IN Jamaica the electric and telephone systems have been privatised but I’m going to look at it in perspective. I write from personal involvement with the utilities and the help of Zia Mian, recent former Director General of the Office of Utilities Regulation and Alvaro Casserly, former Secretary to the Public Utilities Commission.

Sound policy

It may seem obvious — but without a formal government produced privatisation policy that ranks objectives and describes modalities, more harm than good will result from transactions.

The privatisation policy that I drafted in 1986 ranked the two highest objectives of privatisation as:

* To improve the general efficiency of the economy

* To democratise ownership of productive assets

The 2012 policy objectives are reasonably sound, but sadly the objective of promoting individual ownership has now slipped to 5th place from 2nd place. Why sadly?

There is an old saying: “When nobody owns it nobody cares.” Public behaviour is better in societies where there are equal opportunities and individual property rights which are stringently and fairly enforced under a sound legal framework, especially if the citizens themselves own things worth conserving.

The premise of our building societies was that if people have a stake in the formal economy through home ownership they will act in ways conducive to economic growth and public order. But residences are a “big ticket” item. Privatisation is a better vehicle to enable vast numbers of “ordinary people” to obtain a stake in the formal economy.

Another advantage in deliberately doing IPOs is that it is a transparent process — the deal in its entirety is laid out in a prospectus and there can be little suspicion of side deals.

If the size of the IPOs is too big, shares can be paid for in instalments and this has been done in several UK privatisations with the following advantages:

* Instalments were spread over more than a year and this encouraged more applications

* As dividends were paid in full in relation to partly paid shares there was a very attractive yield which better assured the take up of the IPO

Foreign equity investment — not debt

Privatising utilities means that the core investors will be foreign if technology and large capital sums are needed.

Some resent dividends. But growth needs investment, investment requires returns and foreign investment requires returns in foreign exchange. Clearly equity has big advantages over debt, since:

* Debt must be repaid, equity need not be repaid.

* Dividends are only higher when the economy is performing well.

* When the economy is bad dividends are lower.

* Interest must be paid even if the economy is bad.

* Interest rates increase and principal payments can be accelerated in such times.

Currently the trans-shipment port is to be privatised as well as Norman Manley airport and Caymanas Park. Government should require that a portion of the equity is available to local investors.

Another IPO opportunity is the government’s residual 19.9 per cent stake in JPS discussed in more detail in Part 2 of this article.

The regulatory framework

The privatisation policy document of 2012 wisely sets out the need for sound utility regulation very strongly, stating:

“… it is imperative that consideration be directed towards ensuring that regulatory frameworks … balance the needs of consumers and investors.”

In this Part 1, I show why the poor regulatory frameworks set Jamaica’s development back by about 30 years.

Phase I – Early history of utilities in private ownership

If the history had been different the present would be different. To understand why we are where we are, we need to understand the past. There are phases that we went through and the story is still evolving.

In Phase I, the electric and telephone utilities in Jamaica started out as private enterprises over a hundred years ago (in the 1890s), just a few years after the technologies were invented. After changes in the identities of the controlling private shareholders they were nationalised in the 1970s and then privatised again 20 to 30 years later. Water, of course, has a longer history, all in government ownership.

Electricity

In 1892 the first public electricity service in the island was supplied by the Jamaica Electric Light Company from a plant at Gold Street, in Kingston. In 1897, another company, the West India Electric Company, built a hydroelectric plant on the Rio Cobre River at Bog Walk.

As electricity use spread, individual towns in Jamaica had their own vertically integrated private electricity companies, the one in Montego Bay being owned by American investors using Great River as its power source and the one in Mandeville, Spalding and Christiana being owned by the Lord family (“Oh Lord! let there be light” customers used to say when there were outages), for example.

The exception was that the electric supply in Sav La Mar was operated by local government.

The local electric companies produced current at different cycle frequencies so you could not automatically expect to use electric motors, clocks and record players (which used alternating current in those days) for example, in different places in Jamaica. JPS, having bought up the local electric companies in other towns, standardised the frequency to the mid-point of 50 cycles (even going to households and changing the gear on appliances). Up to this point the history is very similar to that of the United Kingdom and other countries.

