Wednesday, February 20, 2008

Oil: still Jamaica’s main external threat

On July 29th 2006 my article was titled “Oil: Jamaica’s main external threat”. That situation has not changed, thanks to nothing being done to reduce our dependency on fossil fuels. In fact approximately 96% of our almost 75,000 barrels imported daily (27.4 Million barrels annually) comes from fossil fuels, or oil. At that time oil had climbed to US$78 per barrel, and last Wednesday it closed above US$100 per barrel for the second day running, and in fact passed US$101 per barrel during the trading day. Projections are rife that it could go to between US$110 to US$130 per barrel by April/May 2008.

The chart shows the movement of oil on a weekly basis, and in fact shows that prior to this week it was trading in a range, between US$87 and US$100 per barrel. What’s more it shows that oil prices have been on an up trend and the breakout from the range above the resistance level is not a good indication. A break above resistance (uncharted territory) implies that the price could keep going up. There is no history to show what the next resistance price might be and therefore what will stop the price of oil are really the sentiments of traders.

Weak US economy
What is clear though is that the higher oil price is being driven by a weakening US dollar, which will probably remain weak until the third quarter of this year. Many expect that the Fed will continue to cut rates in the short term, which will help to keep the US dollar weak. In addition the probability of a recession has increased, with at least one Fed chairman saying that a recession is very likely. My own view, and that of others, is that the US may already be in a recession and the data will soon catch up. Even if the US is not a recession, however, it is clear that the economy is very weak, as consumers are already cutting back significantly on discretionary spending in the US.

What all of this means though is that Jamaica, and the world, will continue to be affected by high oil and commodity prices. In short the whole world, and not just Jamaica, is being significantly affected by increasing inflation as a result of the weakness in the US economy. The global expansion, of recent years, that we have failed to take advantage of, is over and the world is entering the down trend of the economic cycle. This downturn, in my opinion, was unnecessary though and resulted from the interest rate policies pursued by Greenspan in the first instance and the drastic change implemented by Bernanke. One of the surest ways for oil prices to come down is either from US dollar strengthen or the price of oil is denominated in another currency, for example the Euro.

I believe however that the US dollar will eventually strengthen in relation to other currencies, not because the US economy will strengthen but because other economies will begin to weaken. This should help to ease the price of oil, but even so the average price for this year will still be significantly above last year. This of course means that we cannot become complacent, and do nothing much, as we have done from the writing of the energy policy in 2004. We have to reduce significantly our dependency on oil. The US and China, for example, both use coal for 50% and 60% respectively of their fuel needs. They have money; we don’t.

Effect on Jamaica
To illustrate the negative effect oil has on Jamaica, we use approximately 27.4 million barrels per year. When oil is at $101 per barrel it translates to an annual oil import bill of US$2.8 billion (J$197.7 billion), or 28% of approximate GDP of J$700 billion. So almost 30% of what we produce is spent on oil. If we could manage to implement policies to save even 15%, then we would realize an annual savings of J$29.7 billion. I am positive that many Jamaicans could find a lot of things to do with that money. We would have more money to pump into education and security, as companies would make greater profits and the government would get more taxes.

What this means to me is that a significant part of our “energy” should be focused on reducing “energy” from oil. We are of course very late in implementing policies, but must do so expeditiously. The management of funds in this country has sometimes appeared to be similar to that of a bookkeeper who seeks to increase profits, not by adding value, but by cutting costs. We have to look at value added not just from the point of view of cost reductions but also from spending where the returns are the greatest. Suppose for example that we had put J$700 million per annum for the last 5 years in developing an efficient transportation system. We could possibly have a transportation system reliable enough so that people would be willing to leave their cars at home.

When you consider that approximately 30% of our oil bill is spent on transportation, even a 20% savings would be significant. Suppose also we had loaned interest free money through the NHT to homeowners to implement solar equipment. We could realize a significant savings on retail electricity use, which would also accrue significant savings, even though the JPS might not be happy. Not to mention if we had made the proper investments in alternative energy sources such as coal, or wind technology, instead of just talking about LNG. We would be quite relaxed while oil prices are rising. My own personal opinion is that LNG is not the right choice, but that’s for another time.

The point though is that our current oil crisis is as a result of us not making the move to act on the threat we were well aware of. It seems as if we will have to get used to high oil prices though, as it is going to plague us for a while, even if it goes below US$100 per barrel. What this means is that we must put in place the necessary fiscal policies to address this ever growing threat.

Thursday, February 14, 2008

Only results matter

When I was thinking about this article two experiences came to mind that were informative of the way us Jamaicans think. The first was over ten years ago when a well respected retired public servant said to me, “when you introduce someone to me, I am not interested in his title, as the title and position can go away but the man is always present”. In other words it is the integrity and character of the man that is most important and not the position he holds.

