Building on Austerity: How Jamaica’s Infrastructure Programme Survives the Margins of a Budget Consumed by Financial Rescue — and What the Physical Country Can Preserve While the Fiscal Country Burns

The second quarter of 1997 opened with Jamaica formally in an economic contraction, its financial sector under the management of an institution that did not exist six months ago, and its new budget year beginning with capital allocations that were constrained before the first road contract was tendered. FINSAC was six months old. Its intervention rolls were expanding. The institutions passing through its process ranged from small building societies to the major insurance groups that had triggered the crisis, and the cost of managing, recapitalising and ultimately disposing of those institutions was now the largest single item in the Jamaican fiscal account. Against that context, the question of what the road maintenance programme would spend in FY 1997/98, or whether the National Housing Trust could expand its lending ceiling, or how the National Water Commission would fund its pipe replacement backlog, was a question answered by subtraction: whatever FINSAC, debt service and the public sector wage bill had not already consumed.

There is a particular discipline that a financial crisis imposes on the physical management of a country. When the money runs short, the roads that can be deferred are deferred, the pipes that can leak another season continue to leak, and the housing schemes that were in the planning phase remain on paper. What cannot be deferred — the roads that have already been broken by trucks that must continue to move goods, the water supply to the hospitals and schools that cannot close, the power delivery contracts that private investors are legally entitled to enforce — continues. Jamaica in mid-1997 was navigating exactly this discipline: a country maintaining the irreducible minimum of its physical infrastructure while directing the remainder of its fiscal capacity toward the rescue of institutions that had, in the preceding decade, failed to maintain the irreducible minimum of their own financial discipline.

The new fiscal year that opened in April 1997 was, in terms of capital spending on infrastructure, the most constrained since the early 1990s. The fiscal trajectory that the World Bank had identified as a concern in its 1996 Public Expenditure Review had worsened in the intervening year. Capital expenditure as a share of GDP, which had averaged around five percent through the mid-1990s, was under pressure from a combination of higher debt service, the recurrent costs of managing FINSAC’s intervention portfolio and the political difficulty of reducing the public sector wage bill at a moment of economic contraction. The residual available for roads, water, housing and the enabling infrastructure of economic activity was smaller in real terms than at any point since the structural adjustment years of the late 1980s.

What Survives the Squeeze

The road maintenance programme survived the second quarter of 1997 in the way that it had survived the preceding year: through a combination of forward-contracted commitments, multilateral programme funding that was not subject to the same discretionary reallocation as purely domestic budget lines, and the institutional momentum of a Ministry of Works that had learned, through long experience of Jamaican fiscal instability, how to manage a programme that was chronically underfunded relative to the network’s actual needs. Resurfacing was happening. Pothole patching was happening. Drainage cleaning was happening. In some parishes, the programme was visible and meaningful. In others, it was barely perceptible.

The pattern was familiar but the context was different. In the mid-1980s, Jamaica’s road maintenance had declined because the economy had no money and the multilateral institutions that might have helped were imposing structural adjustment conditions that constrained public spending. In 1997, the economy still had limited money, but the constraint was not a structural adjustment programme imposed from outside — it was a financial sector rescue designed from within, by a government that had chosen to guarantee the liabilities of institutions whose failure it had not prevented. The political economy of the two situations was entirely different even if the physical consequences for the road network were similar.

Water infrastructure was in a comparable holding pattern. The National Water Commission continued to operate its supply network under conditions of non-revenue water losses that had not improved materially from the seventy percent level documented in earlier years. The investment required to address that problem — network mapping, leak detection, pressure management, pipe replacement and metering improvements — had been discussed in government documents and multilateral reports for years. The gap between discussion and investment remained firmly open. In a fiscal environment where FINSAC was the prior claim, that gap was not closing in 1997.

The Port: A Pocket of Growth

The second quarter of 1997 offered one genuinely positive infrastructure story: the Kingston Container Terminal, operating at its newly expanded capacity of 1.2 million TEUs per year, was handling traffic volumes that confirmed the commercial logic of the Gordon Cay investment. The Caribbean transshipment market was not pausing for the Jamaican financial crisis. Container volumes were growing globally as the shift from conventional cargo to containerisation continued its multi-decade trajectory. Kingston’s expanded berths and yard capacity were positioned to capture a meaningful share of that growth.

