Editorial | A sovereign wealth fund

In wrapping up the debate in March on the Government’s 2025/26 budget, Fayval Williams, the finance minister, ridiculed the Opposition over Michael Manley’s introduction of the Bauxite Production Levy in the 1970s.

It, Ms Williams said, cost Jamaica high-paying jobs by driving global bauxite-alumina firms to invest in more welcoming, tax-friendly jurisdictions.

A deeper analysis of the levy would have highlighted the real failure of the levy: the missed opportunity of the Manley government, and others subsequently, to use its resources to create a genuine sovereign wealth fund (SWF) on which Jamaica could rely in difficult times.

Ms Williams, however, has the chance to at least begin that process which, in part, was what the Capital Development Fund (CDF) was intended to do. Indeed, the issue should be on the agenda and be discussed in the current election campaign, including how a new proper sovereign wealth fund might now be seeded, the rules by which it would be governed, and the types of investments it would make.

This newspaper suggests that a Jamaican sovereign wealth fund, at this time, should concentrate heavily on investments on digital technologies, especially the rapidly emerging and critical artificial intelligence (AI) sector.

Broadly, SWFs are government-owned investment vehicles used to invest surplus revenue, including, sometimes, incomes from commodities or the sale of specific assets. They are intended to generate wealth, which countries can use to help stabilise their economies during rough periods.

Globally, SWFs control assets worth an estimated US$13.5 trillion.

SIMILAR IDEA

Conceptually, the Manley government had a similar idea when it introduced the bauxite levy in 1974, and simultaneously established the Capital Development Fund into which the revenues from the levy would flow. The levy is a tax on the production of bauxite, charged as a percentage of the price of alumina on the London Metal Exchange.

At the time, Jamaica earned relatively little from its bauxite, a finite resource from which aluminium is made. The multi-national companies that mined bauxite and refined alumina in the island, critics at the time complained, often engaged in transfer pricing (bulking up their Jamaican costs) so as to show low earnings here, and so pay little in taxes and royalties.

Companies in fact scaled-back their Jamaican production with the advent of the levy. However, earnings from bauxite/alumina spiralled – by nine times in the first year.

Despite administrations periodically adjusting or suspending the levy to accommodate downturns in the industry, a decade ago one of its architects, Carlton Davis, conceded that its earnings – estimated at US$4 billion over 40 years – was not as robustly managed as it might have been.

“Our mistake was not to have had the sort of fiscal rules (similar to those now in place for the management of the national debt),” Dr Davis, a former head of the Jamaica Bauxite Institute (JBI), said at a Gleaner Editors’ Forum.

Much of the earnings from the levy went into regular budgetary support, such as funding free tertiary education in the 1970s, rather than, as Mr Manley, promised, infrastructure development.

REGULATORY NETWORK

A large part of the problem was the absence of a strong regulatory framework for the CDF when it was set up. There are now specific rules for how its resources are to be invested, and the finance minister was given almost free rein to withdraw capital.

Indeed, section 12 (5) of the Bauxite (Production Levy) Act says: “The minister may from time to time by order direct that such sum as shall be specified in the order shall be drawn from the Fund for such purposes and subject to such conditions as shall be so specified.”

By contrast, Trinidad and Tobago’s Heritage and Stabilization Fund (HSF), which has accumulated surplus of over US$4.6 billion, allows for withdrawals when the government’s petroleum revenues fall by at least 10 per cent below what was projected.

In those circumstances, withdrawals are limited to the lesser of 60 per cent of the shortfall, or 25 per cent of the balance in the HSF at the start of the year. But there are limits below which the fund isn’t allowed to fall.

Apart from the growth of its investments, the HSF is capitalised from petroleum income, once that income rises, in any quarter, by more than 10 per cent above projections.

In 2018 and 2019, as the Government prepared to shutter the Petrocaribe Fund and transfer its residual resources to the main government account, this newspaper recommended that a portion of the capital be invested in a SWF. We also made similar suggestions with respect to the Universal Service Fund (USF), the levy on foreign telephone calls that is used to widen public access to telecommunications technology, including the Internet.

Those ideas are not feasible now. Petrocaribe no longer exists, while declining regular voice calls, as covered by the law, and the rise of voice over Internet and similar communication services, have refused flows into the USF.

However, governments, when they wish to be creative, will muster resources to do what they consider to be priorities.

A SWF should be one of these. And the growing importance of AI makes investments in these technologies almost a no-brainer.