The other is when my son was relating an incident to me, about a year ago, when he was at a school concert where the DJ Busy Signal was performing and some other students were jumping to his performance. My son went to them and asked what he said, after he introduced himself on stage, because he was reeling off the lyrics very fast. The response was “we don’t know but it sounds good”.

Jamaican culture
Both incidents illustrate the psyche of the Jamaican mind. Our culture is one where form is of greater importance than substance. So when you look at the Jamaican roads and compare it to Trinidad you see much more expensive cars, unlike in Trinidad where factories and businesses are as prominent as the cars we drive. Never mind that they are growing at rates of 9% per annum, and produce oil, while we are struggling to get to 2%, even in the best of times, and can hardly afford to pay our energy bill. We are suffering but we look good.

It is also instructive how we decorate many with CD’s and OJ’s, supposedly for the service they have provided to this country, and many have done well, but after 45 years of independence where are we. We are always much more concerned with the plan than the implementation. So when I was driving in from the North Coast over the weekend, on approaching Spanish Town, I looked up at the gadget that clocks your speed as you approach, to check how fast I was going. Of course it wasn’t working because what was important was the political opportunity when it was being launched rather than the function it provided. And we can go on and on.

The important point though is that as a country we have to move from where we create the plans only, such as the many reports on crime and other commissions of inquiry we have produced. And this has been the way we have approached crime solving over the years. We have produced many reports that tell us what the reasons for crime are, and have held many expensive functions to launch and celebrate the writers of the reports. We have even created special “crime” squads within the police force with great panache. But in the end crime has always escalated, as if all our efforts in the past were to spur on rather than inhibit the crime figures.

The new commissioner, Lewin, is taking a very practical approach to dealing with this crime monster, which people like me have been suggesting for a very long time. The approach is one of dealing first and foremost with discipline on the roads, in the society and within the police force. It is obvious that he has launched an assault on road indiscipline and the blaring night noises that some feel they have a right to impose on others. He has also taken a practical approach to policing, which is to get them patrolling on the roads, instead of sitting in police stations that we can’t afford to properly maintain anyway. It is more important to see the police on the roads than have a police station up the road. After all it is the police that solve the crime and not the building. So once again I encourage the security minister to keep peeling away at the apple rather than take a big bite only to find out that you have taken a chunk out of the worm.

Missing approach
This approach of properly focusing on getting results is what we have been missing as a country. Even though we have always been seeing declining productivity, aneamic growth, escalating debt, annual fiscal deficits, and slowing investments, we are always applauding the efforts and approach of those responsible. So tell me if the results are not forthcoming doesn’t it mean that there is something wrong with the approach. This lack of logic amongst some of our leaders (public and private sector) has always confused me. I mean why do we always seem to celebrate plans but fail to look at the results. It’s as if the “nine-day wonder” is not only just about scandals but everything, as after nine days we seem to forget what the goals were. I am convinced that we need to check the quality of the water from the National Water Commission, as this must be affecting us.

I remember a few years ago while we were having a significant public debate about the quality of our education system (which faded like everything else) that there was a discussion around pay for performance for teachers. Whatever happened to that concept? The teachers seemed to reduce their wage demands after this concept was introduced. I hope not fearing that they would not be able to meet the standards. But isn’t this something that we should be looking at. The argument was that it was difficult to measure the performance. Well if it is difficult to measure the output of the education system then those responsible may need some education themselves.

But certainly we need to move to a culture where we are measuring results and not just discussing the objectives. As an example, the growth projections since 2002 have, for the most part, been far from met, as shown in the table.
If we were to even go back further then it would be the same pattern, where we would see missed fiscal and growth targets. It is the failure to measure ourselves against initial targets that have helped to keep us where we are. And if we were to measure ourselves against our international competitors, even much smaller states, then it would be worse.

So the decision that we all face is, do we intend to go on ignoring targets and constantly making excuses for not meeting them. The common thing is that when targets are not met we give an excuse as to why, such as higher than expected salary increases. Never worry that salary increases is something that is for the most part within our control. It sounds good as an excuse so we will use it. Then after not meeting our targets we go on to set the same unrealistic ones we did the year before, even though the conditions that caused us not to meet the initial targets have not changed or have worsened. If we continue to set ambitious targets then all will be well.

This is a culture that we must change if we are to move forward. If we continue to operate as we always have then we will continue living in “la-la-land”, while our international competitors face the real challenges, analyze performance against initial targets and eventually do better than us.

Wednesday, February 06, 2008

Governance and growth

The recent Contractor General’s report on the “light bulb scandal” brings to mind the very important issue of governance. Over the past few years, Jamaica has been plagued with many governance issues in the political arena. We remember when the PNP government came to power in 1989, shortly thereafter JAG Smith was sent to prison for impropriety in the farm workers fund. This was the first time a former government Minister was imprisoned for misuse of funds.

