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PRIVATIZATION IN JAMAICA.

Privatization of Jamaican Government entities, begun in earnest in the mid 1980s, sought to broaden ownership, create a more competitive and market-driven economic environment, reduce the Government's fiscal deficit, and improve enterprise's operating efficiency. This report from the American Embassy-Kingston provides details:

To date, 80 entities from sectors ranging from agriculture and tourism to medical care and janitorial services have been privatized, most successfully. The Government of Jamaica (GOJ) was forced to take back some divested entities -- such as sugar estates and Petrojam, the national oil refinery -- in the national interest when investors encountered financial difficulties.

Air Jamaica, the national airline privatized in 1994, continues to receive financial support from the Government to remain aloft. Divestment of the power company, JPSCO, is nearly complete. Privatization of Sangster International Airport in Montego Bay is scheduled for May 2001. Other opportunities will be offered soon;

Finsac, a temporary agency set up by Government in response to the 1997 banking crisis, is accelerating its asset divestment. At the end of 2000, sales of Finsac's assets totaled approximately US$270 million, including hotels, residential and commercial properties, and equity holdings in insurance and banking institutions. Investors' inability to secure financing, fragile economic conditions, and long, complex bureaucratic procedures have been obstacles to divestment. Since the Government uses funds generated from privatization to meet budgetary expenses, divestment will become more important as the Government struggles to raise revenue;

Historical background

The National Investment Bank of Jamaica (NIBJ), the main agency responsible for privatization, was originally incorporated in 1975 as the Jamaica National Investment Co. (JNIC). The JNIC was then responsible for expanding opportunities for Jamaicans to participate in the economic development of the country. Investment capital was made available through institutions such as Jamaica Development Bank and the Jamaica Mortgage Bank. During 1975, JNIC directed its attention primarily to industry, agriculture and mining;

NIBJ succeeded JNIC in May 1984 in a restructuring designed to bring sharper focus to the Government's investment and divestment policies. According to NIBJ, the then right leaning Jamaican Labour Party Government adopted a policy of privatization as part of a larger liberalization strategy. The Government believed privatization would broaden ownership and create a more competitive and market-driven economic environment. Shedding loss-making parastatals would reduce the Government's fiscal deficit, while private ownership promised to improve enterprise operational efficiency. Experts hoped newly privatized companies would attract new foreign investment and/or expand Jamaican exports bringing increased foreign exchange earnings and new technologies to the island. Governmental management resources could then be redeployed to traditional public sector activities;

During the 1980's a variety of enterprises, activities and assets were privatized. With this success, privatization was extended from manufacturing to agricultural land, services, medical care, and the hospitality sector. By the end of the decade 14 hotels had been transferred to private hands. The National Cement Co. and the National Telephone Co. followed. With growing importance given to privatization as an engine of economic development, the Government assigned the privatization activities to the office of the Prime Minister (OPM) in 1990. Accordingly, the NIBJ was placed within the portfolio of the OPM as a central coordinating and implementing agency;

Process of privatization

An NIBJ enterprise team, led by NIBJ personnel and comprised of external consultants and ministry experts, conducts each privatization in a unique, ad hoc way. The process can be protracted and complex. typically the team proceeds along the following lines:

-- Value the enterprise and or asset;

-- Propose action (e.g. lease/sale) for cabinet to consider;

-- Invite bids from the general public;

-- Screen prospective investors;

-- Conduct negotiations with selected applicants;

-- Recommend offers for cabinet approval;

-- Oversee the completion of legal transfer arrangements;

-- Announce privatization publicly upon completion;

Progress and problematic cases

To date, the NIBJ has overseen the divestment of 80 public entities. Four foreign investors -- Cable & Wireless, Trinidad Cement Ltd., Taylor Cross Intl., and Government of Belize -- have purchased privatized entities. Island Ice Co. was leased to a foreign firm. While several operations have been sold off successfully, some large companies were taken back by the Government due to financial or other problems encountered by private investors. Details of four high-profile privatizations -- the Sugar Co. of Jamaica, Petrojam, Air Jamaica, JPSCO, and Sangster Airport -- are provided below;

