours in traffic going to and from the venue then it reduces the time to enjoy the other parts of the experience. It also reduces the time available for spending on the other activities.

Economic growth
This is a similar problem that we face with economic growth. Our current social and infrastructural support does not provide us with the capacity to grow over 2.5% to 3.5% at most. In other words if we want the car to go faster then we have to put in a more powerful engine. The factors that continue to limit us remain literacy levels, crime and corruption, slow moving justice system, poor road network, lack of organization of our agricultural sector; among the challenges we face.

If therefore we want to really put the economy on a strong and consistent growth path, we have to build the foundation for growth. This means that we must have deliberate policies and strategies around improving our literacy rates, eliminating crime, improving the roads, and a deliberate action plan as to how we will develop our agricultural sector to replace food imports.

What this means then is that we have to look at our limited resources and see what the best value for spend is. In other words what is the value added from (1) continued subsidies being pumped into Air Jamaica; and (2) the massive spend on World Cup cricket, as two examples. Would we have been better off spending that money on cleaning up the police force or providing proper education or health facilities for the potential criminals?

The problem I think is that this sort of road map to national development may not exist. If anyone knows about it I would love to see it. This lack of a proper plan to national development causes us to focus short term on things like balancing the budget, while what we sacrifice in order to do that is the capital expenditure and investment required to develop that infrastructural support needed for economic growth.

Even within companies this sort of support is necessary. A company will never realize its true potential if the infrastructural support is not in place to facilitate the revenue side. In other words the need for a proper technology infrastructure and human resources are key to any company’s development in today’s world. This is the main difference driving a successful multinational versus a national company.

Although we may not have experienced much jazz at the festival we can’t say that we were short of “blues”. If we are really serious about development though we have to adopt a more structured approach. We have to look at each item of expenditure and make a decision not on how the electorate will see it or meeting a short term fiscal target solely, but rather what is the medium to long term value added to be gained.

If we do this then we may find that much of the expenditures we have committed to may not have been in our best interest, even though it looks good. One such question surrounds the expenditure on World Cup Cricket. The problem with this is not that it is not good for Jamaica, but rather that we have not done the proper analysis to know.

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