ReportNo. 6277-NA TheNetherlands Antilles: Prospectsand Policies

Public Disclosure Authorized UnderChanging Conditions

August26,1986 LatinAmerica and the CaribbeanRegional Office FOR OFFICIALUSE ONLY Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

Documentof the WorldBank

Thisdocument has a restricteddistribution anL' may be used by recipients onlyin the performance of theirofficial duties. Its contents may not otherwise bedisclosed without World Bank authorization. CURRENCY EQUIVALENTS

Currency Unit = NetherlandsAntilLes Guilder (NAf) NAfl = US$ 0.56 US$1 = NAf 1.79

The NetherlandsAntilles Guilder has been pegged to the U.S. dollar at the above rate since 1971

WEIGHTS AND MEASURES

Metric System

FISCAL YEAR

January 1 through December 31 roxOFIMCIL US ONLY

PWACI

rhis reportwas preparedby a missionthat visitedthe NetherlandsAntilles in April 1986, at the requestof the Governmentsof the Nethetlandsand the NetherlandsAntilles. The purposewas to assessthe currentsituation and prospectsof the economy.

The NetherlandsAntilles comprises five islands:Bonaire and Curacao,part of the LeewardIsland group, and St. daarten,St. Lustatius and Saba, knownas the WiadwardIslands. Aruba was one of the Netherlands Antillesuntil January1, 1986, when it becamea separatecountry within the Kingdomof the Netherlands.Except where otherwisestated, all of the figuresin this reportrefer to the NettierlandsAntilles, excluding Aruba, on which & separatereport has been preparedby the mission.

The missionmembers were: RaymondJ. Goodman(Mission Leader), David L. Head (Consultant),Oonald S. Hill (1BKD),Orsalia Kalantzopoulos (1R8), Rene Moreno (IBR1), SamuelOlayinka (IBRO), Carlos Rietveld (IBRD), Jonn Salort(Consultant), James Simmons(IBD), Padej Sukachevin(IMF) and Els van Wingerden(IBRD).

The missionacknowledges with thanksthe excellenthelp and cooperationit receivedin the Antillesfrom Governmentofficials and the CentralBank, as well as representativesof privatebusiness and trade unions.

Thisdocument has a restricteddistribution and maybe used by recipientsonly in the performance of their oMcialduties. Its contentsmay not otherwisebe disclosedwithout World Bank suthofization. THE SET1IUILANDSANTILLES: PROSPECTSAND POLICIES UNDERCHANGING CONDITIONS

TABLE OF CONTENTS

Page No.

COUMTftYDATA

OVIMVIEV SIMIARY AND RECOOIENDATIONS...... i-xii

CAPTER LO ECONOMIC OVEVIEW ...... I

A. Recent Economic Developments in the Netherlands Antilles.... I Industrial Activity...... ,...... 4 Offshore Financial Serviceso...... 4 Tourism and Commerce...... 5 Other...... 6 Employment, Wages and Prices...... 6 B. Public Finance...... 10 Budgetary Developments, 1980-85...... 11 The 1986 Budget ...... 13 C.V Koney and Credit...... 14 ..... Banking System...... 14 Exchange Rae15...... l Balance of Payments...... 15 The Capital ...... 16 Overall Balance of Payments and Foreign Exchange Reserve.. 16 Official Foreign Debt and Debt Service...... 17 Development Assistance ...... 17

CHAPTERII. CLOSING THE BUDGET DEFICIT ...... 18

A. Reducing Expenditures...... 19 B. Enhancing ...... 21 The Case for a Sales Tax...... 21 Tapping Domestic Savings...s* ...... 22 C. Financing the InterimDeficits...... 24 D. Conclusions...... o25

QIAPTER III. TOE PRODUCTIVE SECTORS ...... 27

A. Tourism...... 27 KecentTrends...... 27 Sectoral Problems ...... 29 TABLE OF CONTENTS (Continued)

B. Industry, Primary Production and the Prospects for Employment 39 The Oil Industry...... 39 r4anufacturings...... 40 Primary Production...... 46 imploymentTargets ...... 49 C. The Offshore Banking Sector...... 50

CMilTER IV. GOVERNiENT, INiFRASTRUCTUREAND SOCIAL SERVICES ...... 53

A* Government...... 53 The Nature of Government...... 53 Streamliningand Rationalizing the Government...... 58 B. The Infrastructure...... ******** ...... e 60 Water Service...... 60 Electric Power ...... 68 Port ...... Fa cilities 72 International Telecommunications ...... 76

Aviation. *..*.*...... * 0@ ...... *909****0 77 C. Social Services7...... 0 ...... 79 Insurance and Pension Schemes and Health Services.0.0....0 79 Education...... 83

D. Implementingthe AdjustmentProgram...... 6 85

ANNEXES ...... 87 Page 1 of 3

NetherlandsAntilLes: Basic Data, 1980-85

1981 (Census)

Population 171.6 Of which: Curacao 147.4 Bonaire 8.8 Windward Islands 15.5

Population density is 234 inhabitantsper square kilometer Annual average population growth between 1974-81was 1.1 percent

ConsumerPri.ce Index (annualpercentage changel)

1980 1981 1982 1983 1984 1985

Leeward Islandsa (period average) 14.9 12.2 6.2 2.7 2.2 0.3

a. Exctudes Aruba in 1984 and 1985. Page 2 of 3

NetherlandsAntilles: BasicData, 1980-85(continued)

1980 1981 1982 1983 1984 1985

(Millionsof NAf)

PublicFinance

CentralCovernment Expenditures 248.1 285.3 372.1 414.8 400.9 391.5 Revenue 194.6 209.3 300.1 333.2 363.4 352.5 FiscalBalance -53.5 -76.0 -72.0 -81.6 -37.5 -39.0 CuracaoIsland Government Expenditures 385.2 438.2 497.8 541.0 594.4 612.1 Revenue 396.8 445.0 506.3 568.0 578.0 583.6 FiscalBalance 11.6 6.8 8.5 27.0 -16.4 -28.5 ConsolidatedPublic Sector Expenditures 633.3 723.5 869.9 955.8 995.3 1,003.6 Revenue 591.4 654.3 806.4 901.2 941.4 936.1 FiscalBalance -41.9 -69.2 -63.5 -54.6 -53.9 -67.5

Balanceof Payentsa (cashbasis) s

Trade Balance -1,364 -1,299 -1,450 -1,407 -1,296 -1,362 Services 1,445 1,569 1,674 1,444 1,383 1,485 PrivateTransfers and InvestmentIncome -186 -176 -118 -119 -158 -131

CurrentAccount -105 94 106 -82 -71 -8

OfficialCapital 151 111 62 112 93 103 PrivateCapital -18 -130 -95 -123 -125 2 Errorsand Omissions 24 20 18 45 33 25

Changein Net ForeignAssets, Increase(-) -52 -96 -91 47 70 -122

MemorandumItems: Net ForeignAssets 246 342 433 386 316 438 (in monthsof merchandise imports) 91.8) (2.6) (3.1) (3.1) (2.7) (3.5)

MonetaryData

Changein Money and Quasi-money(M 2) 87.3 120.9 146.5 61.4 25.9 68.6 (percentgrowth) (10.2) (12.8) (13.7) (5.1) (2.0) (5.3)

a. IncludesAruba. Page 3 of 3

NetherlandsAntilles: BasicData, 1980-85(continued)

1980 1981 1982 1983 1984 1985

Counterpartsto M2 Growth Net ForeignAssets 52.2 96.4 90.7 -47.2 -70.0 122.3 DomesticCredit 48.9 71.6 83.8 107.9 105.5 -44.4 (percentchange) (6.1) (8.4) (9.1) (10.7) (9.5) (-3.6)

Claimson Government,Net -26.7 -72.5 -11.1 -26.7 95.5 25.7 CentralCovernment -3.4 -5.0 50.8 -11.5 4.9 -10.8 IslandGovernments -23.3 -61.5 -61.9 -15.2 90.6 36.5

Claimson PrivateSector 75.6 144.1 94.9 134.7 10.0 -70.1 (percentchange) (11.8) (20.0) (11.0) (14.1) (0.9) (-6.4)

MiscellaneousOther -13.9 -47.2 -27.9 0.6 -9.6 7.4

ExchangeRates

CentralRate: NAf 1.79 a U.S.$1 NAM per SDR (periodaverage) 2.3301 2.111 1.976 1.914 1.835 1.817

Real EffectiveRate (annualpercentage change: periodaverage) 0.9 6.1 1.5 3.1 4.6 -1.8

Sources: Officialpublications; data providedby Antilleanofficials; International MonetaryFund and staff estimates.

a. Partlyestimated. b. Annualtonnage of non-oilshipping traffic in the port of Curacao. c. Value of completedbuildings on Curacao,deflated by the CPI. d. Offshoreforeign exchange inflows, deflated by the CPI. e. Revenuesharing transfers are deductedfrom the CuracaoIsland Covernment revenuesand added to the CentralCovernment revenues. f. Includesthe CentralCovernment and the IslandGovernment of Curacao. g. Correctedfor changesin consumerprices. JVERVIEW SUMMAKY AND RECOMENDATIUNb

i. The modern NetherlandsAntillesl/ are both a creation and a casualty of the internationaltrade in oiT. The great retineriesc the islands of Curacao and Aruba, with their fine harbors, were establishedin the early decades of this century to serve the North American market. Until 198U, their activitiessustained a prosperous, if vulnerable,economy with a standard of living only one-third lower than that of Holland and much higher than in the neighboring countries of the Caribbeanand South America.

ii. Uil refining also stimulated the growth of relatedactivities in oil storage and transshipment,cargo handling and ship repair. The steep rise in oil prices during the 197Us, although adding to the islands' own costs, brought a wave of visitors from Venezuela who spent their new wealth in the shops and casinos of Willemstad and elsewhere in the Leeiard Islands.

iii. From the mid-l9b0s, Curacao became an important center for off- shore banking, owing to the favorable tax treatment accorded interest pay- ments from the United States to companies resident in the Antilles. Offshore financial companies raised large sums in the Eurodollarmarket, and taxes on their profits have become the most important source of revenue for the Curacao Island Government. Dividends paid by companiesin the Netherlands to eligible companiesin the Antilles were also tree of taxation until the beginningof 198f-,when a small tax was imposed. It is believed that sizable floi:sof dividends have been channelledfrom third countries to the Anti3les ,hroughthe Netherlands,a flow that boosted the profits of offshore companiesand therefore tax revenues.

A. Deteriorationof External Conditions

iv. All of these favorable external conditions have changed for the worse in the present decade, some of them irreversibly.

- In 1963, following the fall in oil prices, the Venezuelan bolivar was devalued, which reduced to less than a third the flow of tourists from that country and cat.seda severe loss of income for the hotels and recail trade, especially in Curacao.

- The world recessionof 19bZ-83 affected port operations adversely, and they have recoveredonly moderately since then.

- The decreasingprofitability of the oil refineries caused both Shell (Curacao)and Exxon (Aruba) to cease operationson these islands in 1985. The refinery on Aruba, now a separate country within the Kingdom of the Netherlands,was closed. The Curacao

1/ Aruba (until 1986), Bonaire and Curacao, also known as the Leeward Islands, and St. Maarten, St. Eustatius and Saba, part of the Windward Islands. - ii -

refinerywas sold to the Curacao IslandGovernment for a nominal charge,and in October 1985 was leasedto the Vene2uelanState Oil Companyfor five years for a low rentalcharge. Part of the agreementwas a reductionin the wage bill. The futureof the refineryafter 1990 is uncertain.