From the 1990s to present we had reports on issues such as the Shell Waiver, NSWMA, Operation Pride, Intec Fund, Cement Crisis, Trafigura, etc. All in their own right costing Jamaica billions of dollars, not just directly but in lost opportunities. The “light bulb scandal” is nothing more than a continuation of the poor governance that has plagued this country and caused us untold amounts of damage to our economy. If we are serious about halting this trend then it is important that the allegations made by the Contractor General be properly investigated and the appropriate action taken. When referring to these “scandals’ it is always important for proper investigations to be done, as the associated parties could very well be innocent and it is important not to write off someone based on just an allegation.

Poor governance
The fact though that so many of these allegations come to the fore consistently is evidence of the fact of the poor governance that this country has seen since independence. And it will continue because successive governments have failed to put the necessary controls in place to ensure that this type of mismanagement of funds is difficult. This, I am convinced, is a primary problem for the aneamic growth rates, and decline of social standards, that Jamaica has always experienced.

Growth is stymied because the poor governance we have mad almost certainly ensures that the country’s resources are not used in the most efficient manner. So what happens is that the money we earn or borrow is spent without a return being generated on those funds, and the markets stop operating efficiently. In addition because our leaders are responsible for this type of behaviour it sends a signal to the youth that this type of behaviour is acceptable, and could be a reason why young politicians, and their followers, do not see anything wrong about flouting controls. The result is that we create a second tier leadership that carries on with the same behaviour patterns they have learned from the older leaders. This is supported by the allegations made by the Contractor General of the flagrant way in which the contracts were distributed, showing little concern for any appearance of legitimacy, if these charges are true.

Governance concerns are not just an issue in governments, however. And it is not just a concern in Jamaica. For example in the USA we remember the incidents of Enron and WorldCom, and we also remember cases of politicians brought up on charges of using public assets (such as airplanes) for private purposes. The difference between the USA and Jamaica is that when it happens in the USA it becomes of major public concern and is dealt with in a timely manner.

In the case of Jamaica, however, we find that governance issues, such as the banks during the FINSAC era, Trafigura, Dyoll etc., arise and it seems as if they are never brought to an end. Even today, after years and costing the country billions of dollars in debt and lost growth opportunities, there is still no resolution to the banking crisis in the 1990s. Even if there are then the public is not made aware of the final outcome so there is no learning.

UTECH auditors
One recent governance issue that had me concerned also was the matter of the suspension of the internal audit staff from UTECH. One source informs me that the internal auditors were sent on leave by the management and not the council. If this is the case then it should be of major concern not only to the Internal Auditors Association and the Institute of Chartered Accountants, but also the PSOJ, JCC, and everyone concerned about proper governance.

My reason for saying this is that internal auditors are supposed to answer only to the board of directors (UTECH Council) and not management. This line of reporting is necessary to ensure the independence of the internal auditors so that they can carry on their duties without fear of any backlash from management, whom they are supposed to ensure operate within the internal controls of the organization. When internal auditors are sent on leave based on suspicion only then this is a serious governance issue and all well thinking organizations should be concerned about the message that this is sending to the society.

The report on this incident indicates that the report was distributed to all members of council, as well as other parties. The leaking of the report is a serious breach of trust and I hope that when the matter is fully investigated that strong action is taken against whoever was the source of the leak. But it is important that the matter be investigated properly before any drastic action is taken. Even though the internal auditors were subsequently reinstated, it would be very interesting to understand what their state of mind is now when approaching any future investigations, if it is possible for them to be sent on leave and then reinstated, just based on a suspicion.

What is even of greater concern is that UTECH is an institution of learning, which no doubt would teach their students about the necessity of independence of internal auditors as a necessary ingredient for proper governance. This would be the case of “do what I say and not what I do” and I trust that UTECH will make a statement to clear up this issue, as I do not believe that the allegations made against UTECH could be so.

If we are to move this country forward though it is going to be necessary that good governance prevails. It is important for us to understand also that the main issues of governance are not to do with politicians. It is not politicians that run countries, but boards of public bodies, and the public sector. If we change our politicians each year and never address the sectoral level of management then we will always have the same result. So the low growth rates, and underachievement, that we have seen in this country has a lot to do with the management by boards and the public sector, as it is very difficult for any politician to make changes without their cooperation.

The fact is that many politicians in the past have appointed people to manage public bodies, based on friendship rather than competence, and it has resulted in not only them looking bad but also Jamaica suffering from the mismanagement. But I guess reputation has never been a consideration for some persons, as they rely on the “nine day wonder” phenomenon.
It is important for us to remember then that if a country, or company, is to realize its full potential then proper governance is going to be necessary for maximum growth. Proper governance ensures that returns are maximized, and is the only way that we can increase productivity and eventually compete effectively on the world stage.