AS a result of the numerous responses to last week's article, I thought it would be good to do a part 2. This is also based on my very firm belief that a focus on the efficient use of energy could be the single most beneficial economic activity for Jamaica. As I indicated, a mere 30 per cent reduction in our energy bill could eliminate our trade deficit within four to five years, and so a focus on a comprehensive energy policy would be most beneficial to the country.
In response to a comment from Omari last week:
(1) I agree that it would be more beneficial to focus on an overall energy project but one could argue also that as long as the cost of even a small project is less than the operations it makes sense. Prudence would dictate, however, that the most effective approach is used, as the rest of the world is exploring energy options and if their projects are more cost-effective then although our own may cost less than what currently exists, relative costs will be higher; and
(2) The payback period is typically six to eight years, but the way I implemented the system will cut my payback in almost half. Remember it is not just access to capital that is important but how it is used, which is why professional financial assistance is always prudent.
One other person indicated to me that he used grid-tie technology where the system runs on solar entirely from panels, but the excess produced by the panels not used is pushed back to the grid by turning the JPS metre back. He therefore indicated that he just used JPS at nights and does not invest in batteries. Apart from being illegal, if the numbers are worked out then there is no real benefit as what you push back in the day you use (and more) at nights. A battery backup would allow less JPS use and increase in the payback period, while having the convenience of electricity at night if the JPS supply goes. I guess the emotional thought of beating JPS has trumped the financial logic.
There are two other issues I wanted to address. These are to do with the way in which GCT is computed on the JPS bills and look at what may be an overly optimistic oil cost projection in the IMF projections. The latter is very important because oil is such a substantial cost to the country.
JPS GCT
The first thing is that the JPS is known to estimate many of its monthly bills. Therefore if they are going to charge GCT on consumption above 200KWH per month, then effectively what they are doing is levying estimated tax assessments on the public. This leads to another concern with the computation of the GCT component, and the JPS (and OUR) may want to tell the public how they will deal with what could be an overestimation of tax.
The table above shows two scenarios, based on an actual consumption over three months of 650KWH. In the first case there are two estimated bills of 150KWH each, based on prior consumption patterns, and in the second case three actual readings. The assumption of a $30 per KWH is used, and shows in case 1 where GCT comes out at $450, while the actual readings show GCT of $150, which is what the customer is actually liable for. So because the JPS does not provide an accurate reading per month the consumer is overtaxed by 200 per cent.
The question therefore is how the consumer is going to be protected against this possible overcharge of tax on their bill, which effectively is an overestimation of tax. The truth is that unless the JPS does actual readings each month then it cannot guarantee against this happening. The other policy that needs to be understood is how they will adjust GCT charges on bills that are erroneously sent to customers, as it is very easy to misread the analog metre.
There needs to be some policy direction from the OUR and JPS on this. I would hope that the OUR gave some thought to this. It doesn't affect me, though, as my consumption is less than 200KWH per month.
IMF oil projections
The other concern is the oil price projections in the IMF document, which projects oil price to average (barrel) - US$77.30 (2010/11); US$79.90 (2011/12); US$81.50 (2012/13); and US$83.40 (2013/14). These prices seem to be optimistic given the global energy realities as outlined by the International Energy Agency (IEA) and that oil is currently close to $80 per barrel ahead of 2010/11 and with the world still facing economic challenges.
The IEA states the following:
* Oil demand and price will peak in 2025, and until then oil prices will be on the increase. China and India will account for the steepest increases;
* The greatest demand increases will come from coal, followed by oil and then natural gas;
* Oil supply into 2030 will be mainly from "Fields yet to be developed and found". It goes on to state that the cost of finding oil continues to rise (a higher break-even price) and that there is a declining investment in new oil fields (declined by 19 per cent in 2009); and
* Demand is increasing at a faster pace than supply. Output from existing fields will drop by almost two-thirds by 2030. IEA states "Additional capacity of around ...four times current Russian capacity, is needed by 2030 -- half to offset decline at existing fields and half to meet increased demand".
These arguments also do not include any geopolitical concerns that may arise. It seems very likely therefore that next fiscal year oil could average between US$80 and US$90 per barrel and increasing until 2025, or until new sources of energy are found. The problem is that trends show a steady reliance on fossil fuels.
