2013

PRIVATE SECTOR ASSESSMENT REPORT (PSAR) for The Commonwealth of The Bahamas

Guillermo R. Alborta February 2013 pg. 1

TABLE OF CONTENTS

Introduction and Background

Compete Caribbean and the Inter-American Development Bank (CC-IADB)

Private Sector Assessment Report (PSAR) Content

CHAPTER I: IDENTIFYING MARKET FAILURES

I. Goal of Private Sector Development (PSD) and Current Agenda

I.1 Private Sector Importance for Long Term Growth

II. Overview of the economy

Summary of the Overall Economy

II.1 Domestic Economy

Gross Domestic Product

Inflation

Unemployment

Fiscal Balance

II.2 International economy

Current Account of the Balance of Payments

Foreign External Debt and Exchange Rate Regime

Trade

Foreign Direct Investment and Sovereign Credit Ratings

II.3 Services and the Productive Structure

Agriculture and Industry

Services

II.4 Institutions and Economic Regulation

Economic Regulation and Private Activity

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III State of the Private Sector

IV Large and Fast Growing Sectors

IV.1 Tourism and Travel and the Wholesale/ Retail Trade Sector

IV.2 Financial Intermediation and Financial Services

IV.3 Construction

IV.4 Industry and Manufacturing

IV.5 Agriculture, Fishing and Mining

IV.6 Small and Medium Sized Firms and Informality

V Issues for Private Sector Development

V.1 Institutions for Private Sector Development

V.2 Donors and Other International Entities

V.3 Access to Finance V.4 Corporate Taxation

V.5 Business Environment

V.6 Technology and Innovation

V.7 Trade and Tariffs and Foreign Direct Investment Policies

V.8 Labor Regulation and Workforce

V.9 Infrastructure, Communications and Energy

V.10 Environment

V.11 Gender

V.12 Crime, Corruption and Informality

V.13 Analytical Remarks and SWOT Analysis of PSD

CHAPTER II: SELECTING AND PRIORITIZING ISSUES

I. Identifying Critical Issues

I.1 Inadequately Educated Workforce

I.2 Customs and Trade Regulations

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I.3 Infrastructure, Discretionary and Unpredictable Regulation

I.4 Small and Medium Enterprises (SMEs) and Access to Finance

I.5 Other Private Sector Development Issues

Clustering

Information Communication Technology (ICT)

Innovation

Overwhelming public sector red-tape and lack of transparency

II. Establishing a long term action plan

CHAPTER III: CONCLUSIONS AND RECOMMENDATIONS

I. Improving Education and Workforce Skills

II. Infrastructure Provision and the Private Investment Enabling Environment

III. Financial Support for SMEs and Entrepreneurial Development

IV. Others

V. Policy Matrix

BIBLIOGRAPHY

ANNEX A: List of Participants

ANNEX B: Comparable Countries

ANNEX C: Data Charts

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PRIVATE SECTOR ASSESSMENT REPORT (PSAR) FOR THE COMMONWEALTH OF THE BAHAMAS

Introduction and Background

The Commonwealth of the Bahamas is located in the western part of the Caribbean islands. The Bahamas is an archipelago country consisting of more than 3,000 islands, cays and islets in the Atlantic Ocean, north of Cuba and the Dominican Republic and Haiti, northwest of the Turks and Caicos Islands and southeast of the US state of Florida. The country's population, numbering around 351,461, lives on a land area of 13,939 km2 (5,382 sq mi). Its capital city is Nassau, located on the island of New Providence, while the city of Freeport, the second largest city, is situated on Grand Bahama. At its northern border lies the United States of America, and its western, eastern, and southern borders are Cuba, Haiti/Dominican Republic (Hispaniola island) and Turks & Caicos Islands, respectively.

Self-government was achieved in 1964 and full independence in 1973. Lynden Pindling was the first prime minister and head of the Progressive Liberal Party (PLP) until 1992 when the Free National Movement (FNM) won parliamentary elections. The FNM ruled for 10 years with its leader, Hubert Ingraham, as prime minister until the PLP, led by Perry Christie, returned to power in 2002 until 2007. Elections in 2007 restored Ingraham to the post until 2012. The Commonwealth of the Bahamas’ most recent election was held in May 2012 when Perry Christie (PLP) was elected to return to post. Next elections might be expected by 2017. The head of state is Queen Elizabeth II of Britain, represented in the Bahamas by a Governor- General. The head of the government is the prime minister, who is the leader of the majority party or coalition following legislative elections. The two chamber legislature consists of the

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Senate, whose 16 members are appointed by the Governor-General on the advice of the prime minister and the leader of the opposition for five year terms, and the House of Assembly whose 41 members are elected by popular vote for five year terms. The government may dissolve parliament and call elections at any time.

The Bahamas is classified as a high-income economy, but is not a member of the OECD group. In 2011 the total nominal value of goods and services produced was USD$ 11.1 billion (current international USD equivalent) according to the World Bank. GDP per capita on a purchasing power parity basis (PPP) was $31,978. In relative terms, in 2011 the Bahamian per capita GDP was almost 2.6 times higher than the per capita income average for Latin America and the Caribbean.

In terms of income inequality, the situation is less positive. Average income inequality in the Caribbean region as estimated by the Gini coefficient was 0.38 in 2005, while the Bahamas Gini coefficient was 0.47 percent in 2011. There are wide regional variances in this measure, however, with neighboring countries showing greater income inequality such as Haiti (0.65), St. Vincent and the Grenadines (0.60), and Antigua and Barbuda (0.50).

The Bahamas’ economy has been largely influenced by two services sectors that represent probably two-thirds of its economy and employ most of its labor force. The Bahamian economy is driven by tourism (and tourism-related construction) and financial services. Industrial production, manufacturing and agriculture are limited by the country’s geographic extension and factor endowment, mainly land and labor. Agriculture is largely carried out on small plots throughout most of the islands. The nature of the terrain limits the scope of farming, and only one percent of land is cultivated, mainly for household consumption. Limited agriculture and agro industry production has necessitated the import of some 80% of the islands’ food supply. The Bahamas is among the Western Hemisphere countries most vulnerable to global food price increases because it imports most of its food.

Tourism directly and indirectly employs about half the Bahamian work force. In 2008, 4.6 million tourists visited the Bahamas, 85% from the United States. The number of visitors declined in 2009 due to the global economic crisis, but by December 2010, the Bahamas once again enjoyed 5 million visitors. This was a 4.5% year-on-year decrease from 2007. There are about 110 U.S.-affiliated businesses operating in the Bahamas, and most are associated with tourism and banking. With few domestic resources and little industry, the Bahamas imports nearly all its food and manufactured goods from the United States. American goods and services tend to be favored by Bahamians due to cultural similarities and heavy exposure to American advertising. The Bahamian economy, due to its heavy reliance on U.S. tourism and trade, is strongly tied to U.S. economic performance.

The last 2010 census recorded that the population of the Bahamas is 351,461, with an average annual growth rate of 1.6 percent from 2000 to 2010. In absolute terms the population rose by 47,850 persons during the last ten years. The bulk of the population (70%) resides in New Providence, with another 14.6% living in Grand Bahamas and 5% in Abaco Island. The other islands or the Family Islands are less populated, with a total approximate population of 36,540 inhabitants.

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As a small island state, the Bahamas along with other Caribbean countries faces extraordinary vulnerabilities. Despite the country’s relatively high average per capita income, the geographical spread of the islands, over-reliance on a few key economic sectors to drive economic growth, and exposure to recurring natural disasters increases the country’s vulnerability to external shocks.

Economic exposure is generally determined on the basis of the economy’s trade and financial linkages with the rest of the world, or neighbor countries as the case for Bahamas. Economic vulnerability measurements are related to income volatility and resilience, as determined by a weighted measure of GDP using principal components analysis.

Tourism-dependent economies are dangerously reliant on the regular arrival of tourists. If the rate or number of tourists from the United States falls, this would have immediate negative repercussions on the economy. The Bahamas has benefitted immensely from tourism, but the industry is changing and the country needs to maintain a competitive advantage in the sector over many neighboring competitors or comparable economies for the sector to remain the driver of economic growth in the future.

For this report, the selection of country comparators was made to deliberately focus on Caribbean neighbors. The comparator countries selected for the Commonwealth of the Bahamas are: Antigua and Barbuda, Barbados, Jamaica, and Trinidad and Tobago. The rationale for the selection of these countries is described in detail in Annex B.

Compete Caribbean and the Inter-American Development Bank (CC-IADB)

As part of Inter-American Development Bank efforts and activities to support economic development in the region, it created the Compete Caribbean Program (CCP) as a private sector development program. CCP is jointly funded by the United Kingdom Department of International Development (DFID) and the Canadian International Development Agency (CIDA) to provide technical assistance grants and investment funding. Its specific objective is to help increase: (i) donor harmonization and coherence, equity and sustainability of national and regional private sector strategies; (ii) the efficiency and effectiveness of Caribbean governments to promote a competitive, growth-oriented business and investment climate; and (iii) innovation, productivity, value added production, sales and sustainability in key Caribbean clusters and value chains, and product sophistication, productivity and exports of individual firms.

One of the analyses used to guide the focus of Compete Caribbean assistance in each country is a Private Sector Assessment Report, or PSAR. These reports are designed to (a) increase regional and national consensus and focus on strategic and priority interventions promoting private sector development; (b) increase the synergies among donor-supported Private Sector Development (PSD) projects; and (c) strengthen knowledge management to ensure the transmission of PSD best practices, evaluation of interventions’ impact, and knowledge exchange with national and regional stakeholders.

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Private Sector Assessment Report (PSAR) Content

The PSAR aims to contribute to the development of a comprehensive national strategy for private sector development. In the case of the Bahamas, a Private Sector Assessment Report (PSAR) for The Commonwealth of the Bahamas indentifies private sector development constraints and opportunities in the country and recommends priority areas for action. The document includes three types of information. First, the PSAR compiles and analyzes information from different sources, (including the Ease of Doing Business and Global Competitiveness Reports, and any available databases specializing in PSD indicators and information), to provide a snapshot of the state of the private sector in the country. More specifically the PSAR provides an overview of the economy, the state of the private sector, large and fast growing sectors, and issues for private sector development such as support institutions, access to finance, taxation, business environment, trade and FDI, and infrastructure among others. Second, the PSAR brings the information to relevant stakeholders – such as governments and firms in the economy – to establish priorities on all the identified issues affecting further growth in the private sector. Third, the PSAR summarizes a comprehensive analysis and provides conclusions and recommendations to all related stakeholders, while serving as a useful tool to coordinate further actions and interventions.

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CHAPTER I: IDENTIFYING MARKET FAILURES

I. Goal of Private Sector Development (PSD) in the Country and Current Agenda

The Commonwealth of the Bahamas is a small island state and small open economy in the Caribbean. The Bahamas is classified as a high-income economy, but is not a member of the OECD group. Its economy has been largely influenced by two services sectors such as tourism and financial services that represent probably two-thirds of its economy and employs most of its labor force. Bahamas’ industry, manufacturing and agriculture are limited by its geographic extension and factors’ endowment, mainly labor and land. For Instance, Agriculture is carried out on small plots throughout most of the islands. The nature of the terrain limits the scope of farming, and only one percent of land is cultivated which is mainly a household industry. Limited agriculture and agro industry production has necessitated the import of some 80% of the islands’ food supply.

In order to address these peculiar limitations, since the 1980s the long-term development policy framework for the Bahamas has historically been addressed by government policy documents called Manifestos. The latest policy document or manifesto is the “Vision 2030: Charter for Governance. Believe in The Bahamas”, which belongs to the current administration in office since May 2012. In this plan, governmental authorities note the urgency of economic change and the need for a long term development plan. As all of the previous plans the Progressive Liberal Party’s (PLP) proposal sets up a long term progressive and spectacular future for Bahamians. Overall, the Bahamas’ current administration economic goal as stated in Vision 2030 are “Reaching and rescuing those in poverty. Saving and expanding the middle class. Protecting the future”1 The new administration intends to accomplish that through improving income, removing impediments to business and investment and the reduction of productive vulnerabilities. The specific objective is sustainable social development, continued improvement in living conditions and engagement of private sector as partners in the development process. Along with these mentioned objectives, there are three sub-themes in the 2030 Vision document: 1) crime and security cooperation; 2) civil society participation; and 3) institutional development, support and program effectiveness. The plan establishes both a short term agenda with twelve issues to address during the first one hundred days in office, and a long term vision through 2030 with the explicit and vital participation of the private sector. The role of the private sector is viewed as fundamental.

Regarding a long term perspective, the document is explicit about protecting the Bahamas’ future, saying ”….this plan will be a commitment to building a broader sense of collective purpose among all Bahamians ...., to utilizing the collective will of all such people and to better use natural resources , such as land , sea and geographic location.” Vision 2030 will relate to every aspect of national life and provide the cornerstone for fostering a sense of common purpose”2 High on the agenda of Vision 2030 are policies and programs designed to enhance

1 Progressive Liberal Party PLP (2012) pag.15 2 Progressive Liberal Party PLP (2012) pag. 30

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Bahamians’ guardianship of the physical resources and natural endowments. These policies will focus in a more general sense on the relationship between these resources and sustainable development.

I.1 Private Sector Importance for Long Term Growth

Although the strategy identifies the government as the direct stimulant for policy, it accepts that most jobs must be created by and within the private sector. The administration stresses that as a matter of policy, such state direct participation will occur in partnership with private investors in order to create long term jobs for Bahamians. In order to achieve these long term goals, public- private sector partnerships are vital for the nation’s interest.

The short term agenda, “The First 100 Days”3 includes the following elements:

 Project Safe Bahamas and Operation Cease Fire, including the reintroduction of urban renewal to immediately reinvigorate the fight against crime and violence.  Prioritize a doubling of the nation’s investment in the education and training of Bahamians. From preschools all the way up to retraining for Bahamians already in the workforce, new investment and innovative reforms are needed.  Create a Ministry for Grand Bahama, bringing focus to growing that island’s economy.  Institute a mortgage relief plan in conjunction with private sector lenders to help struggling homeowners.  Set in motion the plan to secure the nation’s borders, with steps to hire new personnel, acquire new technology, and initiate new training programs.  Reposition the Bahamas Development Bank, so it becomes again a key player in creating jobs and expanding small and medium-sized businesses.  Re-establish the Ministry of Financial Services and Investments.  Introduce the Employees’ Pension Fund Protection Act to keep pension funds out of reach of business owners, and to make directors and officers personally liable for breaches.  Renew the nation’s commitment to National Health Insurance, and support the Public Hospitals Authority in the acquisition of much-needed new cancer-screening technology, ensuring that Bahamian women have access to state-of-the-art mammogram machines at both Princess Margaret Hospital in New Providence and Rand Memorial Hospital in Grand Bahama.  Initiate a plan to lower the cost of electricity in the Bahamas.  Bring together representatives from all sectors to launch a 40th Anniversary of Independence of the National Congress to begin enactment of Vision 2030.  Provide details for a referendum on a National Lottery and gambling in the Bahamas.

3 Progressive Liberal Party PLP (2012) pag.12

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 Reduce the maximum level of stamp tax payable on real estate transactions from 12% to 10%.  Re-introduce a ceiling on the maximum level of real property taxes payable on a residence.

The private sector was asked to participate in the current government’s Bahamas Economic Recovery Strategy as a complementary initiative to its original plan. Private enterprises remain the primary engine of job creation and entrepreneurial opportunity in the country, and tourism and financial services, supported by industrial expansion, fisheries and agricultural production should be the chief areas of economic activity in the Bahamas. Current authorities have said “Government is committed to the formulation and execution of policies that will encourage private investment in these areas while maximizing job creation and career development for Bahamians in the shortest possible time.”4 Moreover, the private business community and the government need to look at important issues, including energy. “The cost of energy is just too high and it’s an impediment to having a successful country. So we’re working on having a conservative energy platform that over a period of time will reduce the cost of energy.” “Secondly, the tourism sector is not dead. There are opportunities to be tapped in the tourism sector so we are going to pursue those opportunities.” Bahamas Minister of Investment Mr. Michael Rolle stressed that this is a national strategy that will need all stakeholders on board, including PLP’s opposition party. “Our approach is to make sure that it is entwined in what we do, so that the people make the decision that long-term they want to see this economy develop and that there is a concrete strategy in place. We are going to sit down and talk to all the stakeholders and to prepare a plan……”

4 Hon. Minister Michael Rolle (2012) The Freeport News November 17, 2012

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II. Overview of the economy

Summary of the Overall Economy

The Commonwealth of the Bahamas is a small island state with an open economy in the Caribbean. The Bahamas is a constitutional monarchy based on the Westminster system of parliamentary government. Queen Elizabeth II is the head of state. She is represented ceremonially by a Bahamian governor-general who acts on the advice of the prime minister and the cabinet.

The Bahamas enjoys a stable political environment with elections constitutionally held every five years. The Prime Minister, Perry Christie, took office for a five-year term in May 2012, following a landslide election victory for the center-left Progressive Liberal Party (PLP). The previously governing Free National Movement (FNM) has now become the main opposition. Mr. Christie scored one of the biggest electoral wins ever witnessed in the Bahamas, with the PLP garnering 29 of the 38 seats in the lower house of parliament.

The Bahamas is classified as a high-income economy, but it is not a member of the OECD group. Its economy has been largely influenced by two services sectors - tourism and financial services – representing approximately two-thirds of the economy and employing most of its labor force. The Bahamas’ industry, manufacturing and agriculture are limited by its geographic extension and factor endowment, mainly labor and land.

As of 2011, the total nominal value of goods and services produced was USD$ 11.1 billion (current international USD equivalent) according to the World Bank. GDP per capita on a purchasing power parity basis (PPP) was $31,978. However, there has been a steady increase in inequality in the distribution of the Bahamian per capita income since 1999, after a significant improvement from 1973 to 1998. During recent years, the most common measure of income inequality (the Gini coefficient) increased slightly from 44% in 2009 to 46% in 2011.

Starting with the contraction caused by the hurricanes in 2004/5, the unemployment rate has been relatively high, making job creation and labor market reform a fundamental objective. The unemployment rate hit a recent high of 15.9 percent in 2011, with unemployment registering 33.7 percent for youth between 15-24 years old. Inflation tends to be low and stable in the Bahamas. Over the last decade, the average annual rate of inflation in the island was 2 per cent compared to almost 11 per cent in Jamaica or 6 per cent in Trinidad and Tobago. The Bahamas has a long-standing fixed exchange rate regime that according to the IMF has served them very well for more than four decades. The exchange rate has sustained a 1:1 parity with the US dollar since the 1970s.

The Bahamas fiscal position has deteriorated since 2007 due to downturns in international services trade and counter-cyclical expenditures after 2008. The majority of fiscal revenue collected derives from taxes on international trade, which are approximately 50 per cent of total revenue. The government decided to compensate the lower consumption and aggregate demand with spending, resulting in larger deficits over the period of time from 2007 to 2011. Whereas

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the World Development Indicators show moderate deficits for the central government in Graph 15, the International monetary Fund reported a 4.5 per cent overall deficit in 2008 followed by 4.4 per cent in 2009, 4.7 per cent in 2010 and 5.0 per cent in 2011. IMF average projections forecast the central government deficit will register 4.5 per cent of GDP during fiscal year 2011/2012 through 2015/2016.

The Bahamas trade current account historically registers large deficits. The current account deficit deteriorated and spiked at 15.5 per cent of GDP in 2006 (US$1,403 million), but in following years returned to around 10 per cent of GDP. While trade balances in goods are notoriously negative, trade services are significantly positive, but not large enough in magnitude to provide a positive overall current account result. The large current account deficits reported since 2000 period were largely financed by foreign direct investment (FDI) inflows and to a lesser extent by transfers. Remittance flows are negligible or not significant.

Large and persistent current accounts deficits raise questions about how it is financed, and about the services trade patterns of the country. Bahamas largely depends upon positive travel services flows. The total external indebtedness of the island has significantly increased from approximately US$ 326 million at the end of 2007 to around US$ 1.3 billion as of the second quarter of 2012.

The government of the Commonwealth of the Bahamas generally encourages foreign investment in all sectors of the economy except those the Government reserves exclusively for Bahamian citizens. Government policy is committed to promoting a favorable economic environment in which the government regulates and facilitates economic development, where transparency, fair play and equality of treatment are protected. However, private domestic and foreign investors complain about the discretionary issuance of business licenses and lack of transparency in decisions to authorize or to renew the license of a business.

The Bahamas is facing increasingly more difficulty in attracting foreign investors. Standard & Poor's Ratings services announced it revised the outlook on its long-term rating of The Commonwealth of The Bahamas to negative from stable in September 2012. FDI was high at US$ 706 million in 2006 and registered a record figure of US$ 860 million in 2008, with significant variations after 2009. FDI has continued to provide positive flows despite the global financial recession and the pessimistic outlook from credit rating agencies.

The most important trading partner of the Bahamas is the United States, reflecting the close relationship between both countries. However, the Bahamas also conducts trade with Canada, the United Kingdom and other countries in the European Union. In 2011, the U.S. bought 25 percent of the Bahamas’ non-service exports and accounted for roughly 75 percent of all imports.

Since the 1950s and country independence in 1970’s, the Bahamas has largely been a service- driven economy with tourism, tourism related activities such as hotels, restaurants and wholesales along with financial services as the main forces explaining its economic performance. However, the contribution of other sectors to overall GDP is not negligible. Agriculture is small in both employment share and overall contribution to growth, and the manufacturing sector is

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still in its initial stages. Manufacturing employs approximately 3.2 percent of the workforce and its GDP share ranks similarly.

As shown in the product space figures, the Bahamas productive structure for goods is very heterogeneous. Products are not closely connected between sectors, thus they mostly operate in a relative isolation. A Bahamas detailed merchandise export profile is incorporated in the following section, but the product space figures indicate that structural transformation cannot be guaranteed.

II.1 Domestic Economy

The Commonwealth of The Bahamas is an archipelago including a large number of related islands and cays. It is spread over some 100,000 square miles in the interconnecting waters in the Atlantic Ocean. Its capital city is Nassau, located on the island of New Providence, while the city of Freeport, the second largest city, is situated on Grand Bahama. At its northern border lies the United States of America, and its western, eastern, and southern borders are Cuba, Haiti/Dominican Republic (Hispaniola island) and Turks & Caicos Islands, respectively.

The last 2010 census recorded that the population of the Bahamas is 351,461, with an average annual growth rate of 1.6 percent from 2000 to 2010. In absolute terms the population rose by 47,850 persons during the last ten years. The bulk of the population (70%) resides in New Providence, with another 14.6% living in Grand Bahama and 5% in Abaco island. The other islands or the Family Islands are less populated, with a total approximate population of 36,540 inhabitants.

Gross Domestic Product

Graph 1: Bahamas GDP and Per Capita GDP in Current International Currency

12 40,000 10 35,000

30,000 Billions 8 25,000 6 20,000 4 15,000 10,000 2 5,000 - -

GDP ppp GDP pc ppp

Source: World Development Indicators, WB.

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As of 2011 (Graph 1), the total nominal value of goods and services produced was USD$ 11.1 billion (current international USD equivalent) according to the World Bank. GDP per capita on a purchasing power parity basis (PPP) was $31,978. In relative terms, in 2011 the Bahamian GDP per capita was almost 2.6 times higher than the per capita income average for the Latin America and Caribbean, 42 percent higher than the Antigua and Barbuda and 21 percent higher than the Trinidad and Tobago per capita GDP as its Caribbean comparator countries. Within the Caribbean, comparable GDP per capita levels for Antigua and Barbuda ($18,492) and Trinidad and Tobago ($25,073) were significantly lower. As shown in Graph 2, per capita GDP in the Bahamas is only 13 percent lower than other high income countries that are not members of the OECD.

GDP per capita PPP figures for 2011 in constant terms show the Bahamas at $28,239, followed by Trinidad and Tobago at $22,132 and then Antigua and Barbuda $16,330. These results suggest that Bahamas is more similar to non-OECD high income countries than to Latin American and Caribbean comparable economies (Annex B).

However, there has been growing inequality in the distribution of aggregate household income in the Bahamas since 1999, following income equality improvements over the period of 1973 to 1998. The most common measure of income inequality, the Gini coefficient, increased slightly in the country from 44% in 2009 to 46% in 2011. As of 2005, while average income inequality in the Caribbean (38%) was lower than the regional average for Latin America, some Caribbean countries suffered from higher inequality, including Haiti (65%), St. Vincent and the Grenadines (60%), Antigua and Barbuda (50%), and the Dominican Republic (47%).

Graph 2: Regional GDP Per Capita 2011, in Current International Currency 50000

40000

30000

20000

10000

0 BHS A&B T&T LACall HI noOECD HI OECD

Source World Development Indicators, WBI

Over the past two decades, the Bahamas GDP growth rates have closely tracked neighbouring country economic performance and response to exogenous shocks, Graph 3. A significant drop in travel demand from the United States after September 2001 has resulted in less revenue for the Bahamas. Additional financial regulation for international operators and reduced financial flows

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to international financial centres including the Bahamas has also contributed to a slower growth dynamic.

