Economist touts sovereign fund for bauxite earnings

Economist Dennis Morrison says Jamaica should consider developing a sovereign wealth fund seeded by bauxite royalties and taxes, should the sector regain vibrancy.

His suggestion comes against the background of the dissipation of US$4 billion in earnings from the Bauxite Production Levy garnered over its 40 years without any real legacy projects to show for it. The levy was created in 1974.

Morrison said bauxite remains Jamaica's best bet for the creation of a sovereign wealth fund out of which sustainable capital projects can be pursued.

Panama is among the countries to have recently gone that route. It created a sovereign fund to provide the Panamanian government with an investment vehicle to manage the country's surpluses.

All monies received by Panama's National Treasury - from distributions from the Panama Canal Authority (ACP) - in excess of the equivalent of 3.5 per cent of the country's nominal GDP must be deposited into the fund.

Dr Carlton Davis said that the industry could be revived with new and more economical energy sources, and that it was possible to retain 40 cents out of every bauxite dollar spent - an even "better" record than the tourism industry.

Morrison is senior director of the Jamaica Bauxite Institute while Davis is special envoy in the Office of the Prime Minister with responsibility for consultation in the bauxite/alumina and energy sectors. Both participated in a Gleaner Editor's Forum on the bauxite levy on Tuesday.

Most of the monies collected under the levy - the proceeds flow to the Capital Development Fund (CDF) - have been spent not on capital projects as was expected but on public-sector projects, including free education in the 1970s and budget support in the decades following.

Embassy buildings purchased in London and New York through the CDF have since been sold for budget support, while stocks purchased on the New York Stock Exchange have also been disposed of. Several projects started under the CDF have also foundered.

Morrison said the Capital Development Fund, which was created to preserve the earnings from the levy, would have benefited from a fiscal rule similar to that being pursued under the current International Monetary Fund agreement.

Under the amended Financial Administration and Audit Act, which together with the Public Bodies Management and Accountability Act, forms the legislated fiscal rules, the Jamaican Government must attain a fiscal balance relative to GDP.

A similar rule would have preserved bauxite earnings, the experts contend.

"The CDF was an early precursor to the sovereign wealth fund, but we did not operate that way. The CDF has been left empty," Morrison stated.

Participants in the forum said that all it took to remove money from the fund was an announcement in Parliament.

They note that similar mistakes are being made with the PetroCaribe Development Fund, the only difference being that the distributions have to be paid back with interest. PetroCaribe Fund is the repository of unpaid oil proceeds owed to Venezuela that have been converted to long term loans. The Finance Ministry discloses in its Debt Management Strategy that it intends to tap Petrocaribe for $24 billion in loans this fiscal year to support the budget.

Davis noted at the forum that bauxite companies were diversifying ore sources as early as the mid-1970s and that "none of us had the illusion that we would be able to sustain the levy, which was why the CDF was critical."

Jamaica's bauxite-alumina sector was weakened during the global economic crisis when some of its capacity was taken offline due to falling world prices, and is yet to regain full throttle.

But Davies said the sector could be revived if coal fired plants were established as an energy source for all three existing alumina refineries.

Jamaica earned $1 billion from the bauxite levy in the last fiscal year.

Said Davis: "The sector brings in cash. It pays it directly to government accounts. But what do we have to show?"