With frequency conversion came a World Bank loan and this required that the 20-odd licences held by JPS that were renewable annually (no wonder there was no serious investment up to then) be consolidated into one 25-year islandwide licence. JPS built an islandwide backbone transmission grid in the following decades. A regulator was set up (on paper) along the lines of the US public utility commissions to regulate the rates that could be charged and set service standards, but it was not staffed with experts (though they hired consultants from Montreal Engineering to help in rate hearings) and was not sufficiently independent nor was there any set of local legal precedents, so execution was poor, actually very harmful.

Telephone

In 1892 the private telephone company in Kingston with about 300 subscribers owned by foreign interests was challenged by a group of local businessmen who wished to set up a competing network. There was a spirited debate in The Gleaner about the merits of this, the main arguments against centreing on this being a natural monopoly, as colourfully expressed by the manager of the incumbent West India and Panama Telegraph Company at the time, as follows:

“…Two Exchanges cannot exist for any length of time; one at least, must succumb, but as the dying of one is a slow process, the subscribers during the time must put up with a deranged service. And as in the fight for existence, considerable money will be sunk, even the surviving exchange will be crippled and unable to give as good service as the old exchange had; and to recoup themselves the exchange will either raise the rates higher than ever or continue to give miserable service…

In Part 2 of this article you will see that these arguments were still thought to be valid in 1988, about a hundred years later!

Phase II – The politicisation of the utilities and ‘quasi-expropriation’

When Jamaica became independent in 1962 there was a period of “nervous nationalism” (as the prominent columnist Morris Cargill used to put it) and there was intense distrust of the private sector by the civil service.

Initially, JPS was controlled by Canadian investors. Stone & Webster, a Boston-based company that owned electric utilities all over the USA, took on the roles of consultants and engineering managers. In time Stone & Webster became the largest (at 20 per cent) shareholder and the general manager. The 1966 licence required that there should be a local IPO for the Jamaican company and the board of directors should all be Jamaicans.

In the late 1960s the recently established Public Utility Commissions were interfered with by politicians wishing to keep rates down and rate hearings became circuses and platforms. In that hostile climate, and the absence of expert regulators, the private companies ceased investing meaningfully. Afterwards the government bought out Stone & Webster’s holding and in 1974 it bought out the remaining shareholders.

In the mid-1960s the British company that owned the sole telephone utility stopped investing when its 1945 licence was replaced with one that was vague as to how rates would be determined, in a climate known to be hostile. The result was that, for example, it was quicker to drive to Spanish Town than to get through on the telephone.

In 1969 the clever British telephone company sold out to an American company, Continental Telephone, which invested in the modernisation of the exchanges (but underestimated the investment needs in outside plants). Continental was met with hostility when rate increases were sought and the manager, Malcolm Holmes, was publicly mocked and (not fatally) shot by a protester during a labour dispute. Continental too left Jamaica and the government took over the company in 1975.

Starving utilities for rates has been aptly described as “quasi-expropriation” The Public Utility Commissions were ill-equipped to match the skills of experienced operators and their advisers and were suspicious. They also had too much discretionary power in an environment of few supporting legal processes and precedent. A prerequisite to having public utilities in private ownership is experienced regulators and a robust supporting legal framework.

Well, the dog chased and caught the car — now what does he do with it?

Phase III – Life under state ownership

The rate-making process thereupon became solely the province of government decree and investment funds could only come from government-to-government loans. Political appointees were installed as board members. The Water Commission, street lighting authorities and ministries did not pay JPS which therefore did not pay Petrojam or pay its PAYE, so massive inflationary “funny money” receivables and payables were carried on the balance sheets.

With devaluations, asset replacement costs and debt service costs escalated and new investment was inadequate since local currency rate increases lagged behind cost increases and were politically set.

Like all politically imposed price controls the protected “goods” were not actually available. One had to wait years to get a telephone — even for ‘party lines’. There were frequent electricity outages.

PART 2 of this article will deal with the reprivatisation of the utilities and the results, and what possibilities exist for the future.

Richard Downer, CD, FCA, is a Fellow of the Institute of Chartered Accountants of Jamaica and a past Vice-President. He has been an advisor to the governments of 16 countries on utility privatisation strategy and transactions and was in charge of several large-scale privatisations in Jamaica. He may be reached at: rldowner@hotmail.com