Jamaica Stock Exchange Conference Presentation - Audley Shaw

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PRESENTATION
ON
PRACTICAL GOVERNMENT POLICIES TO ADDRESS
GROWTH IN THE SMALL AND MEDIUM SIZE
BUSINESS SECTOR
BY
AUDLEY SHAW, CD, MP
OPPOSITION SPOKESMAN ON FINANCE AND PLANNING
JAMAICA STOCK EXCHANGE(JSE) INVESTMENT & CAPITAL
MARKETS CONFERENCE 2015
THURSDAY, JANUARY 22, 2015
JAMAICA PEGASUS HOTEL

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SALUTATIONS
1. Background to Presentation
2. Report of the Commission of Enquiry into the Collapse of the
Financial Sector
3. Our Interest Rate Environment
4. Jamaica’s Challenging Investment Climate
5. Clarity Needed on a Competitive Investment Incentive Regime
6. Special Initiatives Needed to spur investment and Growth in the
Small and Medium Enterprises Sector
1. BACKGROUND
Any discussion of initiatives to secure substantial new investment
and growth in the economy, must take into account our present
situation and how various issues over time affect the psyche of
investors.

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Notwithstanding recent indications of an apparent surge in
consumer and business confidence, Jamaica has major challenges
that collectively threaten to militate against our best chances for
significant investment and growth in the economy.
This has resulted in Jamaica achieving a mere 1.0% per annum
growth over the past 25 years, 21 of which has been managed by
the PNP. In fact, in only two periods before this - 1960s and 1980s
under the JLP - we grew the economy by 6% per annum for
multiple years.
This level of paltry growth has been largely due to faulty
government policies which led to the collapse of the productive
and financial sectors of the economy in the 1990s, when interest
rates averaged 53 percent for commercial bank lending, money
supply was out of control leading to sharp depreciation in the
Jamaica exchange rate and inflation reached as high as 80
percent.
In consequence, 40 financial institutions closed, 40,000 businesses
(mostly SMEs) closed their doors putting thousands of people out

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of work and the government had to assume a debt of $140 billion
representing 40 percent of GDP at the time.
2. Report Required from the Commission of Inquiry into the
Collapse of the Financial Sector in the 1990s
The previous government established a Commission of Inquiry
into the collapse of the financial sector, in April 2009. Hearings
were completed by November 2011, and the present government
has refused to provide between $10.0M and $15.0M to complete
the Report of the Inquiry, claiming that it had overshot its original
budget of $80.0M and had reached $120.0M.
Ironically, a part of the delay and cost overruns were due to Court
challenges put up by some members of the present government
while they were in opposition.
The total cost of this Inquiry would now be about $130.0M to
$135.0M (See attached original estimate for this Inquiry) as well
as a table comparing the hourly costs of the Financial Sector
Inquiry and the Western Kingston Inquiry.

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COMPARISON OF HOURLY COSTS OF FINANCIAL SECTOR AND
WESTERN KINGSTON INCURSION
COMMISSIONS OF INQUIRY (US$)
POSITIONS FINANCIAL SECTOR
INQUIRY
WESTERN KINGSTON INQUIRY
CHAIRMAN 300 370
COMMISSIONER 150 300
COMMISSIONER 150 300
SENIOR LAWYER 300 300
SECOND LAWYER 250 250
SECRETARY TO COMMISSIONER 150 150
SUB TOTAL US$1,300 US$1,670
SECRETARIAT
ADMINISTRATIVE ASSISTANT 14 (8,000/MTH/160 HRS) 50
CLERK 8 (10,000/MTH/160 HRS) 62.50
4 STENO WRITERS 25 (18,000/MTH/160 HRS) 112.50
JDF LAWYER 250.00
JDF LAWYER 250.00
JDF LAWYER 250.00
JCF LAWYER 250.00
JCF LAWYER 250.00
JCF LAWYER 250.00
TOTAL US$1,347 US$3,395.00
 TIVOLI COMMISSIONERS ARE PAID A MAXIMUM OF 540 HOURS TO WRITE THE
REPORT. THE FINANCIAL SECTOR COMMISSIONERS DID NOT GET THIS
COMPENSATION.
 THE ITEMS LISTED AS PROFESSIONAL SUPPORT IN THE FINANCIAL SECTOR INQUIRY
WAS NOT PUT IN THE HOURLY COSTS AS THEY WERE A ONE-OFF COST FOR 5 DAYS.
 FROM THE TABLE ABOVE, IT IS CLEAR THAT THE TIVOLI GARDENS COMMISSION HAS
AN HOURLY COST OF MORE THAN TWICE THE COST OF THE FINANCIAL SECTOR
INQUIRY.

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Given the recently announced rates for the Commission of Inquiry
into the Tivoli Gardens incursion, in which several of the stated
rates have doubled over the FINSAC Inquiry rates, the
Government of Jamaica now can claim no further justification to
withhold a relatively small sum of money to complete so
important a report as this report on the causes into the collapse
of the financial sector.
The publication of this Report is absolutely critical to documenting
the full impact of the crisis on SMEs and the Jamaican economy
and provide valuable lessons for the present and future
generations. People lost their livelihood and sense of being,
families were broken up and people died by suicide and from
broken hearts.
3. The Interest Rate Environment
Since the collapse of the financial sector in Jamaica, the entire
economy appears to be permanently wedded to a high interest
rate regime.

