Mon | Oct 21, 2019

G. Anthony Hylton | Wealth creation formula for the ‘small man’ (Part II)

Published:Sunday | October 6, 2019 | 12:27 AM
Anthony Hylton

The special economic zone (SEZ) policy and legislative framework was created to generate a facilitating space within the Jamaican economy to spur economic growth by attracting new investments.

This economic growth is fuelled by attracting new industries with new types of jobs. The SEZ framework is designed to insert Jamaica deeper into the global supply and value chain (the global trading system) or, as the act in s.7(1)(b) puts it, “promote measures, actions and investments aimed at improving the logistics chain of which the zones are a part”.

However, all of this cannot happen without micro, small and medium-sized enterprises (MSMEs).

MSMEs are a critical part of Jamaica’s overall economy as the sector accounts for more than 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.

In Part I of this article, we established three key facts:

- MSMEs are the backbone of the Jamaican economy.

- MSMEs have a role to play in Jamaica’s SEZ development as reflected in the SEZ law, giving MSMEs special treatment.

- The SEZs are not for everyone, including MSMEs.

In Part II, we will explore some of the opportunities just ripe for the picking by MSMEs within the SEZ ecosystem.

SEZ Ecosystem

In ‘Cracking The SEZ Code’, I made an analogy of the SEZ being like a tree. I wish to return to that point by having you think of the SEZ like a tree, but in the wider forest of the Jamaican economy – the tree (the SEZ) and the forest (the economy) each building on and mutually reinforcing the other.

The sponsor of an SEZ is the seed; the developer, the body of the tree; and the occupant and zone users are the fruit.

Sponsors literally seed the investment with capital (money, land, equipment, etc) in a development in exchange for equity (i.e., shares). The sponsor is the one that provides the paid up and issued share capital of US$1.5 million that the developer requires to be eligible under the SEZ Act. From this seed, the developer (the body of the tree) has the responsibility to develop the SEZ and create an environment to attract occupants and zone users (the fruit) to whom the developer leases space. The fruit, the occupants and zone users, are the ones that carry out the commercial activity in the SEZ.

The main difference between an occupant and a zone user is that the occupant must be a company and is entitled to the fiscal benefits (e.g., 12.5 per cent corporate income tax) under the SEZ regime, and the zone user is not.

We have already established in Part I of the SEZ Act (Fourth Schedule) that special allowance is made for MSMEs as occupants. How do they use this benefit? And how do non-SEZ MSMEs benefit?

Real Chance To Compete Globally

Critical to answering the questions above is getting a clear understanding of a specific feature of the SEZ and its role in rebalancing an MSME’s or a large business’ balance sheet.

A feature of SEZs globally and in Jamaica 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. This duty-free concession ought not to be thought of as simply an attractive fiscal incentive as it is much more than that, if used correctly, particularly by MSMEs. This is what I explained in the three-part series: ‘Case studies in how to make money from Jamaica’s SEZ development’. However, what I neglected to do, but will remedy now, is to mention that this applies to MSMEs, particularly MSME occupants.

The duty-free concession allows a firm to increase its global competitiveness and productivity. This particular feature of the SEZ helps to level the playing field for MSMEs to compete by having lower cost for inputs into production (machinery and raw materials) and inventory costs. Additionally, when combined with no general consumption tax (GCT) on electricity and purchases from the local Jamaican economy, there is an even greater impact on a company’s cash flow and bottom line. With these cost-saving features, MSME occupants have a real chance to compete on the global stage.

There is more.

Just-In-Time Business Model

The duty-free concession also facilitates just-in-time business model for MSMEs to benefit from. It also represents a business opportunity.

The business opportunity for an MSME occupant or a large business is in providing warehousing and other logistics support services to other businesses, be they in the SEZ or in the local economy.

The value of these services is their ability to cut supply-chain costs, increase a business’ reliability, improved customer satisfaction, and competitiveness. Just imagine being able to supply a product or spare part immediately because it is with your SEZ-based supplier down the road, rather than waiting three to six weeks for it to be shipped from China or Japan. What would the saving in time be worth to you, especially an MSME?

This is what postponement using the SEZ benefits can deliver. 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 and its Global Auto Logistics Centre, where cars are brought in from various countries and destined for different countries, including the local market.

While the cars remain in the zone, no customs duties apply; in effect, it is postponed until the next decision is made. However, if cars are being released into the local market, duties become payable in Jamaica. If they are being re-exported, no Jamaican duties are applicable but duties may be payable in the export market in accordance with the customs rules that apply in that market.

However, this is not just about cars or big business. Any raw material or finished goods could be imported into a SEZ by an occupant (MSME or not) or by a single entity and warehoused in a SEZ. Depending on the business model and risk appetite of the occupant or single entity, they could, for example, either pursue one of the two following models, or a combination of the two, using postponement. Either model entails doing research (much of which is freely available on the Internet these days) of the local and/or international markets to determine the demand for products of interest.

These products could be imported as finished goods, in bulk or knock-down kits (i.e., in parts to be put together) at cheaper prices because of economies of scale, cheaper shipping costs and the postponed payment of duties. Value may or may not be added at this point. However, if it is, it may come in the form of repackaging, labelling, sub-assembly or full assembly. These goods can then be sold to local businesses from the SEZ, especially MSMEs at a lower cost than having them imported directly. The other model entails the occupant (MSME or otherwise) providing a service where it acts as importer of record for a third party’s goods, holding them in a SEZ (for a fee) while its client makes its next decision.

This decision may vary from asking the SEZ company to carry out logistics services and add value to the product or export the goods or release them into the local economy (all for a fee), at which point duties would become payable.

This form of the postponement model represents a new way to unlock rapid growth at both the national (GDP) and business (profits) levels in Jamaica.

Once this service is offered to local non-SEZ businesses, particularly MSMEs, these local businesses would be doing what the ‘big boys’ like e-commerce giant Amazon are literally doing to deliver. In essence, it is leveraging third parties, an SEZ-based logistics service provider, to serve your customers.

For MSMEs or big businesses, this would represent a tremendous reordering of their business and cost structures. It means that they no longer have to own all of their business assets, ranging from factories, to equipment, to warehouses, to inventory, making the MSMEs more effective, competitive and profitable.

 

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