Sarah St George Remarks at the Chamber of Commerce Luncheon
Freeport not Fee port
Good morning Everyone – Distinguished Guests, my GBPA Colleagues and Friends!
First let’s show our appreciation to Kevin Seymour and everyone at the Chamber for these lunch meetings?! We all enjoy them and I’d like to say a big thank you for inviting me here today to speak. In fact, turning it down wasn’t an option with Kevin and Mercynth, but I’m truly honoured you’ve all come today – as I guess the only thing more alarming than an audience is no audience at all! My father Edward always encouraged the Chamber to play its part in bringing investors to Freeport and we are all in this together!
Of course I believe, and I think you all believe, that Freeport should be the Free Trade Zone it was intended to be. We need to catch up with our competitors in the Region. We need to add to the Public Purse through growth not fees. So I’m loosely calling this “Freeport not Fee port”.
I want to talk to you a bit about the MOU we signed with Government in May, and the incumbent Legislation. This might well be called: The GRAND BAHAMA (PORT AREA INVESTMENT INCENTIVES) BILL 2016 which is a bit of a mouthful. It could simply be called, “The Freeport Grand Bahama Act 2016” like the one passed in 1993, but you know how lawyers are!
In the end, everything more or less boiled down to Real Property Tax and Stimulating the Economy of Freeport – Two issues. Two hot potatos, in one hot-bed of debate, and GBPA in the hot seat. I’ll come back to this in a minute – not to my hot backside – but to the methodology.
You know the history of this – Have you ever done one of those IQ Tests which say: “What number comes next in the sequence? Well, the expiring Clauses originally ran for 30 years 1960-1990. The renewal was for 25 years 1990-2015. So next in that sequence is coincidentally 20 years 2015-2035; a good consistent result for the business community (and Kevin, on the upside it means your Committee won’t have to worry about this again till you reach the ripe old age of 3 score years and 10!).
You’ll notice we haven’t used the word ‘extension’ as this is not an ‘amendment’ of the HCA but a Grant of New Concessions in Like Terms, meaning as regards Property Tax, Taxes on Capital gains and Capital appreciation and Taxes on Earnings. That’s a technical but important distinction, as it means the MOU does not in any way breach the HCA and does not require what one might loosely call a Licensee ‘Referendum’ (I hope Fred doesn’t get any ideas!). We’ve had BREXIT in Britain and probably do not need FREXIT in Freeport! We’re just aiming to FIXIT right?
But I’ve just been in England and what happened there is fascinating with good lessons for us to learn as a Sovereign Nation, in a world of Sovereign Nations, and of course as part of the Commonwealth. What a few weeks we’ve seen – We celebrated a Happy Bahamian Independence Day last Sunday July 10th. Yesterday was a sad French Bastille Day. There was US Independence July 4th (Donald Trump we know but what about Bernie Sanders whose delegates have vowed to raise a stink at the Democratic Convention – quite literally – by eating as many beans as they can to send a strong-smelling message to Hillary Clinton – True!). BUT the biggest surprise was ‘Breakaway UK’, where UKIP the UK Independence Party forced the ruling Tory Party into a Referendum on June 23rd, which against all odds voted for a British Exit (or BREXIT) from the European Union (or EU). On a lighter note, it’s slightly disconcerting that the day after the referendum the two most googled questions in England were: “What is BREXIT?” And even more worrying “What is the EU?!”
Anyway, Jeremy Kinsman former Ambassador to the EU said, the fatal flaw is that “a Referendum succumbs to Emotion” and seeks “a superficial binary yes/no answer to complex questions”. Sound familiar? That’s why, he said, the Referendum process is; “the Nuclear Weapon of Democracy”.
And the UK’s may cause long-term “fall-out”. In Army lingo, that’s referred to as “Collateral Damage”. In Sociology, Robert K. Merton devised what he called “the Law of Unintended Consequences”. More prosaically, Oscar Wilde applied it to basic manners & etiquette, writing, “A true Gentleman is one, who is never unintentionally rude”! But we human beings simply cannot control everything. Frederic Bastiat a well-known 19th Century economic journalist said: “the good Economist takes into account both the effect that can be seen and those effects that must be foreseen”.
Now, not all accidental outcomes are bad, for instance the UK will have a Woman Prime Minister…And the inimitable Boris Johnson is now the UK Foreign Secretary as relates to Bahamas/UK affairs…But at the cost of Parliamentary pandemonium, which saw the loss of UK Prime Minister David Cameron; Scottish separatism; the collapse of the Opposition Labour party leadership; and the resignation of UKIP Party Leader Nigel Farage.
Asks one expert on Caribbean integration and development, Aurelia Bruce; How will an EU without the UK, affect us and our Trade Agreements, like the EPA CARIFORUM which governs Trade between the Caribbean and EU, or The Transatlantic Trade and Investment Partnership Agreement (which is still being negotiated); Will it reduce UK aid to this Region? And will it affect the EU’s mindset without the same historic British ties to the Caribbean? Of course, most of us are too young to remember that the EU and similar treaties like NATO, the WTO, World Bank and IMF were in fact formed to hold in check the kind of nationalism that sparked the Two World Wars! It’s about interconnection not disconnection.
