Sat | Aug 19, 2017

Editorial | The Babel of bauxite

Published:Sunday | March 5, 2017 | 3:00 AM

Investors, domestic and foreign, prefer to operate in an environment of certainty. The impression that a government formulates its policies on the fly, or that they are without coherence or consensus, saps confidence and is inimical to growth.

That was a problem that dogged the Holness administration in its early days, when it got its sums wrong on its PAYE reforms, when it believed that it could do a J$30-billion give-back to workers without raising new taxes. The confusion over whether or not the Government will maintain a bauxite production levy represents another iteration of this failure to think things through clearly and ensure that all members of the executive are on board before public declarations are made.

Apart from the example of the first, why this development is particularly egregious is that four months ago, at the Government's approval of the acquisition of Noranda Holdings' bauxite operation in Jamaica by an outfit called New Day/Da Da Holdings, this newspaper called for clarity and warned of the possibility of creating a moral hazard with other firms over the levy.

"... There is the danger of other firms asking for the same treatment, even claiming it as an entitlement," we said.

Essentially, Jamaica's bauxite production levy, in place for more than 40 years, is a tax on the export of the ore, or, in its refined form, alumina, whose value is indexed against the market price of the commodity. It was introduced by the Manley government of the 1970s as a way around the transfer-pricing regime of the multinationals of the day and to earn more than the small royalties then paid by the firms. Over time, it has contributed more than US$4 billion to the national coffers, including during this fiscal year, J$2.8 billion.

more than three decades

For more than three decades, the floor rate of the levy has been US$5 per tonne of bauxite, but from time to time, based on market conditions, it has been adjusted, or calculated as a combination of the levy and taxes on profit. What was different with the deal with New Day/Da Da was that the Government would either pay a levy of US$1.50 per tonne of bauxite and 17.33 per cent of EBITDA from its bauxite-mining operations in Jamaica and its alumina refinery, whichever was greater.

That is a potentially lucrative deal, except for the fact that Jamaica would be locked in for a quarter-century, during which there are likely to be several business cycles, including some that could cause the country to forgo significant earnings. Further, it seemed to this newspaper that other companies that now paid the levy, or contemplated doing so, would ask for a similar deal.

Unfortunately, the Government never responded to our call for an explanation of the analyses that informed its decision.

Last week, however, at the observation of the political Opposition that there were no projections of earnings from the bauxite production levy on the revenue estimates for the new fiscal year, Finance Minister Audley Shaw confirmed that the scheme was being suspended for five years. He should know. Indeed, the early projections for earnings from the bauxite sector in the estimates are for J$675.24 million in royalty payments.

Except that Minister Shaw has been contradicted by the minister with responsibility for mining, Mike Henry, who insisted that a levy is projected at a rate of US$1.5 a tonne and that 2.5 million tonnes of ore will be shipped this year.

On the absence of a projection of levy earnings in the Budget documents, Mr Henry said: "I am expecting all of that to be adjusted as the substantive minister (himself) speaks to what the reality is."

That is the making of Babel!