Friday, March 25, 2011

Energy again

FROM early last year I pointed out that Jamaican businesses were feeling inflationary pressures and that as soon as the economic recovery started we would begin to see price increases. Additionally I indicated that oil and food prices would see increases come 2011. Because of what I expected, when oil was around US$50 per barrel I invested in solar equipment and have never regretted it. I believe the time to do such investments is before the crisis, and at the time I encouraged everyone to do the same.

Oil is now trading above US$105 per barrel and JPS will be hiking rates by 10 per cent. The NWC has hinted at a rate increase. My only regret is that I did not fully replace JPS. However, I didn't expect the Middle East uprising which has caused oil prices to increase so quickly.

So here we are once again, having been in this position in 2008, but forgetting about that period as a result of oil prices plummeting in 2009. The "9 day wonder" psyche of Jamaicans. Similarly, when we had drought conditions last year everyone was complaining about the need to improve the water supply infrastructure. The government announces the two-month closure of the Bog Walk Gorge to improve the water supply and receives many complaints. So we may once again complain about the water supply infrastructure at the next drought.

While the immediate crisis we face is energy, we must look beyond that, as graver implications are yet to come. The increase at the pumps and light bills is just the tip of the iceberg if oil prices continue to remain over US$100 per barrel. The real problem lies in the threat to global economies, which could lead to further social unrest around the globe, as higher energy costs translate into higher commodity and food prices also. This is at a time when unemployment levels are still relatively high and disposable incomes have declined considerably.

The Jamaican economy will no doubt have to be propped up by government spending, for example the JDIP and PIOJ Growth Inducement Strategy. While I advocated this for a while, as it was clear as day it would be needed, my only caution is that monies be spent wisely to ensure maximum sustainability or else we find ourselves chasing our tails again.

2011 is shaping up to be a difficult year for consumers, businesses, and the government. Already we are seeing that government will have to support the economy, as private capital will be very cautious in this environment. The fact is that businesses follow consumer expenditure and all indicators are that disposable income levels will be hit even further this year. The signs include increases in flour and baked products; increases by JPS, NWC, and the knock-on effect on other products; increases at the gas pumps; and a struggling global economy.

If you look at the recent major spending in the economy, and expenditure to come, they include (i) Falmouth Pier; (ii) JDIP work; and (iii) PIOJ Inducement Strategy. These are all government expenditure and are what the economy will have to continue to rely on in the short term. The main challenge with this is going to be the bureaucracy and the time it will take for the funds to be rolled out, and therefore it may not provide the greatest value added because of that.

It is clear therefore clear that the country and government are going to face challenges. The government in particular will be faced with the dilemma of soft revenue (because of a decline in disposable income), unemployment, and reduced company profits, and the fact that it has to be the primary driver of expenditure in the economy. So while the prudent thing seems to be to reduce the tax burden to drive economic expenditure, they are going to be faced with increased spending demands and weak revenue. So the million-dollar question is how to successfully juggle these demands versus what is needed, as it is going to be very difficult.

My own view is that there is no alternative but to programme further value-added loans in order to accomplish some form of vibrancy in the economy while keeping the wheels of government moving. Because I had expected this would happen I was calling from last year for greater stimulus spending from the government, as today there would be a reduced need for government spending.

I don't think, however, that anyone expected such a rapid rise in oil prices, which has also hastened the need for government expenditure. The immediate challenges we face continue to be energy and food, and should be the target of much of the expenditure to reduce costs to the country.

Ineffective Strata Commission

Since my article last week I have received much feedback to say that although my general thoughts about the strata commission are correct, it is actually much worse. An example was used that if someone owed maintenance fees of $250,000 for two years (assuming monthly maintenance of $12,500 ) and refuses to pay, then to access the recovery provision under the strata act through sale, you not only have to pay the $5,000 before the commission will talk to you but have to get two valuations on the property (approximately $100,000), advertise (approximately $50,000) and then wait at least three months before any action can be taken. So at the end of the period the corporation would have paid $155,000 to collect a $250,000 debt and would have to wait at least six months before they could recover (between the three-month waiting period and period to close the sale).

So my question then is, what value do Strata plans get from registering with the commission, as by the time one collects the debt the corporation is bankrupt and the property is run-down anyway. The Act is therefore a bigger burden to the corporation than it is to the delinquent owner. But as the often quoted saying goes: "The man who plays by the rules gets shafted". Welcome to Jamaica.

And understand this: the Strata corporation has no choice but to register with the commission, as it will be in breach and fined if it does not. Further, if it does not abide by the Act then it can be fined significant sums, which it will be unable to pay as it cannot collect maintenance.

My recommendation is that the government should suspend any requirement for Strata plans to register with the Commission and change the Act to conform more with the objective of protecting Strata properties. The fees paid already would be carried forward until the first year after the appropriate amendments. Otherwise this is nothing more than an unjust tax.

So the motto for the Strata Commission should be, "Contributing to the demise of strata properties....for a fee, of course".


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