As shown in Graph 4, economic trends in the Bahamas closely follow the United States. A notable exception was in 2004, when two major hurricane storms (Janine and Francis) hit the Bahamas during September 2004 disrupting economic production. Graph 3: GDP growth rates 20

15 LAC 10 A&G 5 BHS

0 BRB

JAM

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -5 1993 T&T -10

-15

Source: World Development Indicators, WB

Graph 4: Bahamas Growth Rates Closely Correlated with US Growth Rates 8

6

4

2

0

-2 September 2004 : Hurricane FRANCES AND JEANNE hit The Bahamas -4

-6 BHS USA

Source: World Development Indicators, WB

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Over last two decades, the Bahamas’ economic compound average growth rate has been low but stable.5 Compound average growth during the period averaged 0.7 per cent per annum, including two major economic downturns during the period: 1999-2003 and 2007-2009.

In contrast, the average annual rate of growth for similar countries was 0.9 per cent per annum since 1988, not significantly different from the Bahamas, but at little bit higher for Trinidad and Tobago and Antigua and Barbuda

The recent international economic downturn also had a significant effect on the Bahamas’ economic growth, with the economy contracting by approximately 4 or 5 per cent accompanied with a decrease in GDP per capita by 1.6 per cent in 2008, 5.2 per cent in 2009 and a disputable 0 per cent in 2010. Graph 6 shows that the downturn has significantly affected all comparable countries to varying degrees. While the Bahamas and Antigua and Barbuda growth rates showed the first contractions in 2008, Barbados and Trinidad and Tobago growth contractions were first felt later (in 2008 and 2009, respectively). Graph 5

Graph 5 : GDP Per Capita Growth After the Crisis 15

10

5

0 2005 2006 2007 2008 2009 2010 2011 -5

-10

-15

A&B BHS BAR T&T

Source: World Development Indicators, WB The new growth dynamic following 2007 has affected principally the gross fixed capital formation in the island. The following graph shows the GDP dynamic by expenditure category.

5 As a small island state, the Bahamas along with other Caribbean countries faces extraordinary vulnerabilities. Despite the country’s relatively high average per capita income, the geographical spread of the islands, over-reliance on a few key economic sectors to drive economic growth, and exposure to recurring natural disasters increases the country’s vulnerability to external shocks.

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Graph 6 : Bahamas Dynamic of Investment (GFKF) and Consumption 30.00

20.00

10.00

- 2004 2005 2006 2007 2008 2009 2010 2011 (10.00)

(20.00)

Household Cons Govern cons Var Invent GFKF Exports Imports

Source: World Development Indicators, WB Graph 6 shows that the significant drop in gross fixed capital formation was partially compensated by a significant increase in government consumption (expenditure) after 2007, but the fiscal stimulus lasted for a relatively short period of time. However, exports and imports percentage chance regain dynamic after than government effort.

Graph 7: Bahamas GDP Dynamic by Sector 40.00

30.00

20.00

10.00

0.00

-10.00

-20.00

-30.00

Services Agriculture Manufacturing Industry

Source: World Development Indicators, WB Taking into account the fact that services represent a large and increasing share of the Bahamas economy, Graph 7 highlights the fact that the economic downturn has affected all sectors of the

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economy since 2007. Correspondingly, manufacturing and agriculture represent small shares of GDP and unsteady rates of economic activity over time. Industry’s participation has hovered around 15 percent of total GDP over the last decade. During 2008 and 2009, the Bahamian economy contracted and the services sector has dominated overall performance. Once the services sector resumed growth after 2011, the economy recuperated slowly and with little impact over employment. Along with Bahamas, comparators country growth have shown similar trend regarding services sector.

Inflation

Inflation tends to be low and stable in the Bahamas, Graph 8. Over the last decade, the average annual rate of inflation in the island was 2 per cent compared to almost 11 per cent in Jamaica or 6 per cent in Trinidad and Tobago. The Bahamas’ inflation rate is approximately equitable to Antigua and Barbuda, but half of the Barbados average rate, as it is shown in Graph 9 . Since 2004, however, inflation in the Bahamas has been above its historical average, largely due to rising food and commodity prices including oil prices.

Graph 8: Bahamas Inflation 2000-2011 5

4

3

2

1

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

CPI

Source: World Development Indicators WB

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Graph 9: Inflation in the Bahamas is One of the Lowest in the Region 25

20

15

10

5

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -5

A&B BHS BRB JAM T&T

Source: World Development Indicators, WB

Graph 11: Average Inflation over the Last Decade 12

10

8

6

4

2

0 A&B BHS BRB JAM T&T Unemployment

Due to the low and negative rates of economic growth after 2005, the unemployment rate has been relatively high, making job creation and labor market reform a fundamental objective. The unemployment rate hit a recent high at 15.9 percent in 2011 with youth unemployment registering 33.7 percent for 15-24 years old.

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In the early 2000s and up to the recent global crisis, the Bahamian unemployment rate registered 6.9 percent in 2001, and then after rose to 10.8 percent in 2003. However, the rates declined slightly between 2003 and 2007. Since the crisis started in 2007, unemployment has increased rapidly and has remained in two digits after 2009, see Graph 10 . By 2010, the Bahamas’ unemployment rate was significantly higher than that of Antigua and Barbuda (11.7) Barbados (12), Jamaica (12.7), and Trinidad and Tobago (6.4) according to CIA World Factbook and the IMF. Bahamas unemployment rates started to rise in 2006 due to less investment flows to construction and real estate.

Graph 10: Bahamas Unemployment rates 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Department of Statistics and Labor Force Survey 2011, IDB

Note: There is no Data for 2010, because the DOS conducted the Census. As will be constantly stressed for the Bahamas, the service sectors provide the largest share of employment in the country, with women being considerably more reliant on these sectors for employment than men. By 2011 sectors such as hotels and restaurants, wholesale and retail trade and financial services including banks, insurance, real estate and others represented the largest shares of GDP and employment. When construction is included, which tracks closely with tourism, these sectors together represent more than 60 percent of total employment.

National unemployment rates are almost evenly distributed between man and female during last decade according to official figures, see Graph 11 Despite there is no data available for 2010, the latest labor force survey for 2011 show that unemployment rates by gender were 16.1 percent for men and 15.7 percent for women. While female unemployment rates were usually slightly higher than men, this trend has been reversed since 2009.

pg. 21

Graph 11: Unemployment by gender 2001 - 2011 20

15

10

5

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Female Male

Source: UN Comtrade ILO Labor A complete picture of the employment market shows that better educated workers have had a larger chance to be employed as of the end of 2011, see Graph 12

Graph 12: Bahamas Employed and Unemployed Workforce by Educational Attainment (2011) Not Stated Other Tertiary Institution University Complete Secundary Incomplete Secondary Primary No Schooling

0% 20% 40% 60% 80% 100% Employed Unemployed

Source: Department of Statistics, MOF

Fiscal Balance

The fiscal year of the Bahamas ends on June 30 of each year. The Bahamas government does not have a system of direct taxation, but instead relies on indirect taxes, mainly in the form of customs duties, stamp taxes, real property taxes and taxes on tourism activities.

The Bahamas fiscal position has deteriorated since 2007 due to downturns in international services trade and the expansion of expenditures after 2008 as Graph 13shows. The majority of

pg. 22

the revenue collected derives from taxes on international trade, which are approximately 50 per cent of total revenue. Miscellaneous taxes represent approximately 40 per cent of total government revenues and non-tax revenue comprised of various fees, service charges and property sales accounts for the final 10 per cent of total revenue. On the expenditure side, wages and the purchase of goods and services are approximately two-thirds of total current expenditures with subsidies and transfers making up the other third.

Graph 13: Fiscal Deficits as pct of GDP

20

15

10

5

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -5 Surplus (+)/Deficit (-) Revenues excl. grants Expenses excl. k Investment

Source: World Development Indicators, WB

Revenues fell from 17.3 per cent of GDP to 16.7 per cent from 2008 to 2010 as international trade continued to drop. The government decided to compensate the lower consumption and aggregate demand with spending, resulting in larger deficits over 2007 to 2011. Although the World Development Indicators showed moderate deficits for the central government in Graph 6, the International Monetary Fund reported an overall deficit of 4.5 per cent in 2008, 4.4 per cent in 2009, 4.7 per cent in 2010 and 5.0 per cent in 2011. IMF average projections forecast the central government deficit will be 4.5 per cent of the GDP during fiscal year 2011/2012 through 2015/20166. On the expenditure side, current spending rose from 16.8 per cent of GDP in 2008 to 18.2 per cent in 2009 and an estimated 18.4 per cent in 2010. The government also accelerated privatization of BTC, its telecommunicationcompany, and expanded capital expenditure and net lending to 4 per cent of GDP in 2009. The following Graphs 6 and 14 shows the acceleration in government expenditure after 2007 and corresponding debt increase after 2008. As with all countries, the slowdown in world economic growth has had a negative effect on macroeconomic fundaments in the Bahamas over the last five years. The Bahamas’ very close economic relationship with the United States has made it more difficult to pull out of the global recession quickly, in light of the weak US recovery to date. Fiscal accounts have deteriorated with a consequent acceleration in public sector debt, which has increased from approximately 28

6 IMF (2011) Pag 1.

pg. 23

per cent of the GDP in 2007 to 49 percent in 20117. As with many countries in the region, the government’s focus moving forward is on revenue-boosting measures including possible tax reform along with further institutional reshaping of its state-owned enterprises.

Graph 14: Bahamas: Debt as a Percentage of GDP 60.0

50.0

40.0

30.0

20.0

10.0

- 2007 2008 2009 2010 2011

Source: World Development Indicators WB

.

The government has made announcements for its taxation reform while challenges will be remain at the level of state own companies transformation and regulatory issues that might impact on or limits its recovery prospects.

II.2 International Economy

Current Account of the Balance of Payments

The Bahamas current account historically registers large deficits. The current account deficit deteriorated and spiked at 15.5 per cent of GDP in 2006 (US$1,403 million), but in following years returned to around 10 per cent of GDP. While trade balances in goods are notoriously negative, trade services are significantly positive, but not large enough in magnitude to provide a positive overall current account result.

The current account deficit in 2011 was estimated at 10.5 per cent of GDP (US$1,090 million), following deficits of 7.6 per cent in 2010, 7.8 per cent in 2009, 11.12 per cent in 2008 and 12.0 per cent of the GDP in 2007. See Graph 15.

7 Debt information was not available for the time period 2001 to 2005. For reference, debt as a percentage of GDP was 23.9 per cent for the year 2000.

pg. 24

Graph 15: Bahamas Current Account balance 2,000 1,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -1,000

-2,000

-3,000 Goods Services

Net income Net Transfers Current Account Balance

Source: World Development Indicator WB. Large and persistent current accounts deficits raise questions about how it is financed, and about the services trade patterns of the country. Bahamas largely depends upon travel services positive flows. Nevertheless its net financing have significantly increased during 2004 to 2006 as a reflection of current account deficits and reserve accumulation as it is shown by Graph 16.

Graph 16: Bahamas Net Financing

2,500 2,000

Millions 1,500 1,000 500 -

(500)

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (1,000) (1,500) FDI + REMITTANCES + ODA NET FINANCING CAG&S balance + Acc Reserves

Source: Author elaboration with WDI data

The large current account deficits reported since 2000 period were largely financed by foreign direct investment (FDI) inflows and to a lesser extent by transfers. Remittance flows are negligible or not significant. Likewise, FDI was high at US$ 706 million in 2006 and registered a

pg. 25

record figure of US$ 860 million in 2008, with significant variations after 2009. FDI has continue to provide positive flows despite the global financial recession and the pessimistic outlook from credit rating agencies.

Foreign External Debt and Exchange Rate Regime

The total external indebtedness of the island has significantly increased from approximately US$ 326 million at the end of 2007 to around US$ 1.3 billion as of the second quarter of 2012. In 2009, the external debt load rose quite sharply to double the outstanding public and public guaranteed debt to US$ 945.6 million. As shown in Graph 17 , overall debt has grown steadily since 2007, but there is no publicly guaranteed private debt. At 49 per cent of GDP in 2011, servicing the external debt of the island is likely to increase in absolute values that will reduce the amount the public sector has available to pay for recurring goods and services, including government employee wages.

Graph 17: Bahamas: External Debt Position 2007-2012

1,500

1,000 Millions

500

0 2007Q4 2008Q4 2009Q4 2010Q4 2011Q4 2012Q3

Publicly-Guaranteed Private Sector External Debt Public Sector External Debt Public and Publicly-Guranteed Private Sector

Source: World Bank (QEDS) As part of this external scenario, the Bahamas has a long-standing fixed exchange rate regime that according to the IMF has served them very well8. Central bank authorities restated their commitment to support the peg citing medium and long economic perspectives and the expectation that fundamental external balances will remain strong. Authorities remarked that the Bahamas reserves are adequate and inflation pressures under control. Labor market dynamics are not part of the IMF mandate.

Trade

As an open economy, Bahamian trade is not only largely dependent on trade of physical goods with neighboring countries, but also in services which are dominated by tourism. Trade in services has dominated most of the country’s international relationships, registering large

8 IMF Art IV revision 2011, page 11-13

pg. 26

positive net balances. Export services have notoriously compensated imports services since the 1990s. Graph 18 shows the positive balance between services export and import.

Graph 18: Bahamas Services Exports and Imports

3

2.5 Billions 2

1.5

1

0.5

0

1993 2004 1988 1989 1990 1991 1992 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 2011

Exports Imports

Source: World Development Indicators At the same time, trade balances in goods have been negative which reflects the Bahamas’ dependency in consumable goods and foreign inputs for its economic activities. As we can observe in the following tree-maps for Bahamian exports and imports of goods, there is little diversification in both goods and markets. The two Graphs 19a, 19b and Chart 1 show the distribution of good exports for the Bahamas in 2010 according to HS4 and SICIT4 respectably.

pg. 27

Graph 19a : Bahamas Exports Tree Map 2010

Source: The Observatory of Economic Complexity MIT, HS4 classification

pg. 28

Graph 19b: Bahamas Exports Tree Map 2010

Source: The Observatory of Economic Complexity. MIT, Atlas SITC 4. Goods exports are highly concentrated in mineral fuels and mineral oils, followed by plastics and related articles. As we can observe in the international classification of goods, Bahamian exports are concentrated in codes of manufacturing along with agriculture products.

The country also has a relatively vibrant generic pharmaceutical and cosmetics industry. Some industry has important linkages with tourism and agriculture. Other merchandise was primarily composed fish and crawfish, salt, cement, rum, argonite, residual fuel oils, distilled fuel, cascarilla bark, and citrus. The island’s export market is largely dominated by some industrial codes such as 27, 39, 03, 29 and 84. The Bahamas main exports codes represent more than nine- tenths of total merchandise exports.

pg. 29

Chart 1: Bahamas Export Codes 2010

Code Description 27 Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes 39 Plastics and articles thereof 03 Fish and crustaceans, mollusks and other aquatic invertebrates 29 Organic chemicals 84 Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof Source: UN Comtrade In the other hand, the following tree-map for imports Graph 20a, 20b and Chart 2 reflects that Bahamian goods imports were mainly composed of petroleum fuels, mineral oils, machinery and mechanical appliances and electric machinery and equipment. Imports were comprised primarily of foodstuffs, motor vehicles, animal feed, petroleum products, clothing, machinery and appliances. Foodstuffs account for a significant amount of imports from the United States.

Graph 20a: Bahamas Imports Tree Map 2010

Source: MIT, Atlas HS4 Classification

pg. 30

Graph 20b: Bahamas Imports Tree Map 2010

Source: The Observatory of Economic Complexity MIT, Atlas SITC 4

The following chart lists the most important import codes for the Bahamas in 2011. It shows the large dependency of imported consumable goods and industrial inputs at the same time.

Chart 2: Bahamas Import Codes 2010 Code Description 27 Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes 84 Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof 85 Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles 39 Plastics and articles thereof 73 Articles of iron or steel

pg. 31

Source: UN Comtrade

The most important trading partner of the Bahamas is the United States, reflecting the close relationship between both countries. However, the Bahamas also conducts an amount of trade with Canada, the United Kingdom and other countries comprising the European Union. In 2011, the U.S. bought 25 percent of the Bahamas’ non-service exports and accounted for roughly 75 percent of all imports. Other countries in the region including Canada and Trinidad & Tobago have become more important in Bahamian exports. Even so, the Bahamian economy will continue to be dependent upon economic and other conditions in the United States to drive growth in its tourism sector and merchandise exports.

The following chart summarizes Bahamian trade in goods.

Chart 3: Bahamas Trade 2010

Major exports: Petroleum oils, refined (49%), Cruise ships and similar vessels for the transport of persons (22%), Oils and other products of the distillation of high temperature coal tar (7%), Heterocyclic compounds with nitrogen hetero-atom(s) only (4%), Polymers of styrene, in primary forms (4%) Major imports: Petroleum oils, refined (59%), Cruise ships and similar vessels for the transport of persons (5%), Paintings, drawings and pastels done by hand (2%), Cars (1%), Medicaments, packaged (1%) Major trade United States (25%), Singapore (12%), Germany (11%), Poland (11%), partners Dominican Republic (9%) (exports): Major trade United States (75%), Colombia (6%), Poland (5%), Canada (4%), Switzerland partners (3%) (imports): Source: The Observatory of Complexity HS 2007 classification

Bahamas is not a WTO member, but as of the end of 2012 it had made considerable progress towards reforming its trade regime to bring it in line with WTO guidelines. In its accession to the WTO, the Bahamas will address issues such as: trading rights, import licensing, export/import regulations, subsidies, agricultural policy, intellectual property rights, anti-dumping and countervailing measures, telecommunications services, quantitative import restrictions, technical barriers to trade and sanitary/phytosanitary measures. Bahamian authorities have stated that WTO accession is an important part of the government’s program to accelerate trade and economic development, as well as to create more and better jobs for Bahamians. The 2012 Customs Management Act will begin to address some of the performance requirements of the EPA. Predictable access to world markets for goods and services originating in the Bahamas is one of the necessary preconditions for this government’s economic expansion strategy to succeed. As of April 26, 2013, the Bahamas has summited four sets of documentation to the working party of the WTO regarding new legislation and policy proposals. The Bahamas has provided documentation according to Article 25 of the agreement on Subsidies and Countervailing

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Measures and Article XVI of GATT 1994. The Working Party's information gathering process on The Bahamas' economic policies and legislative, regulatory and administrative regime has continue in order to complete its accession package.

According to WTO information records, the Bahamas has not only handed its proposal over countervailing measures and subsidies, but also new bills such as the Animal Health and Production Bill, Food Safety and Quality Bill, Plant Protection Bill, and, Plant Protection Import Control and Transit Regulations. Any “accession package” consists of three documents which represent the results of both the multilateral and bilateral phases of the negotiation. This package must include: a report of the Working Party containing a summary of proceedings and conditions of entry; a Protocol of Accession; and, schedules of market access commitments in goods and services agreed between the acceding government and WTO Members.

Foreign Direct Investment and Sovereign Credit Ratings

In general the administration of the country’s investment policy and attraction of foreign direct investment (FDI) largely resides in the Bahamas’ National Economic Council (NEC), led by the Prime Ministry. The most important trading partner of the Bahamas is the United States, reflecting the close relationship between both countries. However, the Bahamas also conducts an amount of trade with Canada, the United Kingdom and other countries comprising the European Union. In 2011, the U.S. bought 25 percent of the Bahamas’ non-service exports and accounted for roughly 75 percent of all imports. Investment regulations in the Bahamas recommend that foreign investors register and declare inflows into the country for quicker processing of applications to repatriate profits and capital. The Bahamas Investment Authority (BIA), an executive agency, serves the investor as a one stop shop for investors and as a secretariat for the cabinet in investment matters.

The Bahamas provides large and significant investment incentives for private investors, including exemptions from the payment of customs duties on building materials, equipment, inputs, and real property taxes according to sectorial promotion legislation. A list of these legislation norms is presented in the institutional section of this report. In general the following benefits are offered to investors:

 A 20 year tax holiday;  duty-free imports of raw materials and inputs (customs duty exemptions do not apply to consumables);  low tax rates for companies in the international business and financial services sector; and  no tax withholding on dividends and interest, and in some instances royalties.

Manufacturing companies in the Bahamas also benefit from international trading treaties that provide duty-free access to the US (CBI), the European Union (EPA) and Canada.

In 2011 the UN reported total investment flows into the country reached US$ 1,533 million – a significant increase from the US$ 873 million registered in 2009. Since 2009 flows into the

pg. 33

country for real estate and direct investment in companies have returned as noted in Graph 21, but they have not yet recovered pre-crisis levels. These FDI inflows are largely related to foreign investors making large real estate investments in traditional tourism, manufacturing and public utilities sectors.

Graph 21: Bahamas FDI 2000-2011 1,800.00 1,600.00 1,400.00 1,200.00 1,000.00 800.00 600.00 400.00 200.00 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: UN Comtrade

There is a direct linkage between imports coming into the Bahamas and foreign direct investments. Both values have almost recuperated pre-crisis levels after 2011. Firm data regarding the source nationally of incoming FDI to the Bahamas is not reported by either the UN or the government, but according to some sources the most important investors are American, Canadian, Chinese, and South A in origin.

Data from the United Nations confirm that the Bahamas has received substantially more FDI since 2009 than its Caribbean neighbors. See Graph 22.

Graph 22: Foreign Direct Investment 3,000.00

2,500.00

2,000.00 A&B BHS 1,500.00 BAR 1,000.00 JAM 500.00 T&T -

pg. 34

Source: World Development Indicators, WB.

Nevertheless, the Bahamas is facing increasingly more difficulties in attracting foreign investors. Standard & Poor's Ratings services announced it revised the outlook on its long-term rating of The Commonwealth of The Bahamas to negative from stable in September 2012. As the country’s fiscal outlook continued to weaken, and the government deficit rose even further in the fiscal year ended June 2012, S&P granted the Bahamas a 'BBB/A-2' sovereign credit rating and 'BBB+' transfer a convertibility assessment in September 2012.

In December 2012, Moody's Investors Service downgraded the sovereign credit rating of the government of the Bahamas to Baa1 from A3, with a negative outlook. The drivers of this rating action were summarized in three points: 1) limited growth prospects following a protracted recession and weak recovery in tourism and construction; 2) significant and rapid deterioration of the government's balance sheet, exacerbated by a low revenue base and 3) high and rising levels of debt and a weakening of debt sustainability metrics relative to peers.

In the short term, Moody’s noted expanding financing needs, as the central government's debt stock rose to 53% of GDP in 2012 from 31.7% in 2007 and debt sustainability metrics have deteriorated relative to A-rated peers. The combination of historically high debt levels and large fiscal deficits has left the government with limited fiscal buffers to affect further stimulus or respond to external shocks.

II.3 Services and Productive Structure

Within this macroeconomic context, this section will examine the productive structure of the country, focusing in greater depth on industry, agriculture and services to identify large and fast- growing sectors.

Agriculture and Industry

As previously mentioned, the Bahamas’ economy largely depends upon services although industry’s share in overall GDP is not negligible. Agriculture is small in both employment share and overall contribution to growth, and the manufacturing sector is still in its initial stages. Manufacturing employs approximately 3.2 percent of the workforce and its GDP share ranks similarly. The country’s productive agriculture, manufacturing and exporting base has historically focused on a very narrow range of primary commodities and goods with low value-added content. The most recent Product Space Maps for 2000, 2005 and 2010 indicates the challenges that the country will face in moving into new high-growth sectors in the future or more complex interrelated industries. Figure 1: Bahamas Product Space Map 2000

pg. 35

Figure 2: Bahamas Product Space Map 2005

Figure 3: Bahamas Product Space Map 2010

pg. 36

*

Source: The Observatory of Economic Complexity MIT, Atlas. In a recent paper for the Inter-American Development Bank, Ricardo Hausmann and Bailey Klinger said: “Given the Bahamas’ hyper-specialization in tourism and finance, it is difficult to draw many conclusions from their data, but that country does have some export activity in beverages as well as chemicals that are approaching the industrial core”. They continue “As with Jamaica, Guyana, and the Bahamas, both Malta and Cyprus are somewhat present in the peripheral agri-food and textile sectors”9 As shown in the product space figures, the Bahamas productive structure is very heterogeneous. Products are not closely connected from one sector to others nearby, and thus they mostly operate in a relative isolation. A Bahamas detailed merchandise export profile is incorporated in the following section, but the product space figures indicate that structural transformation could not be guaranteed.

Diversification

Despite this “hyper-specialization” label, the diversity of Bahamas’ exports hints some diversity over recent years and the average ubiquity10 show the particular nature of the Bahamas’ exports. Over last decade, the number of products for which the Bahamas has a revealed comparative advantage (RCA larger than 1) has fluctuated between 40 products in 2000 and 23 products in

9 Inter-American Development Bank (2009). Private Sector Development Discussion Paper # 2, Hausmann R. and Klinger, pag. 13. 10 It is measured by the number of countries with similar exports.

pg. 37

2010, and its diversification11 seems to be far behind Antigua and Barbuda and Jamaica. Graph 23

Graph 23: Bahamas Export Diversification 45.00

40.00

35.00

30.00

25.00

20.00

15.00 Number of Products of Number

10.00

5.00

0.00 Antigua Bahamas Barbados Jamaica and Barbuda

Source: Wiston Moore (2012) Pag.20

Ubiquity

The average ubiquity index shows in Graph 24 how unique are its exports - the higher the value, the less unique a country’s exports. The Bahamas is the lowest among selected comparators and most Caribbean islands, which shows the relative uniqueness of Bahamian exports.

