Fri | Sep 20, 2019

G. Anthony Hylton | MSME and SEZ – wealth creation for the ‘small man’

Published:Sunday | September 8, 2019 | 12:29 AM
Ambassador Anthony Hylton
File Natricia Brown (right), regional retail supervisor of Things Jamaican, speaks to students (from left) Danica Campbell, Brittany Garrick, Xavier Roberts, Devonio James and Shaquille Poyser of HEART Vocational Training Development Institute about her products at the 11th Annual Small Business Expo and Conference on May 16, 2018. MSMEs have a place in the era of SEZs, writes Anthony Hylton.
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Small businesses have a unique and critical role in Jamaica’s Special Economic Zone (SEZ) regime.

The SEZs in Jamaica may not be for everyone, as I established in a previous article, ‘Is the SEZ for you?’. However, what I failed to mention, but will remedy in this article, is the special consideration given to the micro, small and medium-size enterprise (MSME) sector. MSMEs do not merely have a role in Jamaica’s SEZ development. In fact, this role is critical not only to the success of Jamaica’s SEZ programme but also to the current transformation being witnessed of Jamaica becoming a logistics-centred economy.

However, before I delve into the SEZ-MSME connection, allow me to make two points:

The first is that in my last article, I promised to explore further the matter of existing Jamaican businesses incorporating a separate company for the purposes of entering the SEZ. However, in the three-part series on ‘Case studies in how to make money from Jamaica’s SEZ development’, particularly the final in the series, ‘Bringing suppliers closer’, I have more than adequately addressed the matter.

The second point is that the incorporation of a separate company because of the Section 7(2) prohibition on existing businesses re-establishing themselves in the SEZ to benefit from the generous fiscal benefits ought not to be construed as a manipulation/circumvention of the law or finding a loophole in the law. Rather, it is about working within the law to achieve its objectives, which, principally, are to create an environment to drive new investments, economic growth, industrialisation, and job creation through SEZs, or as the act in s.7(1)(b) puts it succinctly in directing the SEZ Authority, to “promote measures, actions and investments aimed at improving the logistics chain of which the zones are a part”.

With that being said, I now pivot to the MSMEs!

The MSME sector is one very near and dear to my heart. As industry minister, I promulgated the country’s first MSME policy. I also conceived, proposed, and promoted the idea to use ‘unclaimed funds’ from financial institutions as a sustainable mechanism to finance the MSME, sector. I have always maintained that MSME are a critical part of Jamaica’s overall economy as the Sector accounts for over 80 per cent of jobs in Jamaica. What is more, according to Tax Administration Jamaica data, 97.6 per cent of all classified business taxpayers are defined as MSMEs. The contribution of the MSME sector to the Jamaican economy is clear.

However, what is not so clear is how they fit in with the SEZs. Moreover, how do the SEZ represent an opportunity for wealth creation for the ‘small man’?

SEZ 101

SEZs are geographically designated, purpose-built areas used to attract foreign and local investment. They typically have trade laws that are applied differently from the rest of the country, an example of which is duty-free concession on all building materials, equipment, raw materials, and finished goods as long as these goods remain in the SEZ or are exported.

The duty-free status should not be looked at as just a mere incentive. As attractive as is the prospect of duty-free access for all raw materials imported as inputs into production and not just some inputs as is currently enjoyed by manufacturers under the Omnibus Tax law (productive input tax relief), the opportunities presented by these benefits are much wider.

This aspect of how SEZs work represents a far bigger opportunity than is readily understood. It is an opportunity to change the way we do business in Jamaica by creating pathways, through better understanding and use of logistics, to expand Jamaica’s integration into the global economy and the generation of greater wealth for our people.

This is part of what I explained in the three-part series ‘SEZ: rebalancing the company’s balance sheet [Part I] – case studies in how to make money from Jamaica’s SEZ development.’ The beauty about this is that the opportunities the SEZs present are inclusive and are cross-cutting for big or small businesses, SEZ or non-SEZ.

As mentioned before, the SEZ is not for the faint of heart or men of straw. Before the signing of a licence agreement with the Jamaica Special Economic Zone Authority (JSEZA), an SEZ developer has to show US$1.5 million in issued and paid-up share capital and propose to build an SEZ sufficient to accommodate at least three occupants. The licence agreement, of course, encapsulates the terms (for example, rights, duties, and obligations) agreed between the developer and the JSEZA, while the occupant, on the other hand, has to show US$25,000 issued and paid-up share capital and US$50,000 in zone-related investments (building machines, equipment, etc.).

But how can the SEZ benefit the ‘small man’? Based on the numbers I just cited, he or she doesn’t even qualify, you may think. But there is more.

Under the SEZ Act, there is a special category of occupant - MSME Occupant. Oh, yes!

And the reason why I know that it is in the law is that I directed that it be placed there. As the minister at the time who brought forward the MSME Policy and the SEZ Act, I understood the clear synergies between the two, but more important, saw the opportunities for the Jamaican people that would be catalysed by linking the two.

SEZ MSME Occupant

The Second Schedule of the SEZ Act sets out a definition of MSME Occupant, breaking down what qualifies as micro, small and medium. To my knowledge, this is the only existing piece of legislation currently in Jamaica which does this. Beyond definitions, the more impactful segment for MSMEs in the SEZ Act is to be found in the Fourth Schedule - the Eligibility Schedule.

Paragraph 2(2) of the Fourth Schedule is where the magic is to be found. It states, in summary, that even if an applicant who qualifies as an MSME, as defined in the act, does not meet the financial eligibility requirements of an occupant (US$25,000 issued and paid-up share capital and US$50,000 in zone-related investments (building machines, equipment, etc), they nevertheless may qualify for SEZ status if they prove to the SEZ Authority, through their application, that they have ‘sufficient development potential’ to be granted this status. However, their total investment must not be less than US $25,000. As I explained before, the SEZ is not for everyone, and that equally applies to MSMEs. However, as I will explain later, even the ones that do not qualify still have opportunities from the SEZ.

MSME Occupants are then given four years, or a shorter period, as determined by the SEZ Authority, to meet the regular financial eligibility criteria of an occupant. This way, the SEZs function as an incubator for a steady stream of start-ups in Jamaica. These businesses will benefit from, among other things, paying 12.5 per cent corporate income tax, rather than the normal 25 per cent in the domestic territory. They will also benefit from duty-free imports on their building and raw materials and equipment, provided these goods remain in the SEZ or are exported. Also, they will benefit from zero per cent general consumption tax on electricity and other purchases from the domestic territory.

So what are some specific opportunities for MSME Occupants? How do they use the SEZ benefits to grow their business? And what about the non-SEZ MSMEs, how do they benefit?

In Part II, I will answer these and many more questions.

 

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