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As Minister, I fought this fight by implementing a debt exchange
which reduced domestic debt from an average 17 percent to 12
percent. I borrowed cheap money from the multilateral
institutions at low single digit levels, instead of double digit rates
on the International capital market as was the practice of the
previous administration.
The result was a phasing down of mortgage rates from an average
18-20 percent to single digit at 9.5% making home ownership
more affordable for many Jamaicans when I left office.
But the commercial banking sector has remained stubbornly in
double digits for most business and consumer loans, still now
hovering at between 14 and 20 percent respectively.
Why is this so? Commercial banks have been steadily increasing
revenue from bank fees, while continuing to insist on interest rate
spreads between deposit and lending rates of between 11 and 14
percent, among the highest in the world, while insisting on
returns on equity of 21 percent while the world industry standard
is 9-12 percent. Absolute madness.

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The present review by a Parliamentary Committee, the BOJ and
the Ministry of Finance must bring this monster of a high interest
regime under control or we will never see significant investment
in the small and medium sized sector again, as it makes
investment in productive assets totally uncompetitive.
4. Jamaica’s Challenging Business Environment
Add to the problem of high interest rates must be the following
minimum things:
i) High energy costs
ii) High tax rates
iii) Inadequately trained work force/low productivity
iv) High security costs
v) High entry and exit costs (Imports and Exports)
vi) Low per capita GDP
vii) Small domestic market with low purchasing power
viii) High cost of registering businesses combined with a new
minimum business tax of $60,000 on SMEs.
ix) Limited access of SMEs to credit on reasonable terms to
invest in productive endeavours with an explosion of micro

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finance agencies offering loans at uncompetitive rates of
50% per annum.
x) Continual depreciation in the exchange rate leading to price
instability for raw materials and capital goods, as well as
reduced purchasing power among consumers.
These are only some of the negatives that militate against an easy
flow of investment in Jamaica, and which will all be tackled in turn
by a future JLP Government.
Our location and our English-speaking status combined with
available jobless college graduates make us attractive for business
process outsourcing businesses which are among the few areas,
including tourism that can easier attract business at this time.
We therefore require a strong and attractive incentive regime to
help drive more investment in the SME sector.

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5. Clarity Needed on a Competitive Incentive Regime
Despite the promulgation of the Omnibus Tax Law in the House,
there remains a lot of confusion about various aspects of
applicable tax incentives.
The most recent example which is causing confusion, stems from
the tabling of a Green Paper by the Minister of Industry for the
proposed Special Economic Zones (SEZs).
The Green Paper suggested a range of incentives that would
apply, including:
(1) Single uniform low/positive rates of corporate tax with a low
CIT rate of 10-12.5% on profits.
(2) Ten percent (10%) withholding tax on dividends
(3) Full relief from customs duty (CET), customs fees, levies,
stamp duties, additional stamp duty and GCT on transhipped
supplies into the SEZ.
But no sooner was this tabled in Parliament, the Ministry of
Finance has warned the MIIC is a letter that the MOF has not yet
signed off on the Incentives regime, and it must await the White
Paper before this is done.

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So, the upshot is total confusion. This is simply not confidence
building at all.
6. Special Initiatives for Small and Medium Enterprises to Spur
Investment and Growth
The following are a few of the things that need to be considered
to help roll out the red carpet to SMEs.
(1) Roll back the recent increases in transfer taxes and stamp
duties. I had brought them down from 7 ½ percent to 4
percent. Now it’s back to 6 percent – a retrograde step.
(2) Leave the Junior Stock Exchange alone since its inception, 25
companies have been listed, raising over $4.0 billion in
equity financing, leading to significant expansion in plant,
equipment, exports or import substitution and job creation.
Put back the 10-year tax free on profits and continue the
Junior Stock Exchange beyond 2016.

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(3) In addition to the enhanced collateral framework for loans
to small businesses recently passed in Parliament, introduce
a scheme of receivables – backed securities, where
mainstream financial institutions can establish special
purpose vehicles that accept confirmed receivables from
SMEs as collateral to give them cash advances to avoid
disruption on cash flow requirements.
The government could deposit say 10-15% in the SPVs to
cushion any possible losses, until the SPVs mature.
(4) JAMPRO must ramp up its activities in support of SMEs to
assist with technology, packaging and merchandising for
export markets.
An example of this is in India, where the government has a
website called “Welcome to India SME Technology
Services”.
They provide a platform where micro, small and medium
enterprises (SMEs) can tap opportunities at the global level
for new and emerging technology or to establish business
connections through networking.

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(5) The PetroCaribe Development Fund (PEDF) should be
accessed to create a special fund to provide loans to SMEs
involved in exports, at interest rates no higher than 5% per
annum.
(6) In our revised procurement law, we must ensure that
qualified SMEs are guaranteed a percentage of government
contracts.
This should also be ring-fenced from international contract
bidding, including CARICOM, with whom Jamaica’s SMEs
have had to abide by unfair trade practices. In this regard
I’m in full support of the position taken by the Institute of
Chartered Accountants and the Jamaica Manufacturers
Association.
I will address these issues further in the Budget Debate in
March.
Thank you.
Audley Shaw, CD, MP
Thursday, January 22, 2015