Graph 24: Bahamas Export Ubiquity

11 Measured by number of products exported by a country.

pg. 38

45.00

40.00

35.00

30.00

25.00

Index 20.00

15.00

10.00

5.00

0.00 Antigua Bahamas Barbados Jamaica and Barbuda

Source: Wiston Moore (2012) Pag.20

From all of these measures, the Bahamas shows low economic complexity in the goods sector. Its export products are notoriously disconnected from each other, operating almost alone in the product space map. There have not been any significant changes over the time frame 2000 to 2010. Despite the limited complexity of the Bahamas economy as reflected in the analysis and graphs of the Product Space Map, it is noted that its largest sectors and/or its traditional sectors will remain relevant for some period of time, but there are some exports such as Alcoholic beverages that have started to fall in terms of their importance in the overall export basket.

An alternative view of the Bahamas’ exports is shown in the following manufacturing exports graphs. The first Graph 25 shows the significant growth of exports since 1998 from a small base for manufactures and non- manufacture products accumulated. The second Graph 26 shows those exports values as shares of total exports where some products such as non-manufacture expanded their share since 2008, despite the general economic downturn. Both figures underline that Bahamas’ merchandise exports have multiplied and grown over last decade until 2010.

Graph 25: Bahamas Exports 1998 – 2010

pg. 39

Source: The Observatory of Economic Complexity, MIT Graph 26: Bahamas Export Share by Products 2010

pg. 40

Source: The Observatory of Economic Complexity, Tree Maps

As of 2010, a small Bahamas exports have transformed from chemical products, mounted precious stones, diamonds, precious jewelry and oxygen-function acids & derivatives to sodium chlorinate, heterocyclic compounds, warships, work of arts, polystyrene and fresh, chilled, frozen or salted crustaceous and mollusks poultry. Using the SITC4 classification, Bahamas’ exports reveled comparative advantage (RCA) is manifest on products such as mineral tars, salt (sodium chloride), ships & boats and polystyrene, which have shown the largest RCA values for 2010, but with very small participation in the total value of exports except ships & boats. During 2008, The Bahamas has exported warships with a RCA of 356.71; represented approximately USD 195 million in export. Along those lines the exports of alcoholic beverages have decline from USD 227 million in 2008 to only USD 14 million in 2010 as its RCA significantly declined. Chart 4 provides a detailed list of products that represent approximately 97 per cent of total merchandise exports.

pg. 41

The Bahamas Main Exports and Revealed Comparative Advantage (RCA) 2010 2009 2008 Share of Share of Share of Code Name Total USD$ Value of Total USD$ Value of Total USD$ Value of RCA Exports Exports RCA Exports Exports RCA Exports Exports Fresh, chilled, frozen or salted 360 crustaceans & molluscs 18.48 3.13% 84,602,625 19.4 3.4% 71,157,215 22.96 3.39% 87,363,017 422 Semi or wholly milled rice 2.21 0.3% 6,140,083 612 Refined sugar 5.45 0.5% 9,508,796 1124 Alcoholic beverages 3.37 0.52% 14,069,529 38.54 6.2% 131,039,002 62.52 8.84% 227,638,277 2734 Stones 27.1 0.49% 13,185,721 35.49 0.8% 15,952,716 61.25 1.37% 35,180,081 2783 Sodium chloride 38.87 0.89% 24,040,952 36.85 0.8% 17,274,527 29.37 0.48% 12,312,022 2820 Iron & steel waste 1.95 0.55% 14,826,461 1.53 0.4% 7,417,500 2.23 0.72% 18,479,762 2882 Other non-ferrous base metals 1.56 0.30% 7,693,661 2890 Ores and precious metals 3.61 0.27% 7,403,640 3330 Crude petroleum 0.24 2.18% 56,027,135 3345 Lubricating petroleum oils N.E.S. 12.27 48.96% 1,322,782,987 14.99 51.2% 1,085,828,276 7.35 30.11% 775,355,021 3352 Mineral tars 76.78 7.65% 206,611,249 7.34 0.6% 13,317,266 7.19 0.64% 16,598,580 Heterocyclic compound; nucleic 5156 acids 4.12 1.86% 50,387,641 7.38 3.6% 77,079,507 7.28 2.97% 76,526,508 5833 Polystyrene 24.71 3.66% 98,909,931 34.57 4.6% 97,609,574 39.77 5.50% 141,517,355 7810 Cars 0.11 0.4% 7,958,575 7931 Warships 356.71 7.57% 195,026,501 7932 Ships & boats 36.16 22.90% 618,647,573 19.92 13.8% 293,700,320 39.83 21.87% 563,229,536 8960 Works of art 21.47 2.39% 64,524,282 24.06 2.4% 51,505,169 24.7 2.94% 75,752,441 9310 Unclassified transactions 0 4.36% 117,861,547 0 7.7% 163,519,226 0 8.05% 207,173,514 Total Share of Exports 97.63% 96.6% 96.93% Red = Highest RCAs in the period; Green = significantly diminishing value of RCA year to year Source: Author elaboration, from data in The Observatory of Economic Complexity, MIT Among those identified industrial export codes in the previous Chart 4, products with a RCA have varied a lot during last years, with the highest RCA values in red. At the same time that export share and value of the most important products have represented approximately more than 95 per cent of merchandise exports during 2008 to 2010. Among these industry lines we identify subsets such as food & live animals, beverages & tobacco, machinery & transport equipment, and other manufactured articles.

An alternative way to confirm this dynamic is by comparing Bahamas exports growth and its share of world total market by 2011. Using the Harmonized System classification, the following graphs show the structural nature of Bahamian exports and its products dynamic vis a vis world markets. Graph 27: Bahamas Exports Structure

pg. 42

Source: International Trade Center, Trade Competitiveness Map www.intracen.org The relevance of sectors in the core such as mineral fuels, organic chemical & related materials, petroleum refining and ships & boats and mechanical industry are going to continue and establish a permanent role with limited interconnection with others. Graph 27

Graph 28: Bahamas Export Dynamic

pg. 43

Source: International Trade Center, www.intracen.org

A significant number of new products for Bahamian exports have shown a Revealed Comparative Advantage larger than one. Graph 31 confirms the Bahamas role in machinery (code 64), tools and base metals (code 82), articles of iron (code 73), iron and steel (code 72), perfumes and cosmetics (code 33), art (code 97) and optical and medical apparatus (code 90) as very significant compare to the world exports in these classification code products. These are mid-size exports for merchandise or non-service Bahamas exports. Graph 28 More aggregated data shows that the shares of GDP for all these sectors- Agriculture and Industry- were fairly stable over the decade, with only the beverage and tobacco industry sector experiencing a precipitous decline.

UN Trade data for a sub-set of sectors is presented in the following section of this report, showing the compound average growth rate (CAGR) for the entire economy over last decade was a very modest 0.97 percent over last eleven years. Traditional sectors linked to hotels, restaurants, wholesales and construction have grown over the decade with larger CAGR.

Services

Since the 1950s and country independence in 1970’s, the Bahamas has largely been a service- driven economy with tourism, tourism related activities such as hotels, restaurants and wholesales along with financial services as the main forces explaining its economic performance.

pg. 44

Graph 29: Bahamas GDP by Sectors share 1999-2011 100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Agriculture Industry Manufacturing Services

Source: World Development Indicators, WB Within the last decade the sector share of GDP has remained unchanged, as shown in Graph 29. In the year 2000 services value-added accounted for 80.4 per cent of GDP, by 2008 this proportion was almost unchanged representing 79 per cent of GDP. The share of agriculture barely reached 2.1 per cent, manufacturing was around 3.7 per cent and industry the other 15.4 per cent by 2011. Overall growth in the Bahamas has been and will remain highly dependent upon the performance of the services sector. At the same time export services represent aproximately 80 percent of total exports. See Graph 30.

pg. 45

Graph 30: Bahamas Services exports to total exports 1999-2011 100

80

60

40 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: World Development Indicators, WB.

The decomposition of the various components of the services sector, Graph 31, for the period 1990 to 2010 shows that travel services explains a large portion of total exports services.

Graph 31: Bahamas Travel , Transportation, Communication Services as pct of Export Services 1999 - 2010 100 80 60 40 20 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Communi & comp Transport Travel

Source: World Development Indicators, WB

Travel services accounted for just over four-fifths of service exports, with communications and computers, transportation sharing almost evenly the over one-tenth. There is no insurance and financial services related to exports recorded for the Bahamas, its activity is highly concentrated as offshore financial activity.

pg. 46

Nevertheless, manufacture merchandise has slowly grown over the last and half decade. Despite of the fact that the small base of the non-service sector, it has started to influence not only the participation of the whole economy, but it also has influenced manufacture and non-manufacture total exports. The following Graph 32 shows that manufacture merchandise become to be the new ones in the block of exports since 1999.

Graph 32: Bahamas Manufacture merchandise is slowly growing in importance as an export 100

80

60

40

20

0

Services Non Manuf Merchan Manuf Merchandise

Source: World Development Indicators, WB.

The chart shows how the Bahamas economy is changing its productive structure during last decade. Manufacture exports have been increasing their share in total exports from around 6 per cent in 1999 to almost 16 per cent in 2011, at the same time that non manufactured merchandise has varied around 11.5 per cent in 2008 and 7.5 per cent in 2011.

II.4 Institutions and Economic Regulation The Bahamas is a constitutional monarchy based on the Westminster system of parliamentary government. Queen Elizabeth II is the head of state. She is represented ceremonially by a Bahamian governor-general who acts on the advice of the prime minister and the cabinet. The leader of the majority party in parliament serves as prime minister and head of government. The cabinet consists of at least nine members, including the prime minister and ministers of executive departments. They answer politically to the lower House of Assembly. The governor-general appoints the chief justice of the Supreme Court on the advice of the prime minister and leader of the opposition. Other justices are appointed on the advice of a judicial commission. The Privy Council in London serves as the highest appellate court for the Bahamas. Bahamians main authorities are: Queen Elizabeth II since 1952, Governor General Mr. Arthur Foulkes since 2010 and Prime Minister Mr. Perry Christie of the PLP party since May 7, 2012.

The Prime Minister presides over a Cabinet of Ministers who is largely responsible for policymaking. The executive branch is currently headed by the following authorities.

Name Title

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Bell, Sen. the Hon. Keith Minister of State in the Ministry of National Security Darville, The Hon. Dr. Michael Minister for Grand Bahama Dorsett, The Hon. Kendred Minister of the Environment and Housing Fitzgerald , The Hon. Jerome Minister of Education, Science and Technology Gibson, The Hon. D. Shane Minister of Labour and National Insurance Gomez, The Hon. Damien Minister of State in the Ministry of Legal Affairs Gomez, The Hon. Dr. Perry Minister of Health Gray, The Hon. V. Alfred Minister of Agriculture, Marine Resources and Local Government Griffin, The Hon. Melanie Ministry of Social Services Halkitis, The Hon. Michael Minister of State for Finance Hanna-Martin, The Hon. Glenys Minister of Transport and Aviation Johnson, The Hon. Daniel Ministry of Youth, Sports and Culture Maynard Gibson, Sen. the Hon. Z.C. Attorney General, Minister of Legal Affairs Allyson Mitchell, The Hon. Frederick Minister of Foreign Affairs & Immigration Nottage, The Hon. Bernard J. Minister of National Security & Leader of Government Business Pinder, The Hon. Ryan Minister of Financial Services Rolle, The Hon. Khaalis Minister of State for Investments Strachan, The Hon. Hope Minister of State in the Ministry of Transport and Aviation Wilchcombe, The Hon. Obediah Minister of Tourism

The Bahamas enjoys a stable political environment with elections constitutionally held every five years. While there are some minor differences between the two major political parties, both parties are largely committed to democracy, the rule of law and the operation of free markets. In addition, there is a new party Democratic National Alliance. The House of Assembly consists of 38 members elected from individual constituencies for five-year terms. As under the Westminster system, the government may dissolve the parliament and call elections at any time. The House of Assembly performs all major legislative functions. The Senate consists of 16 members appointed by the governor-general, including nine on the advice of the prime minister, four on the advice of the leader of the opposition, and three on the advice of the prime minister after consultation with the leader of the opposition.

The government of the Commonwealth of the Bahamas generally encourages foreign investment in all sectors of the economy except those the Government reserves exclusively to Bahamian citizens. Reserved businesses include: wholesale and retail operations; commission agencies

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engaged in the import/export trade; real estate and domestic property management agencies; domestic newspaper and magazine publication; domestic advertising and public relations firms; security services; domestic distribution and building supplies; personal cosmetics and beauty establishments; shallow water scale-fish; crustacean, mollusk and sponge fishing operations; auto and appliance service operations; and public transportation. On April 18, 2011, the government amended the National Investment Policy to remove foreign investment restrictions on restaurants and entertainment businesses and to increase the minimum investment requirement.

According to the official document “The Bahamas: A paradise for many reasons”12, the government has targeted the following categories of businesses of particular interest for foreign investors: tourist resorts; upscale condominiums; time share and second home development; international business centers; marinas; information and data processing services; assembly industries; high-tech service; ship registration, repair and other services; light manufacturing for export; agro-industries; food processing; agriculture; banking and other financial services; captive insurance companies; aircraft services; pharmaceutical manufacture; and offshore medical centers.

The benefits and incentives of investing in the Bahamas include: a stable, democratic government; relief from corporate and personal income taxes; timely repatriation of profits of approved investments; proximity to the United States; extensive air links through nearby Miami, Ft. Lauderdale, and Orlando; well-developed telecommunications links; excellent tourism and conference facilities; and tariff concessions under the Caribbean Basin Economic Recovery Act. There are no taxes on income, sales, estates or inheritances. The only direct tax is a real property tax. Casinos are taxed, and there is a departure tax levied at the airports and harbors. The principal incentives for investments are concessions on import duties and property tax abatement. Tariffs in general are high but do not generally discriminate by country of origin.

On January 25, 2010 the Bahamas signed an Economic Partnership Agreement (EPA) with the European Union that aims at the eventual elimination of duty on EU imports over the next 25 years.

Incentives are offered for investment under the following legislation by sector or region:

 The free Trade Zone Act or Hawksbill Creek Agreement Act (1955): Declares a Free Trade Zone on Grand Bahamas, Freeport.  The Export Manufacturing Industries Encouragement Act: Under this law, the government may exempt duties from the machinery, tools, equipment, and raw materials imported to construct new factories. A list of duty-exempt items is negotiated separately with each new venture.  The Hotels Encouragement Act: Under this law, new hotels and resorts can be exempted from real property taxes for ten years from the date the new facility opens, and for significant tax reduction for up to ten additional years. An amendment to the Act currently before Parliament would allow the Government to grant tax relief for an

12 Bahamas Investment Authority (2011)

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additional ten years, raising the maximum length of tax abatement to thirty years. In addition, the Act allows the duty-free importation of materials used for the construction of new facilities or the substantial renovation of existing facilities acquired by new owners for a set period of time. The list of duty-free items for each project and the duration of some duty-free windows are negotiated separately for each venture.  The Agricultural Manufacturers Act: This law allows any materials necessary for the construction, alteration, or repair of an agricultural factory, as well as any machinery or supplies used in establishing such a factory, to be imported duty free. An agricultural factory refers to any factory established for the purpose of manufacturing or preparing agricultural or horticultural produce of The Bahamas for sale or export.  The Spirits and Beer Manufacturers Act: This law provides for the duty-free importation of materials used in the construction, alteration or repair of approved liquor distilleries or beer breweries and the duty-free importation of raw materials and equipment for liquor or beer production.  The City of Nassau Revitalization Act and the Vacation Plan and Time Sharing Act.  The Tariff Act and additional amendments provide duty exemptions for construction, energy efficient durable goods and development on certain outer "Family Islands

Prospective investors should discuss the specific terms and conditions under which these benefits will be made available with The Bahamas Investment Authority.

Economic Regulation and Private Activity

Government policy is committed to promoting a favorable economic environment in which the government regulates and facilitates economic development, where transparency, fair play and equality of treatment are protected. However, private domestic and foreign investors complain about the discretionary issuance of business licenses and lack of transparency in decisions to authorize or to renew the license of a business. Obtaining required permits, especially immigration permits, can involve lengthy delays. To encourage and maintain foreign and local investment the government has pledged to implement new investment policies which will simplify the process and reduce ambiguity.

Last year, the government privatized the Bahamas Telecommunications Company (BTC) signaling the end of a major government monopoly on telecommunications. The Utilities Regulatory Competition Authority (URCA) has responsibility for oversight of the telecommunications industry and public utilities. Canadian-Bahamian Company Cable Bahamas merged with U.S. company System Resource Group on February 7, 2011 to add landline services to its internet and television bundle. Government corporations such as the Hotel Corporation of the Bahamas and the Broadcasting Corporation of the Bahamas (BCB) compete on a basis of rough equality with private corporations in similar businesses. To prevent the BCB from competing with private television stations, the government has expressed intent to convert the company to a Public Broadcasting Services (PBS) station. .

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III State of the Private Sector

In the Bahamas the private sector represents around 80 percent of GDP and approximately 78.7 percent of total employment as of 2011.See Graph 33.

Graph 33: GDP SHARE 2011

19.5

80.5

Private Sector Public Sector

Source World Development Indicators, WB Between 2008 and 2011, public sector employment increased slightly due to the government’s expansionary policy in response to the international financial crisis. Nevertheless, the private sector is structurally the main provider of employment for Bahamians, as shown in graphs 34a for 2008 and 34b for 2011.

Graph 34a: Bahamas Employment Share 2008

17.8

82.2

Private Sector Public Sector

Source: Department of Statistics, MOF, Bahamas

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Graph 34b: Bahamas Employment Share 2011

21.2

78.7

Private Sector Public Sector

Source: Department of Statistics, MOF, Bahamas Graph 35 shows the evolution in employment by sector for the years 2001, 2007 and 2011. The financial sector, wholesale and retail trade and construction have been the three top sectors demonstrating visible job growth over this time frame.

Graph 35: Bahamas Employment by Sector 2001, 2007 and 2011

60 50 40

Thousands 30 20 10 0

2001 2007 2011

Source: UN Comtrade. ILO Agriculture, mining and manufacturing combined employ 6.1 percent of total employment (1.9 percent, 1 percent and 3.2 percent respectively).

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Examining employment by gender, reveals that the non-service sectors hire quite a different mix of men and women. While the construction, mining, agriculture and transportation sectors employ predominantly male workers, most of the employees in the community social services, finance and hotels and restaurants sectors are women. Employment is evenly distributed in wholesale and retail trade. At the same time, some disaggregation by employment type or status confirm the relevance of the private sector, provides some details about the self-employed individuals and other type of employment. However, private employment has significantly dropped and government employment has risen, but not enough to absorb the workers the private sector is dismissing, Graphs 36a and 36b The public sector has temporally employed more, but government’s expenditures eventually being adjusted as the country comes out of recession to maintain fiscal solvency.

Graph 36a: Bahamas Employment 2008

285 23190 Government & 31205 Government Corporation Private Employee and Apprentice Self Employed

Unpaid family worker

Other not disclosed 120160

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Graph 36b: Bahamas Employment 2011

Government & Government Corporation 22880 495 34890 Private Employee and Apprentice Self Employed

Unpaid family worker 105235 Other not disclosed

Source: Department of Statistics, MOF, Bahamas Over the period of time 2008 to 2011, the number of self-employed people decreased slightly from 23,190 individuals in 2008 to 22,880 by 2011, a 1.3 per cent decline. According to the Department of Statistics, the data show that there was a noticeable increase in the number of employed persons and a slight decrease in the number of unemployed persons by May 2011 as some people withdrew from the labor force while a substantial number of persons, on the other hand, rather than becoming discouraged workers sought means of making a livelihood by engaging temporarily in informal sector activities such as the selling of phone cards and similar street vendor activities as well as the selling of jewelry, clothing and similar items from their cars or homes. As part of the overall labor scenario, the informal sector refers to those parts of an economy that are not taxed nor monitored by any form of government13. Workers in this sector usually have no contracts, little or no job security, no fixed hours, and often no fixed location from which they operate and no employment benefits such as retirement plans, sick leave or maternity pay. As of May 2011self-employment in the formal or informal tends to increase temporarily and this is borne out in the data which shows that the informal sector grew faster 10.3 percent than private enterprises that grew in 1 percent according to the Department of Statistics.

The Labour Force Report of 201114 shows that female employment increased by 5.6% compared to 2.4% for men from 2009 to 2011. Further, while men continue to represent the majority of informal workers (Graph 37), recent trends show female participation in informal employment growing by 65% compared to a much lower increase, 20%, experienced by their male counterparts over the same time period. Informal activities tend to be concentrated in the retail industry, a subgroup of the Wholesale and Retail industry that grew more than any other industry over the period, increasing its employment numbers by 16%. In contrast, industries which tend to be dominated by males such as construction experienced a decline of 18%. By the end of

13 Department of Statistics (2012) Labour Force – News August 5, 2011 14 Department of Statistics of the Bahamas – Labour Force Report 2011, pg 17

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2011, the informal sector employed 17995 individuals, of which 6005 were women and 11990 were men.

Graph 37: Bahamas Informal Sector Employment 2011

6005

11990

Female Male

Source: Department of Statistics, MOF, Bahamas

Informal activities tend to be concentrated in the retail industry, a subgroup of the Wholesale and Retail industry. In contrast, industries which tend to be dominated by males such as construction experienced a decline between 2008 and 2010. Informal employment represent approximately one-half of total employment of the wholesale and retail sector employment, almost equivalent to hotels and restaurants employment and alternatively one-third of the construction employment.

IV Large and Fast Growing Sectors

Tourism and financial services are the largest sectors of the economy measured in terms of GDP share, but further analysis reveals industry and agriculture to be the promising see Graph 38. In addition, the smallest sector – mining – is the fastest growing. The Bahamian economy is dependent on two main servicers sectors - tourism (hotels and restaurants) and financial services (commercial banks, insurance and other financial institutions), both of which earn revenues in foreign currencies and influence directly at least two-fifths of GDP and indirectly two-thirds of the Bahamian economic activity. Their main indirect influence is reflected in construction, with other indirect effects observed in the wholesale and retail trade sector. Of the rest of the economy, approximately one-fifth is industry, manufacturing and agriculture as a new addition to the traditional economic structure during the last decade and half (1995-2012). Agriculture represented approximately 2 percent of total GDP in 2011.

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Graph 38: Bahamas GDP Share 2011

2.1 15.4 Agriculture 3.7 Industry Manufacturing Services 78.7

Source: World Development Indicators, WB.

Graph 39 : GDP Share 2011 Agriculture, hunting, forestry, 1.72 fishing (ISIC A-B) 2.10 Mining (ISIC C) 3.69

Electricity E 6.89 Manufacturing (ISIC D)

Construction (ISIC F) 45.76

27.45 Wholesale, retail trade, restaurants and hotels (ISIC G-H) Transport, storage and 6.57 communication (ISIC I) Other Activities (ISIC J-P)

Source: UN COMTRADE, ISIC Rev 4, SNA 93 classification Hotels and restaurants represent approximately three-fifths of the total wholesale, retail trade sector. By the same token, real estate is three-fifths of financial services and other services such as education, health, community services and public services and defense participate equally in the rest of the entire services sector. Using International Standard Industrial classification Revision 4, Graph 39 shows the relative importance of non-services sectors for the Bahamian economy.

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The Bahamas still depends upon the sale of services to foreigners and visitors. The proceeds of foreign currency earnings provide the means to import goods and services not produced in the Bahamas. This is the fundamental economic reality of the islands.

IV.1 Tourism and Travel and the Wholesale/ Retail Trade Sector

As of the end of the first decade of the new millennium, the economy of the Bahamas remains highly dependent on two sectors -- tourism and financial services.

According to the World Travel & Tourism Council (WTTC), by 2006 the tourism industry was estimated to directly account for about 17 percent of GDP and 24 percent of jobs, and by 2011 its contribution increased in both counts, its direct contribution of GDP went up to 18.5 per cent and employment went increased to 25.8 per cent. Even considering the significant competition of neighboring countries in these industries, the WTTC forecasts that its direct contribution to GDP in the Bahamas will grow by 3.1 per cent in 2012 and employment by 2.4 per cent. If both indirect and induced contributions15 are considered, the industry contributed 46.2 percent of GDP in 2011 and 53.8 percent of total employment, approximately 90,500 jobs. Looking forward, the WTTC expects sustained growth in the tourism industry at 2.6 percent annually through 2022 and for employment to grow to approximately 111,000 individuals by 2022.

Although the Bahamas tourism sector receives a larger number of visitors by sea than by air (Graph 40), cruise visitors might not represent a significant source of income for the sector. On the contrary, air visitors or stopover spending is ten times more important in value than cruise or daily visitor spending despite their number.

Graph 40: Bahamas Visitor Arrivals 2011

22.69

77.31

AIR SEA

Source: Quarterly Report Bahamas Central Bank (BCB), Min Tourism (2012)

15 The WTTC includes tourism and travel (T&T) investment (construction), government collective T&T spending and suppliers as indirect contribution and food and beverages, recreational, clothing, housing and household good as induced. WTTC Bahamas Travel and Tourism Economic Impact (2012) pag. 2.