The Sugar Co. of Jamaica (SCJ) was divested in 1994 for J$1.36 billion to a consortium of the large Jamaican Rum and Sugar Co., Wray and Nephew, the British sugar conglomerate, Booker Tate and the local manufacturers Investments Ltd. each had a 17%. The Government retained 49%, some of which was to be sold to workers and cane farmers. The private partners failed to provide sufficient capital to keep the sugar factories afloat. In 1998, the private partners returned their 51% stake to the Government for J$1.00. Sugar is a politically sensitive industry. It earns about US$100 million per year from exports to EU and the U.S. market under preferential agreement and employs about 41,000 during the harvesting season and 28,000 during out of crop season. In order to save SCJ from collapse, the Government injected new funds to keep the operation going;

Petrojam: In 1994 the NIBJ solicited proposals for the purchase of Petrojam, Jamaica's sole oil refinery. Petrojam's senior management submitted the only proposal. Many observers warned from the outset that the management team did not have the financial resources to purchase and run the refinery. The Government was convinced by promises of adequate external financial backing. In July 1996, 70% (valued at US$68 million) of the refinery was divested to the management team. Unfortunately, subsequent to the signing of the sale agreement, the external financial backing fell through. The deal fell apart. The management surrendered control of Petrojam back to the Government in 1998.

Although NIBJ continues to receive sporadic proposals for purchasing Petrojam from other consortia (most without clear financial backing), in the absence of a new Government mandate, NIBJ refuses to consider Petrojam divestment. Fearing collusion and price setting by private refiners, the Government seems to be reconsidering Petrojam privatization;

Air Jamaica: In 1994, Butch Stewart, owner of the Sandals resort chain, and a partner bought 75% of the national airline, Air Jamaica, for about US$18.1 million. A 25% stake was retained by the Government. Originally, employees received 5% under the Employees Share Ownership Program (ESOP), an initiative which failed. The airline has continued operating at a loss since privatization. Air Jamaica officials blame regulatory obstacles, including FAA ratings, take-off/landing restrictions and extended over-water operations (ETOPS). The Government has stepped in to provide financial support on several occasions since the divestment. Late last year, the Government absorbed a guaranteed loan by increasing its equity share to 45%. Although privatization has resulted in operational improvements, the airline continues to suffer losses;

Jamaica Public Service Co. (JPSCO): In 1996 the Government put up JPSCO, the sole electricity provider, on the block. The U.S.-based Houston Industries and Southern Energy made offers amounting to an estimated US$110 million and US$160 million respectively. According to NIBJ, the Government aborted the privatization because it found these offers unsatisfactory. After a three-year performance review and upgrade, the Government decided to once again pursue JPSCO privatization. The two U.S. companies that had submitted offers in 1996 were approached by NIBJ on behalf of the Government. Southern Energy indicated its interest. Proposals from a number of other companies were also reviewed. After extensive consultations, Southern Energy of Atlanta was selected in September 2000 for exclusive negotiations with the Government. According to NIBJ, a sale agreement for JPSCO will be concluded in early 2001;

Sangster International Airport (SIA): Since the early 1990s, the Government has been attempting to privatize terminal operations at SIA. In 1998, NIBJ was given the responsibility for coordinating the privatization. The NIBJ widened the focus to include the entire Montego Bay airport operation -- both terminal and tarmac. The current plan is a 30-year concession to develop, manage and operate the airport. According to NIBJ, a primary reason for delay has been the difficulty of establishing a framework that satisfies the government's desire to retain some degree of control while making the contract commercially attractive. (Another reason for delay in the transaction is that Air Jamaica, the major customer of the airport, has a history of delinquency in the payment of airport fees. NIBJ has worked to secure an agreement between Air Jamaica and the Government to meet the private operator's requirements.) NIBJ reactivated the SIA privatization process in November 2000. Four short listed bidders expressed continuing interest. Final bids were due on 14 February 2001. NIBJ expects to complete the transaction by May 2001;

Pending privatizations - Opportunities

NIBJ is preparing other entities for divestment. The following is NIBJ's list of entities/assets that are available for privatization:

Aqualapia Ltd: sale of shares. Production of fresh water fish and tilapia. Assets: buildings, infrastructure, 170 acres of lands inclusive of 105 acres of operating fishponds;

Ariguanabo factory building: Sale/lease lands (4-5 acres); building 60,000 sq.ft;

Black Fountain Hotel and Spa: Lease of assets, land (approx. 80 acres), building with 18 room hotel;

Black River Upper Morass Development Co: Lease. 2000 acres of agricultural lands;

Caymanas Track Ltd: Sale of shares, horse racing entity comprising track, buildings, etc., other lands;

Ferry services: Sale of assets. Two ferries with passenger capacity of 140 each. Operates between downtown Kingston and Port Royal. Has potential to service the Portmore communities of dense population;

Cotton polyester plant: Sale of assets. Textile manufacturing plant. Capacity of 4.5 million yards per annum with 3 shifts. Plant has 14,976 spindles and 348 looms (45q width);

Spring Plain Property: Lease of assets. Packing house 70,000 sq.ft. building, 380 acres of agricultural land and mango orchard of 190 acres;

Swanswick Great House: Built in 1823 and occupies a total of 13.13 hectares. Potential: suitable as a museum or antique furniture display area. Also ideal for horse back riding or a retreat for artists, writers;

Vale Royal Great House: Built in 1823 and occupies approx. 8.82 hectares. Potential: a truly private setting for the upscale traveler with finer tastes;

Arcadia Great House: Built in 1820 and occupies approx. 5.4 hectares. Potential: venue for horseback riding, hiking trails and visitors housing;

Natural cane products: Sale/lease of assets. A small sugar processing plant using unusual technology and capable of producing amorphous sugar and various by-products;

For additional information, interested companies or individuals may contact the senior manager for privatization at the following address. However, please note that applications will not be accepted by NIBJ until an advertisement inviting investment has been placed in the press. National Investment Bank of Jamaica Ltd., 11 Oxford Rd., Kingston 5, Jamaica. Tel: 876 960-9690 to 9. Fax: 876 920-0379. Email: nibj@infochan.com;

Financial Sector Adjustment Co (FINSAC)

In 1997, the Government established FINSAC, a temporary agency -- akin to the U.S. Resolution Trust Corp. set up to deal with the S&L crisis -- to resolve liquidity and solvency problems among Jamaican banking and insurance institutions in the wake of the country's banking crisis. In the process of rehabilitating the institutions, FINSAC acquired assets and non-performing loans from failing institutions. FINSAC is now attempting to divest the assets it acquired. To date sales of FINSAC's assets total approximately US$270 million. These include hotels, residential and commercial properties, and equity share holdings of some insurance and banking institutions;

The most recent sale of FINSAC assets was the Crown Plaza Hotel to the U.S. Embassy in Kingston. Unionbank (an entity created from the merger of four failed institutions) will be sold soon to Royal Bank of Trinidad & Tobago. FINSAC recently acquired controlling interests in the National Commercial Bank (the largest commercial bank in Jamaica) and Life of Jamaica (the largest insurance company in Jamaica). Plans are to return them to private owners in the near future. In addition, there are currently 72 properties available for sale and 64 properties in advanced stage of negotiations for sale;

Unlike NIBJ, FINSAC sells most of its properties through brokers. Forty different qualified brokers market properties for FINSAC. For further details on properties for sale, interested investors may contact: The Marketing Manager, Asset Disposal Unit. Tel: 876 906 1809 to 12. Fax: 876 906 1822. Email: finsac@cw.com;

Comment: The American Embassy-Kingston comments, "Jamaica's privatization program through NIBJ and FINSAC, while encountering a few obstacles, has been successful in most respects. Investors' difficulty obtaining necessary financing and the country's challenging economic conditions have slowed the pace of divestment. The Government welcomes foreign investment, but the response from abroad has been disappointing. Given the Government's urgent need to increase revenue flows to bridge the deficit gap, the Government will be preoccupied with maximizing privatization receipts. We expect an acceleration of the divestment process (particularly of FINSAC assets."
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Publication:Caribbean Update
Date:Apr 1, 2001
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