As this is the Chamber of Commerce, let’s look at the Business impact. Whether the BREXIT result was Good, Bad or Indifferent, Global Financial Markets treated the Pound as a word beginning with ‘sh’ and ending in ‘t’ – yes it was sold “Short”. Its value dipped to a 30 year low. S&P (Standard & Poor) downgraded the UK from its precious AAA (triple A) Credit-Rating to AA (double A). As you’ve seen discussed here, where the Bahamas is at BBB (triple B), a weak credit-rating restricts Liquidity. It raises your cost of money and reduces your access to it, which is the antithesis of Growth. $52 billion was wiped off the UK stock exchange within 48 hrs. The Pound’s status as a Reserve Currency was questioned, and even English itself as the European language of choice. Again how is that relevant to us here? Well, I doubt we’re all going to start speaking German anytime soon, but the Moral of the Story is that, in this digital age, ‘Unpredictable volatility’ is a synonym for a 4-letter word RISK. Risk and uncertainty are bad for Business. In a nutshell, Fluctuations Affect Valuations!
And Grand Bahama has been in a state of Flux. Freeport is Fragile. That’s why it was astute of the Prime Minister to use a light hand and longer-term view than was at first contemplated – and we went back and forth on this a lot! You know the poem: “God works in a mysterious way, his wonders to perform; he plants his footsteps in the Sea, and rides upon the Storm”. Some call it the “Invisible Hand”.
But back to the MOU, as you know the Concessions under Clause 2(6), (7) and (8) expired last August 2015 and the Prime Minister granted two interim extensions. Like a baby, these gestated for exactly 9 months at the end of which, this MOU emerged and, if it was going to be good news, it really had to be delivered by the deadline of May 4th 2016. I’d call the final MOU “Inventive Interaction” rather than “Active Intervention”. In the Prime Minister’s words, “a refreshed Partnership”.
In exchange for the new 20 year exemptions, GBPA will welcome Two (2) Govt appointees to the board of GBPA to achieve an effective working relationship. Offer Govt a ten percent (10%) equity stake in the Port’s undeveloped Residential and Commercial land on agreed terms, (sort of like a tithe). This will be done through a newly formed entity “Newco” which will hold Freeport Commercial & Industrial FCI’s undeveloped land, and the Port’s 50% interest in Devco. There’ll be Two (2) Govt appointees to the Board of Newco and One (1) to the Board of FCI. The Government will also receive an option to buy an additional five percent (5%) of Newco.
And last but by no means least, GBPA will welcome One (1) Director, elected by the Licensees, to its Board. See Elections are good!
There will be transparency in relation to GBPA accounts and an appeals process for GBPA licensees. GBPA will also use best endeavours to address questions raised by Government in relation to Clause 1(5) of the HCA. I’d like briefly to touch on this– it’s the so-called “reimbursement” clause which you’ve been hearing about. Any kind of scare-mongering is unhelpful. Firstly, its interpretation is very unclear. And remember Einstein’s principle: “If you can’t explain it to a six year old, you probably don’t understand it yourself.” Secondly, the wording of this clause calls for a “detailed accounting” of Govt expenditure in the Port Area, not an estimate extrapolated from consolidated nationwide spending. Thirdly, the question of Govt administrative expense in Freeport was addressed in 1993.
In ongoing commitments under the MOU, GBPA will undertake reasonably achievable Social and Infrastructure improvements on the island. And Remember GBPA maintains Freeport on 5% of what Freeport send to the Treasury in Nassau. Priorities include, a means of expanding the non-US international and Domestic Airport. You’ve probably read recently that Nassau Airport Development (NAD) who operate the Lynden Pindling LPIA airport suffered a $15 million loss again in 2015, and may have to raise airport fees per passenger, notwithstanding its being the 4th busiest airport in the region. So these things are a cost-benefit balancing act. GBPA will also collaborate with Government in making meaningful contributions to education, training, health and other community causes like sports of course, Mr Sturrup!
GBPA will continue to attract investment to Grand Bahama, including: Project Specific equity and new equity investors and/or a Sale for Fair Market Value of all or part of the GBPA and Port Group. GBPA and Govt will co-operate in establishing a world-class Promotional entity to attract Domestic and Foreign Direct Investment (“FDI”). Very importantly, GBPA and Government will collaborate on the creation of a “One Stop Shop’ for investors in the Port Area and Island.
GBPA and Government will also confer on the exercise of Regulatory powers vested in GBPA to ensure consistency with National policy. However, we still have grave concerns over a proposed Government Bill for URCA to subsume GBPA’s regulation of GBPC (the Grand Bahama Power Company). Apart from being the sole domain of GBPA under the HCA, you’ve all read about the issues facing BEC/BPL in Nassau with Load-Shedding or power outages every two hours due to insufficient generation, as well as alarming financial losses and capital needs. URCA has no Electricity Framework yet.
