Fri | Dec 14, 2018

Editorial | Why that bauxite deal needs explaining

Published:Sunday | September 23, 2018 | 12:00 AM

The Government ought not to find it unreasonable, or ascribe partisan motives, if people question, as has the political Opposition, the logic and efficacy of the taxation deal that it has locked itself into for the next quarter of a century, with the bauxite-mining company, New Day-DaDa Holdings.

Indeed, the questions being aired are similar to those raised by this newspaper two years ago when the Holness administration presented the outlines of a memorandum of understanding with New Day-DaDa, to which we were offered no satisfactory answers. That MOU has now been turned into a formal contract. In the circumstance, it is urgent that the Government explain its strategic thinking on the matter and assure stakeholders that it hasn't opened itself to the moral hazard of having to make similar concessions to the other bauxite/alumina companies operating in Jamaica.

For more than 40 years, since Michael Manley's government implemented the scheme in 1974, Jamaica's default arrangement for taxing bauxite companies has been a production levy. The tax is at a rate of 7.5 per cent of the realised price for alumina, but with a base of US$5 per tonne of bauxite mined.

The system makes sense. Bauxite is a finite resource. This upfront tax is a way of ensuring that the country earns from its exploitation before its depletion. Further, at the time of its imposition, it allowed the Government to get around the transfer-pricing schemes transnational companies were believed to have employed to cause their Jamaica operations to record little or no profit, from which the country might suffer. Returns from bauxite were via royalties.

 

HISTORICALLY FLEXIBLE

 

The logic of the levy notwithstanding, Jamaica's governments have been historically flexible in its application. They have frozen or lowered it during periods of extreme market stress, or to encourage investment. But these arrangements were never for 25 years, as is the one with New Day-DaDa, the successor to the mining rights that were held by Noranda Holdings, the American company that went bankrupt in 2016.

Insofar as it has been sketched to the public, under this agreement, the firm will pay the higher of a levy of US$1.50 per tonne of exported bauxite - 30 per cent of the normal floor rate - or 17.3 per cent of EBITDA - earnings before interest, taxes, depreciation and amortisation - from the combined operations of its Jamaica mines and its alumina refinery at Gramercy on the US Gulf Coast.

As we noted two years ago, the profit-sharing arrangement is, on the face of, potentially attractive - if Jamaica can be assured of real transparency around the business' income and costs and can avoiding the potential pitfalls of sleight-of-hand pricing. Further, while we appreciate that levy adjustments may be employed to help boost recovery after exogenous shocks - such as the Great Recession of a decade ago that slashed levy earnings from J$5 billion in the 2007/2008 financial year to less than half a billion dollars in 2010/11 - the 25-year concession afforded to New Day/DaDa appears excessive. A generation is a time period in which there can be several cycles of boom and bust.

Indeed, alumina prices, which tumbled to below US$200 towards the end of 2015, have enjoyed a strong recovery, reaching over $700 a tonne earlier this year, on the back of American's imposition of sanctions against Russian associates of Vladimir Putin, including Oleg Derispaska, the owner of the aluminium company, UC Rusal, whose portfolio includes Windalco alumina refinery in Jamaica. This month, the commodity has traded in the US$630-a-tonne range.

At current prices, with the levy in place, Jamaica, according to the Opposition's calculations, would have earned US$38 million in the period since New Day-DaDa acquired the Noranda business. The Government puts the take, so far, at US$7 million. Other firms could well claim that there is nothing unique in the domestic or global environment for New Day/DaDa. Moreover, in a country report on Jamaica last year, the International Monetary Fund lamented the Government's resort to discretionary tax waivers, to the value of 0.1 per cent of GDP, to bauxite companies, saying that the move "potentially undermined the hard-earned gains from the elimination of tax incentives in 2014".

Nigel Clarke, the finance minister, no doubt, will offer a counternarrative.