Friday, May 26, 2017

Fake flooding


Just over a week ago, sections of the island suffered massive infrastructure and other damage as a result of torrential rains which lasted for several days. It is estimated that the direct damage caused by the floods could be in the region of $700 million, and if one were to assume GDP conservatively at $1.3 trillion, then we could easily add lost productivity that would approximate a further $1.7 billion.

This means that the cost of the rains could be upwards of $2.5 billion, and some suggest it could be as high as $4 billion.

Of course, this does not take into account the negative social impact which will result from people having to recover from tremendous personal losses.

The devastating effect of the rains, however, is no real surprise, as for many years now we have been neglecting our capital infrastructure. This neglect has been somewhat expedient, as our attempts to recover from our deep economic woes left us with little option but to reduce capital expenditure, among other things, in order to balance our fiscal accounts.

During this period, some of us warned that by neglecting our infrastructure, we were running two grave risks:
(1) incurring serious damage - as we have just witnessed, and
(2) scaring off potential investors.

But although the neglect of shoring up our infrastructure is the primary cause of the recent flood damage, the irony is that the real reason does not lie in spending copious financial resources. The real reason is the culture of indiscipline that we have developed in this country — a culture which has resulted from a serious lack of leadership by those in authority, and the fact that we fail to implement accrual accounting in our fiscal accounts.

This culture of indiscipline is reflected in many areas, but the following stand out: the proliferation of informal settlements (where an amazing 40 per cent of Jamaicans are squatting); lack of proper zoning plans and approvals for developments; and practices like incorrect disposal of solid waste, which ends up blocking our drains and gullies. As a consequence, flood rains invade homes and businesses as the water has nowhere else to go.

All of these practices are attributable to successive administrations over the past 40-plus years, and no one can take full credit for it, but all who have been in government (especially at the local government level) must accept responsibility.

Both Prime Minister Holness and Dr Phillips have recognised this, and have said so publicly, with Dr Phillips stating quite bluntly that all those who have been in government must accept responsibility.
Holness has also said that illegal construction on river banks must stop, and I think he should go further and say that illegal settlements must also stop.

The Government must now give a timeline for remedying this situation of poor local government control over planning and zoning, what measures will be put in place to prevent illegal settlements, and how our population of squatters will be properly housed.

Apart from the severe threats to the infrastructure, it is inhuman to have a society where so many people must resort to squatting. What this speaks to is a failure of governance. But I guess this is what people vote for, and so there is some personal responsibility; just as the Trump supporters must now face the consequence of lost health care and other benefits.

Although there must be consequences for people who continue to live in illegal settlements, or to make a living from illegal vending, we also have to drive policy that creates alternatives. So if we are going to tell people not to vend or squat illegally, then we must also ensure that there are properly maintained markets (again a local government failure) and available housing solutions.

So we can't, for example, proclaim with great fanfare the construction of new hotel rooms without announcing accommodation for workers, as is the case in Montego Bay.

Funds from the NHT should be used to provide housing solutions and help to grow the economy, instead of being used to support the fiscal accounts.

We also must pass appropriate legislation and regulations for the revised anti-litter law, which will see a significant increase in fines for people who illegally dispose of their solid waste. If citizens insist on this practice, then they must pay heavily for it.

The second point made about accrual accounting may not seem like much to most readers, but as an accountant, I believe that failure to do this leads us to have a false sense that our financial house and assets are in order.

Accrual accounting addresses this by making provisions such as depreciation, so that when it comes time to replace the asset, you would have provided for the full cost after its useful life. So if you buy a new car today for $5 million, and it has a useful life of five years, you would provide in your accounts for it by putting aside $1 million per year for five years, thus ensuring that at the end of the five years you have the $5 million to replace the asset. This, of course, is a simple example, as one has to consider inflation, etc.

Contrary to this though, our fiscal accounts are prepared on a cash basis, so at the end of the fiscal year, the fiscal accounts do not consider assets to be replaced or monies owed to suppliers of government.

So one way that we famously balance the budget is by (1) not spending on our infrastructure (spending less capex than budgeted), and (2) not paying vendors when they supply goods or services.

As an illustration, I went to a gas station where there was a sign reminding the staff not to accept Advance cards from the Government.

The result of not using accrual accounting gives us a false sense of security about our finances and capital infrastructure.

So in my view, the recent rains resulted in what I call “fake” flooding, because the flooding is really just a symptom of what over the years has been poor governance, or one could say “fake” leadership, which we now have an opportunity to address based on the utterances of both Holness and Phillips.

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