Why the private sector is hesitant to invest
Aubyn Hill, Financial Gleaner Columnist
There is a continuing and growing complaint, turning into an almost moral indictment, that the private sector is not stepping up to the plate to do its part now that the Government has passed six IMF quarterly tests and is 'fixing the economy'.
The wailing is heard in the utterances of government ministers and from some members of the Economic Programme Oversight Committee (EPOC).
The berating of Jamaican investors - it is our local money people that is the focus of this near-abusive phrase of certain non-endearment - for their reluctance to invest, or more likely, re-invest in the local economy tells me that the psychology of investors and money is widely misunderstood.
Money dislikes uncertainty, is very jittery, takes flight easily and is very reluctant to be coaxed back to a destination from which it once, worse twice, took flight.
Jamaican investors are now expected to disregard their negative experiences and plunge their good cash right back into the local economy, where many of them got burned and lost money and other assets.
And why should they abandon their cautious reasoning? Because Dr Phillips has squeezed so much cash out of the local economy to pay the IMF commitments and pass six tests.
The wailers overlook the fact that many of the businesses of these former and prospective investors are really hurting from the shortage of money being experienced under the Portia Simpson Miller-led, IMF-directed squeeze, and from the absence of proper and efficient government facilitation to enable and encourage business investments.
Some government policies have even deterred investors. One such is the inexplicable reduction of incentives from 10 to five years for companies that qualify and choose to invest in the local junior stock market. One of the most prominent states, New York, in the country with the most economic success ever, the United States of America, offers 10-year tax-free everything to investors - including income, state and sales taxes - to come and invest.
This administration took Jamaica in the exact opposite direction. This is an economic growth destroying and investor confidence-eroding, regrettable policy move.
SOME BAD EXPERIENCES
Those who voice this indictment need to be reminded of some recent and not-so-long-ago experiences of local investors. These have not been good. Jamaican investors - individuals, business operators, pension funds, lenders and other institutions - suffered three significant, very negative and wealth-eroding experiences in quick succession in the recent past by the JDX and two NDXes GOJ bond defaults. To expect local investors to be sanguine, never mind optimistic enough to return with substantial cash to the economy so soon after those really tough experiences is to be somewhat unrealistic.
A raft of scandals which engulfed and tarnished the administration's credibility and perception to govern well, have weighed heavily, and negatively, on local investors' confidence. The Richard Azan market debacle, the Phillip Paulwell EWI and no-energy policy fiasco, and the NHT Outameni disrespect-to-ordinary-Jamaicans mess all have a bearing on how local persons with money feel about investing in Jamaica.
It's incredible how political and other leaders, who crave local investors to come to the market, simply do not get it that when scandals like these erupt and the prime minister personally and publicly absolves the senior ministers, executives or key players, declares that they have done nothing wrong and ensures they are not held accountable, then those governance approaches take a toll on investor confidence. Someone to whom the prime minister listens should press home this investor-related message.
That is not all that scares investors. The mother-of-all-local-investor-wipeout, FINSAC, engineered by another PNP administration, still casts a dark and foreboding shadow over many local investors' psyche.
Put those investor psyche-scaring memories beside a still very inefficient government apparatus - one that often blocks rather than helps business activities - and you get real disincentives to invest. Corruption, graft requests, poor health services and crime all sharpen and heighten the disincentives.
Persons who may be quick to call these excuses for the private sector better look at the facts on the ground and face the reality that many local investors are very wary of investing locally. This administration has a lot to do, apart from passing IMF tests and holding strain on a very high 7.5 per cent IMF-directed primary surplus target, to re-establish local investor confidence.
SOME BIG FIRMS ARE INVESTING
Given the perceived risks in the local economy, investor size matters for two reasons.
First, small firms do not have the equity capital base which will encourage banks to lend to them and so are risk-averse when it comes to taking chances in the local economy. The little or no-growth economy does not provide enough profit incentives to encourage smaller risk takers (and bigger firms too), who are the ones who often fuel economic expansion and job creation, to take risks.
Second, big companies have the balance sheets, management, political and financial connections which will work to their relatively easy advantage to secure funds to invest. These same connection-assets allow big companies to be much less risk-averse and so take on more local risks. Still, there are not many of these.
The Sagicor Group, Jamaica Broilers Group and the Lasco Group have all laid down multimillion US-dollar investments in the last 12-18 months.
Policymakers need to remember, and act accordingly, that Jamaican investors have recourse to a 10-year tax-free New York and almost 200 other states and territories in the world as investment destinations for their cash.
Aubyn Hill is the CEO of Corporate Strategies Limited and chairman of the Economic Advisory Council of the opposition leader.Email: firstname.lastname@example.orgTwitter: @HillAubynFacebook: www.facebook.com/Corporate.Strategies