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Graph 46 : Visitors to the Bahamas in 2011

24.05

74.50

Stopover Cruise

Source: Quarterly Report BCB, Min Tourism (2012)

Graph 42: Visitors to the Bahamas in 2011

31.57 New Providence Grand Bahama 53.79 Family Islands

14.65

Source: Quarterly Report BCB, Min Tourism (2012)

Cruise boat and daily visitors might represent on average two-thirds of total arrivals (Graph 41), but only one-tenth of total tourism spending. Therefore, cruise ship and day tourism is economically clearly less significant than air visitors or stopovers. Most stop-over visitors are high-end tourists from the US who spend their holidays in one of the mid-sized or large hotels. Of the overall number of visitors, New Providence receives approximately 55 percent, the Grand Bahama 15 percent and Family Islands 30 percent (Graph 42). The tourism sector in the Bahamas is dominated by large resorts with an average occupancy rate of around 60 percent, and hotels cater to international tourism. Small hostels or bed & breakfasts are dedicated to serving domestic tourism. Although the overwhelming majority of hotels are small in size (20 or fewer

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rooms)16, they are estimated to account for less than 5 percent of overnight stays; a clear indication of the importance of large hotel resorts in the sector.

Graph 43: Share of Visitor Spending, by Mode of Transport 2011

11.02

89.95

Stopover Cruise

Source: Quarterly Report BCB, Min Tourism (2012)

Stopover visitors have accounted for 90 percent of total tourism expenditures since the year 2000, with the most recent figures for 2011 shown in Graph 43. Previous studies of stopover expenditures have shown their reliance on tourists’ home country income to a large extent, and to a lesser extent to variations of relative local prices. According to the IMF, tourists’ home country income explains 45 percent of the variation in their tourism expenditures and relative prices less than 6 percent.17 The dynamic of the Bahamas’ revenues from travel and tourism are largely explained by overseas demand and US demand especially.

Small businesses in the tourism industry are directly and indirectly related to the hospitality (food and beverages and recreational) wholesales sector. Most of them are retail stores, transportation providers, or night clubs that cater to cruise ship passengers and hotel guest resorts. The rest of the small numbers of local businesses that work directly with the hospitality sector include basic service providers, advertising companies and a few providers of equipment, clothing, food or ancillary tourist services. All of them depend heavily upon cruise ship schedules and synergies with large tourism operators or hotel management.

Regionally, the 2011 travel and tourism sector contribution to GPD and employment in the Bahamas ( see Graphs 44 and 45) are larger than for other comparator countries Antigua and Barbuda, Barbados, and Jamaica. According to the WTTC, travel and tourism investment in the Bahamas is 2.8 times the sector investment in Barbados; 7 times than the Antigua and Barbuda and it is almost 17 percent higher than the investment in Jamaica.(see Graph 46)

16 According to the Bahamas Hotel Association, these hotels are approximately 70 percent of its total number or associates. 17 IMF (2005) Pages. 9 -10

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Graph 44: Travel & Tourism Contribution to GDP US$ million 2011 1600 1400 1200 1000 800 600 400 200 0 A&B BHS BAR JAM

Source: Bahamas WTTC Travel and Tourism Economic Impact 2012. Graph 45: T&T contribution Jobs 2011 90 (thousands) 6.3% 80 70 Percentages of 60 country labor force 50 22.9% 40 30 20 10.4% 16.6% 10 0 A&B BHS BAR JAM

Source: Bahamas WTTC Travel and Tourism Economic Impact 2012.

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Graph 46: T&T Capital Investment (US$ Million) 2011 450 400 350 300 250 200 150 100 50 0 A&B BHS BAR JAM

Source: Bahamas WTTC Travel and Tourism Economic Impact 2012. Travel and tourism accounts for four-fifths of the Bahamas’ foreign exchange earnings. During the period from 2000 to 2011, hotels and restaurants were one of the most dynamic sectors in terms of growth, with approximately 4.1 percent compound average growth rate, which in turn spurred growth in wholesales and construction. The wholesale, retail trade, restaurants and hotels (ISIC G-H/SNA 93) sector accounted for the largest share of GDP during last decade, the second largest share of total employment in 2011 (20.5 percent), and the largest share of employment of women. In spite of turbulent economic times, the wholesales sector has grown significantly well over the period with a compound average growth rate of 2.7 percent. In 2011, the Department of Statistics has identified 2031 establishments in New Providence, of which 1438 employ between one and four individuals and 358 establishments with five and nine employees. These wholesale and retail trade establishments represent potential employment for almost 8900 individuals in small enterprises. This last figure shows how important the wholesale and retail trade sector is for employment generation, even though small and medium enterprises (SME) are operationally linked to most activities in the Bahamas.

IV.2 Financial Intermediation and Financial Services

The second most important productive sector is financial services, with a large component of off- shore transaction services and smaller domestic activity. The Bahamas’ financial sector dynamism began as a government-led effort in the 1940’s to diversify the economy. Although commercial banking, trust fund and private banking services have traditionally been the cornerstone of the country’s financial industry, the sector has expanded significantly to offer more sophisticated services to include wealth management, insurance services and other activities over last ten years. Demanding regulatory changes were made after the year 2001, but even so the attractiveness of offshore financial services remains strong and is closely linked to the Bahamas’ advantageous tax, legal and regulatory framework, including banking secrecy laws and tax-free status.

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As a worldwide offshore financial center (OFC), the Bahamas financial sector has a large and cumbersome institutional structure and works within the confines of restrictions for domestic and foreign market operations18. As of June 2012, of the number of financial institutions authorized to carry operations within or from the Bahamas were 274, of which 159 of them were restricted under OFC regulations and 115 were authorized to work as Banks and Trust companies. However, most of these institutions are dealers, euro-currency branches and subsidiaries of banks and trusts that operate outside the Bahamas. The Bahamas local financial sector is composed of 18 banks and trusts, of which approximately ten banks serve the domestic market.

The Bahamas government exerts capital control on the financial flows of these institutions, where off shore deposits represent approximately seven times the stock of domestic deposits as of 2010. Stock exchange debt and equity transactions are limited, reflecting the small domestic market for securities. The Bahamas Central Bank exerts restrictions on capital movements to sustain the standing fixed parity (1 to 1) of the Bahamian dollar to the US dollar.

The direct contribution of the financial sector to the economy is estimated to be around 15 percent of GDP, and another 12 percent can be added as indirect effects taking into account the contribution of insurance companies and agents, credit unions and other stock exchange operators. Although direct and indirect impacts are difficult to disaggregate by sector, a recent labor market survey including real estate services sustains that the entire financial sector employed approximately 40,687 people in 201119. The central bank estimates that the financial sector directly provides 25,000 jobs and employs around 6,000 professionals, of which about 95 percent are estimated to be Bahamians20.

An additional way to view the contribution of the financial sector is through gross operational and capital expenditures (Graph 47). Both figures show that significant contributions not only in terms of government revenue and the number of employees, but also highlights a large number of small related companies such as registration companies, auditing services and law firms. The following graph shows total expenditures of B$ 574.7 million in 2010, of which B$ 25 million are capital expenditures, another B$ 4.3 million government fees and approximately B$ 287.7 million went to salaries. An important detail is that approximately B$ 236 million was spent on administrative costs with related partners and overhead.

18 An off shore financial center (OFC) is a country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy. Zoromé, IMF Working Paper/07/87] 19 Department of Statistics, MOF Bahamas 20 Inter-American Development Bank (2012)

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Graph 47: Gross Expenditures by Banks and Trust Funds (US$ million) 800 600 400 200 0 2005 2006 2007 2008 2009 2010

Salaries Government fees Administrative Costs CAPITAL EXPENDITURES TOTAL GROSS EXPENDITURE

Source: Bahamas Central Bank (BCB) According to these figures, there are a fair number of small businesses or independent consultants who provide legal advisory or accounting services to foreign and domestic clients. Some of them may also be offering services to local financial institutions, competing with international accounting firms and tailoring services for the domestic market.

During 1990’s, the Bahamas promulgated the International Business Companies (IBC) Act to enhance the country's status as a leading financial center. As a result, a large number of international businesses have registered to the reduce costs of incorporating offshore companies in the Bahamas. As of 2010, more than 162,872 IBC-type companies had registered and approximately 42,745 remain active. Although this additional regulation has impacted and reduced the number of offshore banks registered in The Bahamas, the industry and the government is considering additional legislation to keep the industry competitive while complying with international standards, including possible reform of the regulatory structure. As of March 2010, the Bahamas had signed 20 bilateral Tax Information Exchange Agreements, 14 with Organization for Economic Cooperation and Development (OECD) members and seven with G-20 members. The Bahamas has sufficiently complied with OECD and international tax information exchange regulations.

IV.3 Construction

Over last decade a number of planned hotel constructions have not only increased economic growth, but employment as well. For instance, the construction of the Atlantis Resort and Casino on Paradise Island continues to boost tourism and other activities in New Providence. The construction of the BahaMar resort project is driving construction growth with a 2.6 billion US$ planned facility to be completed by 2014. Recently, the renovation of Nassau’s Lynden Pyndling International Airport and its new U.S. arrivals and departures terminal at the airport was completed in March 2011. Other projects of significance to the construction sector include the construction of a new US$ 30 million sports stadium in New Providence and road construction projects for another US$ 100 million. The country's construction sector and

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infrastructure is best developed in the principal cities of Nassau and Freeport, where there are relatively good paved roads and international airports.

IV.4 Industry and Manufacturing

The industry and manufacturing sectors have grown in importance to the Bahamas economy over last two decades. As of 2011 industry has contributed approximately 15.7 per cent of GDP and manufacturing another 3.7 percent. Major industries in the Bahamas include cement, oil refining and transshipment, rum, pharmaceuticals, and spiral-welded steel pipe. As a result of a long standing agreement, the Hawksbill Creek Agreement, the largest segments of Bahamian industry are established in a duty-free zone in Freeport. The Bahamas' second-largest city has been based for foreign and local industry investment in manufacturing, including chemicals and ship refurbishing, and a recently established film production facility.

The Bahamas has a few notable industrial firms: the pharmaceutical firm PFC Bahamas (Syntex); the BORCO/ Vopak Terminal Bahamas oil facility; Sands Beer; the Bahamian Brewery in Grand Bahama; and the Commonwealth Brewery in Nassau, which produces Heineken, Guinness, and Kalik beers. Other industries include sun-dried sea salt, cruise ship repair services, and aragonite mining.

IV.5 Agriculture, Fishing and Mining

Agriculture and fisheries together account for 2.1 percent of GDP in 2011. Production in these sectors includes citrus, vegetables, and poultry. Although the Bahamas has been exporting lobster, fish and craft-poultry- (organic, free range, craft meat), most of that production is not captured or raised commercially. Lobsters, crawfish and other seafood products have been exported to the US and European Union. There is no large-scale agriculture, and most agricultural products are consumed domestically. Most agriculture production comes from Andros, the Abacos, Eleuthera and Grand Bahama Island. The Bahamas imports more than $250 million in foodstuffs per year, representing about 80% of its food consumption.

The mining sector plays a minor role in the economy of the Bahamas. The production of salt and aragonite stone (a component in glass manufacture) are the two most commercially important mineral products. Among its major mining operators are Morton Bahamas Salt Company, the only major industry and the largest employer on the island of Inagua, where the second-largest solar saline operation in North America is located. Limestone sand is produced by Freeport Aggregate Ltd. for the local construction industry. Aragonite is used for building materials and cell phones. Operators claim they produce some of the finest light weight aggregate- mined materials in the world because the Bahamas has the best high quality lime stone in the world.

IV.6 Small and Medium Sized Firms and Informality

In all sectors of the Bahamas economy, a significant number of small and medium enterprises (SMEs) coexist with large domestic and international companies. Despite their number and proximity to those large operations, SME economic contribution to GDP is limited as the majority of these individual or small operations operate in sectors with very low productivity.

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Among SMEs, coexisting with the tourism sector or hotels and restaurants there are a large number of wholesale and retail stores, transportation providers, bars and night clubs that cater to cruise ship passengers and hotel or resort guests. SMEs also include advertising companies, repair and equipment services, clothing, food, local accessories and tourist services. The latest survey from the Department of Statistics states that approximately 42.9 percent of total small and medium firms in New Providence are wholesales firms.

SME in the construction sector provide services in the home construction market, plumbing, woodworking, electric installations, and some participate as subcontractors. Large construction development projects and the real estate industry employ local firms for services to hotel complexes or residential areas. Other economic activities with important SME participation include domestic retail trade, personal, social and business services, communication, education and health activities.

Statistical information on the participation of small enterprises in the economy is precarious and scattered. Although it was confirmed that there was a private establishment survey carried out in 2007 and 2008, there is no rigorous data, or nation-wide establishment survey. Charts 5 and 6 summarize data obtained for New Providence regarding business establishments by number of employees. Chart 5

Source: Department of Statistics, MOF Bahamas

pg. 65

Along with this chart we can introduce information about Grand Bahamas from UNIDO, which has some differences in the industrial nomenclature and classifications21 and time period (2008- 2009). While the average firm employs 10 individuals, there are some firms which employ four times more people in metal products and machinery and the double the number of employees in the meat, fish, fruit and vegetables food sectors. Chart 6

Grand Bahama: Manufacturing Firms and Employees Average Size of Firm by # of ISIC Rev 3 2008 2009 Employees Foot Employees Establishments Employees Establishments 2008 2009 note 151 Processed meat, fish, fruit, vegetables, fats 1029 49 1061 50 21 21 1 171 Spinning, weaving and finishing of textiles 101 16 76 16 6 5 2 1810 Wearing apparel, except fur apparel 138 68 142 66 2 2 3 2010 Sawmilling and planing of wood 93 17 77 17 5 5 4 221 Publishing 430 63 473 64 7 7 5 2610 Glass and glass products 332 19 329 20 17 16 6 281 Struct.metal products;tanks;steam generators 500 49 521 52 10 10 7 291 General purpose machinery 758 20 758 20 38 38 8 3610 Furniture 250 49 250 51 5 5 9

D Total Manufacturing 10 3631 350 3687 356 10 10 1)151 includes 1520, 153, 154, 155; 2)171 includes 172,173; 3) 1810 includes 1820; 4) 2010 includes 202 5) 221 includes 222,2230; 6) 2610 includes 269 7) 281 includes 289; 8) 291 includes 292,2930; 9) 3610 includes 369; 10) includes all available data Source: UNComtrade INDSTA UNIDO In terms of both employment and GDP share, the travel and tourism and financial services sectors are the Bahamas’ most important economic activities. Along with a number of small and medium enterprises together they may account both directly and indirectly between two-thirds and four-fifths of the economy for the near future. Regarding employment and SME firm activities in the Bahamas, employment rates by sector provide figures that must be disaggregated in order to obtain consistent data regarding SME employment by sector. A recent labor survey for the Bahamas in 2011 indicates the four most important sectors are tourism (hotel, restaurants, wholesales and retails) which employs 30.7 percent of the labor force; financial services (financing, insurance, real estate and other business services) which employs 25.4 percent; construction which employs 25.1 percent; community, social and personal services which employs 9.9 percent; manufacturing, which employs 3.2 percent; transport, storage and communication, which employs 2.7 percent; agriculture, hunting, forestry and fishing, which employs 1.9 percent.

21 The Business Establishment Section of the Department of Statistics MOF Bahamas classifies businesses based on Rev.4 of ISIC. However all the ISIC categories are not currently being surveyed by the Department of Statistics along with the Agriculture, Financial and Insurance sector. Establishments are coded at the four digit level, however when reporting some ISIC they are reported at the two or three digit level. The following individual categories of ISIC are surveyed by the Establishment Section: Section Divisions B 08, 09; C 10, 11, 14, 15, 16, 17, 18, 20, 23, 24, 25, 31, 32, 33, 35, 36, 37; F 41, 42, 43;G 45, 46, 47; H 49, 50, 51, 52, 53, I 55, 56 J 58, 59, 60, 62, 63; L 68; M 69, 70,71, 72, 73, 74, 75; N 77, 79, 80, 81, 82; P 85, 86, 87, 88, R 90, 91, 92, 93;S 95, 96; Section B, C, F, J and R are coded at the four digit level but released data are reported at the three digit aggregation.

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Informality

In a country without corporate tax and where firm registration exceeds 93 percent, it is difficult to define informality.22 However, the large number of people engaged in small-scale operations has encouraged authorities and the government to seek a definition of small and medium enterprises within the Bahamian context. According to an IMF document in the Latin American region,” The size of the informal economy in the early 2000s is found to vary considerably— from a low of around 15 percent of measured GDP for the Bahamas to …..”23.

Small firms employ between one and four employees, while medium firms employ between 10 and 49 employees and have sales lower than US$250,000 annually. It is estimated by the Department of Statistics of the Bahamas that the informal sector employed 17,995 individuals in 2011, representing approximately 11 percent of total employment. The causes of informality worldwide include burdensome tax systems, rigid labor markets, high inflation, and dominance of the agriculture sector. In the case of Bahamas, the current analysis suggests a key factor determining the size of the informal economy is labor market rigidities.

IV.7 Fastest Growing Sectors Since 2000

Traditionally large sectors are not the fastest growing sectors of the Bahamas economy, as shown in Graph 48 4, sectors and subsectors show a significantly pace of growth. Although mining is only 1.7 percent of GDP, the production of aragonite and salt are the fastest growing sectors with a 7.5 percent compound average growth rate (CAGR) over the last decade. Similarly, the sub- sector of fishing with a CAGR of 2.3 percent was sufficient to overturn the negative growth trend of agriculture as a whole. The observed dynamic of the last decade reveals new trends with manufacturing growing at a small pace of almost 0.5 percent compound annual growth since 2000. Electricity, gas and water have shown a solid 2.4 compound annual growth rate for the same period and construction with also was robust with a 2.21 percent CAGR. For traditional sector such as financial services and tourism, wholesale and retail trade the data shows important differences among their subsectors. At the same time that hotels and restaurants, wholesale and retail trade have grown steadily (4.16 percent and 2.74 compound annual growth rates, respectably), hotels and restaurants became the second fastest sub-sector. While the financial services sector growth is largely explained by real estate and renting with a dynamic compound annual growth rate of 2.32 percent, financial intermediation itself seems stagnant with a growth rate of almost zero (0.05 CAGR). Graph 54 provides subsector growth performance in more detail. The third fastest growing sub-sector is health and social work with a 3.14 percent compound annual growth rate, which in turn contrasted with the large negative growth rates of community, social and personal services. While education services have grown by 0.77 percent, social and personal services decreased by almost 3.2 percent. By the same token, the reduction in transport,

22 The Department of Statistics has published some data on informal sector employment by 2011, as noted in a previous section of this report. 23 IMF (2008) Page 4

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storage and communications subsectors was offset by growth in telecommunications and surface transport sub-sectors.

Graph 48: CAGR by Sector and Sub Sector 2000 -2011

Other community, social and personal services Post and telecommunications Public administration and defence;… Education; community, social and personal… Transport, storage and communications * Agriculture, hunting, forestry * Financial intermediation Surface Transport Manufacturing * Education GROSS DOMESTIC PRODUCT Financial intermediation, real estate, renting… Agriculture, hunting, forestry and fishing * Construction * Fishing Real estate, renting and business activities Electricity, gas and water supply Wholesale, retail trade, repairs and personal… Health and social work Hotels and restaurants Mining and quarrying *

-4 -2 0 2 4 6 8

Source: Author’s calculations using UN Comtrade Data Base, ISIC Rev4 classification SNA 93. Department of Statistics In short, the smallest economic sectors are the fastest growing and most dynamic sectors of the Bahamas economy. Although traditional sectors such as tourism (hotels and restaurants) and financial services will continue driving the Bahamian economy, three small sectors have registered interesting economic growth - mining, sea poultry fishing (crustaceans and mollusks),

pg. 68

and real estate. Last but not least, manufacturing sustained positive growth rates until 2011, despite the decline of some industries such as beverages and alcoholic beverages. V. Issues for Private Sector Development

Moving from a macro overview of the economy and the role played by the private sector, the following section will address twelve issues relevant for the private sector to add a microeconomic and institutional perspective to the initial assessment.

Relevant businesses and donor entities consulted in the analysis for this study are listed in the following tables (Sections V.1 and V.2).

In order to expand the understanding of these private sector development issues, a country comparative perspective for each indicator follows starting with Section V.3. The case of the Commonwealth of the Bahamas is compared with countries such as Antigua and Barbuda, Barbados, Jamaica and Trinidad and Tobago which Bahamas share historical, institutional and economic similarities and distinctive differences. Annex B provides more detail on how the comparator countries were selected.

A comprehensive analysis about strengths, weakness, opportunities and treats (SWOT) will come at the end of this subsection, after all issues have been discussed.

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V.1 Institutions for Private Sector Development

BAHAMAS: INSTITUTIONS FOR PRIVATE SECTOR DEVELOPMENT

Name Type Vision, Mission and Goal Contact Additional information

The Bahamas Hotel Association (BHA) serves the needs of the Bahamas hotel industry by Private Sector Bahamas Hotel Association providing a forum to facilitate the promotion, profitability, quality growth and security of Mr. Frank Comito http://www.bhahotels.com Representation the tourism industry consistent with the needs of The Bahamas.

To serve as the premier employers’ and business organization in the Commonwealth of The Several programs to support Private Sector Bahamas Chamber of Commerce and Private Sector Bahamas by developing, promoting and protecting trade activity as well as the interests of Mr. Winston Rolle and SME; Employers Confederation Representation the employers on all social and labour policy issues within the context of true tri-parties, in http://www.thebahamaschamber.com national, regional and international forums

Our vision today is to become the island of choice for global investment in The Bahamas by 2012. This vision means we have to run the most efficient and effective regulatory organization not only in the Bahamas but in the Caribbean. Our vision also dictates that we Private Sector Grand Bahamas Port Authority operate to the highest ethical standards and ensure we hold each other to account for Mr. Charles Pratt http://gbpa.com Representation ensuring we live by them each and every day. "The Mission of GBPA is to better the lives of the Grand Bahama Community, and by extension, The Bahamas, through the unique features offered by our island."

To provide the network, to sustain, promote and support business development in an Private Sector Grand Bahama Chamber of Commerce effort to encourage growth and expansion in the Grand Bahama economy and within a Ms. Mercynth Ferguson http://www.gbchamber.org Representation healthy and clean community environment

To unite the Real Estate Brokers, and their Associates of The Bahamas for the purpose of http://www.bahamasrealestateassociation.c Bahamas Real Estate Association Private Mr. Franon Wilson exerting effectively a combined positive influence upon matters affecting their profession. om

Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant Bahamas Entrepreneurial Venture Fund Private Mr. Michael Cunningham; Mr. Sean Brennen http://www.bahamasventurefund.com economic contributors. Venture capital is an important source of equity for start-up companies

Our mission is to turn knowledge into value for the benefit of our clients, our people, and KPMG Private Ms. Karen Williams-Bartlett www.kpmg.com the wider business community.

The Bahamas National Trust will continue to develop an integrated National Park and Bahamas National Trust Private Protected Area System and foster initiatives to achieve conservation and sustainable use of Ms. Lynn Gape http://www.bnt.bs/_m1699/Home the natural and historical resources of The Bahamas.

Provides a comprehensive overview of the Bahamas' financial industry and consumer Mr. Paul Winder; Ms. Tiffany Norris- Associates participate in financial sector; Bahamas Financial Services Board Public and Private guidance. Pilcher; Mr. Brian Jones www.bfsb-bahamas.com

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BAHAMAS: INSTITUTIONS FOR PRIVATE SECTOR DEVELOPMENT

Name Type Vision, Mission and Goal Contact Additional information

Bahamas Institute of Chartered To govern, discipline and regulate the professional conduct of members, associates and Private Ms. Jasmine Davis; Mr. Reece Chipman http://www.bica.bs Accountants students

The primary responsibility of the Ministry of Finance is the care and management of the Government's financial resources. This responsibility involves providing support and advice on the most appropriate fiscal, tax and economic policies with the aim of maximizing Ministry of Finance Public sustainable economic growth and development with full regard to equity and social policies. The development and management of the Government Budget is a major aspect of the Ministry's function.

Promotion and Development of Tourism, tourism production improvement, relations with Nassau Tourism and Development Association, tourism publicity and advertisement, Ministry of Tourism - Reseach and Statistics Public relations with the Hotel Corporation of The Bahamas, relations with Tourism Promotion Mr. Gary Young Boards, the Welcome Centre, Prince George Dock, relations with the Gaming Board and Lotteries and Gaming.

To promote the development and improvement of industrial relations policies, procedures Department of Labor Public and practices through the provision of a range of services to employers, trade unions and Mr. Harcourt Brown; Mr. Tyrone Gibson employees

To ensure that the Bahamas Government, Businesses and People are never hampered in Ms. Kimberley Rolle; Ms. Bettina Turner; Ms. their activities by any inadequacies of statistics, their recent trends or their interpretation: Department of Statistics Public Ms. Kelsie Dorsett Kajana Rolle - and in particular, to ensure that the managers of the Bahamian economy in the Ministry of http://statistics.bahamas.gov.bs/ Finance, Central Bank and elsewhere, never lack adequate statistics nor argue about them.

To foster an environment of monetary stability conducive to economic development, and Central Bank of Bahamas Public to ensure a stable and sound financial system, through the highest standards of integrity Mr. Alwyn Jordan http://www.bahamas.gov.bs and leadership.

