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CAPITAL CONCERNS
Part VI

Published Thursday 18th October, 2007

Economic and Financial Aspects

In a recent article, we reflected that, despite widespread modernizing aspirations, our behaviour seems incompatible with the attitudes required by modern development.

In fact, in terms of how development issues are handled, we seem to have changed little from colonial times.  The guiding assumption during the colonial period was that there was little point in discussing proposals with ‘the natives’ since they might not understand and in any case it was all for the development of the empire anyway.  Given the prevailing attitudes, you have to wonder how far we have come. 

What we need to strive for is an understanding of what is the appropriate process for our planning our important places.  The recent columns in this series have highlighted the perils of relying on an approach which ignores financial and economic planning.  The point is that our low level of financial literacy can blind us to considerable errors and oversights in our development process. 

What are the indications of this low level of financial literacy?  Some key points are –

·         Feasibility Tests - What logical process could have ratified the financial viability of the wave of office schemes being built in our capital?  Was such a comprehensive approach taken by the promoter/s of these schemes?  More to the point and for those who might feel that we are over-emphasizing the office development issues, we can consider the proposed commuter rail proposals.  It seems that the Minister of Works and Transportation is willing to proceed without feeling obliged to release the results of the feasibility analysis.  That approach demotes financial concerns to the bottom of the page.  It is met with little popular outrage and is a direct example of money being the problem.  Would this approach be accepted in the private sector?  It may shock some readers, but the answer to that question is not necessarily in the negative.  The deficit in terms of financial literacy is a national consequence of the overabundance of monies.  Surely someone in the State must have details of what we are going to be ‘saving’ when the new buildings are occupied – I wonder how much it works out per sq. ft?  The silence on the financial rationale for these office schemes is eloquent.

·         Depletion of Capital – An ongoing cry is for more pro-active maintenance of public properties and there is no doubt that some urgent action is needed.  The accustomed cycle is one of new buildings/facilities being opened with much fanfare, followed by a decline into leaky roofs, unpainted walls, broken windows and so on.  This is then followed by high-profile announcements of renovation or replacement of those deteriorated properties.  We seem unable or unwilling to do the boring, but necessary, work of maintaining our public facilities.  We need to become aware that it costs much more to do major renovations or replacements - in economic terms that is a continuing depletion of our society’s capital stock.  That is one of the more serious concerns with respect to this new wave of construction of State buildings in our capital – What plans are there for the proper maintenance of these?  If we are failing to maintain our stock of basic buildings, how are we going to overcome that challenge with these new, first-class buildings?  There is a real case to be made for emphasizing that aspect of the current development wave since it can represent opportunities for new businesses and employment.

·         Public Goods and Betterment – There is another species of development which can provide public goods – i.e. a facility, provided or preserved at public expense, which adds to public welfare.  Examples of Public Goods would include the Queen’s Park Savannah, the Brian Lara Promenade and the Priority Bus Route.  If we accept the principle that owners should be compensated for loss of property in the case of acquisition by the State, what about those whose properties increase in value as a result of public goods?  Should they pay increased taxes?  If not, why not?

·         The Tax Base – As we started to say above, the tax base is seldom mentioned here as a point in the property development discussion.  Our property taxes are abysmally low and this will be fully explored in later columns.  The practice in other more developed places is to locate development proposals in a tax context with scheme promoters contrasting present levels of property taxes with those which would be earned upon completion.  We need to start considering those aspects.

·         The limits of legality – We need to recognise that legality and clean audits are only necessary conditions.  They are not, as we are often led to believe, sufficient. 

It is possible to do a great deal which is legal and ‘above board’ but which nonetheless makes no economic or financial sense.  As the late, great Grandmaster used to say – ironically enough, about another frustrating, moneywasting public project – ‘More money dan sense!’  As we shall soon see.

Next, we discuss the physical planning of our capital.

Afra Raymond is a Director of Raymond & Pierre Limited.  Feedback can be sent to afra@raymondandpierre.com. 

Afra Raymond - Property Matters

What we need to strive for is an understanding of what is the appropriate process for our planning our important places. The recent columns in this series have highlighted the perils of relying on an approach which ignores financial and economic planning. The point is that our low level of financial literacy can blind us to considerable errors and oversights in our development process.

‘Proper Public Purpose?’

Readers will know that some effort has been put towards explaining the capital’s many State-sponsored office buildings.  It is clear that this market is about to become flooded with space with a consequent decline in open market rental values, in a situation of runaway construction costs with rising ‘break-even’ rents.  It is paradoxical that those very buildings which will cause that rental decline will themselves be in jeopardy of failing since their ‘break-even rents’ are at very high levels.

But the burning questions are – What did the State know?  And maybe more importantly, When did they know it?

In the course of researching the series I read a speech of the Minister of National Security, delivered on behalf of the Prime Minister, on 26th June 2006 at a ceremony to mark the Restoration of Civic and Municipal Rights to the City of Port-of-Spain.  The full text was reported in the Guardian of 14th July 2006 and in relation to our expressed concerns it includes the perturbing statement that –Expenditure associated with rentals of property in the City Centre in past years is in the range of millions of dollars.  The Government knows by building these facilities the advantage would be that it would reduce the cost of rent in the city.

The most reasonable reading of that statement is that it was a fundamental intention of the government to cause office rental values to decline.