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The bauxite levy 40 years on: Who let the puss out of the bag?

LANCE NEITA

Sunday, May 18, 2014    

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THE imposition of the bauxite levy in 1974 was one of the most far-reaching and pivotal decisions ever taken by any Jamaican Government since the formalities commenced on September 25, 1961 to move Jamaica forward into Independence.

It was a bold move taken by a small Third World country in the face of a line-up of powerful foreign investors with immense global, political and economic backing.

Prior to the announcement of the levy on May 15, 1974, the bauxite industry had been owned lock, stock, and barrel by six multinationals — Reynolds Metals and Kaiser Aluminum (bauxite producers), and Alcoa, Alcan, Revere and Anaconda (alumina producers).

But the Government of Michael Manley, which had assumed national leadership in 1972, had already determined while in Opposition that Jamaica was being short-changed by the terms of the reigning industry contracts, and had vowed to correct the one-sided balance of power and payments on attaining office.

No surprise then when Alan Isaacs, minister of mining and natural resources, announced a National Bauxite Commission in June 1972, with the expressed intention of reparation of lands owned by the companies, acquisition of 51 per cent of ownership of the operations, and the establishment of an industry monitoring unit -- the Jamaica Bauxite Institute.

The companies were no doubt a bit uneasy, but were lulled into a calm frame of mind, quite sure of their ability to control shipping, marketing and prices, and, it was felt, their ability to play Third World countries against each other.

The next several months saw the two sides playing a waiting game, with the commission arduously studying the intricacies and strategies of the industry in order to equip itself for negotiations which it knew would begin in short order for new contracts.

But Jamaica was running out of time. The local economy was under severe pressure, and when the Organisation of Petroleum Exporting Countries (OPEC) raised their crude oil prices sharply and dramatically in October 1973, Jamaica's economy took a steep nosedive with oil increasing from US$3.00 per barrel to US$12.50 by 1974. This resulted in an import increase to Jamaica from US$71 million in 1973 to a stunning US$195 million in 1974. The puss had been let into the bag.

Foreign exchange reserves went into sharp decline and the Government now had to look elsewhere for additional exchange inflows. There was little choice but to turn to bauxite.

So, armed with the preparation and research done by the Bauxite Commission, Mr Manley held a meeting at Jamaica House on March 14, 1974 with an assembled group of all the aluminium companies.

At that meeting the prime minister announced three radically new goals for the future development of the industry: return of bauxite land ownership to Jamaica, greatly increased taxes on the ore itself, and participation in the ownership of the operating companies.

Now, who let the puss out of the bag?

A corporate biography of Kaiser Aluminum published in 1980 reported that the industry group, stunned by the announcement, launched immediate negotiations with the Government.

Jamaica's negotiating team was led by Pat Rousseau, Sir Egerton Richardson, Jamaica's ambassador to the United States; Horace Barber, financial secretary; Alister McIntyre, academic and economist; and industrialist Meyer Matalon.

The Cabinet team consisted of David Coore, Alan Isaacs, PJ Patterson, Eric Bell, and Vivian Blake. Special advisors included G Arthur Brown, Leacroft Robinson, Jack Ashenheim, and Dr Carlton Davis.

There followed two months of the most intense financial, investment and diplomatic round of negotiations ever undertaken by a Jamaican Government, with Manley declaring that he had every intention of restructuring the industry in order to increase the nation's income and to regulate the operations. Much was at stake.

According to Edward Seaga in his autobiography My Life and Leadership, "the massive oil increase had created a gap which would have to be closed with urgency. This could only be done by curtailing imports, travel, and debt servicing, or by an additional source of revenue, or a combination of both."

By mutual consent both negotiating parties had agreed that neither side would issue releases to the press during the period. But during that time, in spite of the veil of secrecy and confidentiality, discussions were being held all around the country on how best to improve income generation to add to the country's coffers.

In a unified approach, the JLP Opposition, led by Hugh Shearer, expressed support for the Government's efforts, and Shearer wrote a letter to the companies supporting Jamaica's case for renegotiation of bauxite contracts.

Well, the talks did not go so well at all. The aluminium corporations resisted Jamaica's proposals, in one instance placing considerable emphasis on the cost increases, other than bauxite, which they would have to absorb. The Government accommodated this argument and adjusted their position accordingly.