Operating from the Office of the Prime Minister, the BIA has been designated a “one-stop Bahamas Investment Authority Public FDI promotion shop” designed to simplify investing in The Bahamas. The BIA serves as the administrative Ms. Joy Jibrilu; Ms. Samantha Rolle http://www.bahamas.gov.bs arm of the National Economic Council and Investments Board.

The Water & Sewage Corporation is the only water resource authority and regulating agency for water and sewerage in the Bahamas. Transform the Corporation into an Water & Sewerage Corporation Public Mr. Glenn Laville www.wsc.com.bs efficient, customer focused organization that provides quality service and enjoys a reputation for consistently high performance.

Utilities Regulation Competition We are committed to achieving sustainable competition and promoting consumer Ms. Katheleen Riviere-Smith http://www.urcabahamas.bs Authority interests, through effective and efficient regulation of utilities and broadcasting.

BAIC's Mandate is to stimulate and encourage the creation, expansion and promotion of small and medium-sized Bahamian business and to assist those business in developing and Bahamas Agriculture Industry enhancing profitable opportunities for Domestic and International Trade. This is done by Public http://www.baic.gov.bs Corporation providing research and feasibility studies, industrial land / Industrial parks for lease at concessionary rates, access to development funding, access to buyer markets, and business monitoring and evaluation. pg. 71

BAHAMAS: INSTITUTIONS FOR PRIVATE SECTOR DEVELOPMENT

Name Type Vision, Mission and Goal Contact Additional information

The University of The Bahamas will be the nation's primary resource for research & innovation and community engagement. It will meet the educational aspirations of its College of the Bahamas Education Ms. Cheryl Simms students and nurture their creativity. It will promote the values of learning, leadership and service.

Atlantis (University) Education Mrs. Adrilla Horton

The Mission of Nova Southeastern University, a private, not-for-profit institution, is to offer a diverse array of innovative academic programs that complement on-campus educational opportunities and resources with accessible distance learning programs to foster academic Nova Southeastern University Education Ms. Juliette Reid excellence, intellectual inquiry, leadership, research, and commitment to community through engagement of students and faculty members in a dynamic, life-long learning environment

Bahamas Technical and Vocational To provide learning opportunities that enables individuals to be globally competitive and Education http://www.btvi.org.bs Institute economically independent.

The Political/Economic/Commercial Section’s principal mission is to advance U.S. policies Diplomatic Representation, and interests in The Bahamas in order to strengthen democratic institutions and the market http://nassau.usembassy.gov/pol_econ_com. US Embassy Nassau, Bahamas Political and Economic Mr. Alexander Sokoloff economy, encourage bilateral and regional cooperation in the fight against terrorism and html Counselor ECOPOL section drug-trafficking, and build partnerships to meet other key areas.

pg. 72

V.2 Donors and Other International Entities The Bahamas: Donor Engagement and Activities in the Past Five Years

Name Program Description Contact PROJECTS AND PROGRAMS Other Additional Information for International Domestic Economy Productive Structure Improvement

CARTAC is one of the International Monetary Fund’s (IMF’s) TA for Fiscal Revenues, Financial Major contacts are the Bahamas Caribbean Regional Technical International Monetary Fund regional technical assistance (TA) centers (RTACs), a model Mr. Arnold McIntyre Sector Supervision, and Capital Ministry of Finance and The Assistance Center CARTAC of TA delivery. Markets and Debt Bahamas Central Bank

DFID is the Development Agency of the United Kingdom. Its UK Department for International TA for Fiscal Financial Counterparts in Ministry of European Union main goal is to promote sustainable development and Mr Kato Kimbugwe Development DFID Management Finance eliminate world poverty

The CDB is a regional financial development institution established in 1969. The purpose of the Caribbean Provided some support for Private sector Development Bank is 'to contribute to the harmonious social and economic Private sector development development division that Caribbean Development Bank economic growth and development of the member countries Mr. Warren Smith development of the Family program (CDB) provides loans, grants and in the Caribbean and to promote economic cooperation Islands and Tertiary Education equity finance among them, having special and urgent regard for the needs Law School for the entire region of the less developed members of the region.'

Compete Caribbean is a multi- The project aims to enhance the donor initiative, administered CIDA was formed in 1968 by the Canadian government. It management of public finances in CIDA has currently no specific by the Inter-American administers foreign aid programs in developing countries, the Caribbean region through Canadian International programs with the Bahamas, but as Development Bank (IDB), with and operates in partnership with other Canadian Ms. Marie T. Legault increased effectiveness of Ministry of Finance Development Agency CIDA part of regional programs with the objective to enhance organizations in the public and private sectors as well as domestic revenue systems, more other Development Institutions sustainable economic growth other international organizations effective and transparent budget through improved preparation. competitiveness.

International Financial Corporation The IFC purpose is to create opportunity for people to escape TA for the Bahamas Central Band Also it is related to the Bahamas Credit Bureau Program IFC (World Bank) poverty and improve their lives and regulation Development Bank

The Multilateral Investment Fund (MIF) is an independent fund administered by the Inter-American Development Bank (IDB), created to support private sector development in Latin America and the Caribbean. In partnership with business TA for Small and Medium Inter-American Development Bank Multilateral Investment Fund organizations, governments, and non-governmental Mr. Tomas Miller Enterprises organizations, MIF's stated goal is to provide technical assistance and investments to support micro and small business growth, build worker skills, and to improve markets and access to finance.

The IIC’s mission is to promote economic development in its Inter-American Investment regional developing member countries by fostering the Mr. Michael Apel; Jorge Work with the University of the TA to SME development Corporation FINPYME establishment, expansion, and modernization of private Roldan West Indies enterprises, with the focus on SMEs.

Pan-American Health Organization Support to the water and PAHO's main objective is to achieve sustained development Organization of American States PAHO, Health Services, Water and Dr. Gerry Eijkermans sewage company, focus on of the health services. supply drinking water.

Inter-American Institute for IICA will contribute to the Cooperation in Agriculture (IICA) IICA's initiative in the Bahamas aims for the revitalization of Support the Ministry of schools’ agriculture programs program for agriculture production the agriculture sector is an important first step for sustaining Agriculture and Marine Mr. Manuel Messina and provided support to young and competitiveness. Center for improvement of food security, and diversifying the local Resources (MAMR) and entrepreneurs, women’s arts Strategic Analysis for Agriculture economy. agriculture stakeholders. and crafts businesses. (CAESPA).

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V.3 Access to Finance

As with all economies, domestic savings play a main role in relation to the availability of credit for the Bahamian private sector. At the end 2011, credit to the private sector as percentage of the GDP was approximately 86 percent and the highest among comparator countries. See Graph 49.

Graph 49: Domestic Credit to the Private Sector (as a percentage of GDP) 90 80 70 60 BHS 50 40 A&B 30 JAI 20 T&T 10 0

Source: Word Development Indicators and Global Financial Development Indicators

As of the end of 2010 deposits as percentage of GDP was 80 percent while bank lending as a ratio of bank deposits was above 100 percent24. This suggests that domestic financial institutions have been able to sustain a significant supply of credit to the private sector, despite an adverse international context (Graph 50). Domestic financial institutions have increased loans to the government and the state-owned companies, as total credit rose from approximately 12 percent of GDP in 2005 to 21 percent of GDP by 2010.

24 “Deposit Money Bank Assets to GDP” are claims on the domestic real nonfinancial sector by deposit money banks as a share of GDP.

pg. 74

Graph 50: Deposit Money Bank Assets to GDP 140 120 100 80 60 40 20 0 199619971998199920002001200220032004200520062007200820092010

ATG BHS BRB JAM TTO

Source: Word Development Indicators and Global Financial Development Indicators

In terms of administrative costs and bank efficiency, the interest spread between the average lending and deposit rate for the Bahamas is the lowest among comparison countries. See Graph 51.

Graph 51: Interest Rate Spread

18 16 14 12 10 8

6

4 2 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

BHS A&B JAI T&T

Source: Word Development Indicators and Global Financial Development Indicators

Although intermediation costs are an important incentive for borrowers and lenders, bank returns on equity and on assets shows large differences. It seems likely that banks incentives and returns from money intermediation or loans are significantly lower that for other financial transactions. See Graph 52.

pg. 75

Graph 52: Banks returns 1995 -2010 25

20

15

10

5

0

LrTDr Spread Net Interest Margin ROA ROE

Source: Word Development Indicators and Global Financial Development Indicators

From the viewpoint and opinions of managers of Bahamian firms regardless of firm size, in 2010 access to finance was not a major obstacle to their businesses. See Graph 53. Only 12 percent of all Bahamian firms interviewed believe that access to finance is a significant constraint to their business development. This result contrasts sharply with counterparts in Antigua and Barbuda, Barbados, Jamaica, and Trinidad and Tobago, where at least 30 percent sustain that access to finance is an important constraint and challenge. See Graph 54.

Graph 53: Access to Finance as an Obstacle

30

25

20

15

10

5

0 World LAC A&B BHS BAR JAM T&T

pg. 76

Graph 54: Percentage of Firms Identifying Access to Finance as Primary Constraint 45 40 35 30 25 20 15 10 5 0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

Finance impacts firms differently along their business cycle and depending upon their large and small structure. Midsize companies in Bahamas sustain that the second most important constraint to their business development is finance according to the World Bank Enterprise Survey of 2010. Bahamian midsize firms sustain their argument on two counts. The first refers to the large need of working capital for operations, more than for the initial investment which large companies might not demand locally. According to World Bank survey only 30 percent of all sizes firms in the Bahamas use bank loans for working capital. See Graph 55. This ratio is the lowest among country comparators.

Graph 55: Percent of Firms using Loans to Finance Working Capital 70 60 50 40 30 20 10 0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

The second rationale refers to the exorbitant amount of collateral required by domestic financial institutions. See Graph 56. Although the required collateral is significant, this may be a symptom

pg. 77

of other institutional limitations. For instance, the Bahamas has a credit system that does not check the past creditworthiness of borrowers or effectively measure credit repayment risk.

Graph 56: Collateral Value / Loan Value 250

200

150

100

50

0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

Required collateral for business credit can reach 230 percent of the amount of the loan in the Bahamas, for midsize companies can reach 253 per cent and approximately 319 per cent for the largest firms. The Bahamas shows the highest percentages for required collateral in the Latin American and Caribbean region.

V.4 Corporate Taxation

In the Bahamas there is no tax on capital gains, corporate earnings, personal income, sales, inheritance, or dividends. The fiscal system relies heavily on trade and tourism taxes, as there are neither direct taxes nor value added taxes. In an attempt to avoid some of the negative effects of trade taxes on investment and economic activity, the government has introduced several special taxation schemes. As a result of these additional mechanisms, the tax system lacks transparency and introduces further distortions to the economy.

Although taxation systems in the Bahamas are largely regressive and inequitable, private firms do not consider tax rates or tax administration to be a major obstacle to their businesses (Graphs 57 and 58). Overall private corporation representatives have expressed that they would rather see the government collecting more taxes throughout the current system than changing the taxation regime itself. According to some private institutions, the current system allows the government to be an effective collector in times of fiscal need.

pg. 78

Graph 57: Percent of Firms Identifying Tax Rates as a Constraint 80 70 60 50 40 30 20 10 0 World LAC A&B BHS BAR JAM T&T

Graph 58: Percent of Firms Identifying Tax ADM as a major constraint 50 45 40 35 30 25 20 15 10 5 0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

As of February 2013, the Bahamian administration has stressed its commitment to improve the fiscal performance of the country in the medium term and it has embarked on several reforms to improve public finances. The administration has stated that the Government’s revenue base is extremely narrow and ill-suited to the expanding needs and demands of modern Bahamian society. The Cabinet has approved the “White Paper on Tax Reform”25 that provides a road map for the introduction of a value-added tax (VAT) by mid-2014.

25 Ministry of Finance (2013) A VALUE ADDED TAX WITHIN A REFORMED TAX SYSTEM, White Paper on Tax Reform to Secure Adequate Revenues for the Future, Nassau, February, 2013

pg. 79

As for the Government’s commitment to VAT, the implementation of the tax will be overseen by a Steering Committee chaired by the Financial Secretary and comprising relevant senior officials of Government. The Committee will receive regular progress reports on implementation and will provide guidance. A dedicated VAT Implementation Team will be established, under the leadership of a senior officer of the Ministry of Finance, to develop a detailed implementation plan and assure its effective execution. As it represents a significant change in the way of doing business, the introduction of VAT needs to be explained to the general public to clear up any uncertainties. The Bahamian Government will undertake programs to: create awareness among the population; host consultative sessions with the business sector and the general public on the proposed changes and operational procedures of VAT; and inform citizens of their rights and obligations under the new system and the resulting consequences of non-compliance. Individual VAT registrants will receive individualized support from the Implementation Team to ensure that they meet all legal requirements. Businesses with existing fiscal concessions under other previous legislations such as the Hotels Encouragement Act, the Industries Encouragement Act or the Fourth Schedule of the Tariff Act, will continue to receive those concessions. However, they will be required to register and pay VAT on imports and domestic purchases. Furthermore, the legislation will contain transitional arrangements to facilitate smooth VAT implementation and alternative methods might be employed during the transition to ensure that double tax is not paid on any product. As this stage of the tax reform there is not enough data on trade and domestic markets to gauge the effect on private sector competitiveness. The schedule for VAT application by specific goods and services has not yet been established. The final impact on the price of goods and services will depend on the extent of reductions in import tariff rates arising from accession to the WTO as well. Agricultural products, food and certain other products that currently benefit from duty- free status under the Tariff Act will also be exempt from VAT. Their prices should be unaffected by tax reform. Similarly, the services also proposed to be exempt from VAT, such as health and education services, should experience no direct change in price under a VAT system.

V.5 Business Environment

The World Bank’s Doing Business report ranked the Bahamas in 77th place globally out of 185 countries surveyed in 2013, and 71th out of 183 in 2012, according to World Bank’s newest report. This last report places The Bahamas in 12th place within Latin America and the Caribbean. The Bahamas’ ranking has steadily deteriorated since 2009, when it was first included.

The Bahamas business climate poses numerous difficulties for businesses, according to the World Bank’s Doing Business Report (2013). Although the country ranks well in resolving insolvency, trading across borders and paying taxes, average and below-average rankings are assigned in all other areas. At the same time, all other indicators have deteriorated during the most recent period. The country (see Graph 59 a and b) is particularly poorly ranked in areas such as registering property (179th out of 185 countries), enforcing contracts (123th), and protecting investors (117th). Bahamas has lost six positions in the 2013 global ranking.

pg. 80

Graph 59a: Bahamas DB 2013 Starting a Business Resolving 200 Dealing with Insolvency 150 Construction… 82 100 Enforcing 68 Getting Contracts 123 3550 Electricity 43 0 Trading Across 58 Registering Borders 51 Property 83 179

Paying Taxes 117 Getting Credit

Protecting Investors Source: World Bank Doing Business database

Graph 59b Starting a Business 200 Dealing with Construction Resolving Insolvency 150 Permits 100 Enforcing Contracts Getting Electricity 50 0

Trading Across Borders Registering Property

Paying Taxes Getting Credit Protecting Investors

Bahamas, 2013 Bahamas, 2012

Source: World Bank Doing Business database

In addition the Bahamas received a ranking of 83th out of 185 countries for getting credit, 82th for starting a business, and 68th for dealing with construction permits. Rankings in these categories are lower than in previous years.

pg. 81

Graph 60: Comparative Doing Business 2013 Antigua and Starting a Barbuda Business Trinidad and 200 Resolving Dealing Tobago Insolvency 150 with… Bahamas, The Enforcing 100 Getting Contracts 50 Electricity 0 Barbados Trading Registering Across… Property Jamaica Paying Getting Taxes Credit Protecting Investors

Source: World Bank Doing Business database

In relation to comparator countries, see Graph 60 and 61, The Bahamas obtained better ranks than Jamaica and Barbados, but worse than Antigua and Barbuda and Trinidad and Tobago.

Graph 61: Ease of Doing Business Country Rank 2013 100 90 80 70 60 50 40 30 20 10 0 Antigua and Trinidad Bahamas, Barbados Jamaica Barbuda and Tobago The

Source: World Bank Doing Business database

The Doing Business indicators provide an objective basis for understanding and improving the regulatory environment for business, and the Enterprise Survey provides a closer overview of key business environment indicators for the Bahamas. For the year 2010, Bahamian firms identified and ranked eleven obstacles for business activities. See Graph 62. A significantly higher proportion of Bahamian businesses identify issues such as an inadequately educated workforce, customs and trade regulation, practice informal sector, and access to finance as their key barriers.

pg. 82

Graph 62: BAHAMAS Enterprises Survey 2010 Access to finance Transportation 40 Access to land Business licensing Tax rates 30 and permits 20 Tax administration Corruption 10

Practices of the 0 Courts informal sector

Crime, theft and Political instability disorder Customs and trade Labor regulations Inadequately regulations Electricity educated workforce

Source: World Bank Enterprise Surveys (2010)

Crime, theft and disorder, electricity and corruption were identified as moderately sensitive issues, and finally tax rates, licenses and permits and labor regulations came in at the bottom of the ranking of key constraints to business. The Bahamas ranks worse than the Latin American region overall in licenses and permits, customs and trade regulations and an inadequately educated labor force.

Overall, independent of their size, Bahamian enterprises agree that their major problem is an inadequately educated workforce. However, access to finance seems to be a particular obstacle for midsize firms (20-29 employees) and crime, theft and disorder were identified as important barriers for the largest ones.

Graph 63: Bahamas Small Firms (5-19) Access to finance Transportation 25.0 Access to land 20.0 Business licensing Tax rates 15.0 and permits 10.0 Tax administration Corruption 5.0 Practices of the 0.0 Courts informal sector Crime, theft and Political instability disorder Customs and trade Labor regulations Inadequately regulations Electricity educated workforce

Source: World Bank Enterprise Surveys (2010)

pg. 83

Graph 64: Bahamas Medium Firms (20-99) Access to finance Transportation 50.0 Access to land 40.0 Business licensing Tax rates 30.0 and permits 20.0 Tax administration Corruption 10.0 Practices of the 0.0 Courts informal sector Crime, theft and Political instability disorder Customs and trade Labor regulations Inadequately regulations Electricity educated workforce

Source: World Bank Enterprise Surveys (2010)

Graph 65: Bahamas Large Firms (100+) Access to finance Transportation 60.0 Access to land 50.0 Tax rates 40.0 Business licensing… 30.0 Tax administration 20.0 Corruption 10.0 0.0 Practices of the… Courts

Political instability Crime, theft and…

Labor regulations Customs and trade… Inadequately… Electricity

Source: World Bank Enterprise Surveys (2010)

Independent of the size of the firm, the number one problem is an inadequately educated workforce and the second is customs and trade regulations, according to the Enterprise Survey. Whereas issues such as crime, theft and disorder are identified by large firms (see Graph 65 ) as major constraints, access to finance affects medium-sized enterprises in particular (see Graph 64) and practices of the informal sector are noted as key barriers for smaller businesses (see Graph 63). Moreover, infrastructure weaknesses including the inadequate supply of electricity and water can increase costs, disrupt production and reduce profitability for any size of firms. At the same time losses during trade or exportation are highly significant for any size Bahamian firms as well.

pg. 84

V.6 Technology and Innovation

In 2003, the Government of the Bahamas established as a long-term, broad-based objective to transform the Bahamian economy into a digital economy as a means of generating viable opportunities for Bahamians to participate in the global economy. The Bahamas’s strategy includes the pervasive use of the Internet to engage in activities such as e-commerce, e-learning, e-health, and e-government services. Although the initial government commitment was to the expansion of its wide area network connecting all governmental agencies and accelerating the development of online processes to facilitate business, the results are also positive with benchmarks for the private sector.

There is a relatively high level of technology use in enterprises and large access to electronic communications for business. Internet penetration has allowed most enterprises to use e-mail to interact with clients and suppliers (see Graph 66). A significant proportion of these companies are also developing a web presence by investing in their own website. Bahamas has the highest percentages of firms with an internet-recognized quality certification (see Graph 67), while the percentage of firms with licenced technology is the highest among the four comparable countries (see Graph 68 and 69). Bahamian companies are ready to adapt new technology and enjoying promising opportunities for greater innovation with foreign companies.

Graph 66: Percent of Firms Using the Internet to Interact with Clients and Suppliers

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Graph 67: Percent of Firms with an Internet- Recognized Quality Certification 35 30 25 20 15 10 5 0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

Graph 68: Percent of Firms Using Technology Licenced from Foreign Companies 25

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Graph 69: Percent of Firms with Own Web Site

80 70 60 50 40 30 20 10 0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

In 2005, The Bahamas began designing and implementing a Science and Technology (S & T) plan directed at increasing economic growth, development and prosperity. The Bahamas wrote a Road Map for the Advancement of Science and Technology to provide direction and guidance for accelerating national development in these important areas. As such, the Road Map places emphasis on building national and local capacity within the field of S & T. It also outlines the benefits of promoting innovation and undertaking the development and advancement of S & T knowledge, capabilities and systems, on a broad, national scale. The plan is under the authority of the Science and Technology Committee of The Bahamas, Environment, Science and Technology (BEST) Commission. The Science and Technology Committee was established in May 2001 to fill an acknowledged gap in governmental processes regarding the support, encouragement, management and accelerating the development and growth of science and technology in the Commonwealth of The Bahamas.

V.7 Trade and Tariffs and Foreign Direct Investment Policies

The Bahamas tariff and trade regime is summarized in the Chart 7 and 8 below.

Bahamas Part A.1 Tariffs and imports: Summary and duty ranges Summary Total Ag Non-Ag Non-WTO member Simple average final bound Binding coverage: Total

Simple average MFN applied 2011 35.9 23.2 37.8 Non-Ag Trade w eighted average 2010 20.2 13.4 21.7 Ag: Tariff quotas (in %) Imports in billion US$ 2010 2.8 0.5 2.3 Ag: Special safeguards (in % ) Source: www.wto.org, ITC Market Access Map.

The Bahamas applies the highest average tariffs to all products generally, including agricultural and non-agricultural products. Although there is a large discrepancy between the tariffs applied by the comparator countries Antigua and Barbuda and Barbados, trade tariffs for the Bahamas

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are almost double those of Jamaica and Trinidad and Tobago with the exception of animal and dairy products. High tariffs are justified by the authorities on two counts – they provide a large share of fiscal revenues, and also protect the local market. The Bahamas has declared that wholesale and retail operations cannot be carried out by non-Bahamians.

Chart 8: Bahamas: Import Duties by Product Groups MFN Applied Duties Average Bahamas Jamaica T&T Animal products 11.4 26.5 23.6 Dairy products 9.3 25.2 13 Fruit, vegetables, plants 22.8 23 21.2 Cotton 45 0 0 Other agricultural products 40.2 5.5 5.4 Fish & fish products 31.1 29 29.1 Minerals & metals 39.8 3.9 3.7 Petroleum 0 4.8 4.2 Chemicals 41.8 2.6 2.6 Wood, paper, etc. 34.3 7 7 Textiles 37.4 3.1 3.1 Clothing 34.6 19.8 19.8 Leather, footwear, etc. 34 6.7 6.7 Non-electrical machinery 40.8 1.5 1.7 Electrical machinery 41.2 6.5 6.6 Transport equipment 14.1 6.6 5.8 Manufactures, n.e.s. 33.3 11.2 11.2

Average Tariff 30.06 10.76 9.69 Source: www.wto.org, ITC Market Access Map

Graph 70: Compare Average Trade Duties 2011

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Average Trade Duties 50 45 40 35 30 25 20 Bahamas 15 Jamaica 10 T&T 5 0

Source: www.wto.org, ITC Market Access Map

The Bahamas is largely dependent upon travel services, exports and foreign investment in tourism and tourism construction projects and financial services. Its private sector is reliant upon imported supplies and is protected by high tariffs and regulatory barriers to entry (see Graph 71). The Bahamas is not a member of WTO and has not entered into large bilateral trade agreements which would have significant impacted its trade barriers. As shown in Graph 72, customs and trade regulation is not a major contrain among most of the comparable countries, with the exception of Antigua and Barbuda. Only one-fifth of the firm considers trade regulation as a major constrain. Among the mentioned companies, small firms, 5 to 19 employees, are the most consern about trade regulation.

pg. 89

Graph 71: Percent of Firms Using Supplies of Foreign Origen 120

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0 World LAC A&B BHS BAR JAM T&T Source: World Bank Enterprise Surveys (2010)

As shown in Graph 72, customs and trade regulations are not a major constraint among most of the comparable countries, with the exception of Antigua and Barbuda. Only one-fifth of the firms consider trade regulation a major constraint. Small firms with between 5 to 19 employees are the most concerned about trade regulation.

Graph 72: Percent of Firms Identifying Customs and Trade Regulations as a Major Constraint 70

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Source: World Bank Enterprise Surveys (2010)

A useful indicator for the performance of trade services is the Logistic Performance Index (LPI) of the World Bank. It measures six subcomponents related to the efficiency and the quality of trade and logistics services associated to shipping, transport and trade. Although not all selected comparator countries have received LPI scores, the data available shows that the Bahamas has not ranked significantly far behind Latin America or Caribbean countries such as Jamaica. (see Graph 73).

