Oil: an example of our inaction

ONE of the things, it seems, that governance is famous for in Jamaica, is doing nothing. We have heard the many expressions that we love to study everything, and seem to do nothing. Hence we have many reports from commissions of inquiry, and other committees, just sitting down and gathering dust. We also have a tendency to call for studies on things we have already studied. It would be interesting if an investigative reporter did a piece on all the commissions of inquiry we have had, and compared the recommendations against what has been implemented.

The success of anything I can think of, even academic studies, is to be found in the practical use, or put another way — the implementation. This is one reason why we have not been able to move forward as a country, as we are caught up in too much rhetoric and arguments as to why something can't happen. This is a characteristic of our bureaucracy, which does not encourage risk and reward, but rather encourages inaction for fear of the consequences.

This is also a characteristic of our business environment, where if someone fails in an attempt to start a business, he/she is faced with ridicule and punishment, rather than encouragement. Because of that consequence, persons will hold on unrealistically to a failing business, incurring debt and more inefficiency, rather than admit failure. And this ridicule is not only in our social arena, but also our legislation (like our bankruptcy laws), which does not encourage innovation and reinvention like in the US. So failure is not accepted as a route to success, and so many persons either do not take risks and innovate, or incur more losses than necessary in order to avoid failure.

One example of our inaction which as a result has cost us significantly, is our energy use, and more specifically oil. We have had an oil crisis since the 1970s, and have failed to do anything about it. More recently it has threatened, since the turn of the century, to destroy our economy, and is winning the battle.

I did a search on "oil" on my blog, and saw where articles I wrote about the threat of oil were as follows:

* July 2006 - "Oil: Jamaica's main external threat";

* Feb 2008 - "Oil: still Jamaica's main external threat";

* March 2008 - "Where will oil go?";

* August 2008 - "What price for oil?";

* June 2009 - "Jamaica's balance of payment challenge";

* March 2011 - "Oil and food price threats";

* March 2011 - "Energy again"; and

* July 2011 - "Jamaica's continuing energy crisis".

All these articles referred to the major threat oil prices pose to the Jamaican economy. Yet the amount of oil we consume today is the same as we did ten years ago, which is approximately 98 per cent of our energy needs. In fact, the last time that any significant effort was made to improve our energy efficiency was the establishment of Wigton Wind Farm in Manchester.

This is why I am 110 per cent behind the energy minister in his effort to reduce energy costs by 40 to 60 per cent, and to also bring competition to the distribution of energy. The only action that will cause sustainable reduction in energy costs is competition. No goodwill effort from any company, while still a monopoly, will help.

One of the things that we must do is create a vision of where we want to go, and so I was surprised at those who said that the minister's idea about reducing the energy cost to consumers by 40 to 60 per cent in four years is unrealistic. This is especially as I have seen this sort of reduction in my consumption since using solar equipment at home. I guess the DNA of some is just to oppose. My argument with the minister's proposition would be that four years is too long and that consumers can start seeing that sort of reduction in six months, not based on a hypothetical argument but on my own experience.

The other argument, which is really just another example of our inability to think long term and outside of the box, is that it is too expensive to install a renewable energy solution. So the result of that thinking is to continue paying the current cost. The fact that I am an accountant tells me that if you intend to use electricity for the rest of your life, then it makes sense to borrow the money and make the capital investment, which has a payback during your lifetime, and certainly within seven to eight years. Some people would prefer to go borrow money to buy an expensive car, which increases costs instead of reducing them.

It would even suit you to pay an amount of $10,000 per month forever, if it reduces your living cost by $12,000 per month, as you would really be saving $2,000 per month.

My own view is that it would be to the medium-term benefit of the government accounts and economy, if the government were to assist persons with establishing renewable energy solutions with the money from the GCT on electricity.

There are other solutions that can take effect in six months, with the proper will and implementation, that could significantly reduce our oil import bill, which would also assist in stimulating the economy. The irony of this is that it does not actually require any new funding to come into the economy. All it requires is a deliberate will to implement certain structures and discipline.

At 37 per cent of our import bill, oil certainly remains the most significant external threat to our economy, even more than when I wrote the first article in July 2006.

Will we still be discussing this issue in another six years? If we rally behind the initiatives of the minister and ensure that they are pushed through, we could see the long needed relief. If, however, we adopt the approach of someone who told me last year that I was wrong that oil prices were going back up, but would go back down under US$80 per barrel, then I may be able to resubmit this article for printing in six years' time.

