Freeport the right way forward

Grand bahama business outlook presentation march 5th 2015 | Freeport the right way forward | By sarah st george

Protocol having been established,

Good Morning everyone!

Firstly, I wish to thank Joan Albury and the Counsellors for this platform enabling us to share with the Grand Bahama community, the outlook for our island! 2015 marks the 60th year of the birth of Freeport and the Hawksbill Creek Agreement; 60 years of a partnership between The Government of The Bahamas and The Grand Bahama Port Authority. I’m here to raise hopes for 2015 and to lay a few popular myths to rest – For those who don’t know me, I am Sarah St George.

Let’s start by looking at the World around us – as we can’t look at ourselves in splendid isolation in these ever-changing markets. To quote from Baumant & Bordoni’s book State of Crisis, “Governments are bound to seek LOCAL solutions to GLOBALLY generated problems”.

Global problems are Black Swan events like 9/11, the sub-prime mortgage collapse of 2008 and the world recession. And by the same token, the Nation’s challenges are ultimately ours in Grand Bahama.

The blame game

The Nation’s issues are those of most other countries; Government Debt as an increasing chunk of Gross Domestic Product (GDP) – here currently 60%; national interest payments, which must be met to avoid down-grading by Moody’s, or worse – devaluation pressure on the Bahamian dollar, and scant access to future funding. Those scenarios would negatively impact Freeport too. Hence the nationwide advent of VAT, which is a thorny subject!

The National Debt is $5.4 billion and this year’s National Interest and Principal repayment is $357 million. The overall Government Deficit is forecast to be reduced by 40% to $384 million in 2015 as a result of new VAT revenues estimated at $300 million. I’d say none of that Government Deficit or Debt relates to Freeport, but obviously we must play our part in the Country’s turnaround.

Our economy also affects the Nation. Freeport GDP is conservatively estimated to make up about $1.5 billion or 15% of Bahamas GDP, although it could be a healthy 20% or more. But let’s first look at the Micro Economy of Freeport. What does the GBPA and Port Group of Companies contribute to it? What is the role of the GBPA?

The Local Landscape

The GBPA is a self-funded, ‘non-profit’ Centre of Administration for Freeport which directly contributes an average of $10 million a year to the economy with an all-Bahamian workforce. It’s role includes; Municipal Administration, Regulatory Responsibility, Building & Sanitary Code & enforcement of standards, Town Planning, Environmental Policy & Byelaws, Digital Mapping, Promotion of Public Private Partnerships, and Promotion of Freeport (Ian Rolle will speak to that area called InvestGrandBahama). The monies are a complete flow-through of Licence Fees and Service Charges. To clear up another myth, no dividends are paid out. It’s a zero sum equation.

The GBPA is also community conscious so last year, close to $1 million went towards; Education & scholarships, Sir Charles Hayward Library, Columbus House home for teens, Northern Council for Disabled, Red Cross, Keep Grand Bahama Clean, GB youth Choir and Junior Achievement, Sports, Cultural activities such as Junkanoo & Goombay Festival, GB Humane Society, Small Business Development, Religious conferences and other sponsorships.

Let’s look at GBPA’s Licencing department and address another myth about lack of transparency; Licencing is standardized and that committee is headed by Nicole Colebrooke. It includes the GBPA Chief Financial Officer, GBPA General Counsel, GBPA head of business development, the President of the GB Chamber of Commerce and one representative of our nation’s Royal Bahamas Police Force. No shareholder sits on that Committee. You need an application form, a copy of your passport, police record certificate and a processing fee of $250 (+ VAT). Last year, 99.9% of Bahamian Licence applications were approved. Decisions can be made in 48h via e-communication. Non-Bahamian business Licence applications require a

financial reference and two business references. About 2 to 6 weeks are needed for submission to the Bahamas Investment Authority in Nassau for notation.

GBPA City Management, lead by Troy Mckintosh, carries out road repair work, drainage installation & maintenance, bulk trash removal, removal of derelict vehicles, verge improvement, clean-up of illegal dumping – at no cost to Government.

The GBPA Building Department, headed by Arthur Jones, ensures safety and protection for homeowners and business owners with structural inspection, framing inspection, mechanical inspection, electrical inspection, and plumbing inspection – again at a very high standard and no cost to Government.