- The repeal by the United Statesin July 1984 of the withholding tax on intereitpayments to foreigners,from which the Antilles was exempt,ended the advantageof channellingEurobonds and other borrowingsthrough Curacao. There have been few such transactionssince. v. Other conditions,on the other hand, have offsetor postponedthe losses occasionedby these adversechanges. The fall in oil priceshas reducedthe pressureon costs as well as the foreignexchange payments for this commod-.ty,which the Antillesuses heavilyfor water distillation. The rate of inflationhas been among the lowestin the world. Tourismhas been boomingon St. Maarten,the largestof the Dutch WindwardIslands, and there has been a modestincrease in the numberof North Americantourists visitingthe other islands. The tax revenuesderived from the earningsof the offshoiesector on bonds and other borrowingsnegotiated before July 1984 have been buoyantand even increasedin 1985 and 1986. Large severanceand other liquidationpayments by Shell and nxxon added to the reserves,which now (aftersettlement with Aruba)are equivalentto six months'imports. vi. These temporarysources of revenueand foreignexchange have disguisedthe severityof the.longer term problemthat faces the Antiiles, and insufficientadvantage has been taken of the breathingspace they have affordedto adapt the economyto the new conditions. vii. The Shell paymentsceased in mid-1986. While tax revenuesfrom the offshoresector have increasedin 1985 and 1986, as the arrearshave been paid off, they are expectedto drop steeplyin 1987 as the outstanding bonds are refinancedat prevailinglower interestrates. Presentestimates suggestth 4t the revenuefrom this sourcewill fall from Netherlands Antillesguilders (NAf) 375 millionin 1985 (56 percentof the Curacao Government'srevenue before transfers to the Center,and 44 percentof the consolidatedrevenues of the Centraland CuracaoIsland Government) to NAf 100 million in 1990. The operationalexpenditures of the offshoresector (NAf 217 millionin 1985)will also fall.

B. The Long-TermProblem viii. Time is short if the economyis to be adaptedin an orderlyand undisruptiveway to the declineof its principalsources of revenueand foreignexchange. The broad dimensionsof the problemof the Antillesmay be stated brieflyas follows:

- The high wages paid by the oil refineriesin the past have estab- lisheda patternof high wages and costs throughoutthe economy that makes it difficultto competefor businesswith lower cost - iii -

countriesin the region and elsewhere. Local industry is small and heavily protected, and with tew exceptions caters only to the domestic market. Agriculturehardly exists.

- The economy is thereforealmost entirely dependeaton imports ot goods and materials, including food. Increases in private and public expenditure result in a correspondingincrease in imports. If imports are to be reduced, as they must be until new sources of foreign exchange can be developed, expenditureswill have to be cut.

- Government revenues have been increasing at a rate of almost 10 percent a year in the l98Us, largely because of increased tax receipts from the offshore sector; these receipts have encourageda fast growth in public expenditures. Until recently, the wage and salary bill of the public service was growing because of more workers, higher pay and other benefits. Subsidies to loss-makingpublic utilities and enterpriseshav risen sharply, and social expendituresappear to be out of control.

- During the period of large external earnings and public revenues, the economy had little incentive to become efficient. The structure of Government is generally acknowledgedto be cumbersome and the public sector overste.fed. Public enterprises are, by and large, wasteful and inefficient. Social services, with minor exceptions, are non-contributoryand costly, especially medical care. The private sector is sophisticatedbut has done little to develop exports. It is widely believed, especially by the trade unions, that the import and distributive trade maintains unjustifiablyhigh consumer prices. The unions themselves are well-organized,and although some are willing in prinziple to make concessionsto meet the more austere conditions few have been made so far.

- Employers outside the public service have been shedding labor. Unemployment, which is officially26 percent of the labor force, is high, and the Government is understandablyreluctant to add to the numbers. Indeed, in the absence of a formal system of unemploymentcompensation, Government employment has been used as a relief mechanism. Although actual unemploymentis less than the official estimate, owing to unrecorded emigration,herein lies the most serious dilemma facing the Antilles: scaling down the staff of the public sector is essential if efficiency is to be improved and expendituresreduced, but doing so will add to the unc-mpioyment,at least in the medium term.

C. Objectives of an Adjustment Program ix. In the light of these problems, the twin objectivesof an economic adjustment policy must be: (a) to close the gap between public revenues and expenditures,which would go far toward closing the - iv - prospective gap in the Lalance of payments; and (b) to create the conditions for expanding jobs in the private sector, a step that, if directed towards export marKets, would also help the balance of payments. x. The Government has already adopted the first objective and has proposed to eliminate the budget deficit by 1988. However, several months have passed since the measures were announced and, even if implemented soon, they are unlikely to close the gap within the next two to three years. A more realistic goal would be to eliminate the deficit by 1990. xi. Lower oil prices, assuming they continue, should signiticantly reduce government expenditures, both directly and indirectly, by reducing the losses of the public utilities and other public enterprises. The World Bank's current forecast of the average per barrel price ot crude oil during the next fei;years is US$15-16 (in constant dollars). If realized, this level of prices would save the Government approximately NAt 1UU million a year, leaving a gap of some NAf 250 million to be bridged to offset the expected drop in profit taxes from the offshore sector. xii. This target is still large, representing nearly 12.5 percent of the 1965 GOP and nearly 28 percent of the combined expenditure of the Central and Curacao Governments in that year. However, the adjustment does not have to be made entirely by cutting expenditures; measures to enhance revenue can also be taken. In general, the mission believes that it should be possible to cover the gap without resort to measures that would impose severe hardships on the population, provided, of course, that corre-tive action is taken in timely fashion. Painful choices and sacrifices cannot be avoided. If action is not taken soon, much harsher measures will have to be imposed. xiii. Since the overriding objective is to improve efficiency, correc- tive measures should be directed to that end. They include a combination of the following options on the expenditure and revenue sides:

Expenditure Side

(a) Implement the recently announced measures that were expected to achieve savings in 1986 of about 5 percent, and reduce the wage and salary bill as soon as possibie by a further 10 percent. Fifteen percent of the combined Central and Curacao Governments' wage bill in 19b5 was NAf 77.5 million. Savings on that order could be achieved by a more effective budgetary and control system, including uaanpowerbudgetting and improved administrative practices; early retirement of redundant staff; and a reduction or at least a freeze on nominal remuneration. A fuller dis- cussion of this topic is found in Chapter II.

(b) Reduce and if possible eliminate the subsidies to the national airline (ALK), the water and power companies, the government- owned hotels and other public euterprises now running at a loss. All of these enterprises are overstaffed. In particular, the water distribution company is extremely inefficient, permitting - v -

extensivelosses of high-costdesalinated water and failingto collectbills. Its lossesin 1984 were NAf 54 million,not countingindirect subsidies from the Government,and NAf 90 millionof uncollectedbills were outstandingin March 1986. The cost of a cubic meter of water is ten times the averagein Europe and North Americaand is an importantcontributing factor in the high cost structure of the country. The best solution would be to merge the variousutility operations, integrate them with the facilitiesat the refinery,and bring in an experiencedteam to take over the managementand to train local counterparts. Betailsof the presentstatus of the publicutilities and recom- mendationsfor improvementwill be found in ChapterIV.

The futureof ALM has been affectedby the separationof Aruba which has opted for an "open skies"policy. However,even before separation,ALM was overstaffedand ran a loss of NAf 16 million in 1985-86;cumulative losses amountedto NAf 100 millionand more are on the horizon. The airlineis importantto the tourist and businesstrade of both countries,and it is to be hoped that an acceptablearrangement car. be workedout. A recentstudy by consultantsproduced suggestions for improvingoperations, but the airlineappears likely to make a continuingclaim on governmentfinancial support for some time.

The Governmentplans to divestitself in due courseof the hotels it owns on Curacaoand Bonaire,which it took over as the alter- nativeto their closingwhen the lossesbecame too heavy for their previousowners. The currentlosses are NAf12-15million a year. (Thissubject is pursuedin ChapterIII.)

(c) Developa rationaland supportablepolicy for socialservices and put the SocialSecurity Bank (SVB) and the civil servicepension fund (APNA)on a sound financialfooting. Both are underfunded, if not insolvent,as the Centraland IslandGovernments have not been payingin what they should but insteadhave been using the premiumsand contributionsto financetheir own deficits. The CentralGovernment pays the largerpart of the pensionsof retiredsalaried civil servantsout of its budget,which limits the savingsto be gainedfrom early retirement.Whereas employersand workerscovered by SVB contributeto its retirement fund, only employerscontribute to healthand accident insurance. Medicalcoverage, which can includetreatment abroad, is free for most people,and salariedcivil servantspay only 10 percentof their bills. The Governmentplans to increasethe individual'sshare of medicalbills; it shouldalso require contributionsto the insurancepremium. Bettercontrol of hospitaland medicalcosts is urgentlycalled for.

Provisionfor educationis more extensivethan elsewherein the region,the proportionof childrenattending primary and second- ary schoolsis high, and the standardof educationis also high. However,the structureand administrationof the educationsystem - vi -

appears to be overly rigid. Teachers are paid better than regular civil servants of comparable seniority and account for 65 percent of educationcosts, which amounted to an estimatedNAf 200 million in 19b5. Savings could be made by improving the flexibilityof the system and closing down or merging underused facilities. However, expendituresfor teaching supplies and building maintenanceshould probably be raised.

It is hard to say how much could be saved by reforms in this area, as the government accounts do not lend themselvesto an analysis of expenditureson social services. however, health, education, retirement and other services are a large item in the Government'sbudget, and the potential savings are therefore considerable.

Revenue Side

Apart from the loss of profit taxes from the offshore sector, there will be some loss of income tax revenue if the size of the public sector is reduced and employmentelsewhere does not increase correspondingly. Should the Governmentimplement the mission's recommendationof a pnased eliminationof protective duties and their replacementby a modest revenue-raisingtariff, there may be some revenue loss. However, the excise duty on gasoline has recently been increasedand is expected to yield NAt 21 million, which will partly offset these losses.

The marginal tax rates in the Antilles are progressive,with a top rate of 57.5 percent. Not much would be gained by increasing the rates; doing so might discourage productive effort and encourage evasion. A more fruitful course would be to strengthen the Tax Department and speed up the collectionot back taxes. Assessmentsare sometimesseveral years behind, and the reporting and collection of interest income in particular is a weakness that should be remedied.

Considerationshould be given to introducinga sales or value added tax, includingthe administrationand costs of such a tax. It would be more likely to yield the needed revenue increases, since so much income presently escapes tax. The argument against taxes on consumptionis that they bear more heavily on poorer than richer individuals. Exempting food and a limited range of other necessitieswould relieve the burden on the less affluent and also help to avoid a rise in the cost of living. The yield from a sales tax on other expendituresat, say, 15 percent, comparable to the value added tax in Europe, would be in excess of NAf 150 million a year, substantiallylarger than the yield from present excise taxes. The revenue could be used in part to remove lower paid workers from the income tax rolls. An extension of the hotel room tax to a tax on lodging and food would be consistent with practice elsewhere in the Caribbean. - vii - xiv. Most of the above measures would raise the expenditures of individuals and corporations through increased charges (and/or payment of arrears) for services and increased contributions to the social security and health funds. However, revenue increases are necessary and, from the public's viewpoint, a preferable alternative to a sharp drop in wages and salaries, which was tried but rejected in 1985. Moreover, these measures have the merit of introducing a sense of the value and cost of public services to both providers and consumers.

