Keith Collister, Contributor
MATALON
JOSEPH 'JOE' Matalon is so sure Jamaica's future is in the service sector that he has staked his family's fortune on it.
Of course, as a member of the prominent Matalon family, he is also responsible for much of that family's remaining business interests in Jamaica, and particularly in the reformulated ICD group. He is better known to the wider public for his public service as chairman of the Jamaica Tax Reform Committee that produced the so called 'Matalon Report'.
"Services are the future," Mr. Matalon stated definitively. But he cautions that this is not to say that, "where we have or can create an advantage in the real sector we shouldn't."
From an economy which had once been dominated by sectors such as agriculture, mining and manufacturing, by 2004 services contributed 72 per cent of Jamaica's Gross Domestic Product, according to the Economic and Social Survey. And that dominance has been growing.
Huge potentials remain for the development of services, Mr. Matalon says. In his view the tourism product, for example, remains substantially under-developed relative to the resources available in Jamaica.
A London School of Economics educated economist, Joseph M. Matalon joined the family business in 1983 at the age of 23 as a financial analyst after a stint at Alcoa U.K., and Alcoa's head office at Pittsburg in the U.S. Rising to chief operations officer of ICD, then a public company listed on the JSE, Joe Matalon was chiefly responsible for ICD's delisting, and subsequent pooling with other Matalon family interests including the construction company West Indies Home Contractors (WIHCON) and Prime Life to create the Mechala Group, which was financed through the international issue of U.S. dollar high yield corporate debt.
However, the original plan had been to raise equity rather than debt to finance the creation of the Mechala group, and although its finance business did well, the combination of high leverage and the domestic housing, manufacturing and trading businesses performing poorly
in the 1996-1999 period of Jamaica's financial crisis ultimately led the group into financial difficulty.
ICD'S RESTRUCTURING
In December 1999, the Matalon family bought back Mechala's corporate debt at 51c on the dollar, bringing to a close its highly publicised financial problems. This was part of an operational restructuring plan that involved the group exiting from manufacturing and trading, and focusing on its financial and home building businesses. This divestment and rationalisation mainly reflected the view that there was no "silver bullet" to fix these poorly performing businesses e.g. Facey Commodity, which would require more management time and capital than the group was prepared to spend.
The businesses comprising the new ICD include WIHCON (the largest provider of housing solutions in Jamaica), British Caribbean (Jamaica's third largest general insurance company), CGM (a property and casualty brokerage now expanding regionally), and Prime Asset Management (now a pension management business). The group also has an extensive real estate portfolio.
WIHCON's book of business includes substantial housing projects in MoBay and Old Harbour, as well as 17 school projects as part of the Government's current school building programme.
The assets that have been disposed of include Facey, Serge Island, Shopper's Fair, Prime Life Insurance Portfolio and 40% of Pan Caribbean (as a result of its merger with Sigma/Manufacturer's Merchant Bank.) As a consequence, the group is now debt free, with a drastically reduced head office cut from 112 to 5 key management positions.
The Road to the Matalon Tax Reform Committee
As a vice president of the Private Sector Organisation of Jamaica in 1984, Mr. Matalon was one of a couple of PSOJ representatives on the Tax Reform Committee of the 1980's, and was subsequently part of the 1991 Committee planning for the introduction of General Consumption Tax (GCT), before finally becoming chairman of the Tax Reform Committee in 2004.
His most important conclusion from this experience is that it is critical to lower the tax rate to get people to move out of the informal into the formal sector, as they won't do it at our current high personal tax rates. Only by widening the tax base in this fashion will we be able to reduce the burden on the Pay As You Earn (PAYE) taxpayers, who are currently subsidising the rest of the population - in his view a clear case of inequity. Moreover, the pressure on the PAYE cohort means that labour is being taxed at very high rates which is likely to stunt productivity growth and formal job creation. Unfortunately, he believes that the Government's fiscal situation makes it much more difficult to move aggressively on tax reform.
GCT PERFORMANCE
One of the Matalon Committee's recommendations was to raise the rate of GCT by 1%, and further narrow the range of exemptions. The GCT was actually raised by 1.5%, but has underperformed significantly against budget. Mr. Matalon believes that it is unlikely that this slightly higher than recommended rate was chiefly responsible for GCT's underperformance. In his view, the more likely explanation is that GCT revenue increases were over projected, along with the impact of various factors on consumers purchasing power last year.
Nevertheless, he believes that there may also be some element of diminishing returns to increased taxation, and recommends that the approach should be to broaden the revenue base rather than raise the tax rate going forward.
In his report, it was recommended that Excise Taxes on Gas should be rolled back to 1999 levels in current values, and that this revised excise base should have GCT applied to it. The logic of the recommendation is that higher taxes are justifiable, as taxes on motor fuels in Jamaica are lower than many countries, including some oil producing ones, despite the fact that we don't currently produce a drop of oil.
FISCAL POLICY
Mr. Matalon argues that fiscal policy is one of the few levers a small developing country has left in today's globalised world to influence its development. Having objectively surveyed our tax system, he believes one cannot describe it as a system designed to promote growth and productivity. Neither is it equitable given its current administrative practice. In addition, he believes the threshold is far too low, and should be at least $500,000 Jamaican or $8000 U.S.
The Government needs to substantially upgrade their fiscal policy research capability, perhaps through setting up a Fiscal Policy Institute based at the University, which could look at tax issues on a Caricom wide basis, he says. One area of research could be to look at whether a more uniform, low rate tariff structure offered significant benefits, as the Government cannot change Caricom arrangements unilaterally.
Other areas that need to be looked at urgently include our current rate of corporate income tax, and transfer and stamp duty, if the country is to have any chance of making a leap forward economically.
"Jamaica does not have a shortage of good plans and ideas," he says. "Where we have fallen down is implementation. You can successfully plan, but if you don't implement you haven't added any value".