GBPA’s Environment Department is spearheaded by Nakira Wilchcombe who has drafted additional provisions to further strengthen our existing bye laws relating to sewage management, operated to best international practices. She also has responsibility for all matters concerning coastal & freshwater resources, native vegetation, wetlands, environmental nuisance, refuse, construction debris, abandoned vehicles and more. She conducts environmental impact assessments (EIAs), environmental approvals, industrial monitoring, monitoring of accidents and emergencies as well as pollution and waste management – again at no cost to Government.

Freeport is the Industrial capital of The Bahamas and we at the GBPA have to constantly re-evaluate and balance man-made capital versus our natural capital. In a lighter vein, on the landfill site, Sanitation Services keeps a herd of goats to mow the grass (per best practice fire prevention), instead of heavy machinery, so as not to disturb rare birds nesting in the turf. This is an example of how the right regulator can spur innovation. We are now the leading Bahamas Island for number of Bird Species – some 140 according to Cornell University. BirdsCaribbean, the largest bird conservation organization in the Caribbean, are basing their headquarters in Freeport. This delicate balance between development and environment has fostered Eco Tourism and we have now about 40 thriving Eco tours for our tourists, ranging from kayak tours through the wetlands to bird watching, bone fishing, jeep tours, bike tours, shark dives, dolphin dives and more. The GBPA regulates the Grand Bahama Power company by means of a Regulatory Framework Protocol, the first of its kind in The Bahamas, with a transparent rate-setting process and regular performance monitoring through monthly reports. Against the backdrop of a dramatic

reduction in the frequency of power outages, for example, GBPA receives ‘Reliability’ reports like SAIFI (System Average Interruption Frequency Index) which measures the frequency of outages and SAIDI (System Average Interruption Duration Index) which measures the average duration of the outage. Since implementation of the framework and start-up of the brand new 52MW Generators, GBPC reliability has increased by 60% and even outperformed targets set. With efficiencies in the new plant, the price of electricity has decreased to 32c/kWh compared with a high in 2012 of 42c/kWh. Less fuel is wasted as ‘heat’ inefficiency, typical in older generators, and system losses are lower. A fuel hedging policy keeps stability in prices and oil prices are down. Compressed natural gas (CNG) is still in the pipeline, along with other developments in green energy. I’m happy to say there’s a renewable biofuel energy project, using vegetable oil from the Jatropha plant and waste cooking oil, scheduled to come on-stream in the 3rd quarter of this year. This will be a first in The Bahamas and provide a Jatropha cultivation market for farmers. Also, a 5-6 MW Solar Farm Plant is slated for 2016 so, hopefully, we’ll be one of the first solar farms – or the first solar farm – in The Bahamas, and set the bar high in terms of renewable energy versus traditional fossil fuel.

Freeport’s Municipal Services are provided by the GBPA & joint ventures (JVs) of the Port Group of Companies and PGL itself. Excluding JVs, Port Group (PGL), directly contributes about $19 million annually to the local economy with 100 plus, all-Bahamian jobs. PGL equally engages in road and subdivision maintenance, scholarships, sponsorships and promotional activity. Municipal Services encompass garbage collection & sewage disposal, water supply and distribution for the whole of Grand Bahama, the International & Domestic Airport, the Harbour & Cruiseport, supply and distribution of electricity to the whole of Grand Bahama by Emera (which GBPA regulates), road repairs, landscaping, city beautification, general infrastructure maintenance and low cost housing programs …all to high international standards and at no cost to the Government.

Sometimes the GBPA gets a lot of flak, but we are very proud of our dedicated team working day in and day out! I want to take this opportunity to say thank you to all our managers, and employees for working so hard to make this little island one of the best in the Caribbean.

Freeport’s pride in her appearance itself attracts and holds the attention of those tourists and investors to whom promotion is targeted. This public/private sector model is increasingly accepted in the modern world as better for the consumer, more efficient and cost effective. For example, reducing unnecessary regulations is a high priority on the US national political agenda. In 2011, President Obama issued an Executive Order calling for a comprehensive review to improve the regulatory system. As noted in the Executive Order, policymakers should “identify and use the best, most innovative, and least burdensome tools for achieving regulatory ends.”