The significance for the Jamaican economy extended beyond the terminal’s direct revenue contribution. A port that handles more containers employs more stevedores, generates more logistics work, attracts more bunker fuel purchases and supports more associated service businesses. In a quarter when virtually every domestically-oriented sector of the Jamaican economy was contracting under the weight of FINSAC’s shadow, the port’s steady growth provided a form of economic counter-programming that was easy to overlook but structurally important. Foreign exchange earnings from port services were not trickling through a financial system in crisis; they were arriving in the operating accounts of institutions that, for the most part, were providing services rather than managing leveraged investment portfolios.

Power Steady, Regulation Maturing

The independent power producers continued their uninterrupted delivery of 134.2 megawatts of contracted capacity to the Jamaica Public Service Company grid. Doctor Bird and Rockfort were by mid-1997 settled features of the Jamaican power landscape rather than novelties. The generation reliability they had introduced — dramatically lower load-shedding, greater grid stability, more predictable electricity costs for industrial and commercial users — was now the baseline expectation rather than a celebrated achievement. The Office of Utilities Regulation, in its first six months of formal operation, was developing the regulatory instruments it would need to govern a sector that was now more complex than the single-utility model it had replaced. Tariff methodology, licence conditions, service standards — each of these required regulatory decisions that the OUR was working through in its first operating year.

The OUR’s position in mid-1997 was delicate. Its statutory independence was clear. Its operating environment was one in which the government was managing the most expensive fiscal commitment in the island’s history and was not well-positioned to absorb the public relations cost of significant utility tariff increases. JPS’s cost structure — with US-dollar denominated fuel and equipment obligations being met from Jamaican dollar revenues in a depreciating exchange rate environment — required periodic tariff adjustments to maintain cost recovery. The OUR’s mandate was to permit those adjustments on cost-reflective principles. The government’s political preference was for tariff stability. Navigating that tension was the OUR’s first real test of institutional independence.

Housing: The NHT in a Constrained Market

The National Housing Trust entered the second quarter of 1997 with its funding base intact and its programme continuing, but with a market environment that was challenging in ways the Trust’s structural design had not anticipated. The contribution base — drawn from employer and employee payroll contributions — was maintaining its income stream, since employment levels, while under pressure, had not collapsed in the way that would follow a more disorderly financial crisis. The Trust’s mortgage portfolio was performing adequately. Defaults were rising modestly from the very low base of the mid-1990s, but not at a rate that threatened the Trust’s overall financial position.

The challenge was on the supply side of the housing equation. Construction costs, while no longer inflating at the rates of the early 1990s, remained at levels that made it difficult to deliver units at the price points accessible to the moderate-income earners who represented the bulk of NHT’s potential beneficiaries. Developer finance was severely constrained by the retreat of the commercial banking sector from new lending. Land servicing — the road connections, drainage systems, water supply mains and electricity infrastructure that converted raw land into a viable housing site — was being funded from a public capital budget that had less room than at any point in the preceding decade. The consequence was that NHT was maintaining its mortgage programme — approving loans, disbursing funds, supporting individual buyers — without a matching improvement in the housing supply into which those buyers could direct their approved finance.

FINSAC’s Property Overhang

One of the least-discussed consequences of the FINSAC intervention was the accumulation of real estate assets in government hands. The institutions that FINSAC was taking over had, in many cases, diversified into property through their affiliated conglomerates during the boom years. Hotels, office buildings, retail centres, residential developments, agricultural estates and undeveloped land had all found their way onto the balance sheets of the insurance companies and merchant banks that had built Jamaican financial conglomerates through the early 1990s. As FINSAC assumed control of those institutions, it inherited the property portfolios.

The significance of this accumulation for the property market would not become fully apparent until FINSAC began its disposal programme — a process that was, in mid-1997, still several years away. But the eventual scale of government-managed property disposal would be substantial. When it arrived, it would add supply to the commercial and premium residential market at prices that reflected the government’s interest in recovering value from assets it had acquired involuntarily, rather than the speculative premiums that had characterised those assets at the peak of the boom. For buyers and developers with the patience and the capital to wait for those disposals, the FINSAC property overhang represented an opportunity. For existing owners of premium property, it represented a medium-term competitive pressure that would take years to fully resolve.