The Prospect for Creating More Jobs xv. The budgetary problem, although difficult, is capable of being solved within the present decade by a combination of the measures outlined above. The more serious, longer term problem is to make the economy more competitive and to create more productive employment. If Government employment is to shrink, more jobs will have to be provided in the productive sector, including jobs for those now unemployed and new entrants to the labor force. The principal employer in this sector, after the decline of oil refining, is tourism, including the trades and activities serving the industry.

Tourism xvi. After a period of extremely rapid growth, which has straine t capacity of the Governments, both Central and St. Maarten, to provide infrastructureand basic services for the rapidly growing population, the pace of expansion of tourism to St. Maarten appears to be slowing. About 300 rooms are expected to be added by 1990, bringing the total available rooms to about 3,000. This number should be sufficient for 280,000-300,000 hotel guests in that year, compared with about 225,000 in 1985. The slower pace of growth, while creating more jobs, will allow time for infrastructure and social services to catch up with demand and for St. Maarten to take the critical decisions necessary to preserve the island's assets and protect the environment. In this context, it is especially important to complete the preparation of a physical land use plan for the island (with appropriate regulations)and to take the steps necessary for its legal enforcement. xvii. In Curacao, rehabilitationof existing hotels, already underway, is a high priority, and the Government's decision to sell the public sector hotels to private owners is correct if it is to avoid a continuationof the operating losses of recent years. A reorientation of the operations of the Tourist Bureau is also necessary, with a greater focus on promotion in the North American market, emphasizing in addition to Curacao's attractions of climate, shopping and casinos, cultural tourism focused on the historic town of Willemstad, the water sports and diving markets, based on the island's protected bays and the new diving center, and business tourism related to the establishment of the new InternationalTrade Center (ITC). The program of renovation and redevelopmentof old Willemstad should con- tinue and incentives should be provided to attract private investment into this program. Given progress in these areas, and a strengthening of the government organization responsible for tourism, it is possible to foresee 180,000-200,000stopover visitors by 1990/91 when the first phase of the ITC is expected to be in operation. This figure compares with 125,000 in 1985. - viii - xviii. The prospects for further growth in tourism to Bonaire, based mainly on the diving market, would justify additions to capacity, but such investmentswill need to be coordinatedwith an improvementin air services to the island. While modest growth in visitor numbers to St. Eustatius and Saba may be expected, the potential in both islands is limited, and the contributionof tourism to the islands' economies will remain quite small.

Industry and Agriculture xix. Industry. If industry in the Antilles is to expand substancially,it will have to look mainly to the export market, as the domestic market is quite small. Because of the ample profits to be made in the protected local market, the policies have not encouragedentrepreneurs to pursue export possibilities. Experience all over the world strongly indicates that protection leads to inefficient,high-cost industries. Since the Antilles has to reduce costs and become more competitive, protection is not the route to follow. xx. The mission therefore recommends that existing protectivetariffs and other barriers to imports be dismantled over the next five years and replaced with a moderate and uniform taritf intended to raise revenue. This measure would give most companiestime to reduce their costs sufficientlyto compete with imports, whose prices must include freight, insurance and the tariff; a few companies, however, may need more time. If some companiesare unable to compete under such a regime, the implicationis that they are not in a competitive business for the Antilles. Where infant industry protectionis warranted, it should be given for a defined but limited period. Companiesmanaging to export could be given tax credits as an incentive; they could either reserve the credits until the company made profits, or sell them to others. xxi. Inquiriesby the mission indicate that of the 2,UUO people employed on Curacao in 82 companies,about half enjoy a natural protection because their products--e.g.,ice cream, bakery goods and some beverages- are not readily imported. Perhaps half of the remainderare in businesses that could compete without protection. The Export PromotionDivision of the Department of Economic Affairs has identified 24 Curacao companies as having export potential; a few have already realized it. A handful of companies on Bonaire and St. Maarten are also potentiallycompetitive. xxii. An appropriate strategy for the development of an export-oriented manufacturingsector would include the following:

(a) Expand the scope of the Free Zone in Curacao'sport to include manufacturingas well as transshipment. Encourage the establish- ment of hi-tech, hi-value ventures there and at the industrial park and halls.

(b) Set up an Investment and Export Development Authority (IWDA) for the whole Antilles to identify and evaluate pro4ecrs, promote foreign investment and explore export market possibilities. Subject to general policy guidance, IEDA would be independentof the Government in its work. It would coordinate or replace the work of the various ministries and agencies engaged in promotion - ix -

but would not take over any management,e.g., of the Free Zone. It would need an experiencedexpatriate team at the beginning, with the obligation of training local counterparts.

(c) Expand the resourcesof the Developmentbank, which would become the financing arm of IEDA and would work closely with the commercial banks and finance companies. Together they would develop a system of short-term credits and credit guarantees for exporters.

(d) Set up an autonomous non-profit foundation,jointly with the private sector, to identify skills (managerial,technical and labor) needed by industry and the public service; to train or arrange for the training of such personnel; and to help place trained personnel in jobs. In time the foundationcould become a training center for the region, linked with the International Trade Center and the University.

There are models for these institutionsand activities in both developed and developing countries. xxiii. The success of this strategy depends on a change in attitude on the part of all concerned: on the part of the Government to reverse its policy of protection and remove or liberalize restrictionsand regulations, in particular those affecting the establishmentof new business ventures and the employment of expatriates;and on the part of private industry and the trade unions to accept the implicationsof an export-orieLted industrial policy, and to moderate claims for high profits and wages. The Government also needs much more accurate and up-to-date informationthan is now available as the basis for intelligent policy making, and a more effective budgetary system for planning and controllingexpenditure. xxiv. Primary Production. Less than 1 percent of the labor force of the Antilles is engaged in agricultureand fishing. other islands of the Caribbean have at least 9 percent and some much more. Although soil and rainfall conditions are not as favorable in the Antilles (except for Saba) it should be possible to raise the proportion to, say, 5 percent by 1990. xxv. The evidence suggests that, under irrigation,the soil on Curacao and Bonaire can be productive and should be able to supply good quality fruits and vegetables to the hotels and local market. Extensionservices are needed to advise farmers on the use of irrigationand the types of pro- duction suited to local conditions. Piped water is expensive, but there are some storage dams that could be rehabilitated,and more could be built. Owners of idle land surroundingthe dams should be required to work it or lease it to existing or would-be farmers. xxvi. Some livestock are raised on a small scale, and more could be encouraged. On Bonaire, the new rice mill offers the possibilityof pro- ducing animal feedstuffs as a by-product. xxvii. In St. Maarten, as long as the tourist boom lasts, the demand for labor is likely to make agriculturalproduction uneconomic. However, St. - x -

Maarten is a natural market for Saba and St. Eustatius. Exploitationof the market is less a matter of production,especially on Saba, than of organization. Cooperativemarketing arrangementsneed to be developed. xxviii. Fishing has not been developed in the Antilles as an industry, although there is some local activity. St. Maarten has a Japanese freezing and storage plant for transshipmentof tuna. All the indicationsare that the conditionsexist in the Windward Islands for a profitablefishing industry, given the right technicalassistance and an appropriatesupply and marketing organization. The Marcultura Laboratoryon Bonaire and the Curacao Federationof Workers have proposed marine shrimp hatcheriesin their respectiveislands. Fishing thereforeseems well worth pursuing, both for local markets and for export.

The Arithmeticof Employment xxix. Dealing with the employmentproblem requires a longer perspective than that for closing the budget deficit, Ten years are suggested. xxx. The labor force of the Antilles numbers some 70,000 and will grow to 7b,500 by 1995 assuming no net migration. Unemploymentofficially stands at about 1l,OUU. Allowing for new entrants and a shake-out from Governmentservice, the number of job seekers would rise to some 27,50U by 1995. However, the official estimate of the numbers unemployedprobably makes insufficientallowance for individualsengaged in informal (i.e. unrecorded)activities, or who have emigrated. The figure of job-seekers used here is thereforean upper limit. xxxi. It would be a major achievement to reduce unemployment to 15 per- cent (about 11,500 by that time), which would require the creation of 16,000 new jobs. Tourism and the InternationalTrade Center together may generate 3,500 jobs directly or indirectly,leaving 12,500 to be found elsewhere. xxxii. Raising the proportionof the labor force in agricultureand fisheries to 5 percent would absorb about 3,500 more people. Some increasedemployment in transport,commerce and other services is to be expected. Absorbing the remaining 7,500 to 6,U00 or so in manufacturing industry would bring the proportionso employed to about 10 percent of the labor force, which is within the range of manufacturingemployment in other Caribbean Islands. It should be possible to accomplishthat goal with the right policy environmentand the kind of institutionalsupport suggested earlier.

Financing the Adjustment Program xxxiii. An adjustment program of the kind outlined in this report requires funds: (a) to cover the deficits that will occur in the budget between 1986 and 1990; and (b) to finance investment in capital projects and new or expanded business ventures. Sources of funding for one or both purposes include:

(a) Drawings on the country's foreign exchange reserves; (b) Domestic savings, including the repatriation of residents' savings held abroad; - xi -

(c) Aid from the Netherlands; (d) Foreignborrowing; (e) Privateforeign and local investment. xxxiv. Reducingthe budgetdeficit in equal annualsteps would require about NAf .50 millionof non-inflationaryfinancing; a fasterpace would requireless, a slower pace more. Drawingon the reservesis to be expectedin 1987 beforeother revenuesources can be mobilized. Beyond that, any furtherdrawings on the reservesshould be made prudentlyand shouldbe used for capitalprojects. xxxv. The outflowof capitalfrom the Antilleshas been risingin recentyears, partly to take advantageof the higherinterest rates abroad. Time depositsof Antilleanresidents, including pension funds and offshorefinance companies, in US banks amountedto US$1,082million at the end of 1985. Repatriationof a part of these funds shouldbe encouragedby offeringattractive interest rates. This shift is beginningto happen anywayas the differentialbetween foreign and Antilleaninterest rates narrows. Permissionto withdrawrepatriated funds in dollarsshould be considered. xxxvi. Antilleanresidents have also investedheavily in foreignsecuri- ties. The net outflowon this accountaveraged NAf 62 millionin 1983 and 1984; and it would have been largerin 1985 but for the restitutionpay- ments by Shellto the refinerypension fund. The Governmentcould attract the returnof these investmentsby issuingdevelopment bonds with a dollar or maintenanceof value clause. Foreignloans in moderateamounts for approvedcapital projects (but not for currentexpenditures) would also be appropriate,particularly as the Antilleshas a modestpublic foreign debt. This measurewould requirethe agreementof The Hague. xxxvii. Hitherto,Dutch aid has not been allocatedaccording to an agreed generalplan. The adjustmentprogram offers such a plan. In additionto aid for developmentprojects and technicalassistance, for which there will be an increasedneed, these funds might be allocatedto the SocialSecurity Bank and the civil servicepension fund to help them put their financial house in order and relievethe Governmentof part of the burdenof the retirementpensions for redundantstaff. Supportof the proposednew and enlargedinstitutions designed to promoteindustrial and agricultural investmentwould also be worthwhileuses. xxxviii. Finally,the designand promulgationof a credibleprogram for tacklingthe Antilles'fiscal, administrative and developmentalproblems would createthe conditionsfor privateforeign and local investmentin tourismand industrialventures. Large investmentsare requiredfor refurbishingand expandinghotel accommodationsand for the developmentof manufacturingenterprises. These investmentswill not occur unless investorsare confidentthat the NetherlandsAntilles is resolvedto create a viable,competitive economy. - xii -