Nevertheless the historic negotiations broke down. "When you take the number of companies, all with their own ideas, trying to negotiate at one time, you get a confused situation," remarked one Kaiser executive.

The final meeting lasted up to midnight May 14, 1974. Then came the dramatic announcement in the House on May 15 that was to change the course of the Jamaican bauxite industry history.

In a 90-minute statement, the prime minister reported that "the negotiations with the companies, which began on March 18, have not been concluded... and in the face of urgent need, the Government cannot allow the negotiations to continue indefinitely".

Further, "the companies have failed to prove that Jamaica's position is unjust or based on faulty logic. In the light of this, the Government has decided to exercise its sovereign right to impose just and equitable taxation in the form of a production levy".

The puss had gone back into the bag. The companies were not going to take this lying down. They considered the move as a violation of the contract, and three of the companies submitted the dispute to the World Bank's International Centre for Settlement of Investment Disputes.

Jamaica was on edge as to where this would go, and whether it would take the bauxite industry along with it. Overseas, investment circles and the foreign press were raking Manley and the Government over the coals. The action was seen as effrontery by a small country against the superior powers. Revere took their case to the Jamaican Supreme Court. The revenue matter, according to Dr Davis, one of the architects of the process, "had rapidly taken international centre stage as a cause celebre."

"It was at this stage," notes the Kaiser biography, "that Kaiser Aluminum stepped back from the rest." And as Kaiser decided to enter further negotiations beyond the levy regarding ownership and participation, board president Cornell Maier declared that "what we seek in Jamaica is not land, it's bauxite. We believe that Jamaican

ownership of bauxite lands can be good for Jamaica and the company".

It was against this background that the impasse with the industry was broken. Following the imposition of the levy, which was now a fait accompli, the path had been cleared for trying to reach an understanding regarding the other objectives of the restructuring, with Kaiser leading the way.

It took two arduous years of further negotiations to work out the details, and on February 2, 1977, a formal partnership was signed at Discovery Bay. Under this new arrangement the Government purchased 51 per cent of Kaiser Bauxite, with Kaiser retaining management control and securing a lease for bauxite mining.

That agreement, according to Dr Davis, represented the final breaking of the ranks of the companies for accepting a new situation, and it became a model for the agreements made with the other bauxite company Reynolds, and to some extent the post-levy agreements with the alumina producers, Alpart, Jamalco and Alcan.

But not so fast. Problems were to surface. Partnership negotiations with Reynolds led to an agreement in 1977. But Reynolds folded and left Jamaica in 1984. The company stated that their decision was not related to the principles of the levy. But others took issue with that claim and blamed the imposition for the Reynolds fallout.

Alcoa also temporarily closed its gates in Clarendon on February 6, 1985, again sparking debate over the reasons, with some blaming the levy and others defending it. Revere closed its shutters on August 19, 1975.

The increased earnings from the levy propelled the revenue from US$19.2 million in 1973 to a whopping US$180 million in 1974. But the levy also moved the cost of Jamaican bauxite from being the cheapest to the most expensive worldwide.

The companies began increasing their investments in other bauxite-producing countries, and Jamaica consequently lost its position near the top of the ratings as a world-leading producer.

Forty years on, note the comments made by Dr Davis and economist Dennis Morrison quoted in The Gleaner of May 14 that Jamaica has little to show from the bauxite levy, and that the country suffered through ill-fated projects and misspending of the bauxite levy funds which were lodged to the Capital Development Fund (CDF).

The CDF was established at the same time as the imposition of the levy, and Manley's conceptualisation of the fund is instructive.

In his levy announcement Manley proposed that the bulk of the additional revenue would be placed in a CDF that would be used for building up and rationalising the productive capacity of the economy.

"Mr Speaker, as the country extracts ore and Government earns income, we owe it to this and future generations to develop further assets which could provide new foundations for sustaining progress. After all, the Government has always urged the country to sow, not to reap."

So, where has all the revenue gone? And who let the puss out of the bag?

Lance Neita is a public relations and communications specialist. Comments to the Observer or to lanceneita@hotmail.com

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