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Graph 73: Bahamas Logistic Performance Index (LPI) 2012 LPI Score 4 3 Timeliness Customs 2 1 0 Tracking & tracing Infrastructure

Logistics competence International shipments

High I non OECD BHS LAC JAM

Source: Logistic Performance Index (LPI), World Bank

Both Domestic and Foreign companies have played a key role in sustaining economic growth and trade performance, which highlights the complementary role between improving investment climate policies and trade liberalization or export promotion. Although the regulatory burden on most foreign firms has been very flexible and adaptive due to a large number of sectorial incentives, the Enterprise Survey for the Bahamas reported senior management spent less than 5 per cent of their time dealing with issues related to government regulations that affect both domestic and foreign companies (see Graph 74). This figure is comparable to the responses for Antigua and Barbuda and Barbados, but larger than for Jamaica. Firms in Trinidad and Tobago reported significantly higher regulatory time burdens.

Graph 74: Percent of Senior Management Time Spent on Government Regulations 14 12 10 8 6 4 2 0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

pg. 91

Although operating licenses (see Graph 75), construction permits (see Graph 76) and imports licenses (see Graph 77) are identified as bottlenecks by firms, the Bahamas does not rank significantly worse that it’s Caribbean counterparts and far better than Trinidad and Tobago.

Graph 75: Days to Obtain an Operating License 60

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Source: World Bank Enterprise Surveys (2010)

Graph 76: Days to Obtain a Construction-Related Permit 450 400 350 300 250 200 150 100 50 0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010). Note: No response for A&B.

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Graph 77: Days to Obtain an Import License 30

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Source: World Bank Enterprise Surveys (2010)

V.8 Labor Regulation and Workforce

The labor market is governed by the Fair Labor Standards Act (1970), the Minimum Wage Act (2001) and related regulation such as insurance and unemployment benefits (April 2009) and a Migration Law. The Department of Labour within the Ministry of Labour and the National Insurance are in charge of the enforcement of labor regulations and standards, the provision of online employment services and the issuance of work permits.

Although labor market regulation and market flexibility are not viewed as a major obstacle or constraint (see Graphs 78 and 79) to the private sector according to World Bank Enterprise Survey in 2010, firms do cite the lack of employable skills, wages and productivity as concerns. The Bahamas labor market shows significant rates of unemployment, the workforce shows deficiencies of required skills and there is a lack of needed training. (see Graph 80 and 81). In an effort to fill this gap, almost 37 percent of the Bahamian firms provide training to their employees. (see Graph 82).

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Graph 78: Percent of Firms Identifying Labor Regulations as an Obstacle 50 45 40 35 30 25 20 15 10 5 0 World LAC A&B BHS BAR JAM T&T

Graph 79: Percent of Firms Identifying Labor Regulations as the Major Constraint

50 45 40 35 30 25 20 15 10 5 0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

It is important to mention the country’s minimum wage of $4.00 an hour, which is relatively high compared to other Caribbean countries. Work permits have become a very important issue that is directly connected to the skills shortage in the Bahamas.

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Graph 80: Percent of Firms Citing an Inadequately Educated Workforce as an Obstacle

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Graph 81: Percent of Firms Identifying an Inadequately Educated workforce as the Major Constraint 50

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Source: World Bank Enterprise Surveys (2010)

pg. 95

Graph 82: Percent of Firms Offering Formal Training to their Employees 50 45 40 35 30 25 20 15 10 5 0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

Although most companies identified an inadequately educated labor force as their main constraint, the relative scarcity of qualified labor has been partially alleviated by in-situ job training. A significant percentage of firms (37 per cent) offer job training to their personnel. Larger Bahamian firms were able to overcome technology skill gaps by offering specialized training to their employees.

V.9 Infrastructure, Communications and Energy

Although infrastructure services have been dominated by state-owned entities, the private sector has started to play an important role in areas such as the newly privatized telecommunications company. The government has also adopted new supervisory measures regarding economic regulation. The Utilities Regulatory Competition Authority (URCA) is responsible for oversight of the telecommunications industry and some public utilities. Overall, indicators for electricity, water services, transportation and telecommunications services do not show dramatic problems, although complaints regarding electricity service or tariffs, water supply costs and the reliability of transportation are slightly worse than for some neighboring countries.

The relatively consistent supply of electricity available to the private sector can be explained in part by the large proportion of firms that own generators (see Graph 83). However, there are sectors of the economy that cite electricity supply and tariffs as an important obstacle and constraint (Graph 84). There are two factors that could explain this somewhat contradictory result. First, electricity prices adjust for fluctuations in the prices of energy inputs (i.e., liquid fuels). Indeed, increases in oil prices could have more than a proportional impact due to mark-up pricing. Secondly, price volatility could reflect the seasonal regulatory adjustments to tariffs that the state-owned company must apply.

pg. 96

Graph 83: Percent of Firms Owning or Sharing a Generator 70 60 50 40 30 20 10 0 World LAC A&B BHS BAR JAM T&T

Graph 84: Percent of Firms Identifying Electricity as the Largest Constraint 50 45 40 35 30 25 20 15 10 5 0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

A large segment of the tourism industry complains about high electricity costs, which also impacts all sectors and is a critical bottleneck to development and growth. Although electricity costs are structurally more expensive in the Caribbean,26 Bahamas’ electricity cost is about average. While Jamaica’s commercial electricity costs (US$0.39 per kWh) is more expensive then the Bahamas, Barbados’ commercials and industrial is less expensive. Moreover, businesses heavy dependency on self-generation of electricity leads to diseconomies of scale and in turn additional dependency on imported oil fuels. The high cost of electricity is a widely cited

26 Castalia (2011), pgs 2-3 states that commercial and industrial electricity costs are approximately double that in Florida. The report includes data for Grand Bahama Power only, based on information from the Caribbean Electric Utility Service Corporation (CARILEC).

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supply-side obstacle. The Bahamas Electricity Corporation is a state-owned enterprise facing challenges in the efficient administrative operation, generation and distribution of electricity. Bahamas’ system faces technical and non-technical losses27.

Businesses also mentioned telecommunication services as another bottleneck, particularly for firms operating in the tourism and financial service industries. The Bahamas Telecommunications Company just recently partially privatized the provision of telephone, cellular and internet services with very little private competition due to its reorganization and regulatory reorganization.

Infrastructure-related challenges in transportation (see Graph 85), water supply (see Graph 86) and communications further constrain the capacity of firms and exporters.

Graph 85: Percent of Firms Identifying Transportation as a Major Constraint 30

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27 Transmission and distribution network losses occur in the lines, substations, and transformers. These losses are referred to as technical losses. Electricity losses also include non-technical losses, which result from theft and unmetered consumption. Non-technical losses are caused by deficiencies in billing and meter reading, as well as by consumption not captured by meters such as theft, meter errors, non-billing and-under billing of legal accounts. Non-technical losses represent the difference between electricity supplied to customers and electricity billed.

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Graph 86: Average Number of Water Outages Per Month 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

Delays in obtaining public services affect businesses differently. While electricity connection delays significantly affect large companies, small firms suffer primarily with telecommunications connection delays (see Graph 87). Mid-size firms might wait between three to four months to obtain a telecommunication connection. Although hookups to water lines are less frequently mentioned, the number of outages per month in the Bahamas is significantly large for the region and delays in obtaining a connection affects all firm sizes. A month delay for water hookups particularly affects large construction and hotel operators.

Graph 87: Delays to in Obtaining Public Services in the Bahamas (in days) 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Small Medium Large

Electricity Water Fix Phone

Source: World Bank Enterprise Surveys (2010)

V.10 Environment

The Bahamas contains very diverse terrestrial and marine habitats. The archipelago is blessed with many sandy beaches, clear warm waters and colorful coral reefs. The tourism industry relies

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heavily on the natural resources of the coastal zone. Ironically development in this sector, as well as urban and infrastructure expansion, has resulted in many physically changes to the coast. The Bahamas is a coastal country, with most of its population living within the coastal zone.

Based on inland vegetation, the islands of The Bahamas are classified into three groups: pine islands (Andros, Abaco, Grand Bahama and New Providence), the coppice islands (Cat Island, Eleuthera, Exuma, Long Island, Rum Cay and San Salvador) and the more drought-resistant woodland islands (Acklins, Crooked Island, Inagua, Mayaguana and Ragged Island). Each island group has its own particular mix of flora and fauna that are well adapted to the terrestrial ecosystem of their islands.

The geographical distinction in biodiversity is largely in response to the amount of precipitation received in each region. On an annual basis, the pine islands receive the most precipitation, while the woodland islands receive the least amount. This climatic variation, along with other factors, has shaped land use in The Bahamas and consequently the management of solid waste, sewage and freshwater resources.

The Bahamas vulnerability is due to the fact that it is a low-lying archipelago, The Bahamas is extremely vulnerable to natural disasters, in particular hurricanes. With an economy based on tourism, any hazard can impact the well-being of most of the country’s people either through direct impacts, physical or economic, or through economic linkages. The combination of population growth and an increasing numbers of visitors places development pressures on the country’s natural resources.

Such pressures have made it necessary to develop legislation, policies, strategies and management systems in order to preserve the country’s resources.

Generally, management of environmental issues has been the responsibility of public agencies such as the Departments of Environmental Health Services (DEHS), Agriculture and Fisheries and the Bahamas Environment, Science and Technology (BEST) Commission. In addition, there is increasing growth in the number of non-government organizations (NGOs) becoming advocates of the environment.

The BEST Commission was established in 1994 with a mandate to provide a comprehensive and integrated approach to environmental management. The BEST Commission includes the coordination of the national effort to: i) protect, conserve and responsibly manage the environmental resources of The Bahamas; ii) develop a National Sustainable Development Strategy and related Action Plans; iii) identify suitable scientific and technological advances that can contribute to the development of The Bahamas; iv) propose legislation to enforce the provisions of the National Conservation Plan environmental policies; and v) identify and make application for technical assistance and financial grants to meet the Commission’s responsibilities.

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The BEST commission has evaluated and enforced policies and legislation relating to: coastal environment, marine environment, land, tourism, water, waste management, natural and technological hazards, nonprofit organizations and international conventions. In addition, within the Ministry of Tourism two units were created to incorporate environmental management and awareness into the industry: the Eco-tourism and the Sustainable Tourism units. The Eco-tourism Unit was established after the Earth Summit (Rio de Janeiro Brazil, 1992) to promote eco- friendly initiatives. The latter unit was established to implement some of the recommendations emanating from “A Sustainable Tourism Policy, Guidelines and Implementation Strategy for the Out Islands of The Bahamas”. Furthermore, the BEST Commission, for example, has implemented a number of initiatives that addresses the vulnerability and mitigation aspects of disasters like climate change through the creation of a National Climate Change Committee (NCCC).The Committee has produced two reports, the first national Communication on Climate Change in order to develop strategies to implement policies and measures to reduce vulnerability to the impacts of climate change, and a second report to address issues related to public education and outreach, national inventory of greenhouse gases, and a vulnerability and risk assessment associated with climate change.

In today's heightened level of environmental awareness, management by all private firms takes on even higher levels of importance. Within this trend, in Bahamas for instance, hotels have responded positively with various environmental initiatives. While these initiatives have resulted in some increases in environmental management performances particularly in the area of energy, environmental management efforts are still to be maximized and there is considerable scope for improvement.

It is evident that cost is a major limiting factor in the environmental soundness of the hotel sector and also that assistance is needed by way of fiscal and other incentives to catalyze wide spread use of environmentally sound technologies by the sector. Incentives to spur the use of such technology are lacking. This is significant in that the majority of hotels in this sector are small, usually family owned and operated that generally operate on smaller budgets and require longer investment periods for any type of project. In The Bahamas this priority is even more urgent in small hotels. This sector should, therefore, play a major part in sustainable tourism and should be encouraged as much as possible to operate in an environmentally sound manner.

As a more current measure of the environment, Yale University has created the Environmental Performance Index (EPI). The 2012 EPI adds to the foundation of empirical support for sound policymaking and breaks further ground by establishing for the first time a basis for tracking changes in performance over time. The EPI ranks countries on 22 performance indicators spanning ten policy categories reflecting facets of both environmental public health and ecosystem vitality.

However, the Environmental Health partial scores, in particular revel information about air and water conditions, very significant for the whole EPI index. Although these indicators of environmental health are partial, they are the best available measures for the Bahamas. These indicators track the resource and pollution impacts of industrialization, such as greenhouse gas emissions and rising levels of waste. Other challenges are commonly associated with poverty

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and underinvestment in basic environmental amenities, such as access to safe drinking water and basic sanitation. These problems primarily affect developing nations.

The following graphs 88 a and 88b present the overall Environmental Health ranking for the Bahamas over the period 2000 to 2012.

Graph 88a: Environmental Health, Water and Air 2000 EHEH 100 80 60 40 20 0

WATER AIR

BHS JAM T&T

Graph 88b: Environmental Health , Water and Air 2012 EHEH 100 80 60 40 20 0

WATER AIR

BHS JAM T&T

Source: Environment Performance Index (EPI) partial indicator for environmental health, Yale University

In addition, other available indicator for the Bahamas is carbon dioxide emissions. The Graph 89 shows that The Bahamas is a larger per capita emitter than comparator countries due to use of fossil fuels for the generation of electricity.

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Graph 89: CO2 emissions (metric tons per capita) 40 35 30 25 20 15 10 5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

BHS ATG BRB JAM TTO

Source: World Development Indicators, WB

V.11 Gender

The Bahamas is the 36th performers among 133 countries regarding gender equality worldwide in 2012, in general; and concerning economic participation, educational attainment, health and survival in particular, see Graph 90. However it grossly falls to the bottom fifteen most gender unequal countries (122th) in terms of political empowerment among 133 countries tested by the World Economic Forum. Progress in relation to the gender gap can be assessed using the World Economic Forum’s Global Gender Gap Report. These reports provide an index that benchmarks overall gender gaps as well as the dimensions of economic participation, education attainment, health and survival and political empowerment criteria.

The following graphs provide the rankings for the overall index for the Bahamas in 2009 and 2012, with rankings close to 1 indicating that the country has relatively low gender-based disparities, except political empowerment.

Graph 90: Bahamas Gender Participation

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2009 2012 Economy Economy 1 1 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 Politics 0 Health Politics 0 Health

Education Education

Source: World Economic Forum Gender Gap Report, 2011-2012

In relation to economic participation and opportunities, the Bahamas has a relatively equal distribution of males and females in labor force participation, earned income and senior officials and managers. Female participation is significantly higher in professional and technical professions. The 2012 report sustains that the gender earnings gap is only one third of male co- worker earnings.

Regarding educational attainment as well as health and survival, women in the Bahamas rank higher than males in literacy rates and primary and secondary education enrollment. Female tertiary education enrolment is almost 2.7 times higher than males. Female professional and technical workers participation is twice than men.

On the other hand the Bahamas was ranked one of the worst 15 out of 133 countries regarding political empowerment of women. In parliament, women are only 14 per cent of the assembly and there are four women in ministerial or cabinet positions.

Even though female voters outnumbered male voters in the most recent elections in 2012, the number of women elected to the legislature remained far lower. Only five women made it into the House of Assembly out of 38 seats, which represents about 14 per cent of the Assembly.

As part of the Enterprise Surveys conducted by the World Bank in various Caribbean countries in 2010, gender participation is measured at the level firms and entrepreneurial activities. The following graph 91 shows that female participation is significantly important for Bahamian enterprises and women have relatively higher participation percentages than other Caribbean, Latin America or even high income non OECD countries.

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Graph 91: Percent of Female Participation 70 60 50 40 30 20 10 0 HI no OECD LAC A&B BHS BAR JAM T&T

Manager Ownership FT worker

Source: World Bank Enterprise Surveys (2010)

On the job female participation in the Bahamas is relatively higher than in comparator countries for managers and owners, and about on par for full time workers.

Finally, the World Bank survey responses stratified by firm size show that female participation is significantly higher for small and medium sized firms, and bringing women into the management of large firms remains a pending challenge.(see Graph 92)

Graph 92: Bahamas: Female Participation in the Labor Force 70 60 50 40 30 20 10 0 Small Medium Large

Manager Ownership FT worker

Source: World Bank Enterprise Surveys (2010)

V.12 Crime, Corruption and Informality

The general perception of crime and corruption is an important issue for the development of the Bahamas due to its relevance for the two major economic sectors of tourism and financial services. Fortunately, very few firms (as low as 5 per cent) sustain that the judicial courts are a

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major obstacle to conducting business. More alarmingly, a large proportion of enterprises have experienced bribe request. While crime, theft and disorder seem important for the large enterprises, medium and small firm are not as concerned, despite the lack of transparency and discretionary procedures for obtaining licenses and permits. The following graph 93 shows in more detail the perception of corruption in The Bahamas compared to its neighboring countries.

Graph 93: Corruption Perceptions by the Business Sector

50 45 Percent of firms 40 experiencing at least one bribe payment request 35 30 Percent of firms 25 identifying corruption as a 20 major constraint 15 Percent of firms 10 identifying the courts 5 system as a major constraint 0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

Although the perception in The Bahamas is roughly on par with world responses regarding gifts to obtain permits and licenses, it ranks better than Jamaica on most of the indicators. The Bahamas scored worse than both Latin American regional average and Trinidad and Tobago, regarding the expectation of bribery to obtain construction permits, electrical and water connections.(see Graph 94)

Graph 94: Expectation of Bribery for Public Utilities Connections

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70 Percent of firms expected to give gifts to get an 60 operating license Percent of firms expected 50 to give gifts to get an import license 40 Percent of firms expected to give gifts to get a 30 construction permit

20 Percent of firms expected to give gifts to get an electrical connection 10 Percent of firms expected 0 to give gifts to get a water World LAC A&B BHS BAR JAM T&T connection

Source: World Bank Enterprise Surveys (2010)

There is no information for the Bahamas on gifts expected to secure government contracts. Almost twenty percent of all firms surveyed felt they were expected to give gifts to public officials “to get things done”, see Graph 95 which could cover a gamut of actions.

Graph 95: Perception of Bribery of Government Officials

30

Percent of firms expected 25 to give gifts to public officials "to get things 20 done" Percent of firms expected 15 to give gifts in meetings with tax officials 10 Percent of firms expected 5 to give gifts to secure government contract

0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

In the Bahamas, over half of all firms pay for private security, and almost twenty percent identify crime, theft and disorder as a major constraint to their business.(see Graph 96)

Graph 96: Private Security and Perception of Crime

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80

70

60 Percent of firms paying 50 for security

40 Percent of firms 30 identifying crime, theft 20 and disorder as a major constraint 10

0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

Approximately 60 percent of Bahamian firms pay for security, compared with averages for LAC 62% and the world 57%. Only Barbados firms spend less than Bahamian firms on security within the region or among comparators. Nevertheless, the cost of security as a percentage of sales to Bahamian firms is significantly larger than for comparator countries. (see Graph 97)

Graph 97: Costs of Security, Theft and Vandalism 2

1.5

1

0.5

0 World LAC A&B BHS BAR JAM T&T Security costs (% of annual sales)

Losses due to theft and vandalism against the firm (% of annual sales)

Products shipped to supply domestic markets that were lost due to theft (% of product value)*

Source: World Bank Enterprise Surveys (2010)

In a country where corporate taxes do not exist and firm registration costs are 92 percent of the total costs of starting a business, the incentives for firms to stay informal may be different in the Bahamas compared to other countries. Some researchers have shown that informal sector activity is

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a response to people living in a depressed economy.28 The Bahamian economy exhibits (see Graph 98) some degree of informality, but less than twenty percent of firms surveyed identify practices of the informal sector as a serious constraint or obstacle to their business.

Graph 98: Percent of Firms Identifying Practices of Competitors in the Informal Sector as a Major Constraint

40 35 30 25 20 15 10 5 0 World LAC A&B BHS BAR JAM T&T

Source: World Bank Enterprise Surveys (2010)

Informality can pose significant challenges for registered firms, as the informal operators are able to avoid the high costs of tax compliance. The following Graph 99 shows a notably high rate of firms starting operations with formal registry in the Bahamas, alongside a perhaps surprisingly large 67.5 percent of firms noting they compete against informal firms in their business sector.

28 Andrew Downes (2009)

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Graph 99: Competition with Informal Firms 100

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0 World LAC A&B BHS BAR JAM T&T Percent of firms competing against unregistered or informal firms

Percent of firms formally registered when they started operations in the country

Source: World Bank Enterprise Surveys (2010)

V.13 Analytical Remarks and SWOT Analysis of PSD

As the highest per capita income country in the Caribbean and one of singular and beautiful geography, the Commonwealth of the Bahamas has developed a dynamic and diverse private sector that has sustained its economy and young democracy since independence. The Bahamas has a number of strengths to help support the continued growth and development of the private sector, creating opportunities for a larger number investors and entrepreneurs.(see Figure 4) These strengths include economic stability, stable democracy, an international and dynamic private sector and the proximity to large markets. Nevertheless threats can be identified as heavy reliance on a single tourism market, rising levels of national debt, and the stress that economic development is placing on natural resources. As the SWOT analysis makes clear, the Bahamas proximity to the United States provides both opportunities and challenges, the latter as economic cycles in the Bahamas are so strongly coupled with US economic trends.

Although the weaknesses and threats identified in the SWOT analysis below have significant implications for private sector development, effective and decisive action from public and private institutions can mitigate or lessen their impact. The Bahamas has announced and started consultations regarding fundamental economic development issues including tax reform, economic diversification, clean energy and economic regulation that should be seen as opportunities for faster and more inclusive development. The success of these consultations relies largely upon the political will and desire for change expressed on both sides of the negotiating table.

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Figure 4: Bahamas SWOT Analysis of Private Sector Development

Strengths Weaknesses Opportunities Threats

Economic stability Discretionary trade, Limited and stressed (exchange rate and tax and economic No corporate tax natural resources inflation) regulation

Expensive and Stable democracy and Inadequately FDI in infrastructure ineffective energy, legislative institutions educated labor force development transportation and utilities infrastructure

Dynamic non- International and Red tape for licenses traditional exports Unsustainable public dynamic private and permits and productive debt burden sector sectors

Telecommunications Large dependance on Proximity to large Limited support to penetration and sole market for markets product development services tourism

New geographic areas Low R&D budgets and for investment and activities development

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CHAPTER II: SELECTING AND PRIORITIZING ISSUES

I. Identifying Critical Issues

In the second part of the team’s data gathering, the Compete Caribbean team carried out a series of interviews and panel discussions with relevant Bahamian public and private institutions to discuss private sector development challenges. Interviews were conducted with various public entities, private firms, representative associations, non-governmental organizations and academia around these issues.

All groups were selected (see list in annex A) to capture an ample variety of views regarding the main challenges to private sector development. Interviews were conducted between November 27 and 30, 2012; panel discussions were held on November 28 and 29, 2012 in Nassau. Although both the interviews and group discussions focused on prioritizing the private sector’s obstacles, challenges and constraints, the four panel discussions were broader in scope and were structured in three parts. The first part included a presentation of the “Compete Caribbean” program along with a description of the PSAR report and donor matrix objectives. In the second part, the participants were asked to identify and enumerate priorities, constraints and challenges from their point of view. The third and final part summarized the open round table discussion, noting comments and counter arguments. As background, the following Graph 100 summarize the obstacles and challenges to the Bahamas private sector as captured in the World Bank Doing Business Report for 2013. Graph 100: Bahamas Doing Business Ranks and Obstacles for PSD

Obstacles Ranks 35 30 Starting a Business 25 Resolving 200 Dealing 20 150 Insolvency 82 with… 15 Enforcing 100 63 Getting Contracts 124 50 Electricity 10 0 Trading Registering 5 Across… 179 Property 0 Paying 117 Getting Taxes Credit

Protecting Courts

Tax ratesTax Electricity

Investors Corruption

Customsand…

Inadequately…

Accessto land

Transportation

Practicesofthe…

Crime,theft and…

Accessto finance Labor regulations

Bahamas, 2013 Bahamas, 2012 Businesslicensing… Politicalinstability Tax administrationTax Source: Doing Business Report 2013, WB

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As shown in the following graphs separating responses by firm size (see graphs 101-small, 102 - medium and 103 -large), all firms agree that an inadequately educated labor force is their primary obstacle, and their third worst that is custom and trade regulation. Regarding the second most important constraint to doing business, firms disagree. Small firms cite informality as their concern, medium sized firms cite access to credit and for the large firms it is crime and theft.

Graph 101: Bahamas Small Firm Constraints (5-19 employees) Access to finance Transportation 60.0 Access to land 50.0 Business licensing and Tax rates 40.0 permits 30.0 Tax administration 20.0 Corruption 10.0 Practices of the 0.0 Courts informal sector

Crime, theft and Political instability disorder Customs and trade Labor regulations Inadequately regulations Electricity educated workforce

Graph 102: Bahamas Medium Firms Constraints (20-99 employees) Access to finance Transportation 60.0 Access to land 50.0 Business licensing and Tax rates 40.0 permits 30.0 Tax administration 20.0 Corruption 10.0 Practices of the 0.0 Courts informal sector

Crime, theft and Political instability disorder Customs and trade Labor regulations Inadequately regulations Electricity educated workforce

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Graph 103: Bahamas Large Firms Constraints (100+ employees) Access to finance Transportation 60.0 Access to land 50.0 Tax rates 40.0 Business licensing… 30.0 Tax administration 20.0 Corruption 10.0 0.0 Practices of the… Courts

Political instability Crime, theft and…

Labor regulations Customs and trade… Inadequately… Electricity

Source: World Bank Bahamas Enterprise Survey (2010) These results were shared with the panelists, which stimulated robust and in depth discussions from the participants. These debates strongly and repeatedly emphasized the most important obstacles and challenges as:

 An inadequately educated labor force, customs trade procedures, access to finance, registry and permits, limited infrastructure and energy availability and overwhelming read tape as the most important barriers for businesses.