Implementingthe AdjustmentProgram

xxxix. The programof major structuraland administrativemeasures proposedin this reportcall for continuoussupport and directionat the politicallevel if it is to be carriedout successfully.It needs also the support of an informedpublic, and the co-operationof the privatesector, the tradeunions and other non-governmentalinstitutions concerned with economicand socialaftairs.

xl. The programcuts acrossdepartmental boundaries, and involves reformsand actionsat both the Centraland IslandGovernment levels. it thereforerequires the establishmentof a mechanismto co-ordinate activitieswithin the programand to superviseprogress. Withoutsuch a mechanismthe impetusof the programwould quicklybe lost under the pressureof day-to-daybusiness and the particularconcerns of individual governmentsand departments. xli. One possibilitywould be to set up a high-levelcouncil, composed of a representativeof each of the islandsand the CentralGovernment, togetherwith a group of prominentcitizens knowledgeable about important aspectsof the nation'seconomic and social life. To give the Council (whichmight be calledThe NationalEconomic Development Council - or NEDC) due weightand authority,it shouldbe chairedby the Prime Minister, or a seniorminister reporting to him. A DeputyChairman, able to devote much of his time to the Council,would serve also as Chairmanof an ExecutiveCommittee responsible for carryingon the work of the Council betweenmeetings, which would be held not more than three or four times a year. The Counciland ExecutiveCommittee would be served by a small secretariatdrawn mainly,but not exclusively,from the civilservice.

xlii. The first task of the Councilwould be to draw up the list ot measuresand activitiesto be includedin the program,in consultationwith the Governmentsconcerned, and a timetablefor their implementation. Representativesof specialinterests, including the churches,private businessand the tradeunions, would be invitedto presenttheir views on the programor on measuresof particularconcern to them. After approval by the appropriateauthority, the departmentsor agenciesconcerned would be requiredto report to the Councilat regularintervals on their progress in implementingthe measuresfor which they were responsible.Since the programwould not have the characterof an integrateddevelopment plan with a definedstarting date, measuresand activitiesshould be initiatedas soon as they were approved. xliii. The Councilwould have the power to call for or commission studiesand reportson specialtopics, and to engageexperts as necessary. For this purposeit would need access to funds,which might be supplied from Dutchaid. Unlessconsidered confidential, such studiesand reports shouldbe published. The Councilitself should issue an annual reporton its activitiesand the progressof the program. Chapter I

ECONOMIC OVERVIEW

1.1 Following the separation of Aruba in January 1986, the NetherlandsAntilles now comprise five widely separated islands--Curacao, Bonaire, St. Maarten, St. Eustatius and Saba.1 Each has its own Island Government; in addition, there is a Central Government that handles certain common functions such as assessment of the profit and income taxes. The standard of living is relatively high, with an income per capita in 1984 of about US$6,600, almost equal to that in some industrial countries. Quite poorly endowed with natural resources but with many vacation spots and what has turned out to be a propitious location, the main productive activities in the Antilles economy have been oil refining, offshore financial services, tourism and transportationservices. Because of a lack of water and fertile soil, agriculturalproduction has accounted for less than 1 percent of employment and domestic value added. In addition, because the home market is small, it has not encouraged local manufacturing,while a policy of protection has discouraged exports. As a result, import volumes have been high and the major source of basic goods such as food.

A. Recent Economic Developmentsin the Netherlands Antilles

1.2 The economy of the NetherlandsAntilles has been heavily dependent on developmentsabroad, and, not surprisingly,the turmoil of the 1980s has had a profound impact. As with other countries, the world recession of 1980-82 led to difficult times. However, whereas the industrialcountries emerged from the recession with growth in output that has lasted up to the present time, and certainly longer than the recoveries from previous recessions, the Antilles has been experiencinga steady downturn, moderated only by the expansion of Government employment and services and by public utility soending. From 1981-85, real GDP (Tables 1.1-1.4) contracted by 1.6 percent a year, while output in 1985 was 4.8 percent lower than in 1979. Excluding the Government sector and public utilities, domestic value added declined by 3.8 percent a year. Government services and public utilities, however, grew by 5.5 percent and 9.2 percent a year on average between 1981-85.

1.3 Some of the decline in output can be traced to reduced activity in the industrial sector, of which 70 percent of the value added has been attributableto oil refining and the remaining 30 percent to a ship repair center and other manufacturing. However, the transport and communications sectors also showed a decline, nor does it appear that hotels and restaurantsescaped the downturn, except for St. Maarten. The main reason

1/ The Antilles are also referred to as the Windward Islands (St. Maarten, St. Eustatius and Saba) and the Leeward Islands (Aruba, Bonaire, and Curacao). As noted in the Preface, Aruba is the subject of a separate report. -2

Table 1.1 NetherlandsAntilles ExcludingAruba, CDP by Economic Activity.

(mllions of Mf at constanc 1980 prices)

1980 1981 1982 198 3a 19848 ±989a

Agricultureand Fishing 12.8 14.8 13.9 14.2 13.8 12.5 mining 9.9 6.8 7.2 7.5 7.9 7.5 Industryand Oil 313.1 280.9 281.2 259.9 240.9 222.8 Public Utilities 26.1 35.6 46.0 48.8 50.9 51.5 Construction 137.8 165.2 161.5 174.2 173.8 167.6 Trade 272.6 296.4 297.6 288.8 243.3 231.1 Hotels and Restaurants 86.4 86.6 80.0 78.6 76.8 76.8 Transportand Communications 320.2 282.6 231.7 204.8 209.5 202.5 Finance and Real Estate 224.1 260.0 247.4 257.6 257.5 262.9 PersonalServices 113.6 106.1 103.7 107.5 108.7 109.8 GovernmentServices 304.4 318.6 349.5 370.3 394.6 396.3 Imputed Bank Charges (-) 45.6 57.3 56.7 58.8 56.4 56.1 GOP 1,775.4 1,796.3 1,163.0 1,753.4 1,721.3 1,685.2

Source: Central Bureau of Statisticsand staff estimates. a. Estimates

Table 1.2 NetherlandsAntilles ExcludingAruba, GDP by Economic Activity, 1980-85 (millionsof NAf at current prices)

1980 1981 1982 1983 1984 1985

Agricultureand Fishing 12.8 16.6 16.6 17.3 17.2 15.6 Mining 9.9 7.6 8.6 9.2 9.9 9.5 Industryand Oil 313.1 316.0 332.1 311.8 262.6 245.3 Public Utilities 26.1 40.5 51.1 52.0 56.4 57.6 Construction 137.8 181.3 185.9 202.4 204.3 199.2 Trade 272.6 333.2 348.7 348.1 299.4 287.3 Hotels and Restaurants 86.4 98.6 100.0 101.6 100.8 101.2 Transportationand Communications 320.2 321.1 289.9 265.0 275.1 271.5 Finance and Real Estate 224.1 294.4 303.7 326.0 331.7 342.1 PersonalServices 113.6 121.7 132.1 '43.5 150.0 153.0 CovernmentServices 304.4 357.5 416.6 453.3 493.6 500.5 Imputed Bank Charges (-) 45.6 64.9 69.6 74.4 72.7 73.0 CDP 1,775.4 2,023.6 2,115.7 2,157.8 2,128.3 2,109.8

Source: Central Bureau of Statisticsand staff estimates.

a. Estimates. -3-

Table I.3 NetherlandsAntilles Excluding Aruba: GDP by EconomicActivity (percentageshares)

1980 1981 1982 1983 1984 1985

Agricultureand Fishing 0.7 0.8 0.8 0.8 0.8 0.7 Mining 0.6 0.4 0.4 0.4 0.5 0.4 Industryand Oil 17.6 15.6 16.0 14.8 14.0 13.2 PublicUtilities 1.5 2.0 2.6 2.8 3.0 3.1 Construction 7.8 9.2 9.2 9.9 10.1 9.9 Trade 15.4 16.5 16.9 16.5 14.1 13.7 Hotelsand Restaurants 4.9 4.8 4.5 4.5 4.5 4.6 Transportand Communications 18.0 15.7 13.1 11.7 12.2 12.0 Financeand Real Estate 12.6 14.5 14.0 14.7 15.0 15.6 PersonalServices 6.4 5.9 5.9 6.1 6.3 6.5 GovernmentServices 17.1 17.7 19.8 21.1 22.9 23.5 ImputedBank Charges(-) 2.6 3.2 3.2 3.3 3.4 3.3

Total 100.0 100.0 100.0 100.0 100.0 100.0

Table 1.4 NetherlandsAntilles Excluding Aruba, GDP by EconomicActivity, 1981-85 (growthrates)

1982 1983 1984 1985 1981-1985

Agricultureand Fishing -6.1 2.2 -2.8 -9.4 -4.2 Mining 5.9 4.2 5.3 -5.1 2.4 Industryand Oil 0.1 -7.6 -7.3 -7.5 -5.8 PublicUtilities 29.2 6.1 4.3 1.2 9.2 Construction -2.2 7.9 -0.2 -3.6 0.4 Trade 0.4 -3.0 -15.8 -5.0 -6.2 Hotelsand Restaurants -7.6 -1.8 -2.3 0.0 -3.0 Transportationand Communications-18.0 -11.6 2.3 -3.3 -8.3 Financeand Real Estate -4.8 4.1 0.0 2.1 0.3 PersonalServices -2.3 3.7 1.1 1.0 0.9 GovernmentServices 9.7 6.0 6.6 0.4 5.5 CDP -1.9 -0.5 -1.8 -2.1 -1.6

GDP, ExcludingPublic Utilities and GovernmentServices -5.2 -2.4 -4.4 -3.0 -3.8 - 4 - for the drop-off in tourism was a severe contraction in the flow of Venezuelan visitors that followed successive devaluationsof the Bolivar, carried out as a result of the decl.ne in the price of oil. It is also true, however, that St. Maarten's booming tourist trade is not fully reflected in the official figures (see Chapter III).

IndustrialActivitY

1.4 The reduction in the vorld demand for oil and the fall in oil prices obliged Shell to m.akesharp reductions in its refining output in the early 1980s, although substantialrecent investmentshad improved the cost competitivenessof the Curacao refinery. Then in October 1985, the refinery,which together with the Exxon refinery in Aruba had dominated industrial production in the Antilles for more than half a century, was closed and sold for a nominal amount to the Curacao Island Government. In turn, it leased the refinery to the Venezuelan State Oil Company for a term of five years, renewable for two-year periods.

1.5 Reductions in the wage bill, which were essential to the conclusion of the agreement with the Venezuelan Oil Company, have ensured the continuationof employment at the refinery, as well as of the busines3es and activities supporting it directly and indirectly. In total, this employment representsa significantportion of the overall labor force. The price, however, has been a reduction in the Curacao Island Government'snet income from refinery operations and a loss of foreign exchange receipts by the Central Government, estimated at Netherlands Antilles guilders (NAf) 60-70 million a year, compared to the more recent years under Shell's ownership.