The question then is how we address our own energy policy going forward. The Green Paper on Jamaica's Energy Policy states that energy use is approximately 98 per cent from fossil fuels and the main users are bauxite/alumina processing (36.6 per cent); Electricity generation (24.7 per cent); and Road transportation (23.5 per cent). These three account for 85 per cent of Jamaica's energy use.
What is needed is an energy policy that targets these areas in specific ways, so that if we can secure policy-based loans to reduce usage by 30 per cent to 40 per cent by 2014, we could save up to US$791 million in 2014 alone. But this needs a multi-policy approach. For example, the bauxite/alumina sector should be looking at coal, wind and hydro; businesses and residences should be looking at solar and wind; and road transportation should be looking at investing in bio-fuels as well as providing more investment to develop the infrastructure and discipline in the public transportation system.
Although many think that natural gas is the way to go I am not a big fan of that approach. My own belief is that based on the demand-supply equation, coal will continue to be a cheaper option, and that coal technology will get better and provide cleaner coal. But that is just my own view based on the cost versus the financial benefit.
What is clear, though, is that the price of fossil fuels will continue to increase over the next 10 to 15 years, and as a poor country we will be negatively impacted. The IEA is very clear on its projections and we should make every effort to ensure that we use some of that sunshine we sell to tourists.
Friday, March 19, 2010
Friday, March 12, 2010
JAMAICA'S ENERGY OPPORTUNITY
WHENEVER I am interviewed about the Jamaican economy, I usually come to the conclusion in my book that the only way for Jamaica to come out of our present downward spiral is to make a fundamental structural shift in our economic and social arrangements. The truth is that there is no other way, as illustrated by a house that is built on a structurally weak foundation. Even if one were to put a fresh coat of paint on the house every year, the foundation would still remain very weak and susceptible to damage.
When I look at the projections in the recent IMF programme, it gives the impression that much of what will be done is tinkering with the numbers and hoping to recover based on the same structural foundation on which we have been unsuccessfully trying to develop the country over the past 20 years.
Fiscal sustainability
In fact it seems as if the main focus by the IMF was to ensure fiscal sustainability so that they can get their money back, and there was not much concern for the development of the Jamaican economy. One cannot really blame the IMF for this myopic view on the economy, as all they really are is a bank to the world. And we all know that the main concern bankers have is to get a return on investment, no matter how caring the marketing sounds. All you have to do to find out is not be able to pay the credit card or loan they throw at you when you are debt-free.
A review of the numbers projected in the IMF paper shows that the fiscal budget balance is projected to move nicely from minus J$106.7 billion in 2009/10 to minus J$10.8 billion in 2013/14. The primary balance is projected to move over the same period from J$66.9 to J$143.4 billion, implying lower real expenditure in the Jamaican economy. But at the end of the day this will assure the IMF repayment.
When one looks, however, at the balance of payments and macroeconomic projections, it shows a difficult ride for the economy, as apart from the lower spending, real growth is projected at an accumulated 2.9% between 2009/10 and 2013/14, or an average of 0.58% per annum. Much of this is caused by our having to pay back for the loans we have been living off in the past.
But one must also examine projections to determine if we can always do better, and my own cursory examination of the numbers leads me to believe there is a significant opportunity for improvement. Unlike the IMF I am looking at the numbers from the point of view of economic development, and so I will see a different path. The irony is that this may even provide greater security for the IMF also.
The table shows extracts of the balance of payments, GDP, oil prices, and exchange rate assumptions of the economic programme. The exchange rate projection is arrived at by taking the 2008/9 GDP from the MOF website, and computing J$ GDP using the nominal GDP growth rate (IMF numbers), and dividing the total by the US$ GDP in the IMF numbers.
The numbers clearly show the following:
* Trade balance is expected to worsen, even with exports growing more than imports. Implication is that not much change is expected in the import content. This is an area of opportunity to be explored.
* The current account balance improvement is heavily dependent on growth in tourism and remittances. The implication is that the economy will remain highly dependent on services and not see much productivity increase (evidenced by remittances, fuel, and import content).
* More importantly, and an area of great opportunity, is that fuel imports are expected to move from 14% to 15.4% of GDP between 2009/10 to 2013/14. This stands out in the projections, and implies that we are projecting a more inefficient use of energy, even though we don't seem to be projecting any real growth in manufacturing, implying most of the use is consumption. This situation I think will be worse than projected as the assumption of oil prices seems overly optimistic. As an example, current oil price (before any real global recovery) is over US$81 while the IMF numbers project an average of US$77.30 in 2010/11.
