Can public enterprises be a tool for governance?

Edward Seaga, Contributor

Public discussion has been recently focusing on governance of the country and how best to manage administration and development. The time is, therefore, appropriate to discuss the strategies of the past on governance structures and how well they fared.

Responsibility for administration and development of the country constitutionally rests in the hands of the civil service, subject to the direction of the political executive. This arrangement worked well in the early days of Jamaica's development. But even then, it was realised that straight application of this arrangement would not satisfy the needs for administration of certain types of development.

Hence, as early as the 1930s, special boards were appointed to deal with the marketing of specific crops such as coffee, citrus, bananas, etc. So, too, was the need to establish a welfare organisation, Jamaica Social Welfare Limited, to actively engage in looking after development and welfare chiefly in the rural areas in matters of a social and cultural nature.

The common thread that runs through all these special bodies was that they comprised members selected by government. These members had special qualifications which fitted the nature of the work they would be required to perform, which skills were not available in the civil service. This was a way to obtain better performance in areas that the civil service could not provide. In most cases, the staff recruited would receive higher pay than would be paid in the civil service. This worked effectively.

With the People's National Party taking over responsibility for Government after the general election of 1972, a new approach was used to select board members, which was in keeping with the advent of a radical form of democratic socialism introduced by Michael Manley. The mantra of this ideology was political control by the state of virtually all essential levers of power of the machinery of the State.

The interpretation of the ideology went as far as to affect appointments to bodies which were not necessarily central to the operation of the State. Prospective members were required to appear before a committee headed by Robert Pickersgill (known as the Pickersgill Committee) to be vetted for socialist credentials.

Reckless programme

This extreme position had its parallel in the initiation of another mantra which embraced ownership of the commanding heights of the economy, a standard feature of the socialist doctrine subscribed to by both Michael and Norman Manley, although the elder Manley was more judicious in its implementation. The intoxicating effect of state ownership of powerful corporations led Michael Manley to unbelievably pursue a sweeping programme of acquisition of private companies, even while the Government, at that time, was struggling desperately to find funds to run the country. This reckless programme led to the following acquisitions of blue-chip private corporations:

After the change of Government in 1980, it became possible to assess the outcome of the management of the group of publicly owned enterprises. The result was not surprising. The net loss in 1980 was $26 million in today's value.

In an attempt to correct the inept management of publicly owned enterprises, a policy of divestment was developed in the early 1980s, and a divestment committee established. By 1988, the following benefits were achieved:

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  $61 million annually received from lease/rentals.
  
  
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  $55.5 million saved in turnaround of losses.
  
  
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  $120 million released from sale of assets.

Taken together, the enterprises showed a surplus on current account of $213 million in 1984, compared to the loss of $26 million in the same period. As a group, the enterprises were able to pay all debt and finance 50 per cent of their capital development from their own resources in 1984, compared to 1980 when only 75 per cent of debt was paid and no surplus remained to finance any capital expenditure.

These figures, taken from my autobiography, My Life and Leadership, pp 60, aptly illustrate the difference between poor and proper management of public enterprises. The illustration also confirms there is room for public ownership of vital enterprises, provided that good management by honest administrators is available and there is proper transparency and accountability in the operation.

Indeed, two excellent examples exist which illustrate the appropriate circumstances under which public investment was crucial.

In 1982, the country was confronted with a threatening situation. The American-owned giant Esso Standard Oil, which distributed petroleum products in Jamaica, presented a proposal for a price increase for its products. It was one of three companies supplying Jamaica with various types of oil products: aviation, motor vehicles, cooking gas, power stations, and so on. The others were Shell and Texaco. All three were foreign-owned, which left Government with little room to manoeuvre.

Profit formula

A small refinery was also owned by Esso and was a producer of some products. The Esso demand was submitted with a list of costs which included new items which were not acceptable. The profit formula was based on an add-on to costs: the higher the cost, the higher the selling price of fuel to the market which Government would be required to accept.

The Government's negotiating team, headed by Hugh Hart and Dr Carlton Davis, was not in favour of the proposed pricing formula, which was obviously padded. It was rejected. But Esso made it clear that without a sizeable increase in price, it would face losses. This meant a shutdown, or a purchase, of the Esso operation.