A logical approach to economic and social development

There has been a renewed round of debate, following the supplementary estimates and PSOJ tax reform proposal, on what policy prescriptions are required to move the Jamaican economy forward. This local debate has been happening at the same time as some international economists and financial commentators have been espousing the benefits of the Keynesian approach of the US versus the fiscal austerity measures of Europe. Even Mervyn King, after the UK went the austerity route some two years ago, in the ECB's February Inflation report is quoted as saying that the current fiscal austerity measures will stymie growth.

Two of the limitations we suffer from in Jamaica are short-term and extreme thinking. In the first case we always seem to be thinking about the short-term fiscal and economic solution, which is why we seem to be constantly making sacrifices, and in the second case we condemn the for Keynesian approach as if it is mutually exclusive with fiscal discipline. I don't think anyone who argues for stimulus is saying that we should be fiscally irresponsible and spend in a scattershot approach. Rather, just as Obama did in the US, we are saying that specially designated stimulus funds should be targeted towards employment, for those with the highest propensity to spend, and also at value-added projects.

Our failure to do so will result in social and comparative advantage deterioration. My own view is that Greece will sink further with these fiscal austerity measures, because fiscal austerity doesn't address the underlying problem, similar to Jamaica's of the balance of payments. It is also a blinkered way of thinking to speak about improving the fiscal and economic situation, without giving much consideration to the social realities.

If we therefore truly want economic and social development, we must look at not only the inhibitors, but also how best to utilise our resources, present and to future. This simply means doing the proper financial analysis to determine the greatest value added, and can be seen as a SWOT analysis focus where we build on strengths / opportunities and eliminate weaknesses / threats.

One of the first things to understand is that our blinkered focus on the fiscal accounts over the years is one of our primary problems. The most important measure of our economic (and ultimately social success) is the balance of payments, and more specifically the trade deficit. Over the years, however, we have ignored this and have instead chose to borrow money to close that gap, rather than address the underlying problems of international productivity and comparative advantage. This is fundamentally what has caused our debt crisis.

So if we take a careful look at our balance of payments we will see where oil and food make up 37% and 10% of imports respectively. Isn't it therefore logical that if we focus on reducing these, and substituting them with local solutions, that this will provide an automatic boost to our trade numbers? So when the Energy Minister speaks about competitiveness in energy and putting solar solutions at home, why is the first reaction that poor people can't afford it? It is this inability to think outside the box that keeps us poor. I support 100% of what he is saying because I had solar equipment installed two years ago and my electricity consumption is 50% of what it used to be. Increasing electricity rates are no longer a problem for me. Isn't it therefore cost effective to get a loan from NHT or a financial institution, such as RBC, to install the equipment?

Dealing with food and oil imports by even 30% to 50% will eliminate our trade deficit and be a positive for the fiscal, which is a symptom, not a cause.

It is also very important for us to understand that investments in capital infrastructure, around our areas of comparative advantage, such as tourism and agriculture, are critical if we are to remain competitive. So while I understand the need to cut the current capital expenditure budget in the fiscal accounts, we must ensure that we increase the capital spend around our areas of comparative advantage; otherwise we will lose the competitive edge and push our balance of payments further into decline. I happen to think also that the renewable energy solution is a new area of comparative advantage for us.

We also need to realistically focus on policy reforms that can take place in the short versus medium term. I have always maintained that (i) public sector rationalisation, the way it was approached, was never going to happen in the short term; and (ii) pension reform is a medium-term project. We fool ourselves into unrealistic projections when we project outcomes way before they are possible.

So the only realistic short-term project now is tax reform (and some legislative reform), which needs to be approached in a way that drives economic growth, and provides the spending stimulus needed for the economy. This is why I am in favour of (i) reducing, with a view to eliminating, direct tax at the PAYE level; and (ii) implementing a sales (as opposed to value- added) tax on all items and services, while at the same time reducing the consumption tax rate and having more targeted welfare funds to persons below a certain income category. Many might not agree, but my responsibility is to provide the most logical financial solution.

Very importantly also, we must take steps to improve law and order, because if we do so then areas of crime like murder, praedial larceny, and tourism harassment will decline. On the other hand a focus on one specific area of crime, without a general law and order focus, will not achieve the desired long term-effect. I again support the initiative of the Security Minister in this matter. We must now move further and address the "in your face" disciplinary issues of traffic and night noise. No one wants to live and raise families in an undisciplined and boisterous society.

What we must understand is that Jamaica can never truly move forward unless we make the citizens, and consumers the centre of development. After all, isn't this what a society is all about?