All about energy
My own view is that focus on more efficient energy remains a significant opportunity for Jamaica. If we were to create energy projects and investments that decrease our energy use by 30 per cent on average, this could create (1) an import bill savings that would wipe out the current account deficit by 2013/14; (2) greater efficiency in manufacturing and service delivery, which could improve our international competitiveness and export earnings; (3) increase available opportunities for investment and ultimately fiscal revenues; and (4) act as a stabilising force for the exchange rate, positively impacting inflation and interest rates. This would certainly start a positive cycle of development.
The question may be asked about the possibility of this happening, and I use my own example. I have been for a while thinking of using solar energy at home, and after doing the research finally did so recently. This is especially as I expect energy costs to increase as a result of oil price increase, devaluation, and the GCT on JPS use over 200 KWH. Of course you have to ensure that you use a company which understands the technology and will be around, as one of the first companies I was looking at went out of business and the costs were higher based on the configuration. You also have to work out the cost-benefit analysis, which I did myself. The company I settled with, which I continue to work with, is Gormann Corporation.
Based on how I implemented and my cost-benefit analysis I expect a four-year payback period. And this does not include the new GCT charges or future increases. My JPS energy consumption fell by over 50 per cent immediately, and more importantly there is no maintenance, and the panels last up to 40 years, and batteries 12 to 14 years. What has not been factored in my computations is the cost benefit of no power outage or risk of equipment damage from JPS even if Jamaica were to see a six to eight-year payback period from the energy bill that could positively impact our future development.
Using this approach, if the government were to secure policy-based loans for cheaper energy projects, it would have the benefit of (1) stimulating jobs and the economy during and after the implementation period; (2) make Jamaican products more competitive; and (3) a 30 per cent import bill savings would reduce energy as a percentage of GDP from 14 per cent to 10.8 per cent. More importantly, it would also have the effect of improving standards of living.
A portion of those loans should be made available for customers with a good payment history at the JPS, to access security-free low interest loans, and those with a poor payment history to require security. An improvement of the public transportation to encourage use over private transportation would also have a significant positive effect on the energy bill, and is an argument for greater subsidy and investment in public transportation. In implementing these projects, however, the objectives must be very clear and the implementation carefully managed to meet the goals.
This illustrates that a focus on energy can have substantial benefits for the country. Maybe the IMF NEEDS to sharpen its pencil and re-examine the projections, as a focus on development rather than just monetary juggling will not only benefit the county but add greater security for their own payback.
Friday, March 05, 2010
A model for development
OVER the past two to three years, I have been involved with two organisations that one can deem successes in their own right. The first is the Jamaica College (JC) School Board and Foundation, led quite ably by the Hon R Danny Williams, and the second a board I have chaired since 2007, and which was recently reported on, Jamaica Ultimate Tyre Company Limited (JUTCL).
In the case of JC, I have had the privilege of working with a group that includes old boys (or they would prefer the term 'past students' to hide their chronological ages) and staff who have been nothing but focused on the development of the institution. At the helm of the operations has been a thoroughly devoted principal, Mr Ruel Reid.
High levels of indiscipline
When the Danny Williams board took over at JC, we were faced with high indiscipline and poor academic performance. Today, I am proud to have played an active role in the transformation of JC into one of the more sought after schools and a place where I would recommend that any parent send their child based on the current development plans. Of course there are problems, but this is mainly as a result of the societal influences. JC is truly living up to its motto, Fervet Opus in Campis: Work is burning in the fields.
In the case of JUTCL, when the three-man board took over the company in 2007, we were making a loss of approximately J$1 million per month. Today, through very strategic policy and operational decisions, we are making a profit of some J$1 million a month. Other decisions are also being taken by the board and management to improve on that profitability in short order. One thing we are very proud of is that we do not get any subsidy from the Government and are current with all our taxes and regulatory requirements. A source of pride for me, also, is that we hold board meetings every six weeks, which averages two hours per meeting, and we restrict refreshments to sandwiches.
I think that both cases hold an invaluable lesson for Jamaica's own development, and are consistent with the view for development I referred to in my book. The path to development is conceptually the same for any institution and despite their differences, the organisations mentioned above both took conceptually the same approach to development.