What This Means

For homeowners, mid-1997 is a period in which the most practical action is to secure the NHT relationship and maintain it carefully. For homeowners already within the NHT system, the contribution record and the accumulated loan entitlement that flows from it represent a financial asset that is more secure than most of the alternatives the current environment offers. For those not yet in the system, ensuring consistent contributions is the single most valuable housing-specific action available in the current environment.

For buyers, the environment has one tentatively positive feature: the rapid decline in inflation means that NHT loan ceilings, which were set in nominal terms, now go somewhat further in real terms than they did two years ago. The range of properties accessible within NHT financing has not dramatically expanded, but it has not contracted in real terms as sharply as might have been expected. The commercial market remains effectively inaccessible to most buyers. NHT is the market, for the broad middle of Jamaican home-seekers, and NHT is functioning.

For sellers, the second quarter offers more of what the preceding three quarters have offered: a thin market, a narrow buyer pool and price expectations that must be calibrated to what NHT-financed buyers can actually afford. The upper market, where buyers historically required commercial finance, is effectively paused. Properties that can be positioned within NHT’s accessible range are transacting. Those above it are not, for the most part.

For developers, the most important strategic question in mid-1997 is what form FINSAC’s eventual property disposal will take, and on what timeline. Developers who can position themselves to acquire serviced development land from FINSAC’s disposal programme at value-reflective prices will find that the rescue’s painful legacy includes a genuine opportunity for those with capital and patience. The timing of that opportunity is uncertain. The characteristics of it — distressed pricing on well-located assets — are not.

For investors, the second quarter of 1997 confirms what the first quarter established: private infrastructure with contractual protections is performing, the port is growing and the regulatory framework for utilities is functioning. These are not the exciting stories of a boom economy. They are the more durable stories of an economy that has built something real that will still be there when the crisis ends. The investors who understand that distinction and position accordingly will be better placed than those who are waiting for the macroeconomic indicators to turn positive before looking at opportunities.

For businesses, the second quarter brings the continued benefit of lower inflation: input costs are no longer rising at the rates that made forward planning effectively impossible in the early 1990s. Power supply reliability, while not perfect, has materially improved from the pre-IPP baseline. The port operates at capacity. The practical challenges are credit access and domestic demand: consumers who are feeling the impact of FINSAC through their savings and insurance policies are spending less, and businesses that depend on domestic consumption are feeling that reduction directly.

For commuters, mid-1997 brings no material change in the Portmore causeway situation and no organised public transport development. The road damage from the preceding wet season is being addressed through the dry season programme that is now beginning to mobilise. The results will be visible in some parishes and not others, depending on where the budget residual directed its attention this year.

For the diaspora, July 1997 is the moment at which the investment case for Jamaican real estate begins to look different from each direction. From inside Jamaica, the market is depressed and buyers are cautious. From outside Jamaica, the combination of a weaker exchange rate, lower nominal prices and the prospect of an eventual FINSAC property disposal programme creates a context in which diaspora buyers with US dollar savings are looking at a different opportunity than they would have seen in 1994. The practical challenges of transacting from abroad remain: legal representation, title verification, property management in a difficult environment. But the underlying value proposition is strengthening as the crisis deepens, counterintuitively enough.

The Outlook: July 1997 to December 1998

The eighteen months ahead will be characterised by FINSAC’s ongoing intervention and the economy’s gradual adjustment to the new fiscal reality it imposes. GDP growth is expected to remain negative through 1997 and into 1998. Inflation will continue its decline. Interest rates will begin to fall, slowly and with a lag, as the monetary environment stabilises. The property market will remain thin. The road programme will operate at the margin of its funding. The port will continue to grow. The power supply will remain more reliable than the pre-IPP baseline.

The event that Jamaica’s infrastructure watchers should mark in their calendars for the next eighteen months is the beginning of the discussion about what replaces the infrastructure investment capacity that FINSAC has consumed. That discussion will not produce visible results in 1997 or 1998. But it is the discussion that will eventually shape the decisions that follow the rescue — about the highway programme that has been in discussion since the early 1990s, about the organised public transport system that the Portmore commuter community has been waiting for since 1983, about the water network rehabilitation that every international assessment has identified as structurally necessary. When the fiscal space reopens, the decisions about what to build first will be made by people who are, right now, managing the consequences of choices that were made when the money was easy. The lesson of FINSAC, for infrastructure planners, is the one that it is always cheapest to learn before the crisis: the quality of the institutional framework within which investment happens matters more than the volume of the investment itself.

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