Revealing that the government forewent $683 million in import duty for this fiscal year in the form of concessions and incentives, which it sees as necessary to remain competitive as a destination for investment, Minister of State for Investments Khaalis Rolle said this should generate a $2 billion revenue windfall in return.
Pointing to the "real structural" and profitability challenges which investors in this country face as part of the rationale for the incentivizing concessions, Rolle said that for each dollar of revenue foregone in this manner the government expects to recoup $3.04 in return.
"There is a perception that major developers do not make a significant contribution to The Bahamas economy in exchange for the incentives received. Based on the estimated total value of approved concessions as at May 2013, for every $1 in concessions provided by the government, in 2013 alone these hotels are expected to generate $0.52 in taxes/fees and payments made to government and its corporations, and $0.83 in salaries, wages and employee benefits for 10,000-plus employees, 98 percent of whom are Bahamians. It is also estimated that direct spending in the economy is $0.69.
"The country front-loads a promissory note to an investor for a dollar and we get $2.04 back at a later date. So essentially we get $3 back because we don't come out of pocket.
"Overall, these annual payments represent more than seven percent of GDP (gross domestic product), before the full opening of Baha Mar," he added.
Rolle was addressing Parliament when he made his comments as part of his contribution to the 2014/2015 budget debate.
His comments come as U.S. consultants for the government, Compass Lexecon, disclosed in its study on tax and fiscal reform needs in The Bahamas that this country ranks 92 out of 98 countries when it comes to its tax-to-GDP ration, collecting just 40 percent of its maximum attainable revenue in this regard, in part because of concessions given to investors.
Earlier this week, Guardian Business reported that Oxford Economics, consultants to the Coalition for Responsible Taxation, pointed to a 46 percent "effective collection rate" for import duty in The Bahamas, due to a combination of evasion, concessions and other factors.
Rolle disclosed that approvals for duty-free importation under the Hotels Encouragement Act increased by almost four times this fiscal year, from $138.5 million to $683 million.
Bahamian ownership
Turning to the common refrain that Bahamians do not benefit from concessions as foreign investors do, Rolle said that duty-free concessions under the Hotels Encouragement Act between 2012 and 2014 for new construction, additions and renovations for hotels with Bahamian ownership or part-ownership amounted to $304 million.
The vast majority of these concessions related to Exuma, where $274.5 million in concessions was provided in relation to eight hotel properties.
"Bahamian entrepreneurs are investing in the tourism sector of our economy. Some are in joint-venture partnerships with other Bahamians and others with foreign partners. Island by island Bahamian investors are developing boutique resorts and other tourism and industrial businesses which play an important economic role, particularly in the Family Islands, where the impact of these investments creates multiple jobs and opportunities for Bahamians."
Rolle pointed to an amendment to the Hotels Encouragement Act in 2008 and 2009 - to include entertainment facilities, nightclubs, restaurants and shops in designated areas - as one which has been well-received by Bahamian entrepreneurs in particular.
"They are taking advantage of the import duty concessions to assist in jump-starting their business and help reduce the challenges associated with start-up costs," he said.
Concessions granted to businesses under this amendment total $926,370 for May 2012 to June 2013 and for the following year - July 2013 to May 2014 - the total grew to $6.2 million.
Laying out the rationale for such concessions, Rolle noted the findings of a recent study commissioned by the government on concessions and incentives regionally, which looked at how those offered by The Bahamas compared to regional competitors' regimes to encourage investment.
The study was commissioned as the government considered how it might "rationalize" the incentives and subsidies it currently offers to investors in The Bahamas, and how this might impact investment inflows into the country.
Among the key findings, Rolle suggested, was that most countries have a program of subsidies and incentivizes for investors in place "supporting the basic assumption that it is a requirement to be a globally competitive player".
In addition, hotel profitability in the Caribbean lags that of the United States, while profitability in the Bahamian hotel sector is believed to lag both.
'Real structural factors'
Developments in The Bahamas move ahead in the face of significant "real structural factors", said Rolle, commenting on the findings of the study.
He said: "In addition to demand-side pressures on the top line in the resort sector, the study suggests that several key operational and structural issues confront the sector across The Bahamas, regardless of location or size. They are as follows: the high cost of energy - Bahamas Electricity Corporation's rates are amongst the highest in the region; challenges related to workforce development, driven by a gap in basic, technical and soft skills; productivity continues to be problematic, and concerns around tax reform."
Resorts operating outside New Providence face further challenges including even higher operating costs; limited affordable and available airlift; shortages of skilled labor; more costly marketing and greater infrastructural needs.
"While data on current Bahamian hotel profitability is limited, it is believed to lag both the United States and Caribbean performance due to: higher salaries and in some cases lower employee productivity; higher electricity rates, and higher pilferage and wastage rates.
"It should be noted that industry profitability is measured on a pre-tax basis," he added.
Rolle noted that the study revealed that regional competitors use a wide range of incentives to encourage tourism development. Of the jurisdictions reviewed, the most consistent investment incentive offered, with the exception of Cancun, was the reduction, or abatement, of import tariffs on materials and equipment used in the construction and fit-out of hotels.
Where a number of other countries contrasted with The Bahamas was in the fact that they limited the ability to access these incentives to specific time periods, projects of a certain size, or location.
"A variety of approaches are taken to incentives related to real estate taxes including limiting the exemption to improved value (Barbados) and reducing the stamp duty/transfer tax on property sales (Cayman Islands)," added Rolle.
City of Nassau
The minister said that there was a decline in applications for concessions under the City of Nassau Revitalization Act for the period July 2013 to May 2014, with the total for duty-free concessions for this period standing at $2.2 million.
"The preceding year, May 2012 to June 2013, the total concessions approved totaled $9.96 million. However, I believe the decline in applications is due to an increase in the number of applicants under the Hotels Encouragement (Amendment) Act," said Rolle.
He added: "The Bahamas is one of the many destinations for investments. Even though this is a very emotional topic because of the imbalance between local and foreign investment, the reality remains that foreign direct investment (FDI) is needed for us to survive as a nation.
"Until such time as someone a lot smarter than most of the global population can provide the world with a viable alternative to FDI, we should work towards extracting greater benefits and greater alignment for local investors."
However, Rolle noted that while it is clear that large scale developers make a significant contribution to the economy there is, nevertheless, room to standardize and restrict the concessions granted.
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