Wed | Aug 21, 2019

Anthony Hylton | Rebalancing the company’s balance sheet (Part 2): How to make money from SEZs

Published:Sunday | July 14, 2019 | 12:30 AM
File An aerial view of Kingston Wharves Limited. KWL has leveraged the SEZ warehouse facility at Tinson Pen to warehouse inventory while postponing customs duties.
Ambassador Anthony Hylton
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Special economic zones (SEZ) are set to reshape not just the way we do business in Jamaica but the very nature of business itself. The greatest beneficiaries of SEZs in Jamaica will be Jamaicans!

At a country level, the SEZs are about catalysing the complete transformation of Jamaica into a logistics-centred economy. At the company level, it is about changing the cost of inventory and capital equipment; adding value and moving goods up the manufacturing value chain; merging goods and services to provide a highly customised product in response to mass demand, and so much more. In short, for both country and company, it is changing the way we do business, and increasing our competitiveness, efficiency, and productivity.

As attractive as Jamaica’s SEZ fiscal benefits are, the real benefit of developing SEZs in Jamaica are not fiscal, but operational. This fact was established in Part I of this article (June 23, 2019). However, as I reflect on many a discussion I have had with both local and overseas business people in the past few weeks or so, I have to conclude that this is a concept that has yet to be fully grasped. But who can blame them given how attractive Jamaica’s SEZ fiscal benefits are to investors. These include:

Developer – the company incorporated in Jamaica for purposes of developing and or managing a SEZ:

n 0% corporate income tax (CIT) on rental income.

n Duty-free imports on building materials, equipment, raw materials, goods, as long as these goods remain in the SEZ or are re-exported.

n 0% general consumption tax (GCT) on electricity.

Occupants – the company incorporated in Jamaica for purposes of carrying out eligible business activities within a SEZ (See my previous article: ‘Is the SEZ for you?’)

n 12.5% CIT, going as low as 7.75% with certain tax credits.

n Duty-free imports on building materials, equipment, raw materials, goods, as long as these goods remain in the SEZ or are re-exported.

n 0% GCT on electricity.

As attractive as these are, it must always be remembered that SEZs are much more than mere incentive packages. Understanding this is critical to cracking Jamaica’s SEZ code and clearing a path to substantial profits.

The SEZs are a major policy tool being used in Jamaica and elsewhere to boost job creation, economic growth and development. The Government, by foregoing taxes, has incentivised local and foreign investors to develop these geographically designated, purpose built, areas that typically have trade laws that are applied differently from the rest of the country.

The real benefits of an SEZ, however, is what I call rebalancing the balance sheet. By this, I mean not just changing the way we do business in Jamaica, but changing the very nature of business in Jamaica!

Let me explain.

SEIZE THE DAY

Jamaican businesses must, as the ancient Roman saying goes: carpe diem – ‘seize the day’ in order to realize this rebalancing of the balance sheet benefit and the realisation of substantial profits. At the end of the day, the more your and other businesses understand the finer details of how SEZs can be used to create and add value, the greater the chances of making significant profits.

In Part I of this article, I introduced four scenarios to do just that. To recap these scenarios (which are by no means the only way that money can be made from the SEZs being in Jamaica), they are:

1. The opportunity to participate and supply new business ecosystems, for example, the business process outsourcing (BPO).

2. Benefiting from the inventory and infrastructure cost savings from postponement opportunities that the SEZs present, with the advent of third- and fourth-party logistics providers.

3. The cost saving represented by bringing your existing suppliers closer to you for existing manufacturers.

4. Expanding into new markets by moving up the value chain into new business areas, like moving from being a local distributor to being a regional manufacturer.

NEW BUSINESS ECOSYSTEMS

There is no question that the business process outsourcing (BPO) is booming in Jamaica! However, what a lot of persons do not realise is that most of these BPOs operate within or as single entity SEZs. The first scenario I would like to walk you through is literally providing outsourcing to the outsourcing industry. This is less about investing in a build-out of an SEZ-based BPO, and while there is nothing wrong with that if that is what you want to do, it is more about the ecosystem that has been created from the boom that is in need of constant support and one with many opportunities bubbling up to the surface.

Let’s take a typical BPO of, say, 200-400 people, just to get it up and running, there are opportunities in construction, furniture manufacturing, workstation fit-out services, etc. Once it is operational opportunities expand into security, transportation, food, day-care services, etc. But a massive opportunity, yet to be fully exploited, lies in human resources (HR) and training.

A frequent complaint of BPOs in Jamaica is finding sufficient people with the specific level of skills they require on demand. This issue hinders service level delivery, their speed of expansion, their ability to move up the value chain into the higher-valued and higher-skilled knowledge process outsourcing (KPO), and it means greater expenditure on their part for training. While the government, both the previous and current administrations, have made significant strides in providing this training, a gap still remains.

This gap is, in fact, an opportunity for the private sector to step in and provide cadres of skilled individuals ready on demand.

Let us just imagine a Jamaican company recruiting and training the best of the best engaged in contracts with several BPOs to supply this labour on demand. The BPOs would be able to concentrate and devote more resources to their core business, creating great possibilities of growth and expansion into higher-valued KPO. And the worker would be able to command much higher wages given the higher level of guaranteed quality skill sets.

This business model is also easily replicated in another area of frequent complaint by the BPO: finding quality local service providers that deliver consistent and reliable service in such things as cleaning and catering services.

POSTPONEMENT OPPORTUNITIES

Postponement, in logistics, is a business strategy that maximises possible benefits and minimises risks by delaying, until the last possible moment, the next decision in the development or deployment of goods and/or services. This is already happening in Jamaica, for example, with Kingston Wharves (KWL) and its Global Auto Logistics Centre.

This location, at Tinson Pen, is an SEZ, where cars are brought in from various sources and for different destinations, with some destined for the local market and others, distributed regionally. While the cars remain in the zone, no customs duties apply; in effect, it is postponed until the next decision is made. If cars are being released into the local market, then duties become payable in Jamaica. However, if they are being re-exported, no Jamaican duties are applicable, but duties may be payable in the export market in accordance with their customs rules.

What KWL is doing is only the tip of the iceberg for postponement possibilities. That is because postponement represents a new way to unlock rapid growth by leveraging third parties to serve your customers. What it also means is that companies no longer have to own all of their assets, which ranges from warehouses to inventory, to be effective and profitable. This is what e-commerce giant Amazon does to literally deliver.

What postponement allows is the emergence of new business models in Jamaica. The local (non-SEZ) business would alleviate, or dramatically reduce, the cost for carrying inventory and warehouse infrastructure, having got third parties in the SEZ to carry out this function.

- Ambassador G. Anthony Hylton, member of parliament for St Andrew Western, is a partner at Samuda & Johnson, and former minister of foreign affairs and foreign trade; and industry, investment and commerce. Email feedback to columns@gleanerjm.com.