By Colin Bullock, Contributor
Jamaica has to reduce its fiscal deficit to make public debt more manageable and to free resources in the future for more essential expenditure. Adjustment means that the Government is unable to spend all that it needs to build productive capacity.
As a result, collaboration with the non-government sector becomes essential. One aspect has to do with holding the line against inflation, exchange-rate depreciation and increasing interest rates. Any wage restraint by workers has to be supported by private investment and employment creation and a moderate rate of price increase. The burden of adjustment also has to be shared by a sharp reduction of the incidence of tax evasion and a narrowing of the avenues for tax avoidance afforded by government policy through waivers and incentives.
The non-government sector needs to fill the vacuum in investment created by the efforts to reduce the government deficit. Despite (or because of) the extremely poor record of tax compliance outside of the "captive" PAYE worker, a significant level of financial assets has been generated, some of which leave Jamaica. With lowered interest rates and concessionary facilities through the ExIm and development banks, one anticipates greater dynamism and creativity in private-sector investment. This is dependent on continuing stability in the economy and the Government "fixing the fundamentals" related to energy and security costs and effective education to facilitate productivity. Foreign investors have, however, rushed in where local investors have feared to tread (and made money too).
The establishment of structured private-public sector partnerships (PPPs) has been recommended as a means of filling the vacuum in capital formation caused by the debt-induced constraint on public finances. For example, in a BOOT structure, a non-government interest would build, own, operate and, eventually (after several years of operation), transfer the asset to the Government. This may include roads, health, educational and even security facilities.
This is attractive because in the near term, it creates economic and social capital without a burden on government finances. If the asset is commercially viable, the non-government interest is able to maintain the asset, recover its investment cost and generate an acceptable rate of return. In the less ideal situation, the Government might have to contribute to recurrent costs and a contracted rate of return although it would retain the advantage of avoiding the immediate capital costs.
It is important, therefore, that the design and evaluation of PPPs consider not only immediate saving, but also recurrent budgetary costs.
Colin Bullock is a former financial secretary and now a senior lecturer in the Department of Economics at the University of the West Indies.