Bauxite: a wasted asset

Claude Clarke, Guest Columnist

Like most Jamaicans, I was infused with tremendous national pride in 1974 when the Government imposed a levy on bauxite extracted from Jamaica by multinational companies. Like most, I saw the Government's action as an impressive exercise of sovereign will, necessary to secure the country's fair share of our national birthright.

It was only in 2006, while preparing for my role as chairman of BATCO, that I became aware that the levy could have been as much as 25% of the market value of alumina. (Jamalco had earlier reported that the removal of the levy would lower its costs by 30%.) It was not difficult to see that, notwithstanding the quality and relative ease of mining Jamaica's surface-level bauxite, this was not a tenable situation and would have eventually led to Jamaica pricing itself out of the world alumina business.

The unilaterally imposed levy would not only force Jamaican alumina into uncompetitiveness but make the country ineligible for further investments in the industry, except to ensure the productivity of investments already made. In fact, growth in the worldwide industry abruptly shifted from Jamaica's fast-growing industry to countries in which bauxite was cheaper.

And there were many. Bauxite is the world's most abundant metallic substance and there is little exclusivity in possessing it.

As with any other business, investment decisions in the aluminium industry are heavily influenced by cost and price. Aluminium is smelted where its highest cost factor, energy, is cheapest, and alumina is refined where the bauxite ore is least expensive. The huge increase in the cost of alumina brought about by the levy weighed heavily on the competitiveness of Jamaica's alumina and the country's attractiveness as a place to expand production.

Of course, with billions of dollars already invested, the alumina companies in Jamaica had little choice but to comply with Government's dictate. But the consequent high production cost would ensure that whenever market conditions indicate a reduction in global alumina production, Jamaican facilities would be among the first to be cut. And so it was.

2008 recession

Nowhere is the adverse effect of the levy more starkly shown than in the response of the aluminium companies to the global recession of 2008, three and a half decades after the levy was first imposed. The immediate effect of the crisis was to sharply reduce aluminium demand and prices. But although prices continued to be depressed, global demand and production recovered. And by 2010, production was more than 18 per cent above pre-crisis levels.

However, the low prices focused increased attention on production costs: on energy for aluminium; and for alumina, on bauxite, among other things. It is therefore not surprising that, of the major alumina-producing countries, it is only Jamaica, with its levy-inflated bauxite costs, that has suffered a reduction in alumina production as a result of the global crisis. Countries like Brazil and India have significantly increased their output, while by 2010 Jamaica's production had been cut by more than 60 per cent from its 2006 level.

Nonetheless, the decision to impose the levy need not have had a net negative outcome. It might very well have been one instance in which killing the goose that laid the golden egg could have been profitable. Had the Government been more focused on its core responsibilities, the approximately US$4 billion yielded by the levy might have been employed for development purposes. It could have formed the basis for the creation of an advanced productive infrastructure. A modern, properly financed road network could have been constructed. An efficient electricity-generation system to supply competitively priced energy might have been developed. And an appropriate technical education and training system to improve the country's human capital could have been instituted.

But the bauxite levy was imposed during the heady days of Government's push to control the "commanding heights of the economy". And revenue from the levy was the fuel that fed that dream.

The financial windfall from the levy assisted in acquiring an array of economic 'monuments': in manufacturing, in banking and in the hotel and attractions sectors. Government acquired an alumina-processing plant, took control of major commodity imports, and massively expanded the fledgling national airline.

Some of these acquisitions, like the alumina refinery, may have been necessary for strategic economic reasons. The mistake was to have held on to them long after their strategic purpose was served.

Like most state bureaucracies, these government adventures were bereft of appropriate managerial capability and lacked the critical ingredient for commercial success: the profit motive. And Government mismanaged its new-found commercial acquisitions accordingly. The massive accumulated losses burdened the people and the economy with unbearable debt and debilitating taxes that hobbled development.

Deep economic wounds

The average US$160 million realised annually from the bauxite levy is minuscule compared to the deep economic wounds suffered from Government's mismanagement of it. We had sold our birthright for the proverbial mess of pottage.

The continued growth of alumina refining in Jamaica would have contributed far more than the levy did, as the value retained in the country from each ton of alumina refined is more than three times the yield from the levy. In the 40 years following the introduction of the levy, world alumina production has quadrupled. In contrast, by 2010, Jamaica's production had fallen to two-thirds its level before the levy.

In the 40 years since the levy, Jamaica's economy has stumbled. Tens of billions of US dollars of the public's money has been squandered on mismanaged state enterprises. Jamaica's reputation as a trustworthy investment partner has been sullied. Most damaging has been the Government's use of resources from the levy to promote fiscal irresponsibility, laying the foundation for today's gargantuan debt.

The real tragedy of the levy, though, is neither its effect in retarding the growth of the alumina industry nor Government's extravagant squandering of the proceeds. It is the fact that it shifted Government's attention from its core responsibility: that of creating an environment which facilitates the generation of wealth for the Jamaican people.

Without the easy bauxite money, Government might have managed the economy more effectively and delivered the public goods and services more reliably and efficiently. More adequate health and education services might have been provided; our justice and law-enforcement systems more effectively used to produce an orderly society; and our external trade relationships better managed to the advantage of the Jamaican producer and worker.

One benefit can be salvaged from our regrettable experience with the bauxite levy. We should never again yield to the temptation to erect state apparatuses to manage commercial activities that are better left to private enterprise. And Government must confine its actions to its core responsibility of providing public goods and services that cannot be more efficiently delivered by private effort.

Claude Clarke is a businessman and former minister of industry. Email feedback to columns@gleanerjm.com.