Friday, January 03, 2014

Effects of crime and bureaucracy on development

AS I stated in my last article, I believe that Jamaica can start seeing positive economic and social development with the current set of legislative and fiscal reforms we are seeing. However, for this to happen in any serious way we must address the issues of crime and bureaucracy.

I see that we are about to embark on the public sector efficiency programme, and in particular the emphasis being placed on the development approval process. Also the statement from the national security ministry that there will be measures against indiscipline and corruption in the police force is welcome news. We now need to see it happen.

An aerial view of the New Kingston commercial district in Jamaica. Crime and bureaucracy is affecting the island’s development negatively, says Dennis Chung.

I want to now look at an example of the way crime and bureaucracy affect development negatively, and next week look at the possible development path if we were to address these issues.

Let us assume that as a consequence of the economic reforms (lower effective tax rate, new insolvency laws, omnibus incentive act, etc) an overseas investor decides that he wants to invest US$100 million in the cultural and construction industries. He is excited about Jamaica because of the recent good news about the performance to date under the International Monetary Fund programme, the performance of Tessanne Chin, and the recent listings on the Junior Stock Exchange.

He starts making plans to come to Jamaica, and invests quite a bit of time and money on due diligence and establishing residence here. After the due diligence and the promises by Jampro about the potential in Jamaica, and the welcome extended by authorities, he feels that this is a good place to do business.

He decides that he will set up a local company and decides to register the company and finds that it took him two weeks, and he had to get a local law firm to assist because it was not a very user-friendly process. Already having a company in New Zealand, he wonders why it took so long, when in New Zealand it took him one day. He shrugs it off as just one of those things that happen and was very pleased with the service provided by the law firm, even though he didn't think it should have been necessary.

He then starts to mobilise his people and office, and then applies for a development permit, thinking that it will take him three months at most to get approval, so that his staff and office can start construction plans. After around six months of waiting, he decides to check with the authorities to find out why it is taking so long, and is anxious because it is costing him significant sums he would not have incurred if he had known the process was so lengthy. He would have checked before, but was busy dealing with his electricity connection, which took him over 90 days to sort out. He is told that the file was sent from the parish council 60 days after the application was made and NEPA needs another 60 days to do its due diligence, so he is looking at another 30 days before it gets back to the parish council for other checks to be done.

At this time he has to think about reducing his staff complement and the size of the operations, as he cannot afford to indefinitely carry the cost without the certainty of a start date. While conversing with his auditors he finds that one of his staff members defrauded some funds and he moves to dismiss the person but is faced with a ruling from the Labour Ministry to say that he can only send the employee on paid leave while it is being investigated. Finally, it ends up taking six months, and legal fees to be represented at the IDT, which the ruling is in the employer's favour but he is unable to get any compensation for the ruling as the employee decides to drop the case just before it gets to court.

During the time that he has been waiting on the development approval, he has had to downsize his operations and rented out the premises to a tenant who has not paid any rent or the associated utilities for three months, and he is unable to ask them to leave because the law requires that commercial tenants need to have one year's notice. He has filed an action with the Rent Board, and was successful, as the Rent Board moved quickly, but the tenant got the court to allow the tenancy to continue for another six months unpaid. The investor is left with the mortgage payments, without any rent revenues.

Finally, after eight months, he checks with the parish council to see where the development approval is, and is met by an employee who says that there is a lot of backlog but if he talks to him he can see what he can do to get it to the top of the pile. Not understanding what he means the investor says he has been talking to people for the last five months, and when he finally understands, refuses to pay anyone to fast-track the process.

The result is that he eventually ends up waiting for another year to get the development approval. What's more is that he has had to explain to the tax authorities why he has filed nil returns after being in Jamaica for over a year, and why he started paying payroll taxes initially but stopped paying it, and if he has proof that he has laid off the people he once employed.

Finally, after two years, and much cost without any revenue, he starts up the operations again. When he thinks that things will now get underway he receives a call from someone who describes himself as an area leader, who says that if he pays a certain amount of money each month he can ensure that he is not affected by crime. He thought this was the role of the police, he tells the so-called area leader, and is told that it is an arrangement that most business people have in the area.

By this time, his friend who invested in another country had his business up and running three months after his application, and has been earning foreign exchange since then. The Jamaican investor is over two years into the process and all he has are costs and brushes with corruption and extortion to show.

He is now wary of the pace of expansion because of his experiences, but still chooses to press on with the operations, when he is listening to the radio and hears someone say that the private sector needs to put more capital into new investments as they are not playing their part in the development of the country.


Anonymous said...

I opened a company in Jamaica as a foreign investor two years ago and it took over 6 months.
Now my wife who is Jamaican tells me that if we want our house plans approved, the guy at the Parish council will have to draw them. But isn't that the same guy who will approve them? She said yes...
So before targeting the $100M investor, deal with the small problems first, then the bigger fish will come. Most foreign investors first come as tourist, then repeat tourist...which gives them a chance to experience real life in Jamaica over the long term and they realize the crime, bureaucracy and the time it takes to get something done. That will discourage them and they will not come back with $100M.
Plus the high cost of living and taxes are very discouraging to investors. We looked at setting up a franchise but the tax rate to import the raw materials is at 60%. So hats off to anyone who can make it! Otherwise, it will forever be an all inclusive tourist type Island which we love..

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