1.6 There is a crude oil transshipmentcenter that operates in conjunctionwith the oil refinery. Developed in the mid-1970s, it has a storage and loading facility of nearly 2 million barrels a day. However, it suffered a major decline in business in 1984-85, largely attributable to improvementsin U.S. ports that permitted them to accommodate very large crude oil carriers and because of shifts in the patterns of the oil trade.

1.7 High wages and the strong appreciationof the U.S. dollar, to which the NA guilder is tied, have significantlyweakened the business of a hitherto importantdrydock company, in which the Curacao Island Government has held a majority interest since 1983. The recession in the worldwide shipping industry has also contributed to the decline in the company's operations,a fall-off that amounted to about 45 percent between 1981 and 1985. As a consequence,the Government has had to raise its direct subsidies to the-companyto NAf 22 million.

Offshore Financial Services

1.8 The principal importance of these services to the Netherlands Antilles' economy is their contributionto taxes and foreign exchange receipts, as their contributionto employment and domestic value added is small. In 1980, the offshore companies accounted directly for almost 17 percent of the consolidatedGovernment revenues, and by 1985 this share was estimated to have reached 40 percent. The foreign exchange inflows - 5 - associated with local expendituresand tax payments by the offshore companies rose from NAf 141 million in 1980 to NAf 217 million in 1985; in that latter year, they contributedalmost 27 percent of total current account inflows.

1.9 As is explained in Chapter III, the favorabletax arrangements between the Antilles and the United States that contributed to the buoyancy of this sector in recent years were largely nullified in July 1984 by changes in the U.S. tax law. As a result, tax receipts from the offshore sector are expected to fall sharply in 1987 and beyond.

Tourism and Commerce

1.10 The tourist industry in the various islands, which is described in Chapter III, has shown very diverse trends (Table I.5). C.-acao was severely affected by the sharp decline in Venezuelan tourism, whereas St. Maarten, given its greater orientationtoward the U.S. market, was largely unaffected. The Antilles as a whole did, however, experiencea modest recovery in 1985.

Table I.5 Tourism: Current Inflows and Outflowsa (millions of NAf)

1981 1982 1983 1984 1985

Bonaire Inflow 9.1 12.2 9.3 5.3 7.8 Outflow 3.0 4.0 3.9 4.3 3.7 Net 6.1 8.2 5.9 1.0 4.1

Curacao Inflow 286.3 240.9 138.9 123.4 126.3 Outflow 90.6 106.6 147.6 125.2 88.6 Net 196.3 134.3 -8.7 -1.8 37.7

St. Maarten Inflow 210.4 214.4 222.6 233.8 230.0 Outflow 5.7 6.9 6.2 11.8 7.1 Net 204.7 207.5 216.4 222.0 222.9

Source: Bank of Netherland Intilles,Quarterly Bulletin,various issues. a. Outflows include foreign exchange purchased by Antilleans for foreign travel. - 6 -

1.11 As to the tradeand commercialsector, it accountedfor 13.7 percentof localvalue added in 1985. Becausethis sectorserves primarilyas a distributionchannel for importedgoods for both residents and tourists,wholesalers and retailerswere hard hit by the declinein tourism. Their trade fell 16 percentin 1984 and stillfu-ther in 1985. Tradersserving domestic consumers were also affectedby the depressed economicconditions.

1.12 Businessat the Free Zone locatedat the Curacaoport also declinedalong with the drop in touristtraffic from Venezuelabut appears to have recoveredto some degree.

Other Sectors

1.13 Constructionactivity in the Antillesescaped the recessionof 1980-82,mainly because of the increasedhotel constructionin St. Maarten and low interestrates. The constructionindustry is dominatedby local firms that undertakesmall projects. Where largerscale projectsare involved,they are usuallycarried out by biggerforeign firms.

1.14 The agriculturalsector contributes less than 1 percentof local value added. Despitethe high level of unemployment,the agricultural sectorhas not been able to attractmore than 0.6 percentof the labor force,mainly because of the poor naturalresources of most of the islands,unequal land distribution,high opportunitycost of labor and consumerpreferences for importedfood.

Employment,Wages and Prices

1.15 The qualityof the data in the Antillesand Aruba is very poor. For example,while the missionwas able to estimategross domesticvalue added by economicactivity, the GDP estimatesderived from the expenditure side were unsatisfactory.The problemswere magnifiedwith respectto the labordata. The labor force,employment and unemploymentdata are based on the 1981 census,which showedsubstantially smaller figures than the Civil Registerof the same year, possiblybecause of emigrationnot recordedin the Register(Table 1.6). Statisticson employmentand wages are not recordedregularly, but an indicationof later trendsin employmentand unemploymentcan be derivedfrom a sampleof large firms; from informationon the numberof layoffsapproved by the Departmentof Labor and SocialAffairs; and from the changesin the directionand compositionof GDP.

1.16 Bearingin mind these problemsand basedon limitedinformation, the labor forcegrew rapidlyin the 1970s,and therewas a concomitant doublingin the rate of unemployment,which went from about 8 percentto almost19 percentin 1981. The rise in the labor force reflectedthe coming-of-ageof the baby boom and an increasein the numberof women seekingwork.

1.17 While this trend deceleratedin the 1980s,so did employment, which fell by an estimated6.5 percentbetween 1981 and 1985. As a result,there was a furtherincrease in unemploymentto about 25.0 percent. Withintotal employment, that in the privatesector dropped - 7 -

Table I.6 NetherlandsAntilles: Poputation-1981 CEsus and Civil Register' (thousands)

Civil Register 1981 Percent 1981 Census Difference

Bonaire 9.222 8.753 -5.1 Curacao 164.579 147.388 -10.4 St. Maarten 15.919 13.156 -17.4 St. Eustatius 1.325 1.358 2.5 Saba 1.0il 0.965 -4.5

Total 192.056 171.620 -10.0

Source. Central Bureau of Statistics.

Table 1.7 Netherlands Antilles: Basic Data on Labor and Employment, 1981

Labor Force Labor Participation Percent (%) ot Island Force Rate (U) Employed Unemployed Labor Force

Bonaire 3,426 39.14 3,031 395 11.53 Curacao 59,296 40.23 47,290 12,006 20.25 Saba 39 41.35 370 29 7.27 St. Eustatius 544 40.06 465 79 14.52 St. taarten 6,497 49.38 5S,998 499 7.68

Total 70,162 36.53 57,1U4 13,008 18.54

Source: Central Bureau of Statistics, 1981 Census. sharply, partly as a result of the recession and partly because a number of hotels were taken over by the Government during the period. Government employment exclusive of the hotels and other publicly owned enterprises, on the other hand, rose, although not enough te offset fully the decrease in the private sector (Table I.8).

1.18 At the sectoral level (Table 1.8), the largest loss in employment between 1981 and 1985 occurred in o4l refining and industry;there was a further drop in 1986 as a result of the change in management and reduced employment at the Curacao oil refinery. The only sectors that showed overall gains during this period were Government services and public utilities.

1.19 Average annual wages in the NetherlandsAntilles (Table I.9), although somewhat lower than those in the Netherlandsand other industrial countries, exceed those of other countries in the Caribbean by 40-100 percent. Fringe benefits are also generous. Since 1982, some enterprises have sought to reduce their labor costs through attrition and cuts in wages and benefits in an effort to counteract their depressed output and profitability. A May 1985 proposal by the Central Government to reduce wages by 15 percent across.the board met with strong opposition and had to be discarded several months later. Subsequently,in September 1985, a 10 percent increase in the tax scale on wages and incomes was introduced,but it, too, was revoked five months later. Finally, in early 1986, vacacion allowances and indexationwere suspended for civil servants.

Table 1.8 NetherlandsAntilles (includingAruba): Employed Persons by Sectors, 1981 and 1985

1981 Estimates 1985

Agriculture and Mining 497 457 Oil and Industry 8,428 5,628 Construction 7,029 6,336 Public Utilities 1,697 1,820 Tourism and Commerce 21,865 19,110 Financial Services 4,941 4,956 Transport and Communications 5,876 5,434 Public Sector 30,232 31,743 Not Ascertained 165

Total 80,730 75,474

Source: Central Bureau of Statisticsand staff estimates on the basis of the InterdepartmentalWorking Group (IDW), Bedrijvenenguet1985, value added by sector and discussionswith Antillean officials. -9-

1.20 To arrest the rise in the wage level, it was decided not to apply any cost of living adjustment to minimum wages in 1985 and 1986. However, this decision had no practical effect, since inflation in those years was less than the 4 percent at which indexationbegins.

1.21 As to prices, because of rhe openness of the economy, changes in domestic prices are largely determined by price movements in the economies of the major trading partners of the Antilles, notably the United States. Movements in the U.S. dollar exchange rate affect the direction of trade and thus the consumer price index. Inflationdecreased gradually from a 15 percent annual average in 1980 to about 2 percent in 1984 (Table I.10); during 1985, it was contained at 0.3 percent in Curacao and Bonaire. Although prices are now stable, they are still generally high. One reason, it is widely maintained, is the limited number of importers and their close ties to suppliersabroad.

Table I.9 NetherlandsAntilles: Minimum Wages Per Montha (NAf)

categoriesb - 1 2 3 4

1980 713 512 430 206 1981 817 587 493 236 1982 920 654 520 262 1983 922 688 583 278 1984 925 688 595 284 1985 925 688 595 284

1985 in U.S. Dollars 514 382 331 158

Source: Data provided by the Antillean officials.

a. For age 20 and older. Wages for youth age 16 are 60 percent of the minimum wage, a rate that increasesby 10 percent for each additional year until age 20, when wages equal 100 percent of the minimum wage. b. The distributionof the different categories is: Category 1: manufacturingand constructionexcluding electronics, textiles and clothing Category 2: financialservices, transportation,hotels and restaurants Category 3: agriculture,commerce, electronics,textiles and clothing Category 4: household personnel. c. Hotel and restaurantemployees receive, in addition to the minimum wage, 10 percent of the services charged. - 10 -

1.22 Some products are subject to price control, with maximum prices set by the Government as a percentage of the c.i.f. prices. This system has only a small positive impact on the local price structure, the reason being that overinvoicingand excess profits occur, if at all, at the earlier stages of trade. Quotas and other non-tariff restraints on trade with respect to commoditiessuch as cooking oil, pork meat, soap and other foodstuffs and necessitiesalso contribute to an artificiallyhigh price level.

Table I.10 NetherlandsAntilles: Changes in the Consumer Price Index for the Leeward Islands (excludingAruba in 1984 and 1985) (annual changes in percent based on index December 1984=100)8

1980 1981 1982 1983 1984 1985b

Food 14.5 11.8 7.0 1.9 2.5 -1.7 Clothing 9.0 12.5 8.4 6.4 -3.1 -2.7 Housing 20.9 14.3 0.7 1.7 2.1 0.3 Transportation 15.0 11.8 6.3 2.3 4.3 5.5 Overall Consumer Price Index 14.9 12.2 6.2 2.7 2.2 0.3 Memorandum Item: Consumer Price Index of the United States 13.5 10.4 6.2 3.2 4.3 3.7

Sources: Central Bureau of Statistics, Economic Profile; Bank of the Netherlands Antilles, Quarterly Bulletin;and IMF, InternationalFinancial Statistics.

a. In December 1984, the CPI, which used to be computed for the combined Leeward Islands and which was based on the commodity compositionof 1975, was split into an index for Aruba and one for Curacao and Bonaire and was based on the commodity compositionof December 1984. b. Through September 1985.

