Lok Jack’s advice: privatise, adjust forex, tax incentives

Arthur Lok Jack, the chairman of Associated Brands Investments Ltd and Guardian Holdings Ltd, shares his views with Sunday Newsday on what he would like to see in tomorrow’s budget.

Privatising State companies, an exchange rate adjustment, a competitive tax structure, an efficient tax collection system are some of the policies Government needs to implement to get us through these difficult economic times.

These are the recommendations coming from entrepreneur Arthur Lok Jack.

Lok Jack said that while TT had been benefiting from the high price of oil and gas over the years, countries within Caricom and within the free trade area were paying high prices for energy and were adversely affected. The economies of these countries are now benefiting significantly from these low energy prices.

REGIONAL DOMESTIC MARKET

Lok Jack said Associated Brands’ trading block was not just TT but included Caricom, the Dominican Republic and other Central American countries.

“Many years ago we perceived TT as our domestic market but our perspective changed when Caricom and Cariforum–which included the Dominican Republic–emerged as a free trade area,” he said. “This means that our domestic market is now approximately 30 million people.

“TT’s population of 1.2 million people is therefore only four per cent of the overall domestic market (no duties or taxes) giving us tremendous opportunity to expand our sales and revenue and, by extension, to expand our production capacity.

TAXES

Lok Jack said Government needed to be careful about how they increased taxes and/or levies, as it could be a disincentive to produce locally. He said if Government taxed manufacturers at a higher rate than they would pay in other countries within the free trade area, it could encourage manufacturers to shift or expand their production away from TT.

FOREX

Over the past few years, given the significant decline in the price of energy, foreign exchange availability has become a major issue. Lok Jack said there were three ways to deal with this:

1. Curtail the amount of foreign exchange being used.

2. Find new sources of foreign exchange.

3. An amalgam of both 1 and 2.

The obvious and best solution would be for the private sector ie manufacturers and service companies to export more.

However, to do so, it was necessary for the exchange rate to be competitive. Therefore, he said an adjustment to the exchange rate was necessary because the TT dollar was overvalued and we need to export more goods and services to increase our foreign exchange income.

Why manufacturing specifically? According to Lok Jack, the manufacturing industry’s demand for foreign exchange is approximately 25 to 40 per cent of their total operation costs as they only import some raw and packaging materials. All the other elements are local costs, that is, labour, plant operations, electricity, depreciation, finance, maintenance etc.

He gave an example of how an approximate 25 per cent adjustment of the exchange rate would affect imports and exports.

EXPORTS

If the rate was TT$8.50 = US$1, an exporter could reduce his export price by approximately 20 per cent and still receive the same income before the rate adjustment. This would make him more competitive thereby increasing his export sales and by extension his production output. He would also be expanding his factory and employing more people. Alternatively, if he did not decrease his price, he would be increasing his export profitability, which would serve as a major incentive for him to export more and increase his foreign exchange earnings.

IMPORTS

Lok Jack explained that any rate adjustment would apply directly to the landed cost of the imported product, thereby making the product 25 per cent more expensive. The locally manufactured product price would only increase by 10 per cent due to the significant local value added. The local manufactured product would therefore become more competitive in price and should increase their market share at the expense of the foreign imported product… an efficient use of foreign exchange.

Given the above examples, the manufacturer could also subsidise the price in the local market with his increased export profits and still be better off, overall. Manufacturing profitability is mainly driven by volume output, which reduces the unit cost of production thereby increasing profit margins.

TOURISM

Tourism could be another source of foreign exchange earnings and is very underdeveloped in TT. Lok Jack said there was a great opportunity given the Sandals project and hoped Government would do whatever was necessary to bring the brand to our shores. He added Sandals would put Tobago on the tourism map and there were many benefits to be had, including increased air-lift to and from that island.

PRIVATISATION

Lok Jack’s next suggestion was that Government should move towards privatising State institutions, as most were currently running inefficiently and losing a lot of money with taxpayers having to pay for the losses. He said that was urgent given the downward spiral in the economy because Government could not afford to fund their operations. At the very least, he said Government should put the right people with the right agenda in leadership roles. He said instead of placing technical people to run State companies, they should put successful businessmen to run and restructure these businesses. He questioned the rationale for Government owning companies such as National Flour Mills, National Petroleum, distribution companies and gas stations etc.

Lok Jack said he was very pleased to see that Government appointed Wilfred Espinet to chair Petrotrin. He said Espinet was an excellent businessman adding he was not an energy expert but he had sufficient people who knew the energy business. Similarly Lok Jack was pleased to see Robert Bermudez, another excellent businessman, appointed Chancellor at the University of the West Indies.

He said the university was a business and education was the product that was manufactured and sold. That product is under the purview of the academic director who would ensure the product and its delivery was of high quality.