The Business Sectors of activity here in Freeport are diversified and most sectors are beginning to grow again. Air and Sea passenger arrivals are up by 40% and 1.4 million people are expected to come to Grand Bahama this year, bringing more tourism jobs. According to the Prime Minister, Hotel occupancy on Grand Bahama has increased by 56% in the last 12 months alone said the PM. And with the new and larger Celebration and Balearia Ferry bringing thousands and thousands more visitors, the Grand Lucayan Resort has already exceeded last year’s performance. Inventory demand is outstripping capacity on the Lucayan strip for the first time since 2004. Many of our existing Industrial partners are set to expand to the cumulative tune of some $800 million. We are on the cusp of a metamorphosis into the biggest and best transshipment container port in the region. KPMG are still working on ‘The Economic Impact’ of ALL businesses in Freeport to the local economy today. This is in the hundreds of millions of dollars and thousands of jobs and will paint an even more complete picture of the vital need to preserve and grow this barely 60yr old economy. Remember Nassau has been a capital for some 300 years.

The Bigger Picture

Let us shift from the Micro to the Macro picture again. What does Freeport contribute to the Nation? We estimate that Freeport makes up some 15% of Bahamas GDP, but what does Freeport send to the Treasury and Government in Nassau in terms of Direct and Indirect annual Government Revenue?

KPMG has helped estimate all taxes and duties paid out of Freeport to Government including; Airport taxes; Hotel taxes, Vehicle Licence tax, Import Duties, Fuel Excise Tax, Stamp Tax on conveyances, Stamp Tax on banking, corporate and other transactions, cruise passenger taxes, work permits, communication fees & operating profits, and sea-bed leases. We estimate these to total some $144 million annually.

If you add Freeport’s indirect contribution to the Treasury in NIB contributions, the figure becomes $188.5 million. And if we add VAT estimated at $20 -$40 million this year, it surpasses $200 million. With the right kind of economic incentives, revenues from Freeport to Central Government will only increase.

Conversely, you have to offset this with the national contribution to Freeport. The Government pays for public education services, public healthcare, justice and security – courts, the police, the fire brigade, customs and immigration, tourism promotion and subsidies such as airlift,

sealift, the casino – the subsidies amounting to $27 million per annum according to the Prime Minister. We are not able today to quantify the cost of government services to Freeport and the wider Grand Bahama. This would allow the calculation of “net contribution’ of Freeport revenue to Central Government, which I think is an interesting figure in the context of our concession renewal talk.

Also in the mix is the cost to build Freeport again today, which KPMG estimates at around $11 billion; physical and industrial infrastructure, tourism and social infrastructure. In terms of private equity capital investment, this means what it would cost to build another Freeport. Physical infrastructure is roads, canals, airport, utilities, – approximately $2 billion; Industrial infrastructure would be the container port, shipyard, manufacturing, commerce – roughly $4.5 billion; Tourism infrastructure is hotels, golf courses, cruiseport, marketplaces – about $1 billion. And finally Social Infrastructure comprising residential, hospitals, schools, parks – some $3.5 billion. This is almost all long-term private equity investment. That level of investment in only 60 years is phenomenal and unlikely to be replicated.

So yes, Freeport has, I think, brought home the bacon and does pay its way and is ready to do more. I hope this dispels the myth that Freeport gets a free ride. Have we delivered on our side of the bargain? I would say yes, resoundingly.

A peek at Hawksbill Creek

GBPA has always complied with its mandates although I won’t go through everything back to the 1960s. The last set of mandates included 2.5 acres of land for a Justice Centre and building the Garnet Levarity Justice Centre for $3.5 million; land and building of two new Government High Schools (St George’s High & Jack Hayward High) – in all some $9.6 million. GBPA built and still funds a Children’s Library with $200,000 per annum; we built the Arts & Crafts Centre. We gave 80 acres and built the Sport Track & Field Facility for $2.5 million, assisted in the creation of local government with a $2.5m contribution plus 12 public parks donated, also bus shelters, sidewalks and so on. Additional contributions include 50 acres of land valued at $6m for a new Hospital in Grand Bahama, donating land for Police Headquarters, building the new waste water treatment plant and sewer plant for $5 million, introducing new environmental policies and more. It is perhaps no coincidence that in the 10 years prior to the last concession renewal, there was very little growth at all and virtually no foreign investment here through the whole of the 80’s!