B. Public Finance

1.23 As noted, there are a Central Government and five Island Governments in the NetherlandsAntilles. The Central Government is responsible for collecting indirect taxes, such as excise taxes, while the Island Governmentscollect direct taxes, such as thofe on income and profits. The Central Government is, however, supposed to assess the direct taxes and monitor their collection. It also shares its indirect tax receipts with the Island Governmentsannually. The small Island Governments keep their own tax receipts, except that Curacao (and before - 11 - its separation,Aruba) transfers 25 percent of its direct tax revenues to the Central Government, and St. Maarten recently agreed to do so. The budgetary deficits of the smaller Island Governmentshave been financed through transfers from the Central Government. As part of the separation agreement, a SolidarityFund was established to which Curacao contributes 55 percent, Aruba 25 percent and the NetherlandsGovernment 20 percent. These funds are to be used to fUnance the deficits of the smaller Antillean islands.

1.24 The budgetary system suffers from a number of problems. The budgets are often incompleteand are not always current, nor are they fully consistentacross Governments,particularly since each Government prepares its own budget.

1.25 The Social Security Bank (SVB), the Post Office, the TelecommunicationsAgency and the public utility companies are independentlymanaged Governmentunits. Their revenues and expenditures are not included in the Government budget, but their operating surpluses or deficits do enter the Government budget as receipts or subsidies. Other public enterprises recently acquired by the Central or Island Governments that maintain separate accounts are the national airline, ALM, the Curacao Dry Dock Company, the oil refinery, ISLA, formerly owned by Shell, and a number of hotels. Except for the refinery, they have all been incurring losses.

1.26 The public financial institutionsconsist of the Central Bank, the Governmentcivil service pension fund (APNA) and the Girodienst,a savings bank owned by the Curacao Island Government.

Budgetary Developments,1980-85

1.27 Total Government revenues (Table I.11) increasedby about 60 percent between 1980 and 1985, a reflection primarily of the increase in fiscal eceipts from the oi.fshoresector and, to a lesser degree, the contribu.ionsof the oil operations' import duties and foreign exchange tax. In Curacao, revenue from the offshore sector postponed the need for urgent fiscal action by the Island Government,but the Central Government had to take various measures in 1983 to help stem the increase in expendituresin the face of stagnatingrevenues. It raised the custom duties on selected imported goods, the gasoline excise tax and the foreign exchange tax rate, which went from 0.8 to 1.3 percent.

1.28 Increased indirect tax revenues and large increases in the revenue-sharingtransfers from Curacao and Aruba were unable to reverse the deterioratingtrend in the Central Governmentbudget. As noted, miore drastic measures to reduce wages in the public sector (and throughout the economy) and to raise taxes were imposed in 1985 but later rescinded.

1.29 Expendituresfor the Central Government'scivil service and subsidies to the public enterprises,together with expendituresfor purchases of goods and services, increasedduring the 1980-84 period by 72.54 percent. There was a 3.5 percent reduction in expendituresin 1984 and an estimated 1.8 percent reduction in 1985. - 12 -

1.30 During the 1980-84 period, the revenues of the Curacao Island Government increasedrapidly and were 45 nercent higher in 1984 than in 1980, after the revenue-sharingtransfers to the Central Government. During the same period, however, expendituresincreased at a faster pace, and in 1984, the Curacao Governmentsuffered a budgetarydeficit, after the transfers, for the first time in the 1980s.

1.31 The budget deficits of the Central and Curacao Governmentsduring 1984 and 1985 were partly financed by domestic bank credit and partly by the proceeds of a crisis tax. However, the Governmentsalso postponed their payments to the Social Security Bank and the civil service pension fund. Because the Antilles cannot borrow abroad without the approval of the Governmentof the Netherlands,they have not resorted to that source

Table I.11 NetherlandsAntilles: SummaryOperations of the Central Governmenta and the Island Governmentof Curacao (millionsof NAf)

1980b 1981 1982 1983 1984 l985c 1986

Central Government (Budget)

Revenue 216.0 352.5 400.8 467.8 473.7 476.8 378.1 Expenditures 244.2 297.1 413.8 430.6 456.5 459.9 431.4 Balance -28.2 28.0 -13.0 -37.2 17.2 16.9 -53.3

Central Governmentd(Liquidity Basis)

Revenuee 190 206 286 302 338 334 Expenditures 225 259 354 353 347 350 Balance -35 -53 -68 -51 -9 -16

Curacaod (LiquidityBasis)

Revenuee 397 445 506 568 578 584 Expenditures 386 438 498 541 594 612 Balance 11 7 8 27 -16 -28

Source: Bank of the NetherlandsAntilles and staff estimates. a. Excludes estimatedexpenditures of the Central Government in Aruba, and revenue transfersfrom Aruba. b. Audited. c. Estimates. d. Derived from Governments'position with the Central Bank. e. After revenue-sharingtransfers. - 13 - of funds. In fact, the only public external debt the Antilles owes is to the Netherlands,except for a small amount owed to the European Development Fund. 2

The 1986 Budget

1.32 The Central Government budget for 1986 forecastsa deficit of NAf 53 million, in anticipationof a 25 percent reduction in the revenue- sharing receipts from the islands and a 30 percent reduction in import duties and excise taxes (see Table I.11). The actual deficit could, however, prove to be higher.

1.33 Because of the difficulties foreseen in financing the 1986 deficit, measures to cut expendituresand increase excise taxes have been considered. So far, the only action ha. been the impositionof the excise tax on gasoline of 20 cents a liter in St. Maarten; it is expected to raise around NAf 20 million. For the first time, St. Maarten will also participate in the direct tax revenue-sharingscheme that exists between the Central and Curacao Island Governments. A tax assessor was recently appointed to St. Maarten, but until he has had time to organize the system, the amount of income tax receipts of the island and hence the Central Government'srevenue from this source cannot be;estimated.

1.34 On the expenditure side, the Central Government announced an early retirement scheme, a hiring freeze and suspensionof the biennial civil service wage increase due in 1986. In addition, it has called for an unspecifiedreduction in medical benefits, together with a 20 percent reduction in non-wage operating expenses. The Government estimates that these savings in expenditureswill amount to NAf 21 million in the 1986 budget, which will include NAf 12 million from the decline in operating expenses.

1.35 The savings from the carly retirement of staff may not be large, since the Central Government does not contribute to the civil service pension fund and thus has tc pay its pensions out of current revenues. The operatingand medical benefit reductions are not specified and have not yet been approved by the Parliament.

1.36 The Curacao Government announced similar measures that it estimates will yield NAf 52 million in savings, but they have not yet been introduced.

1.37 The prospects for reducing the fiscal deficits of the Antilles Governmentsand measures that would contribute to this end during the next few years are discussed in Chapter II.

21 However, the external financing of ALM, the national airline, should probably be considered as foreign public debt. - 14 -

C. Money and Credit3/

The BankingSystem

1.38 The bankingsystem of the NetherlandsAntilles consists of the centralbank, i.e., the Bank of the NetherlandsAntilles (BNA.), the commercialbanks and rhe GIRO system,which is operatedby the Island Governmentof Curacao. There are also a numberof non-bankfinancial entities,such as pensionfunds, life insurancecompanies and the offshore financialcompanies. The BNA has supervisorypower over the country's bank and non-bankfinancial institutions, as well as over the offshore financialcompanies. Althoughthe BA has the power to imposemandatory regulationson bank liquidityand bank lending,it has reliedon gentlemen'sagreements with the commercialbanks to influencemonetary developments.

1.39 The power of the BNA to conductan effectivemonetary policy has been limitedby the opennessof the economy,its dependenceon the Central Government,and the autonomousand growingprocess of currency substitution.Monetary policy has traditionallybeen directedat ensuring exchangerate stabilitythrough the maintenanceof an adequatelevel of officialexternal reserves. To implementits policy,the BNA has relied on infrequentchanges in the liquidityrequirement rather than on changes in the discountrate or open marketoperations.

1.40 The BNA has been much more effectivein controllingdeficit financingby the CentralGovernment. To limitthat option,the bank imposeda ceilingon its advancesback in 1979. However,the ceilingwas exceededin 1985. To preventthis from happeningagain, a new BNA statute was approvedin late 1985 that limitsthe amountof advancesthe BNA can extpndto the CentralGovernment to 10 percentof the total tax revenueof the precedingyear; greateraccess to centralbank financingrequires approvalby the Parliament.However, the BNA stillhas the optionof purchasingTreasury bills and bonds.

1.41 The BNA has also been exercisingcontrol over the commercial banks'net foreignasset positionthrough the so-calledB-9 regulations since the early 1970s,with only minor modifications.At times,it has encouragedthe banks to depositexcess funds with it by offeringinterest rate incentives.

1.42 The year-by-yearrate of growthof broad money (M2) slowedfrom 5.1 percentin December1983 to 2 percenta year later and then turned negativein 1985,although it did reaccelerateto 5.3 percentin December 1985. An inflowof fundsattracted by the relativeimprovement in Antilleaninterest rates after the declineabroad, and the paymentsby Shell to the refinerypension fund, appearto have been the main cause of the rise in money supply.

3/ Informationin this sectionwas derivedlargely from recentIMF reports. - iS,-

1,43 Changesin the measuredmonetary aggregates appear to have been increasinglyinfluenced by currencysubstitution (mainly U.S. dollarsfor domesticmoney). The monetaryauthorities have no effectivecontrol over the purchaseand sale of foreigncurrency notes by residentsand therefore do not know how much is circulatingin the economy. It appears,however, that currencysubstitution has reacheda fairlyadvanced stage, especially in St. Maarten.

The ExchangeRate

1.44 The NetherlandsAntilles guilder has been peggedto the U.S. dollarsince December1971 at a rate of NAf 1.79 per U.S. dollar. As a result,in 1980-85the NA guilderappreciated strongly against the currenctesof its main tradingpartners other than the UnitedStates. However,as most trade in merchandiseand servicesis conductedwith the UnitedStates, local priceshave tendedto followU.S. prices (see Table 1.10). However,the most recentdata availableindicate that consumer prices are scarcelyrising.