In both, there was some amount of inefficiency and indiscipline to deal with. The first task in both cases was to carefully assess what the challenges were, and specifically put in place actions that would address those specific problems. In both cases also, the leadership of the organisation was the first thing that we looked at, as this is the most critical part of any transformation.
Similarly for Jamaica, my own view is that the main problem we face is one of the social arrangements and the respect of fundamental human rights. I also believe that Dwight Nelson is suited for the job of security minister, given what I know of his focus, and also the changes I have seen taking place in the police force.
Once the leadership was determined to succeed at both organisations, the next task was to ensure that the supervisory level was in place, to support the policies of the board and the operational objectives of the CEOs. In the case of JC, the principal, with the support of the board, made sure that the teaching staff was disciplined and efficient. This is important as many schools seek to deal with their problems by disciplining the students and ignoring the indiscipline of the teachers: This is a receipe for failure. The same thing was done for the JUTCL, ensuring that the CEO had the support needed to put the action plan in place.
Ministers responsible for policy
Similarly, as a public we must understand that ministers are responsible for policy direction but must ensure that the operational leadership is efficient and focused on the policy objectives, and they must have the latitude to ensure this or else they will ultimately fail. In my case (JUTCL), I continue to work with a minister (Mike Henry) who is very focused on profitability, efficiency, and service and who receives support from the Ministry.
The next task was to set specific operational goals and define the results we wanted to achieve, and by when. In the case of JC, the board and management designated targets for funding, academic, sporting, and development objectives. Timelines were placed on these, and three years later, I can say that most of these targets were achieved. In the case of JUTCL, we recognised that the pressures faced by JUTC would weigh us down if we continued to have them as our main customer, and so took a strategic decision to ensure within one to two years ensure that most of our business came from commercial customers, which we achieved in the timeline set.
For Jamaica, we need to ensure that the macroeconomic programme that we set out is achieved. There can be no wavering, and the risks must be carefully analysed and managed along the way. The biggest challenge the fiscal accounts continue to face is the revenue side, and this can only face further challenges if there is any attempt to raise new taxes. This is supported by the fact that the January 2010 revenue variance from budget is the largest for the fiscal year, even with the December 2009 tax package. The policy direction is correct, but the risks need to be carefully managed.
One very important operational activity was that we examined every single decision as a stand-alone. No decision was taken just based on the fact that we had excess in the system and therefore could afford to do it. It was measured against the objective, and if it did not add any value it was dropped. Certainly in the case of JUTCL, where the objective was profitability and provision of the best retread tyre, every decision whether to replace or upgrade machinery was supported by a cost-benefit analysis. If it was profitable then we would start the process. If not, then it was dropped until it could be proven so.
Of course, at any time an organisation is subject to risks and external forces, and the fortunes can change. What we must do is ensure that we manage the risks that we can control and those we can't, then we have to hope for the best. If, for example, energy costs go through the roof, then the operations of the JUTCL would be highly compromised.
Most important, though was the commitment of the personnel at the organisation. In the case of JC, the support of staff, students and old boys was critical to the success they see today. In the case of JUTC, the staff played an invaluable role. In 2008, when we recognised that the recession would affect us, and we were still making a small loss at the time, we went to the staff and asked them to produce the same amount of work in four days that they did in five. So we closed the plant on Fridays, to reduce overhead costs. We could not have done it without them and so the buy-in is extremely important.
This is the final point I want to make: if Jamaica is to move forward, then the buy-in from all citizens, not simply JLP or PNP, is important. Again I say that this is one ship, and both ends will go down or rise together. So everything must be done to ensure that all share in the vision for development, and not only those of us who are involved in the 2030 objective. The best way to do so is to ensure that the Jamaican citizen is at the centre of any developmental objective for the country.
In the case of JC, I have had the privilege of working with a group that includes old boys (or they would prefer the term 'past students' to hide their chronological ages) and staff who have been nothing but focused on the development of the institution. At the helm of the operations has been a thoroughly devoted principal, Mr Ruel Reid.
High levels of indiscipline
When the Danny Williams board took over at JC, we were faced with high indiscipline and poor academic performance. Today, I am proud to have played an active role in the transformation of JC into one of the more sought after schools and a place where I would recommend that any parent send their child based on the current development plans. Of course there are problems, but this is mainly as a result of the societal influences. JC is truly living up to its motto, Fervet Opus in Campis: Work is burning in the fields.