 In addition, other challenges were raised including the lack of transparency for licenses and permits, property registering, land tilting, dispute resolution and intellectual property rights.

As part of the PSAR method, these meetings and panel discussions served to identify the following list of obstacles that the private sector is facing:

 Lack of a skilled and professional workforce,  Energy costs, electricity,  Lack of infrastructure and effective public services and utilities,  Political motivations for the settings of tariffs and fees for public services,  Lack of transparency in using domestic accounting and international standards,  Environmental standards for land and marine use,  Crime and theft and the related growing illegal economy,  Overwhelming and excessive steps to open, operate and manage firms,  Lack of technical and nonfinancial support to SME enterprises,  The need for a public private dialogue for investment climate and Private Sector Development,  Access to domestic and international markets

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 Bahamas is less involved in discussions about trade, integration and development with countries by choice  Lack of information about creditworthiness or credit records and assets is a barrier to credit,  Ineffective, politicized or limited economic regulation for utilities  Gap between knowledge and business practices, and  The lack of a long-term development plan to provide consistency and predictability.  Lack of trust and entrepreneurship, as owners refuse to make alliances and associations,

I.1 Inadequately Educated Workforce

The international economic downturn has not only significantly affected the Bahamas economy by increasing vulnerability, but has also negatively impacted its labor market through higher unemployment rates. Although significant inflows of FDI investment have helped the economy since 2004, domestic unemployment rates have exceeded seven percent and particularly affected young Bahamians. Unemployed workers less than 30 years old represent approximately 50 percent of all the unemployed. At the same time, large private employer associations and private businesses maintain there is a lack of skilled workers and a significant gap between the skills acquired by the labor force and the skills needed by employers. Most private sector representatives believe this negatively impacts their business prospects and production. Although traditional productive sectors are able to partially offset this problem through specialized training programs tailored to their workforce needs, there is no government effort to widen such programs to a larger scale. Moreover, skilled labor frequently migrate which further limits the skilled talent pool available domestically. As a result, industry requests for work permits to import skilled labor continue to rise. Without government intervention, the country’s private sector predicts high unemployment rates will continue to coexist alongside shortages of adequately educated workers. According to a recent survey, the total number of employed workers in the Bahamas is 160,186 people, representing 84.1 percent of the labor force. Employment rates among women are slightly higher than those of men at 84.3 percent and 83.9 percent, respectively. The total labor participation rate is 72.1 percent. Employment rates are highest among workers with a university or tertiary education (92 percent). A large proportion of workers are salaried (86 percent) and 14 percent as self-employed, equivalent to 136,140 and 22,404 workers respectively. Salaried employment is more prevalent among women and youth. Self-employment is prevalent in Grand Bahama and among the least educated workers. Approximately 65 percent of total workers have a written employment contract and 10 percent receive wages below the minimum legal wage, which notoriously affects the youngest workers between 15 and 24 year old. Throughout the last decade private sector employment has accounted for at least three-fourths of total employment in the country. Tourism-related industries employ most of the labor force, approximately 55 per cent, broken out by hotels and restaurants (10 percent), retail sales (20 percent), and construction-related activities (25 percent). The financial sector is the second largest employer, with 25 percent of all

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employees. Agriculture, mining, manufacturing and storage and communications employ the remaining 8 percent of the employed labor force. Although labor force participation is high in Bahamas compared to other LAC countries, it has been declining since 2008, likely reflecting the economic downturn. Labor participation was around 76.3 percent in 2008. By 2011, unemployment had risen to a high of 15.9 percent, and particularly affects inhabitants of Grand Bahama, with 20 percent unemployment. Other groups of concern include the no schooling at 29 percent unemployment, in particular people with less than a completed secondary education with a 25 percent unemployment rate. In comparison, there was a 7 percent unemployment rate among the most educated with tertiary education. When stratified by age, youth between 15-24 years of age are significantly more affected with over a third (33.7 percent) unemployed and migrants from other Caribbean countries registering an unemployment rate of 22.9 percent. To put this in perspective, the Caribbean migrant unemployment rate is about 5 times the unemployment rate for the non-Caribbean country migrants, who are largely work permit holders and experience only a 3.8% unemployment rate. According to general legal labor regulations, Bahamians normally work 40 hours per week and the legal working day is 8 hours per day. However recent surveys indicate approximately 16 percent of the workers are under-employed, working less than 35 hours per week. Under- employment is typically an indication of job difficulties in finding a full time job or large skill mismatches. According to the recent 2010 Enterprise Survey and other surveys, employers are heavily involved in providing training and skills to their workers. A large percentage of workers (51 percent) have received specialized on the job training, both during and before their current employment. On the job training is higher among men; New Providence workers; university or tertiary level educated workers; and workers older than 24 years old. Apprenticeship programs are more prevalent among workers with lower educational attainment, at approximately two- thirds of that group. Despite scarce data on labor market and vocational training indicators, the private sector has consistently raised the issue of significant gaps between the skills required on the job and the labor skills present in the Bahamian workforce. Independent of their size, Bahamian firms identify an inadequately educated labor force as the major constraint and obstacle to their business development. Private sector representatives noted that workforce skills shortfalls are not effectively covered by private or public training institutions during the Compete Caribbean consultations in November 2012.

According to some of our interviewees and panelists, the main skills that employers seek in the workforce are: numeracy and literacy, personal traits such as responsibility, team work, and communication, and information technology. The lack of information technology (IT) skills was highlighted by employers in financial services and insurance, while the hotel and tourism industries emphasized shortages of numeric and literacy skills. Due to the increasing importance of technology in these sectors, IT skills have been mentioned across the board. In the construction industry, companies mentioned the need for more air conditioning and refrigeration mechanics, electricians, carpenters, plumbers and pipefitters, operators of heavy equipment, supervisors, and construction managers, again commenting on the poor basic skills of potential workers.

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Surveys conducted in 2000 and 2004 have noted that the severity of the skills gaps has constrained economic growth and restricted the expansion of operations. In 2004 a focus group conducted by private firm association reaffirmed employers’ concerns that most institutional training programs fail to meet industry standards. In 2005, the Bahamas Hotel Association (BHA) revealed that there are training needs at all occupation levels: line entry, mid-level, and upper management. Finally, the 2010 World Bank Enterprise Survey also indicates that the main obstacle reported by employers is the skills shortage (34 percent). At the regional level, the skills shortage is more prevalent in Bahamas than in most Caribbean countries. Among firms, the skills gap is more prevalent as a main obstacle for medium and large firms, compared to smaller ones. Of large firms with 100 or more employees, 55% of the firms cite inadequate skills as the most serious problem for their business, and 40% of employers in firms with 50-99 employees note that the lack of skills is the main obstacle to running a business in Bahamas. Even small firms face the skills gap.

During the Compete Caribbean consultations, several training institutions participated in the panel discussions and interviews. Representatives from the Bahamas Technical and Vocational Institute (BTVI), College of Bahamas (COB), Atlantis College and Nova South-Eastern University – Bahamas explained their institutional challenges and ongoing initiatives to close the skills gap.

Almost all of these vocational institutions pointed to institutional factors as central to the understanding the persistence of the skills gap in the Bahamas. Workforce training in the Bahamas needs to be significantly reform to effectively carry out a skills development strategy for the workforce. Based on this analysis and on consultations with different stakeholders from the training institutions, the main issues and challenges are: i) courses are out of date due to cumbersome procedures for updating the training curriculum; ii) the private sector does not have an institutionalized role to define skills and competencies needed; iii) information on total enrollment at the post-secondary/tertiary level is virtually absent; iv) there is no autonomous national accrediting agency in The Bahamas; v) there are no systematic evaluations of the training system and employment; and vi) public employment services are scarce and at a very early stages of development.

Overall, the provision of training in the country needs a major reorganization including its structure, curriculum design, functions and operations to close the gap between the skills imparted during training and the skills demanded on the job. However, it is important to note that over the past ten years there has been some progress in updating the provision of vocational training in the Bahamas despite the absence of a national training strategy. For instance, the Bahamas Technical and Vocational Institute (BTVI) is the sole public provider of workforce training and its mandate is to provide training opportunities to school dropouts or the unemployed seeking to upgrade their skills. Because of the urgent need for higher-level skills in the country, and the growing gap in the provision of journeyman/technician skills training, the government has expanded BTVI’s mandate to include customized training and standards-driven certificates and diplomas.

The College of The Bahamas (COB) has practically eliminated technical programs, focusing more on the provision of university Bachelor degrees. Its school of Hospitality and Tourism

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Studies caters to higher skills sets. For example, it trains chefs and offers bachelors in hotel management but does not offer programs for entry line positions and mid-level occupations. Finally, the Ministry of Education has taken steps to introduce information technology (IT) into the curriculum of public schools. Until and unless the mainstreaming of IT skills occurs, many students will continue to enter the job market with insufficient IT skills. According to some panelists, the Bahamas is considering implementing the Caribbean Vocational Qualification and while exploring that possibility the authorities have studied the model of the National Training Agency (NTA) of the Trinidad and Tobago agency. The NTA is responsible for coordinating and facilitating the development of a skilled, competent and innovative workforce.

I.2 Customs and Trade Regulations

Private sector growth and development in the Bahamas is closely linked to international trade and custom and trade regulations, specifically services export capacity and travel services. Foreign investment, which has been mostly directed towards tourism projects and financial services investments, has helped to stimulate economic growth. The externally-oriented private sector is mostly foreign-owned and operated and particularly concentrated in tourism, financial and professional services. The domestic private sector is mainly concentrated in import- substitution activities and the retail sector, and is protected by high tariff barriers and/or regulatory barriers to entry. Some small non-traditional activities in agriculture and industry have materialized. In the past five years, the Bahamas has pursued new integration and liberalization arrangements such as the Economic Partnership Agreement (EPA) with Europe and beginning the process of World Trade Organization accession. Successful participation may require negotiating additional agreements, and making adjustments in the public sector and the economy more generally to the new context. Although some of the necessary reforms include taxation, competition policy, intellectual property rights, government procurement, among others, the private sector suggestions concentrating in strengthening key public institutions such as customs services and procedures, and market access and clustering facilitation for potential exports.

In terms of strengthening public institutions, reforms must promote efficient inter-agency coordination among trade agencies and support to the Bahamas Trade Commission as the central conduit for private sector consultation on trade issues. Creating a modern and integrated customs system will be critical in order to comply with and reap the gains from a more liberalized trading environment. Customs modernization must aim to provide a transparent and less discretionary system to product valuation, nomenclature and origin of goods. Investment in information technology (IT) solutions throughout the trade cycle is necessary to facilitate trade flows, such as a Single Electronic Window to comply with origin, standards, and sanitary and phyto-sanitary measures within a single platform.

An institutionalized public-private sector dialogue is increasingly viewed as a fundamental element of Bahamas’ future. The development of economic linkages between foreign investors and domestic sectors will act as an important strategy to diversify the economy, promote private sector activity, particularly for small and medium enterprises, and support employment growth. For instance, linking private investors to the domestic agricultural sector through implementation

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of standards and modern control techniques to improve quality will enhance SME/cluster development which in turn will result greater market opportunities.

Effective public private coordination will affect The Bahamas’ competitive position in both foreign and domestic markets. Currently trade preference erosion in the country’s main export markets is a concern for many goods exporters, including prominent companies such as Polymers International, Morton Salt and Paradise Fisheries. Three of the top four export products to the EU enjoy marked preferential margins – spiny lobster tails, organic chemicals containing pyrimidine ring and expansible polystyrene. Participation in trade agreements such as the EPA will continue to afford Bahamian exporters these preferential margins.

Finally, the tourism industry is concerned about losing competitiveness against other markets in the Caribbean and the eventual opening of Habana, Cuba as a tourist destination. Bahamian firms note that high utility tariffs in general, and electricity rates in particular, are damaging to industry. Bahamian firms face a myriad of additional constraints to their competitiveness. Discretionary and restrictive taxation regimes and high import tariffs can negatively impact hotels, retailers, restaurants dependent on imported goods. More than 60 percent of all agricultural products face import tariffs between 25 and 50 percent.

The tourism industry and the hotel sector have been willing in the past to buy local goods and services, but they are constrained by poor availability, quality, reliability and logistics. Bahamian hotels source 75 percent of their vegetable and dairy needs from outside the country; the share is 75 percent for linens, 80 percent for furniture, fixtures and equipment, and 67 percent for marketing and public relations services. Protectionist policies to promote local activity such as mandating local participation within approved foreign investments, and protecting local industries and workers via high import tariffs and restrictions on foreign business ownership, have proven to be ineffective. According to the 2010 Enterprise Survey, 80 percent of firms use materials and/or supplies of foreign origin and customs and trade regulations is the third most important constraint for all firms independently of their size.

I.3 Infrastructure, Discretionary and Unpredictable Regulation

There is great interest in The Bahamas around the role that state-owned enterprises (SOEs) can play in promoting economic development, the relationship between SOEs and the State as a shareholder, and the criteria used in assessing options for investing in or disposing of state- owned enterprises. It is particularly important to the private sector because SOE are engaged in the provision of essential infrastructure and utility services vital to the competitiveness of the economy. SOEs operate in electricity, water, telecommunications, airports, and other public service sectors. While great progress has been made in upgrading the stock of infrastructure, the Bahamas continues to have significant infrastructure development needs.

Our panelists shared some opinions about the critical role that many SOEs play in the provision of infrastructure. The SOE sector is also an important sector in its own right as a large employer. SOEs are generally judged on their ability to provide high-quality, competitively priced infrastructure and services to enterprises; and their contribution to supporting economic growth and opportunities for enterprise and innovation.

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Often governmental reform platforms are not carried through in subsequent administrations. The new government can put things on hold or make changes that create serious losses for the private sector. State owned enterprises are affected from the top down; if government wants transformation then it will happen. Reform of and within SOEs has to be government driven. There needs to be a national development plan, to avoid internal contradictions among governmental agencies. There is the perception in the Bahamas that the government manipulates tariffs and SOE management for political reasons. There are claims that monthly utility bills fluctuate due to arbitrary calculations and inefficient administration of public utilities; that there are no proper checks and balances to challenge utilities charges; and that SOE administration has a very short term mentality. Accusations have been made that the private sector works within a loose regulatory environment for political expediency, making even private contracts uncertain. Some state-owned companies could expand their services making them leaner and more efficient, but there is no incentive to do so. Even large international companies face challenges in acquiring licenses or to provide services. In light of these arguments and panelist discussions, the followings themes were reviewed from an enterprise development perspective: 1) the regulatory framework for SOEs; 2) the rationale for state ownership of SOEs that provide essential infrastructure and services; 3) the structuring and management of SOEs to ensure that all enterprises can access world class infrastructure and services at competitive prices; and 4) the basis for making informed decisions regarding further investments or the potential disposal of state assets. In recent decades, The Bahamas has relied on a very strict state enterprise model by which SOEs have total control of prices and tariffs and the provision of services, according to specific sectorial regulation (although the regulation is sometimes contradictory and unclear). Even though governments tend to favor regulation and the use of markets to achieve public policy objectives through a combination of regulation and subsidies, the regulation framework mandates that public operators such as BEC play the role of service provider and regulator simultaneously. There is a conflict of interest that does not allow fair competition and results in onerous tariffs. Moreover, legislation mandates that a certain amount of power has to come from BEC even if you have your private generator. Therefore, there is no incentive to provide services in a cost effective manner because a minimum level of market demand is assured. In the case of The Bahamas, the sale of state owned assets cannot be guided solely by how much revenue will be raised. It is important to develop clear criteria to select appropriate assets in water and electricity. It is essential that infrastructure users’ interests are protected by not selling natural monopoly assets or assets to dominant competitors. It is also vital to ensure that investment in advanced infrastructure and regional development is promoted, and that regulatory capabilities are sufficiently advanced to achieve public policy goals in the absence of state ownership rights. The Bahamas has slowly started with telecommunications privatization almost two years ago. Although privatization is not an automatic solution to improving the quality of goods and services or to improve the performance of state-owned enterprises, evidence suggests that complementing the transaction with policies that promote competition and effective regulation of the industries in question makes favorable outcomes much more likely.

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According to the private sector, public services are unreliable and expensive. Energy costs are currently a very serious problem for all firms. A large segment of the private sector sustains that electricity costs now surpass the operational costs of their core business. The BEC reads meters and selects a high peak rate and sets it for the entire year based on the one time per year reading. Hotels are paying more now than they did previously when there were two readings per year. Sometimes the country development strategy and SOE economic strategy conflict because discretionary tariffs impacts on tourist satisfaction. Satisfaction levels and the likelihood to revisit are affected by unexpected energy surcharges and other hotel costs that are added on to the end of visitor stays. The tourism industry is losing competitiveness when this scenario is compared to all-inclusive hotels in neighboring countries. For instance, small hotels in the family islands have low occupancy rates year-round and they cannot afford energy efficient measures. The Bahamas needs to establish a regulatory mechanism which trumps political influence and discretionary management for tariffs and services. It needs to encourage private sector participation in public services in order to improve its business climate. The Bahamas Investment Authority should remove multi-agency impediments to investment procedures and establish one- stop-shop processes and encourage more public-private synergy. Ultimately, the government must develop clear criteria to guide the potential sale of state-owned assets or a strategy to allowed private sector to participation in the provision of public services. One option might be public private partnerships, according to our panelists.

I.4 Small and Medium Enterprises (SMEs) and Access to Finance

Access to finance and credit is a permanent issue for investors worldwide although it does not rank high among the Bahamas obstacles to business, with the exception of mid-size firms. Bahamian firms that employ between 20 and 100 employees rank credit as their second worst constraint and, according to these companies, capital constraints do exist for SMEs in the Bahamas.

There is a need for different types of lending. According to the panelists and group discussions, banks should provide different types of financing - loans for new businesses and loans for established businesses. There is a need for lending for growth, lending for high-risk projects, lending for structural development. At the same time, access to finance and lending should be comprehensive and supported by authorities. The government should have a plan in place with incentives for credit to flow to underserved sectors and businesses. The government should also identify as growth firms that can provide jobs and impact GDP, according to succession planning. Firms should have access to international lenders and foreign exchange control processes must be streamlined at the Central Bank to access funds internationally with low interest rates.

At this time, neither commercial banks nor offshore banks have the incentives to supply credit to domestic firms. Banks operate to maximize shareholder benefits and they will pursue product lines they believe will turn a profit. Banks are not lending funds unless clients have significant collateral in land or real estate property. Financial institutions need urgently to implement a comprehensive system for risk assessment. However a large number of companies in the country have no equity they can use as collateral for a bank loan. Most Bahamian entrepreneurs are small

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and mid-size firms and banks are not yet interested in looking at the potential benefits of these companies as a target market. Technological and creative projects are not supported because they are not traditional.

But according to other panelists, Bahamian firms face a range of challenges including access to credit, but there is no test to prove that financing is really the major problem for small enterprises. With only a small percentage of businesses surviving more than 5 years, non- financial support is the bigger need. Most Bahaman entrepreneurs do not track the firm’s revenues, costs or gross profit, and there is a generalized practice of mixing personal and business record keeping. There is a need for technical assistance to teach business owners how to set-up businesses properly and keep track of records and accounting. There is no platform for personal, professional and business development; business plans are limited and many times incoherent. Many firms complain about access to capital, but they have not taken any measures or positioned themselves on a profitable business path. Some businesses are not structured well enough for adequate bookkeeping, and owners are reluctant to hand their records over to accountants due to a lack of trust. Most owners and manager do not understand the credit structure and many businesses are unsophisticated. Business owners will send their staff for training but refuse to go themselves. For some interviewees, money provided for business development without technical assistance to entrepreneurs is money wasted. The conversations that ensued during the group discussions and interviews gave rise to some candid observations. Entrepreneurs should go through financial training and management programs before starting their business. Business associations have launched programs to train professionals and managers in different sectors. Entrepreneurs who seek help for business plans expect them to be written for them and when they are questioned about those details by banks, they cannot answer or defend the information in their plans. Generally, there is no investment/entrepreneurship plan or ambition (spirit of progress). People are focused on making just enough money to survive and cover costs, so they don’t look at their activities as building for the future. Some people feel that when they borrow from the Government that they are entitled to the funds and do not need to repay. Some have no intention of repaying with anything other than with votes. Commercial banks need to make their requirements more transparent so as not to waste their time or that of the businessperson. An average client does not know the criteria banks apply when deciding whether to deny or approve loans. Lack of knowledge of the requirements for banking and financial institutions explain a large part of fund misappropriations and non- performing results. The previous administration created the Bahamas Development Bank BDB to supply credit for growth and development of Bahamian firms, but it acts like other commercial banks. It charges high interest rates, requires high collateral and extends credit for political motives. Its overall economic impact has been very limited. Some panelists were cognizant that providing credit without following up on repayments is self-destructive.

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The rise of consumer lending has made home ownership almost possible, but good financial practices have been eroded and motivated speculative conducts. No limits or requirements of debt equity ratios or limits over cash flows appear to be imposed. The previous ceiling that protected credit applicants from taking on a loan that would reduce their net income by more than 30% is no longer being enforced in credit decisions. Consumer loans stunt people’s ability to grow and plan financially for the future. Banks should not consider small business loans without considering the owner’s financial background or financial literacy. The lack of discipline and prudent financial management has resulted in 6,000 persons in arrears in their mortgages. Some business people mortgage their homes to finance their businesses which should be addressed. According to some venture capital institutions, firm need funding and support. They need both finance and non-financial support services. When individuals approach them for financing, they have a business goal in mind but there may be a gap between their knowledge and business practices. For instance, most potential entrepreneurs or investors realize that their banking history plays a role in credit decisions but they have few records or proof of their financial needs. Funds are moving towards equity based financing so lenders can retain some control. Some singular statements from the panelists are listed below:

 Persons seeking funding often lack both technical skills and administrative skills to prepare business proposals, maintain accounting records, create invoices or any managerial skills.  Some people don’t understand their own business plans as they didn’t write them, so they cannot explain them.  Banks hesitate to fund business ventures in the productive sector because those loans require more evaluation and work than car loans, for example.  There is a need for dialogue on how small businesses entrepreneurs can tap in to non- traditional sources of funding.

Bundled support to SMEs should include non-financial services such as account management, information dissemination, training and consulting. Some respondents suggested that banks should provide a variety of different non-financial tools and services to SMEs to help business owners and managers develop practical business skills and better grow their enterprises.

Non-financial technical support services needed include: i) account management support services: client tailored support from banks’ account managers; ii) information dissemination: knowledge delivered to SMEs via web sites, publications, business centers, and/or interactions with account managers; iii) training activities and programs: interactive activities designed to facilitate the learning and development of new and existing skills and improve performance; iv) consulting services: direct interactions with knowledgeable sources to gain insights and expertise.

Capital constraints do exist for Bahamian mid-size firms, but:

 Capital assistance and technical support need to go hand in hand when dealing with SMEs.

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 There is a need for a more balanced view of finances and other areas that impact the public and the government.  Individuals have to become their own lobbyists in educating ourselves about credit requirements and creditworthiness.  Training institutions that should be spearheading these types of knowledge transfer using social media.  Credit bureaus, bankruptcy and foreclosure laws are essential to support business development.

I.5 Other Private Sector Development Issues

Along with an open agenda for our panelists, other private sector development issues were mentioned during the discussions. Although the following issues have not dominated all conversations, they represent important development issues that are an integral part of the private sector in Bahamas. Issues such as clustering, information communication technology (ICT), innovation and the overwhelming bureaucracy for licenses and permits, land titling, dispute resolution and courts were brought up and discussed.

Clustering

In the business dynamic, Bahamians are reluctant to form alliances and associations or to put resources together to work for the collective good. There is a general perception that alliances cost a great deal and there is a distrust of efforts to form a unified front. “We need to establish a dialogue to determine what can work on together, and competition can grow everyone’s pie.” Firms have no interest and find no value in associations. Bahamians don’t trust each other’s work and services. Moreover, there is a belief that things are achieved only if politicians are involved. One panelist said: “If we feel the need to wait on politicians to help us, then we feel no need to network.” All of these reasons were provided to explain the limited clustering sophistication in many market segments.

Information Communication Technology (ICT)

Although remarkable efforts have been made to promote ICT, there is a general perception that ICT both helps and inhibits the business community. The geography of the country presents unique challenges for information communication technology. For instance, Cable Bahamas broadband can only reach four islands at this point, and not in every settlement on those islands has coverage. Creating websites for private sector firms is a challenge due to inconsistent coverage and broadband accessibility. Nevertheless, despite the high start up costs, some banks are now providing platforms for e-commerce for businesses to sell online and have the funds deposited into their accounts. Small hotels in family islands have started to implement websites and electronic booking.

Innovation

Although innovation is largely appreciated in the Bahamas as vital for potential wealth and sustainable returns, most panelists believe their culture is to be reactive, not proactive, which in turn limits innovation. Innovation goes hand in hand with research and development, and to date

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there are few institutions that support those activities although the College of Bahamas is a potential candidate. The rising level of business sophistication will eventually result in new and innovative services and products, if knowledge and confidence is raised. Some private institutions such as the Bahamas Chamber of Commerce and the employers’ confederation are currently working to inspire persons and entrepreneurs to be more innovative through competitions and similar events.