1.45 The high cost structureof the Antilleaneconomy and the recent apparentflight of capitalsuggest to some observersthat the guilderis overvalued. Some have proposeda once-for-allor step-by-stepdevaluation for these reasons. The authoritieshave resistedsuch suggestionson the groundsthat havinga fixed exchangerate with the U.S. dollarhas maintainedconfiaence in the currencyand contributedto the low rate of inflation. The effectiveexchange rate of the NetherlandsAntilles guilder has declinedwith the recentdepreciation of the U.S. dollar,and the case for a furtherdevaluation in presentcircumstances is not strong. The immediateeffect would probablybe to provokedemands for higherwages in order to offsetthe increasedcost of importedfood and other consumer items on which the economyis so dependent. However,for the longerterm, the questionof the appropriateexchange rate shouldbe kept under review as part of the programof policyand institutionalchanges designed to stimulatethe productionof food for domesticconsumption and manufactured goods for export. Similarconsiderations apply to tourism,except in St. Maartenwhere the touristindustry operates largely in U.S. dollarsand has littledifficulty in fillingits availableaccommodations. balanceof Payments

1.46 The export earningsof the NetherlandsAntilles derive mainly from services:tourism, the operationsassociated with oil refining,the financialactivities of the offshoresector, and harbor-relatedservices. Merchandiseexports are small and consistof re-exportsof goods via the Free Zone4 /, small quantitiesof oil and oil productsand a limiteiamount of locallymanufactured goods. As few goods are producedlocally, Imports of merchandisehave been very large,equivalent to about two-thirdsof GPD. Receiptsand paymentsof investmentincome have resultedin

4/ These exportsconsist ef duty-freesales to touristsand are normally offseton the importside of the currentaccount. As they are an importantpart of merchandiseexports, the latterare affected significantlyby developmentsin the tourismsector. - 16 - surplusesin recentyears, in contrastto the substantialdeficits in the early 1980s. Privateremittances, meanwhile, have given rise to steadily growingoutflows. (See Annex,Tables A12-15.)

1.47 All in all, in 1981 and 1982, largesurpluses were realizedon the currentaccount--they averaged around NAf 100 million. The situation changeddrastically in 1983,however, when a deficitof NAf 82 millionwas recorded,and there was no improvementin 1984. In the first nine months of 1985, the deficitreached record proportions, but there was a recovery in the last quarterbecause of large paymentsby the formerShell refinery on Curacaoand a drop in outflowson accountof investmentincome payments and privateremittances. As a result,the currentaccount deficit was limitedto NAf 8 millionfor the year as a whole.

1.48 On average,the foreignexchange receipts from servicesamounted to about 85 percentof total currentinflows in the period1980-85. The relativecontributions of the four main servicesectors changed markedly in the course of this period. Whereastourism generated 40 percentof total serviceinflows in 1980-82,its share droppedto only 30 percentin the followingthree-year period. In 1980, transportationservices contributed over one-fourthof the servicesector inflows,but in 1983 their share droppedto 16.5 percent. This sectorhas recoveredsince and now representsabout one-fifthof total serviceinflows. The inflowsgenerated by the two large refinerieson Curacaoand Aruba fell rapidlyafter reachingrecord levels in 1982. In fact, the only reallybuoyant sector over the whole periodwas the offshoresector--its share in total service inflowsrose from less than 14 percentin 1980 to 30 percentin 1985.

The CapitalAccount

1.49 Net privatepurchases of foreignsecurities increased markedly after 1982. While a substantialpart of these purchaseswere on accountof the pensionfunds, institutional investors and some privatecompanies, residentsalso contributedsignificantly to the net outflows,as they took advantageof the interestrate differentialsbetween the Antillesand the UnitedStates. The sharp declinein net purchasesof securitiesin 1985 reflectedthe restitutionby Shell of the investmentsmade by the Shell pensionfund in the precedingyears. There was a sharp increasein externalborrowing in the last three years,the resultof the purchaseof two airplanesby the Antilleanairline company (ALM) and the refinancingof a large loan by a transshipmentcompany on the WindwardIslands. Net privatecapital outflows amounted to NAf 125 millionin 1984, but given the capitaltransactions associated with the takeoverof the Shell refinery,a net capitalinflow of NAf 1.5 millionwas recordedin 1985. It is importantto note that Dutch capitalaid does not appear in the capital account.

OverallBalance of Paymentsand ForeignExchange Reserves

1.50 The overallbalance of paymentsran substantiallyin deficit duringthe first nine monthsof 1985, but transactionsassociated with the takeoverof the Shell refineryproduced a large surplusin the last quarter of the year (NAf 122.2million). This surplusfollowed two years of losses - 17 - in internationalreserves. At the end of 1985, net internationalreserves rose to a total of NAf 438.2 million,representing 2.9 monthsof imports,a littleless than in 1982 and 1983 (3.1 months) but a littlemore than in 1984 (2.6 months). Internationalreserves increased in March 1986 to a littlemore than six months of imports. However,this increasereflects the Shell payments;without them the ratio would have been much smaller.

OfficialForeign Debt and Debt Service

1.51 Officialforeign debt of the NetherlandsAntilles consists of developmentaid (otherthan grants)received from the Netherlandsand from the EuropeanDevelopment Fund. Developmentaid from the Netherlands,which is denominatedin Dutch guilders,is by far the largestcomponent of officialexternal debt. On average,it grew by 5.6 percenta year between 1978 and 1984 and amountedto Netherlandsguilders 780.0 million (approximatelyNAf 394 million)at the end of 1984. Servicepayments, includingamortization and interest,amounted to NAf 47 millionat the end of 1984 or 1.1 percentof currentinflows. Servicepayments, after deductingDutch aid to financeits loans,are believedto have increasedto an estimated1.7 percentof currentinflcws in 1985,in view of greater amortizationpayments and the appreciationof the Dutch guildervis-a-vis the Antilleanguilder. On this basis, the ratio of officialdebt service paymentsto Governmentrevenues is approximately8 percent,which is moderate.

1.52 As noted, the nationalairline, ALM, has taken out loans for the purchaseof two aircraft. These loans are guaranteedby the Central Governmentand should be consideredpart of the publicdebt. The amount outstandingat the end of ALM's latestfiscal year was NAf 66.8 million. Annualservice payments on the loans are relatedto ALM's revenue. In 1984-85,they were US$4.9million and in 1985-86,US$5.2 million. If added to the Government'sservice payments, these amountswould raise the ratio of servicepayments to revenuefrom about6 percentto 9.5 percent. This level is still moderatebut suggeststhat any furtherindebtedness should be incurredprudently and for high prioritypurposes.

1.53 The CentralGovernment has also guaranteedloans for various projectsof the IslandGovernments; these are mostly local currencyloans, but some NAf 13 millionequivalent in U.S. dollarsand Dutch guilderswas outstandingat the end of 1984, The outstandingamount of all loans guaranteedby the CentralGovernment on December31, 1984, payablein local or foreigncurrency, was NAf 239.2 million. Of the total now outstanding (a recent figureis not available),the Governmentof Aruba has assumed responsibilitytor 30 percent.

DevelopmentAssistance

1.54 Developmentaid to the Antillesis providedby the Netherlands, and the EuropeanDevelopment Fund. Dutch aid is distributedin the form of grantsand low interestloans carryingan interestrate of 2.5 percenta year. The loans are for a term of 3U years, includingan eight-yeargrace period. Aid in 1986 is NAf 194.165million and is devotedto physical infrastructure,technical assistance and the industrialdevelopment fund. - 18 -

Chapter II

CLOSING THE BUDGET DEFICIT

2.1 As the previous chapter noted, the Netherlands Antilles faces a serious and growing budget deficit. Closing the gap between revenue and expenditures is perhaps the most serious issue facing the country today. This chapter discusses the s,ze of the gap to be bridged between 1986 and 1990 and outlines various options that the Central and Curacao Island Governments can take on both sides of their accounts.l/

2.2 The fiscal deficit of the Central Government in 1985, excluding Aruba, is provisionally estimated to have been NAf 16 million after the transfers from Curacao (NAf 134.6 million). As part of the settlement leading to the separation of Aruba from the Netherlands Antilles; Aruba agreed to make an annual payment to the Solidarity Fund, which means in effect that the previous transfer payment to the Central Government will continue at a lower level. The payment in 1985 amounted to NAf 4.9 million, and in the full year 1986 is estimated to amount to NAf 27 million. The indirect taxes formerly collected by the Central Government in Aruba are not shown separately in the accounts, but for present purposes the loss of that income may be assumed to be offset by savings on the salaries of Central Government employees stationed on Aruba that its Government took over. The fiscal effect of the separation of Aruba is therefore likely to be small. However, it will permit a significant reduction in the number of Central Government civil servants in Curacao that were dealing with Aruban affairs, although so far this decrease has not taken place.

2.3 A major change in the fiscal situation arises from the expected drop in tax receipts from the offshore financial companies. The size and rate of the drop are uncertain, as they depend largely on the pace at which outstanding bonds and other borrowings concluded before 1984 are refinanced at the prevailing lower rates of interest. Tax receipts from the offshore sector actually rose in 1985 and are still rising in 198b because of the payment of tax arrears. However, the tax.authorities estimate that revenue from this source will decline from NAf 375 million in 1985 to NAf 100 million in 1989-90. When this loss is added to the com- bined deficits of the Central and Island Governments in 1985, a revenue-expendituregap between NAf 300 million and NAf 350 million will have to be closed by 1990 if the consolidated budget is to be balanced.

1/ The financial relationships of the other islands are not significant enough to have more than a minimal net effect on the budget of the Central Government, and they are therefore omitted in the ensuing analysis. (As noted in Chapter I, the Central Government collects indirect taxes in these islands but carries the cost of certain services it provides and makes an annual transfer of funds to them. Unlike Curacao, these islands do not ski e their direct tax revenues with the Central Government, except that St. Maarten has agreed to do so in the future.) - 19 -

A. Keducing Expenditures

2.4 The expendituresof the Central and Curacao Island Governments in 1965, after deducting the estimated wages and salaries of the Central Government civil servants on Aruba,2/ are shown in Table 11.1

Table II.1: Public Expendituresin 1985 (NAf million)

Current Central Curacao Expenditures Government Government Total

Wages & Salaries 242,2 274.5 Less Aruba 42.0 - 20U.2 274.5 474.7

Transfers to Islands 20.3 20.3 liouseholdSupport 9.8 9.b Subsidies 25.1 109.4 134.5 Interest 24.9 14.3 39.2 Other Purchases of Goods and Services 66.1 1b4.8 230.0 346.4 5b3.0 9U9.4

Source: Appendix Tables A4 and Ab; and staff estimates.

2.5 Cutting public expenditurescannot be avoided if the budget is to be balanced. Since it is important to eliminate waste and raise the level of efficiency in the economy, the cuts should be made in those areas where the most waste and inefficiencyoccur. If administeredalong these lines, the reductionwill do the least harm to the general welfare. In fact, in the long run it would improve welfare by making the economy more competitive.

2.6 There are four areas where substantialeconomies can be made (more details are provided in subsequentchapters):

(a) Subsidiesto public enterprises,amounting to NAf 134.5 million in 1965 and covering the losses of the water and power utilities, the drydock company, the national airline and the Government-ownedhotels. So far as the water and power systems are concerned,especially the for-er, the cost of waste and inefficiencygoes well beyond the subsidiesthemselves and contributesto the high cost structure of the economy. The aim should be to eliminate the losses by 1990 and radically improve the efficiencyof these enterprises.

(b) Overstaffingand inefficienciesin the public sector.

EEstimates provided by Department of Finance, Aruba. - 20 -

(c) The proliferationof Governmentdepartments and agenciesand overlapof functionsbetween the Centraland IslandGovernments.

(d) Socialservice expenditures, especially hospital and medical benefits,which not only representa heavy burdenon the budget but also encouragethe inefficientuse of resources.