The position was reported to me. I instructed the team to proceed with the purchase of the Esso holdings. The response was, apparently, a surprise to Esso. Esso obviously put its claim forward as a bluff. The team proceeded to conclude the purchase. Government took possession of the refinery, which was then vested in a state company called Petrojam, established in 1982 for the purpose.

Ownership of Petrojam enabled Government to have many options in protecting the public from unnecessary price increases, and in operating favourable supply contracts previously contracted in the 1970s with Venezuela and Mexico on a concessionary payment basis.

A second such situation occurred in 1985. This time, the problem centred on the bauxite industry which, at that time, was at a low point of production for the decade, falling from 12 million to six million tonnes, 50 per cent of the production level of 1980. I am indebted to Dr Carlton Davis, former head of the Jamaica Bauxite Institute, for refreshing my recollection of the momentous event which followed, in which decisive action was taken to stem the loss of further production.

Notwithstanding the annual fall in production of bauxite/alumina since 1980, Alcoa, one of the mining companies operating in Jamaica, took the opportunity, at a function commemorating the 25th anniversary of its operation in Jamaica, in 1984, to emphatically state that the company was long-term in its thinking on the quality of life it would provide for Jamaicans. Four months later, without notice, Alcoa announced (unilaterally) a closing of the plant on February 6, 1985.

The plant was operated by Clarendon Alumina Production (CAP), which made the announcement. CAP was a joint venture in which Alcoa Minerals of Jamaica, a wholly owned subsidiary of Alcoa, was a 94 per cent partner with Jamaica Bauxite Mining, a government corporation established to own assets of the bauxite/alumina industry and to market the Government's share of the product, owned six per cent.

At the time of closing the plant, its production was only between 450,000 and 500,000 tonnes per year of alumina. This production would have been of some value in a year when the bottom of the market in Jamaica seemingly was falling out.

When the matter was brought to my attention by the mining minister, Mr Hart, and Dr Davis, there was an option which we could examine: take over the plant on a lease, leaving the Alcoa top management in place, and operate it at our cost. The challenge would be that the production would have to be marketed in a depressed global market that had little prospects. The choice was risky because the cost of failure would be awesome.

Yet, the alternative of closing the plant would be certain disaster, while a takeover, though involving great risk of huge losses, offered a glimmer of hope. It was feared that if the Alcoa plant were closed, it would never reopen, as it was too small a producer in the Alcoa system to be of consequence.

With these potential losses, it was better to fight than to turn away in fright, or recede in flight. I agreed that we should lease the plant.

It was one of those moments when all the players summoned an extraordinary will. "When told that the plant would be reopened, the workers cheered," Minister Hart reported, and they promised "to show Alcoa that they could perform." They did, and so did the minister, who negotiated with Marc Rich, global commodity dealer, to purchase the output of the plant for two years, beating the odds that a market could not be found.

Alcoa had pleaded that the plant had the third-lowest productivity in its system globally. The Jamaican workers rallied with great determination, exceeding the average production of 40,000 tonnes of alumina per month with a magnificent effort of 60,000 tonnes monthly, 50 per cent more. In addition, the cost of production of the plant was run at a record-low level when compared to the cost of operations by Alcoa.

Within two years, the plant showed a profit of US$10 million before levy. This was not only a performance which exceeded all previous production achievements, but it lifted the plant to the status of the third best in the Alcoa system throughout the world. (See My Life and Leadership for full account)

With these examples, the conclusion can be drawn that public ownership of enterprises:

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  Should not be pursued for purposes of state aggrandisement, whether ideological or otherwise.
  
  
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  Should be pursued when serious national interests are concerned. In such ventures, all the caveats posed requiring financial honesty, transparency and accountability must be prerequisites for success or the venture would be an undesirable undertaking by the State.

The objective would be to avoid the establishment of public enterprises through public ownership unless public interest demands such recourse.

Edward Seaga is a former prime minister. He is now chancellor of the UTech and distinguished fellow at the UWI. Email feedback to columns@gleanerjm.com and odf@uwimona.edu.jm.