Overwhelming public sector red-tape and lack of transparency Regarding business permits and licenses, there is a generalized lack of information and confusion about the documents required and which governmental offices need to be consulted. In general there is no coordination among governmental agencies or a clear set of procedures to follow. Because the Bahamas is such a centrally regulated economy, there is excessive red tape and standard services or tasks are ineffective. According to our panelists, the state economic role is overwhelming, too much. The private sector does not find a proactive, helpful environment when dealing with public agencies. A generalized lack of customer service is a constraint to fulfilling business permits and licenses. Evidence suggests that registering property and dealing with construction permits is very complex due to the fact that there is limited clarity on the scale and scope of the responsibilities for each governmental institution. All of these inefficiencies have resulted in the duplication of very costly processes. Regarding intellectual property rights, The Bahamas is a member of the World Intellectual Property Organization (WIPO), but registration of these rights suffers from the same limitations. Intellectual property rights must be registered and enforced in the Bahamas under local laws, and intellectual property is primarily a private right. Registration of patents and trademarks is on a first-in-time, first-in-right basis, which encourages inventors to apply for trademark and patent protection prior to selling products or services in the Bahamian market. However legislation granting greater protections to IPR and more stringent penalties for IPR violations has been submitted to Parliament by the authorities to bring the Bahamas in line with WTO privations and Economic Partnership Agreement (EPA) requirements, signed in 2011with the European Union.

Over last decade, despite efforts to improve and accelerate dispute resolutions, contractual and commercial disputes between Bahamians and foreign investors are possible and common, which has a negative impact on the business climate. On the positive side, companies can and are frequently liquidated according to law. Creditors of bankrupt debtors and liquidated companies participate in the distribution of assets according to statute. The law relating to sales of goods and some other commercial property are codified in the Bahamas' statutes.

II. Establishing a long term action plan

Although most panelists enthusiastically supported the idea to create a forum or institutionalize a public private dialogue, some of them reacted cautiously. All understand that the magnitude of the needed reforms must be done in a manner that helps to build broad consensus and guarantee long term stability.

Our panelists acknowledged that there is an urgent need to find more public-private synergies. In light of official announcements from the government, they have suggested taking the partnership

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initiative to two potentials forums. The first might be the Constitutional Review Committee where public-private partners can build a long-term economic plan. The second forum could be more direct or executive such as the suggested Council of Economic Advisors, which is the objective of the current administration. The purpose of this Council will be to advise the government on major issues, particularly those concerning economic growth and stability. A review of the country’s tax system will be high on the list of matters to be referred to the Council.

Overall, the participants in the panel, group and individual discussions congratulated the IADB team for promoting these round tables. They suggested that other countries in the region join these types of discussions with the Bahamas to hold discussions among Caribbean nations. After defining and prioritizing the main issues that affect private sector development and agree upon a national agenda to address these issues, both public and private sector officials must discuss viable solutions and a timetable for corrective action. Agreement of critical problems should be reached, along with the identification of solutions and their implementation. This research discusses some conclusions and suggests some recommendations in the following chapter.

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CHAPTER III: CONCLUSIONS AND RECOMMENDATIONS

The Bahamas is regarded as a high-income country with large flows of foreign direct investment that needs very little support. However, the different private sector representatives, consultants and academics who participated in our panels and round tables underlined significant private sector development issues that need to be urgently resolved for The Bahamas to achieve higher levels of economic and social development. Some Bahamian institutions and a small but growing list of international institutions have already started working on needed changes.

During the November 2012 panel discussions and interviews, private sector representatives identified key barriers including: i) an inadequately educated labor force, ii) customs, trade regulations, and procedures, iii) access to finance, iv) crime and theft, v) limited infrastructure and expensive public services, vi) overwhelming public red tape and lack of transparency, vii) clustering, lack of trust, entrepreneurship and linkages among business, and viii) information communication technology, innovation courts and alternative dispute resolution schemes.

Broad-based public-private dialogue and the urgency of an effective macro and micro agenda for the Bahamas development are two suggested avenues to begin tackling these issues in the country.

Suggested policy goals and potential agenda issues are identified in the chart at the end of this chapter. Although the complete and extensive list of issues discussed by our panelists and interviewees is important, a few are underlined below as conclusions and recommendations of this research.

I. Improving Education and Workforce Skills

At the same time that the Bahamian government is pursuing measures to increase employment and improve workforce skills and training, it is necessary to expand coordination of training programs and skill needs. In addition to ongoing efforts to support education and training programs, and improving labor market information, accreditation and certification, teacher training and stakeholder consultation, the private sector recommends industry being brought in to suggest curricula and refocus training programs by sectors. Industry and training institutions need a mechanism to improve information about labor demand and supply and to facilitate the engagement of new graduates.

As previously noted, the private sector is convinced that reforming education in general from primary to tertiary education and enhancing vocational training with opportunities for four year degrees and further graduate programs with private sector support is needed. Suggestions

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focused on creating a more flexible labor market with dynamic policies on wages and workforce participation. Although labor regulation is not viewed as a tremendous problem, some issues remain sensitive such as timely work permits and migration. With regards to migration, a clear distinction must be made between immigration and emigration policy. Bahamas is facing a lack of qualified construction workers for whom its government has issued permits, while also losing skilled professional talent through emigration.

One recommendation is to revamp immigration regulations pertaining to foreign workers. Although this is a politically sensitive issue, both public and private sector officials agree that the already existing shortages of qualified labor will intensify. The paucity of timely labor information prevents the private sector from knowing how many workers are needed by sector. For example, industry representatives agree that announced construction investments will increase workforce demand and additional workers will need to be imported. Information on projected employment demands by approved investment projects could serve as a basis for revising existing immigration policy, allowing for more flexible, simpler and less discretionary restrictions on foreign workers.

Training institutions should be encouraged to create venues such as job fairs to open effective channels for skilled labor to go where it is needed. The ongoing program should reveal opportunities for additional programs aimed at improved education and training for labor market effectiveness.

II. Infrastructure Provision and the Private Investment Enabling Environment

It has been almost a decade since The Bahamas’ government began important projects and reforms for infrastructure provision. Current existing infrastructure shortfalls are largely due to the government monopoly in the supply of infrastructure services and incomplete policies to enable effective private investment participation.

Streamlining the public sector’s decision process for private investment is one of the top priorities of the current administration. Moving from a highly centralized, discretionary and case- by case negotiation process towards a more policy oriented, decentralized process should be expected and supported. Government’s involvement should center on creating and enforcing appropriate general regulations within an overall development strategy. Although policies and reforms for an independent regulatory framework were mentioned, there is no comprehensive policy regarding price liberalization or private-public discussions.

Nevertheless, advocacy and support for the creation of a PPP unit and improved public utilities management should continue to establish a permanent mechanism of coordination between public and private institutions. In the past, projects in transportation, telecommunications, energy and water and sewage were mentioned, although the major problem in these sectors appears to be the political decision to keep tariffs below cost.

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While the government is currently prepared to undertake significant changes in its decision making process, initial efforts could focus on gradually creating the conditions for change through the establishment of an integrated and sustainable private investment strategy for The Bahamas. Two specific proposals for action regarding improvements in the organization of the public sector to deal with critical aspects of private sector investment are: i) strengthening the strategic planning function, and ii) establishing a public-private partnership unit within the Office of the Prime Minister. Infrastructure and public services are expensive for the private sector. There is significant interest in The Bahamas in the role that state-owned enterprises (SOEs) can play in promoting economic development, the relationship between SOEs and the State as a shareholder, and the criteria used in assessing options for investing in or disposing of state-owned enterprises. While progress has been made in upgrading the infrastructure stock, the Bahamas continues to have significant infrastructure development needs. Our panelists shared some opinions about the critical role that many SOEs play in the provision of infrastructure.

The followings themes were reviewed from an enterprise development perspective: 1) the regulatory framework wherein they operate; 2) rationale for State ownership in SOEs of essential infrastructures and services so as to best achieve their objectives; 3) the structuring and management of SOEs to ensure that all enterprises can access world class infrastructure and services at competitive prices; and 4) provide a basis for making informed decisions as to further investments or the potential disposal of state assets.

Over last decades, The Bahamas has relied on a strict state enterprise model where the SOE has total control of prices and tariffs and the provision of services, according to sectorial regulation that is sometimes contradictory and unclear. Although governments have tended to favor regulation and the use of markets to achieve public policy objectives through a combination of regulation and subsidies, the regulatory framework mandates that public operators such as BEC should be the provider and the regulator at the same time. This leads to an inevitable conflict of interest that prohibits fair competition and results in onerous tariffs. Moreover, legislation mandates that a certain amount of electrical power must be provided by the BEC even if the consumer owns a private generator. These kinds of restrictions remove incentives for SOEs to provide services in a cost effective manner, as market demand becomes inelastic to price changes.

In the case of The Bahamas, the sale of state owned assets cannot be guided on the sole basis of how much revenue will be raised. It is important to develop clear criteria to select appropriate assets in water and electricity. It is essential that infrastructure users’ interests are protected by not selling natural monopoly assets or assets to dominant competitors. It is also vital to ensure that investment in advanced infrastructure and regional development is promoted, and that regulatory capabilities are sufficiently advanced to achieve public policy goals in the absence of ownership rights.

The Bahamas needs to establish a regulatory mechanism which trumps political influence and discretionary management for tariffs and services. It needs to encourage private sector participation in public services in order to improve its business climate. The Bahamas Investment Authority should remove multi-agency impediments to investment procedures and establish one-

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stop-shop processes and encourage more public-private synergy. Ultimately, the government must develop clear criteria to guide the potential sale of state-owned assets or a strategy to allowed private sector to participation in the provision of public services. One option might be public private partnerships, according to our panelists.

III. Financial Support for SMEs and Entrepreneurial Development

As previously mentioned, some private firms have said they face barriers in accessing credit but data show there is considerable short-term liquidity in financial institutions and public institutions exist that are dedicated to providing support to the productive sector. In the 2010 Enterprise Survey, medium size companies were the most likely to have identified access to finance as their main obstacle and a key factor to be addressed in order to improve their ability to do business. Private sector representatives point out that access to credit must be provided along with non-financial support services to be effective.

The Bahamas lacks an integrated approach to support lending to the private sector. Credit products should be comprehensive and cover all stages of financial business needs. The provision of non-financial services should include business development activities such as strategic planning, how to develop a sound business plan, credit negotiation and building a strong credit history. As in many other countries, the private sector expects development agencies and banks in the Bahamas to add technical assistance to their services to boost the business prospects of their SME clients. Some respondents cite the lack of business skills and of familiarity with credit practices and legal and regulatory requirements to be among the major obstacles to SME development.

There is a need for different types of lending. According to the panelists and group discussions, banks should provide different types of financing - loans for new businesses and loans for established businesses. There is a need for lending for growth, lending for high risk projects, lending for structural development. At the same time, access to finance and lending should be comprehensive and supported by authorities. The government should have a plan in place with incentives for credit to flow to underserved sectors and businesses. The government should also identify as growth firms that can provide jobs and impact GDP, according to succession planning. Firms should have access to international lenders and foreign exchange control processes must be streamlined at the Central Bank to access funds internationally with low interest rates.

Currently neither commercial banks nor offshore banks have the incentives to supply credit to domestic firms. Banks operate to maximize shareholder benefits and they will pursue product lines they believe will turn a profit. Banks are not lending funds unless clients have significant collateral in land or real estate property. However a large number of companies in the country have no equity they can use as collateral for a bank loan. Most Bahamian entrepreneurs are small and mid-size firms and banks are not yet interested in looking at the potential benefits of these companies as a target market. Technological and creative projects are not supported because they are not traditional. With only a small percentage of businesses surviving more than 5 years, non- financial support is the bigger need.

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Most Bahaman entrepreneurs do not track the firm’s revenues, costs or gross profit, and there is a generalized practice of mixing personal and business record-keeping. There is a need for technical assistance to teach business owners how to set-up businesses properly and keep track of records and accounting. No platform exists that provides a holistic package of support for personal, professional and business development; business plans are limited and many times incoherent.

Overall capital constraints do exist for a large number of private sector entrepreneurs and specially SMEs for mid-size Bahamian firms, but: i) Credit and technical support need to go hand in hand when dealing with SMEs. ii) Individuals have to become their own advocates in educating themselves about credit requirements and creditworthiness. iii) Training institutions should be spearheading awareness campaigns through social media and other modern channels of communication; and iv) Revised policy is essential for credit bureaus, bankruptcy and foreclosure laws. IV. Other Issues

In addition to the key constraints to private sector development previously mentioned, opportunities exist in a few specific areas that have the potential to significantly improve the investment climate. Issues such as commercial arbitration, environment and land use and titling are part of the private sector agenda. The private sector faces very slow and expensive judiciary processes that could be streamlined by a new arbitration and conciliation system, or the creation of an arbitration center. Although the following issues have not dominated all conversations, they represent important development issues which are integral part of the private sector in Bahamas. Issues such as clustering, information communication technology (ICT), innovation and an overwhelming bureaucracy (red tape) for licenses and permits, land titling, dispute resolution and courts fall into this category.

Clustering

There is a tendency for Bahamian businesses to refuse to form alliances and associations or pool resources to work for the collective good. There is a general perception that alliances are costly. A dialogue should be established to determine where firms can work together and where competition can increase benefits for all parties. There is the perception that Bahamians are skeptical of each other’s work and services. Moreover, there is a belief that things can only be accomplished if politicians are involved. One panelist said: “If we feel the need to wait on politicians to help us, then we feel no need to network.” Effective promotion of business clustering remains a pending task.

Information Communication Technology

Although remarkable efforts have been taken to promote ICT, there is a general perception that ICT both helps and inhibits business development. The country’s geography presents unique challenges for information communication technology and connectivity. For instance, Cable Bahamas broadband can only reach four islands at this point, and not in every settlement on

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these islands is covered. Widespread use of websites for private sector firms is a challenge due to inconsistent coverage and uneven broadband accessibility. Nevertheless, banks are now providing platform for e-commerce for businesses to sell online and have the proceeds of their sales deposited to their accounts. Small hotels on family islands have started to use websites and electronic booking.

Innovation

Although innovation is largely appreciated in Bahamas as vital for potential wealth generation, panelists believe their culture is more reactive than proactive, which in turn it limits innovation. Innovation goes hand in hand with research and development, and to date there are few institutions working in this field. The College of Bahamas is one of these institutions.

The rising level of business sophistication will eventually result in new and innovative services and products, but achieving this goal requires knowledge and entrepreneurial confidence. Some private institutions such as the Bahamas Chamber of Commerce and the Employers’ Confederation are working to inspire persons and businesses to be more innovative through competitions and other venues.

Excessive bureaucracy (public red-tape) and a lack of transparency in the requirements for obtaining business permits and licenses is a problem.

Environment and Land Use

An important requirement for the development of the private sector is an appropriate framework for environmental regulation. Efforts are needed to develop adequate information systems and the generation, compilation and processing of environmental information. This will provide an appropriate baseline to guide policy as well as the integration of these capabilities with the government’s decision-making processes and development strategy. Topics such as innovation and science and technology can be incorporated to the agenda of the BEST commission of the Ministry of Education and Environment. Academic institutions are involved in promoting science and technology but financial resources limited results and programmatic continuity.

Land use policy and administration issues seriously impact agriculture and coastal management. Sectors such as fisheries would greatly benefit from efforts to streamline land grants, sales and concessions. Although land registration systems aimed at replacing the current registry with a standard title system and at modernizing the registration process have been seen as policies relevant primarily for foreign investors, they are also important in domestic marine development, the agriculture sector and fishing exports.

To summarize, the following policy matrix introduces a long list of suggested issues for discussion to promote private sector development.

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Policy Matrix BAHAMAS PSAR: SUGGESTED GOALS, COMMENTS AND RECOMMENDATIONS IDENTIFIED OBSTACLES OR SUGGESTED AND PROPOSED GOAL POTENTIAL AGENDA ACTIONS CONSTRAINTS

1) Improve labor statistics and information.

2) Identify labor demand and skills by sector, facilitating labor mobility.

3) Adjust curricula and training at all levels of education, starting with the IDB inspiration program. Expand private public coordination for labor Establish an institutional program or training programs. Education and training mechanism to support dialogue and Inadequately educated labor force 4) Establish new and expand existing sectorial labor training programs. institutiones should connect with industry exchange information about the supply to identify skills needed in the workforce. and demand for labor. 5) Support job fair and related activities at terciary institutions with private sector companies and associations.

6) Discuss immigration and emigration policy with the private sector, especially work permits.

7) Support initiatives that involve the private sector. The recently created National Training Council is one example.

Create a public private office to advise on 1)Inform stakeholders on WTO accession procedures and evaluate trade negotiations, trade advantages and potential impacts. opportunities.

Eliminate cumbersome and unclear 2)Simplify custom administrative procedures and duty payments. Customs, trade regulation and procedures procedures for foreign trade, exports and Strengthening of private sector imports 3) Establish a transparent and easy access mechanism for custom institutions across all regions and family concessions and duties. islands.

4) Evaluate the impact of contraband and illegal trade.

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BAHAMAS PSAR: SUGGESTED GOALS, COMMENTS AND RECOMMENDATIONS IDENTIFIED OBSTACLES OR SUGGESTED AND PROPOSED GOAL POTENTIAL AGENDA ACTIONS CONSTRAINTS

1) Support the creation of business plans and strategic planning for potential borrowers.

Write details and specific guidelines and toolkits for financial and non-financial 2) Develop toolkits for creating, operating and managing firms. services. 3) Create a credit culture for repayment and strong creditworthiness. Establish a mechanism to support private Establish a credit bureau. sector finance. Credit evaluation must be Access to finance Facilitate further development of off- comprehensive, including past credit risk 4) Provide finance and credit at different stages of firm development shore financial services by improving and reporting creditworthiness. (comprehensive lending). transparency and monitoring.

5) Encourage financial institutions to provide transparent information about the credit award process and requirements.

6) Need to restructure the Bahamas Development Bank (BDB) and evaluate impact of EVF and Loan Guarantee Programs.

1) Convoke private and public institutions to coordinate action regarding security in downtown Nassau and Freeport. Improve civil security mechanisms in public Upgrade all security corps and Crime and theft and access areas. The Bahamas is mainly a mechanism for tourism security. 2) Provide new and visible security around resorts and hotels. tourist destination.

3) Improve order by better traffic signaling around congested areas.

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BAHAMAS PSAR: SUGGESTED GOALS, COMMENTS AND RECOMMENDATIONS IDENTIFIED OBSTACLES OR SUGGESTED AND PROPOSED GOAL POTENTIAL AGENDA ACTIONS CONSTRAINTS

New regulatory framework avoiding 1) Separate the roles between normative bodies and enforcement political influence and conflict of interest entities. Also remove utility operators from normative functions.

2) Establish clear and transparent mechanisms for tariffs and rates, avoiding discretionary charges or corruption. Limited infrastructure and expensive Create a regulatory institution or system Promote better and more effective public services, energy and electricity with a mandate for all public utilities and 3) Establish a series of mecanisms for private sector participation in regulation of public utilities and private costs. services. infrastructure and public services, including dialogue and PPP participation in the provision of public investments. services. 4) Promote public-private partnerships for services and infrastructure projects.

1) Streamline licenses and permits.

2) Open information about public procurement and foreign worker licenses.

Develop a national plan for public Develop a mechanism for both civil 3) Streamline public utilities inspections. Overwhelming public red tape transparency under complementary servant and private party awareness. (bureaucracy) and lack of transparency. concepts such as one stop shop and Both sides must be informed of the processes with fewer steps. process required. 4) Encourage the identification of corrupt acts (whistle-blower).

5) Introduce the concept of administrative accountability for civil servants.

6) Introduce mechanisms for consumer and client protection.

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BAHAMAS PSAR: SUGGESTED GOALS, COMMENTS AND RECOMMENDATIONS IDENTIFIED OBSTACLES OR SUGGESTED AND PROPOSED GOAL POTENTIAL AGENDA ACTIONS CONSTRAINTS Create an Open Forum with private 1) identify public and private institutions involve in private sector sector associations, universities and development. other interested stakeholders. 2) Promote the establishment of a system or mechanism for networking or sharing information to "grow the pie". Improve economic management capacity 3) Request better public agency coordination and one stop shops for and corporate governance for all firm registering, customs and support. sizes. Ineffective clustering and lack of trust Create a holistic institutional framework to leads to underdeveloped 4) Identify business opportunities in large projects and investments, coordinate private sector development entrepreneurship and few linkages looking for synergies and linkages. support. among business. Support and enhance private sector 5) Large and small firms must participate periodically information capacity for research and development, about business and potential threats. ITC and innovation. 6) Create a development center for small and medium enterprises (SMEs).

7) Establish an academic or university center for ICT and science and technology, following the Bahamas Environment, Science and Technology (BEST) comission proposals.

Improve land tenure and titling Land titling - agriculture 1) Open access to crown land for agriculture development. administration. Need for comprehensive public finance management. Taxation is not 2) Tax revenues can be increased under the current regime with more Tax reform progressive, too narrow, difficult to effective administration and expansion of the base. No need to manage and provides insufficient change regime due to FDI disincentive. revenues. Other themes Dispute resolution costs are enormous 3) Establish non judicial mechanism for resolutions of commercial Courts and legal administration and the process is very slow. disputes.

Protection of intellectual property rights 4) Trade related intellectual property (TRIPs) treaty in WTO needed for investment. negociations and IPR issues.

Set an academic mechanism for Science 5) Advance progress on the road map for technology and science with Innovation and ICT and Technology development BEST commission.

Source: Author elaboration based on round table and panel discussions held during November 2012, arranged courtesy of the IDB representation in Nassau, New Providence.

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Annex A: LIST OF PARTICIPANTS

1) Mr. Paul Winder, BFSB Chairman - ATC Trustees (Bahamas) Ltd. 2) Mrs. Tiffany Norris-Pilcher, BFSB Treasurer – Ernst & Young 3) Mr. Brian Jones, BFSB Secretary – UBS Bahamas Limited 4) Mr. Gary Young, Sr. Director Research & Statistics, Ministry of Tourism 5) Ms. Cheryl Simms, Vice President of Finance, College of the Bahamas 6) Mr. Franon Wilson, Bahamas Real Estate Association 7) Ms. Kathleen Riviere-Smith, CEO, Utilities Regulation Competition Authority 8) Mr. Michael Cunningham, Chairman, Bahamas Entrepreneurial Venture Fund 9) Mr. Sean Brennen, Fund Administrator, Bahamas Entrepreneurial Venture Fund 10) Mrs. Joy Jibrilu, Director, Bahamas Investment Authority 11) Ms. Samantha Rolle, Project Manager, Bahamas Investment Authority 12) Mr. Winston Rolle, Chairman, Bahamas Chamber of Commerce 13) Mrs. Juliette Reid, Regional Director, Nova Southeastern University - Bahamas 14) Mr. Glen Laville, General Manager, WSC 15) Mrs. Karon Williams-Barrot, KPMG 16) Mr. Reece Chipman, Bahamas Institute of Chartered Accountants 17) Mr. Harcourt Brown, Ministry of Labour 18) Mr. Tyrone Gibson, Ministry of Labour 19) Mrs. Adrilla Horton, Director of Atlantis University, Atlantis 20) Mr. Don Gray, Shakedd & Co. 21) Mr. Kareem Hanchell, SDC Bahamas 22) Mr. Don Demeritte, EPS Consultants 23) Ms. Janica Deveaux, Ventemiamon Accounting 24) Ms. Tonya Adderley, Contact Excellence Consultants 25) Mr. Andrew Edwards, Principal Consultants Group Ltd. 26) Mr. Mark Turnquest, Outreach Sales and Marketing 27) Mr. Jamico Brice, Kan Consultants 28) Mr. Frank Comito, Vice President, Bahamas Hotel Association 29) Mr. Alexander Sokoloff, Economic and Commercial Officer, US Embassy 30) Mr. Charles Pratt, Manager, Grand Bahama Port Authority 31) Ms. Mercynth Ferguson, Executive Director, Grand Bahama Chamber of Commerce 32) Mr. Alwyn Jordan, Senior Economist, Central Bank of the Bahamas 33) Ms. Kimberley Rolle, Department of Statistics 34) Ms. Bettina Turner, Department of Statistics

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Annex B: COMPARABLE COUNTRIES

The selection of country comparators was made to deliberately focus on Caribbean neighbors. The comparator countries selected for the Commonwealth of the Bahamas are: Antigua and Barbuda, Barbados, Jamaica, and Trinidad and Tobago. The rationale for the selection of these countries is: i) Antigua and Barbuda’s economic and political institutional framework is similar to the Bahamas, despite their geographical distance. ii) Barbados and the Bahamas share several characteristics such as their economic structure, income level and institutional structure. However they apparently serve different export markets. Barbados has stronger trade linkages with Europe than does the Bahamas. iii) Jamaica is a larger country with a large domestic market than for the Bahamas and, at the same time, it shares institutional and historical characteristics. iv) Trinidad and Tobago and the Bahamas share a similar level of income and key institutional characteristics. However, Trinidad and Tobago is a net exporter of hydrocarbons and industry although Bahamas industry represents approximately 15 percent of its GDP at this time. Trinidad and Tobago is also substantially less dependent on the tourism sector.

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