In the case of JUTCL, when the three-man board took over the company in 2007, we were making a loss of approximately J$1 million per month. Today, through very strategic policy and operational decisions, we are making a profit of some J$1 million a month. Other decisions are also being taken by the board and management to improve on that profitability in short order. One thing we are very proud of is that we do not get any subsidy from the Government and are current with all our taxes and regulatory requirements. A source of pride for me, also, is that we hold board meetings every six weeks, which averages two hours per meeting, and we restrict refreshments to sandwiches.
I think that both cases hold an invaluable lesson for Jamaica's own development, and are consistent with the view for development I referred to in my book. The path to development is conceptually the same for any institution and despite their differences, the organisations mentioned above both took conceptually the same approach to development.
In both, there was some amount of inefficiency and indiscipline to deal with. The first task in both cases was to carefully assess what the challenges were, and specifically put in place actions that would address those specific problems. In both cases also, the leadership of the organisation was the first thing that we looked at, as this is the most critical part of any transformation.
Similarly for Jamaica, my own view is that the main problem we face is one of the social arrangements and the respect of fundamental human rights. I also believe that Dwight Nelson is suited for the job of security minister, given what I know of his focus, and also the changes I have seen taking place in the police force.
Once the leadership was determined to succeed at both organisations, the next task was to ensure that the supervisory level was in place, to support the policies of the board and the operational objectives of the CEOs. In the case of JC, the principal, with the support of the board, made sure that the teaching staff was disciplined and efficient. This is important as many schools seek to deal with their problems by disciplining the students and ignoring the indiscipline of the teachers: This is a receipe for failure. The same thing was done for the JUTCL, ensuring that the CEO had the support needed to put the action plan in place.
Ministers responsible for policy
Similarly, as a public we must understand that ministers are responsible for policy direction but must ensure that the operational leadership is efficient and focused on the policy objectives, and they must have the latitude to ensure this or else they will ultimately fail. In my case (JUTCL), I continue to work with a minister (Mike Henry) who is very focused on profitability, efficiency, and service and who receives support from the Ministry.
The next task was to set specific operational goals and define the results we wanted to achieve, and by when. In the case of JC, the board and management designated targets for funding, academic, sporting, and development objectives. Timelines were placed on these, and three years later, I can say that most of these targets were achieved. In the case of JUTCL, we recognised that the pressures faced by JUTC would weigh us down if we continued to have them as our main customer, and so took a strategic decision to ensure within one to two years ensure that most of our business came from commercial customers, which we achieved in the timeline set.
For Jamaica, we need to ensure that the macroeconomic programme that we set out is achieved. There can be no wavering, and the risks must be carefully analysed and managed along the way. The biggest challenge the fiscal accounts continue to face is the revenue side, and this can only face further challenges if there is any attempt to raise new taxes. This is supported by the fact that the January 2010 revenue variance from budget is the largest for the fiscal year, even with the December 2009 tax package. The policy direction is correct, but the risks need to be carefully managed.
One very important operational activity was that we examined every single decision as a stand-alone. No decision was taken just based on the fact that we had excess in the system and therefore could afford to do it. It was measured against the objective, and if it did not add any value it was dropped. Certainly in the case of JUTCL, where the objective was profitability and provision of the best retread tyre, every decision whether to replace or upgrade machinery was supported by a cost-benefit analysis. If it was profitable then we would start the process. If not, then it was dropped until it could be proven so.
Of course, at any time an organisation is subject to risks and external forces, and the fortunes can change. What we must do is ensure that we manage the risks that we can control and those we can't, then we have to hope for the best. If, for example, energy costs go through the roof, then the operations of the JUTCL would be highly compromised.
Most important, though was the commitment of the personnel at the organisation. In the case of JC, the support of staff, students and old boys was critical to the success they see today. In the case of JUTC, the staff played an invaluable role. In 2008, when we recognised that the recession would affect us, and we were still making a small loss at the time, we went to the staff and asked them to produce the same amount of work in four days that they did in five. So we closed the plant on Fridays, to reduce overhead costs. We could not have done it without them and so the buy-in is extremely important.
This is the final point I want to make: if Jamaica is to move forward, then the buy-in from all citizens, not simply JLP or PNP, is important. Again I say that this is one ship, and both ends will go down or rise together. So everything must be done to ensure that all share in the vision for development, and not only those of us who are involved in the 2030 objective. The best way to do so is to ensure that the Jamaican citizen is at the centre of any developmental objective for the country.
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