Suffice it to say, that in the last 22 years we have seen establishment of the Container Port, Polymers, Pharmachem, a new International Airport, Bradford Marine, BORCO (Vopak then Buckeye), Columbus Communications, Quality Services, the Grand Lucayan Hotel, a new Power Plant, Fortune Cay and Shoreline residences, Pelican Bay, the First Commercial Centre building, Solomon’s food stores, and my apologies to those not mentioned. But the real estate front stalled after the 2008 recession and Tourism was hit hard by 9/11 and the Hurricanes. Nevertheless, in the last 15 years we also promoted and assisted the remarkable creation of the number #1 Shipyard Repair Facility in the world providing some 500 Bahamian jobs today. Port Lucaya Marketplace now has new retail owners. A new $4 million bridge across the Grand Lucayan waterway will open in August and a Grand Bahama Museum at the Garden of the Groves is under construction.

So which Hawksbill Creek (HCA) provisions expire in August this year and what remain? The Exemptions which expire are those in in Clause 2 (6) (7) (8) relating to exemptions from Real Property Taxes, Personal Property Taxes and Taxes on earnings. The Exemptions which remain relate to Customs Duties within the Port area both import and export, Stamp Taxes or levies on monies remitted by banks outside the Bahamas, Excise Taxes and export taxes or levies on goods other than for personal use. GBPA feels that VAT legislation is still open to interpretation under the HCA specifically with regard to Services, Utilities and rentals but that is an ongoing debate with the Attorney General’s office.

What rides on the expiring concessions? The impact of additional taxes must be weighed against the urgent need for growth and stability in Freeport. Competitiveness and simplicity of regulation are the ideals.

As said earlier, in the pipeline, there is some $800 million of expansionary investments in Freeport from existing stakeholders like the Container Port, GB International Airport, Freeport Harbour Company, GB Shipyard, PharmaChem, Polymers International, Lighthouse Point and others.

Extending the concessions will boost investor confidence within and without The Bahamas. It will unlock that $800 million of much needed expansion and modernization. It will attract new investments and create new business opportunities for Bahamians. Last but not least, it will significantly increase Freeport’s direct and indirect contributions to the Government Treasury and NIB.

A realm of possibility NOW

The time to invest is NOW! Today, the US economy is experiencing a 3.6% growth for the first time in the last 10 years. Oil prices are 50% lower than in 2013. Libor interest Rates are at their lowest in decades. This is a period of “Expansionary Disinflation” – Growth without consumer prices going up. More spending-power in tourist and investor pockets – And ‘One man’s spending is another man’s income!’ This is the PERFECT STORM in the good sense of the word with the wind at our back!

We need to entice these new investors. The Economic Potential of Freeport can be unleashed by certainty of incentives and ease-of-business as other Caribbean countries around us promise. Today, we should look at expanding our concessions – not the reverse! Enterprise City in the Cayman Islands created through a public-private partnership, is a special economic zone much like the one that exists between GBPA and the Government, the only difference being they offer more incentives than we have in Freeport. Enterprise City is 100% exempt from corporate tax, capital gain tax, sales tax, income tax and import duties, 5 year work permit/residence visas are granted for staff within days, no restrictions on staff, regardless of origin or position, fast-track set-up of operations, no government reporting requirements. As a result in the last 20 months, 433 new companies are there, or on their way, with a $40 million direct impact on Cayman’s local economy. They market themselves as ‘a strategic base with easy access to lucrative North & Latin American markets’. Does that sound like us? In other words, these people have flown over Freeport to get to the Cayman Islands to invest in Enterprise City! We can’t close this chapter about competition without mentioning the elephant in the room; Cuba – The competition will be even greater when Cuba opens up!

We can, as Brian Moree said, and we MUST, “leverage our smallness” by being more ‘nimble’ than larger Nations. The concession clock is ticking, the pressure is mounting locally and globally – so we’re not just going to stand there – it’s time to negotiate, and that, Ladies and Gentlemen, is precisely what we shall be doing for the next few months!

Thank you,

The end

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