GBPA’s Utility Regulatory Framework put in place in 2013 gave this island brand new generators to avoid just such rolling black-outs and outages which carry a huge hidden cost to business. The 3 year Tariff Restructure, agreed last January, will ensure we can meet peak demand for the next 3 years without an increase in power bills; We all know electricity costs are high compared to the States, but in fact we’ve seen a 7-12% rate reduction across all sectors, and lowest income residents are under 29c p/kWh. And per the filing, I’d like to announce that we and GBPC have just successfully completed the Renewable Energy Rider (RER) so within a few weeks, customers will be able to sign up to a Buy-All-Sell-All Renewable generation programme, and use their own solar or even wind power. This accords with stated National Policy on Renewables, so we are aligned. We can cross other bridges when we come to them under HCA Bye-laws. For now, I’d say, If it aint broke don’t fix it!
Moving on – Commitments from other parties to the MOU, Freeport Harbour, Devco, and FCI were relayed by the Prime Minister on May 25th during his Budget Communication. It jumpstarts our much-awaited expansion. He said and I quote: “There is indeed, now a clear path to Freeport Container Port Phase V and VI starting in the 2nd half of 2016 at investment of $260 million. The Freeport Airport runway will be resurfaced for $15 million. Freeport Harbour is spending $14 million on refurbishment of berths. Pharmachem has broken ground on a $150 million extension. There are discussions with MSC regarding Homeporting, a Container Repair Facility, and a Maritime Training and Logistics Centre, to support their Sandy Cay operation. The MOU has cleared the way for negotiations with Carnival Cruise Lines on a major Cruise Port in East Grand Bahama”. Separately, Masterplans, the Barbary Beach project and other plans are on the drawing board.
The Prime Minister also said in his communication; “With the changes contemplated in this MOU, we can get beyond many of the issues that have held Freeport back, and fulfill the promise that Freeport holds to become an important engine for growth and prosperity in The Bahamas.
The MOU includes Govt review of Immigration and Labour Policies – expediting the process of Permanent Residences and Work Permits and implementing policies to speed up approvals from the NEC/BIA and other Agencies to within twenty-one (21) days.
So too the MOU speaks to the Port Area Customs Regs problems in 2013. But paradoxically again, The Bahamas July 2016 Budget imposes a new Processing Fee at 25% of value payable for any Manifest change, requested by a sea or air freight shipper. Presently there is no fee. The fee also jumps from $75 to $2,500 for any manifest submitted under 12 hours prior to arrival. It will inevitably need to be clarified, all the more so as The Bahamas, and Grand Bahama in particular, rely so heavily on facilitating shipping and shipment of goods; it’s our core business.
Over-Regulation by Governments in general can have, not just unintended, but ‘perverse’ consequences. Sometimes known as the ‘COBRA EFFECT’. During the time of the British in India, the British government was concerned about the number of venomous cobra snakes in Delhi. They therefore offered a bounty for every dead cobra. Initially this was a success, as lots of snakes were killed for the reward. Eventually, however, some enterprising locals started farming cobras for the income. As soon as the government became aware of this, they scrapped the Reward program. So the cobra breeders then set the worthless snakes free. As a result, the wild cobra population increased. The solution for the problem made the situation worse!
By the way in those days, people truly believed Liquor was the best remedy for a snake bite. On that note, WC Fields, a heavy drinker and very funny man said: “I always keep a bottle of whiskey handy – in case I see a snake…which I also keep handy!”
Where was I? Goodhart’s Law states, “When a measure becomes a target, it ceases to be a good measure.” For example, the CEO of Fidelity Bank Bahamas has just warned us that Market Interference through the Homeowners Protection Bill might simply cause banks to Exit the mortgage business in The Bahamas, altogether, which would worsen the very housing crisis it’s intending to cure.
We’re also counselling caution in drafting the Concession Legislation and Framework in case it has the opposite effect of adding more red-tape and bureaucracy, whilst pledging to reduce it through a “one-stop shop”. The goal is to deter Speculative investment and to spur Real development and there will be Performance Reviews every 5 years. Number 5 also seems to be the Magic Number for acreage under which everyone will be automatically exempt from Property Tax. Holders of Over 5 acres of Undeveloped land will get Exemption through a New Framework and fall into categories like: Bahamian vs non-Bahamian, Existing Licensees with Existing Developments vs Existing Licensees with New Development, or New Licensees with New Development. The details are still being worked out, but it must tick the ‘Ease of Doing Business’ Box! Here McKinsey could and should be helpful as they have the experience of other jurisdictions to draw upon.
We’d like to see the Statute and Framework split in the interests of time—These are just Our Views and as Groucho Marx said: “I have Opinions, and if you don’t like them, I have others!” You may not hear from me every day, but please have Faith in us (We’ve got your Back!).
Lastly, I’d like to finish with a whimsical verse.
It’s good to be Planned
By Central Command,
And even more fun
When all’s said and done,
By an Able Invisible Hand.