2.7 Pendingthe outcomeof a study that is to be undertakenby con- sultants,it is impossibloto estimateprecisely the savingsin manpower and expendituresthat could be achievedby a more rationalorganization of governmentand improvementsln administration.Nevertheless, since reduc- tions have to be made, a targetshould be set now for a phased reductionin the salaryand wage bill. Severalmeasur"s--a hiring freeze, an early retirementscheme and a stop on automaticwage increases--wererecently announcedby the CentralGovernment; they are expectedto yield savingsof NAf 9 millionin 1986,or a little less than 5 percentof the 1985 bill (less Aruba). The CuracaoIsland Government has announcedsimilar measures, These steps are a good beginningbut need to be implementedmore extensivelyand to be supplementedby additionalmeasures. It shouldbe possibleto achievefurther reductions of at least 10 percentby 1990 by a combinationof a scructuralreorganization of the Governments,improved administrativepractices, retirement of redundantpersonnel and a reduction (or at least a standstill)in averageremuneration. These additional measureswould yield savingsof about NAf 46 million(in 1985 guilders)by 1990, for total savingsof almost NAf 70 million,assuming that the 1986 measuresare implementedand continued.

2.8 Cuts in non-wageoperating eosts, so far unspecified,have also been announcedby both Governments,for an estimatedsavings of NAf 12 millionfor the CentralGovernment and NAf 52 million(including savings in tbe wage bill and other operatingcosts) for the CuracaoIsland Government.These costs could be furtherreduced during the followingfour years. If items that eithercannot or shouldnot be reduced (for example, intereston debt and householdsupport) are omitted,the remainingopera- ting costs of the two Governmentsamounted to about NAf 230 millionin 1985. Reducingthese costs by 15 percentby 1990 would yield about NAf 35 million.

2.9 The combinedsavings in expendituressuggested above would con- tributeabout 70-80 percentof the NAf 30U-350million required to close the budgetdeficit by 1990, as follows: NAf Millions

Eliminationof subsidies 135 Reductionin salaryand wage bill 70 Reductionin other operatingcosts 35 240

2.10 The drop in crude oil prices,assuming that pricesstay at some- thing like the presentlevel, will contributesubstantially to a reduction - 21 -

in Government expend4 ures both directly and by enabling public enterprises to cut thetr losses.i3

B. Enhancing Aevenue

2.11 Apart from the projected decline in the profit tax paid by the offshore companies (NAf 275 million by 199U), there will be some further losses in revenue from the income tax, as the income base will go down when civil servants retire early or are declared redundant. Similarly, import duties will decline if the protective tariffs are phased out and replaced by 1Gwer, revenue-raisingtariffs, as recommendedlater in this report. At the same time, there are huge arrears in the collectionof the profit and income taxes, and a serious effort to remedy this situation should more than offset these losses.

2,12 Income tax rates in the NetherlandsAntilles rise progressively from 3.4 percent on a taxable income of NAf 9,UUO a year for a married person (4.3 percent for a single person) to 55 percent (married)on a taxable income of NAf 148,600 or above (57.75 percent, single). It is doubtful whether raising these rates would yield additional income; in fact, doing so might even encourage greater tax evasion than now exists. Rather than raise marginal rates, efforts should be concentratedon strengtheningthe capacity of the Tax Department and on improving the proceduresfor assessingand collecting taxes, including arrears.

2.13 At the same time, revenues do have to be raised beyond the level that improvementsin the income and profit taxes are likely to yield. The alternativeof increasing indirect taxes may thereforehave to be con- sidered. At present, the indirect taxes collected by the Central Government in 1985 amounted to NAf 185.6 million, of which part were collected on Aruba and are thereforeno longer available to the Netherlands Antilles. The indirect taxes include excise taxes on alcoholic beverages, tobacco and gascline, import duties, the foreign exchange tax and gambling license fees. The Central Governmentraised the excise taxes in 198b, but the expected yield of NAf 26 million may do no more than offset the reduc- tion in import duties advocated in this report.

The Case for a Sales or Value Added Tax

2.14 There is a strong case for broadening the base of taxation by taxing a wider range of expenditures,since a lot of income in the islands is inadequatelytaxed or not taxed at all. An active 'informal"economy is believed to exist that is not recorded in the official statistics or reported to the tax authorities. It would be, however, not advisable to tax foodstuffs and certain other essential commodities(e.g., children's clothing) both on equity grounds and to minimize the effect of a sales tax on the ^ost of living.

3/ It has been estimatedthat every US$1 drop in crude oil prices saves the NetherlaudsAntilles about NAf 10 million. The World bank's fore- cast of the average price (in constant dollars) of a barrel of crude oil during the next five years is US015-16. If realized, this price would save the NetherlandsAntilles at least NAf 100 million compared to 1984-85, much of which would benefit the public sector. - 22 -

2.15 There are no officialestimates of consumerexpenditures in the Antilles,but in the early 1980sprivate consumption accounted for at least two-thirdsof GDP. Applyingthe same percentageto 1985 yieldsconsumer expendituresof approximatelyNAf 1,200million. Expendituresfor food specificallyare not known but are unlikelyto exceed20 percentin a countryat the Antilles'level of income. A sales tax of 15 percenton the remainingexpenditures--which would be comparableto the value added tax in the EuropeanCommunity--would yield aboutNAf 144 million,or some NAf 67 millionmore than the currentexcise taxes produce(NAf 76.9 millionin 1985). The preciseyield would dependon which commoditiesare exempted from the sales tax and on whetherthe excisetaxes on beer, liquor,tobacco and gasolineare retainedat a lower level but on top of the proposedsales tax or are droppedentirely.

2.16 The standardargument against taxes on consumptionis that they are regressive,bearing more heavilyon poorerthan on richerconsumers. However,the presentsituation is even less equitable,given that the income tax is paid largelyby wage and salaryemployees subject to withholding.Moreover, by excludingfood atida limitedrange of other essentialcommodities, a generalsales tax would fall largelyon discre- tionaryexpenditures. Other advantageswould includegreater assurance of collectibilitythan is the case with the incomeand profitstaxes and greateradvantage to be taken of the expendituresof visitorsto the islands. The administrativesystem to collectsuch a tax would need to be evaluated,as would the costs of collection. Considerationshould be given to trainingneeds for staffwho would administerthe new tax.

2.17 Once successfullyintroduced, the sales tax shouldalso permit individualsat the lowerend of the incomescale to be removedfrom the rolls,and/or permita reductionin tax rates,both of which would be desirableon socialand economicgrounds.

TappingDomestic Savings

2.18 Adoptionof a packageof measuresof the kind describedabove wouldgo a long way, but probablynot the whole way, towardclosing the budgetarydeficit by the end of the decade. There is one other potential sourceof savingsto financeboth public and privateinvestment - domestic savingscurrently held abroad. It was noted in ChapterI that Antillean institutionsand individualshave increasinglyinvested in foreign(mainly U.S.) securities,partly in order to take advantageof the betterreturns offeredand no doubt partlyto avoid the risk of a possibledevaluation. The civil servicepension fund (APNA)at presentinvests largely abroad in order to diversifyits portfolio.

2.19 Data publishedby the U.S. Treasuryindicate that residentsof the Antilles,which no doubt includethe offshorecompanies, hold large depositsin Americanbanks and that these have been growingrapidly (Table 11.2). At the end of 1985,demand and time deposits(chiefly the latter) amountedto US$1,183million, an increaseof 30 percentover the previous year. Repatriatiornof at least a part of these savingscould be encouraged by offeringattractive interest rates for guilderdeposits at localbanks - 23 -

with permissionto make withdrawalsfrom such depositsin dollars. Even so, depositorsmust have confidencethat the Governmentis tacklingthe country'sproblems effectively and will not be obligedto cancel the permissionor imposeexchange restrictions in the future.

2.20 Holdingsof foreignsecurities by Antilleanresidents, mainly pensionfunds, are also substantial.The net outflowof funds on this accountaveraged NAf 62 millionin 1983 and 1984 and would have been larger in 1985 but for the restitutionpayments by Shell mentionedearlier,

2.21 To addressthis situation,the Governmentcould considerissuing bonds at competitiverates with a dollar or maintenanceof value clause, thus itselfcarrying the exchangerisk. This measurewould encouragethe repatriationof funds held abroadand diminishthe outflowof savingsin the future. It would also be reasonableto requirethat the pensionfunds hold a minimumof their investmentsin this form. Consideringthat the Antilleanguilder has been pegged to the U.S. dollarsince 1971 and that the rate of inflationcontinues to be low, the risk of loss to the Governmentin servicingthe bonds is likelyto be small.

Table 11.2 U.S. Banks'Liabilities to Residents in the NetherlandsAntilles (millionsof U.S. dollars.)

1980 1981 1982 1983 1984 1985

Total Liablilities 413 3,223 3,340 3,908 4,184 4,956 To OfficialNeth. Ant. Institutions 59 225 375 341 339 382 Of Which: Time Deposits .. 127 217 199 207 258 To Banks'Own Office in the Neth. Ant. 155 2,604 2,557 2,800 2,605 3,110 To All Other Neth.Ant. Residents 199 394 475 721 1,206 1,361 Of Which: DemandDeposits 44 44 66 74 85 101 Time Deposits -- -- 301 392 824 1,082 Payablein Foreign Currency -- 33 47 35 103

Source: U.S. TreasuryDepartment, Treasury Bulletin.

2.22 Such bonds shouldnot be used to cover currentexpenditures but shouldbe earmarkedexplicitly for the financingof capitalprojects and other developwantalpurposes. They might be called "developmentbonds." For informationand adviceon the types of investmentlikely to be attractiveto residentsthat now hold savingsabroad, the Governmentcould call on the highlyexperienced banking community in Curacao. The success - 24 -

of such a scheme is also dependent on the public's having confidence in the Government'sability to live up to its obligations under the terms of the bond issue.

C. Financing the Interim Deficits

2.23 Closing the revenue expendituregap by 1990 leaves unanswered the question of how to finance the budget deficits in the interveningyears. They are likely to be large in the next year or two, as it will take time for the cuts in expendituresand increases in revenue to compensate for the expected drop in the profit tax paid by the offshore companiesduring those years. For illustrativepurposes, it may be assumed that the annual deficits would be as shown in Table II.3.

Table II.3: Phasing of budge- Deficits IllustrativeCase (1985 NAf millitin)

Central & Curacao Governments 1985 1986 1987 19b8 19b9 1990

Expenditures 909.4 900 850 dOU 775 750 Revenue 917.6 b50 650 675 700 75U Deficit 8.2 - 5U -200 -125 -75 0

2.24 The cumulativedeficit to be financed on this schematic basis during the five years 1986-90would be NAf 450 million (1985 guilders). The sources of financingwould include:

(a) Repatriationof residents'savings held abroad (b) Dutch aid (c) Drawing on reserves (d) Foreign borrowing.

2.25 The first source was discussed above. An annual target of US$25 million (about NAf 45 million) for repatriatedand new funds presently invested in time deposits abroad does not seem overly ambitious. This level would yield more than NAf 200 million over the next four and a half years.

2.26 Dutch aid is in principle not available for budgetarysupport, although a substantialpart of it takes the form of payments to the Solidarity Fund and recurrentgrants for technicalassistance, studies, - 25 - interest subsidies and the like. Dutch aid to the Netherlands Antilles in 19b5 totalled Netherlands guilders (Nf) 24b,800,000 of which one-quarter was earmarked for Aruba. The figure for 1986, after the separation of Aruba, is Nf 194,1b5,000 (about NAf 139 million), of which a little over one-half is earmarked for development projects, while the balance is in the form of grants and other recurrent expenditures.

2.27 During the next critical years, it would be helpful if the Governments of the Netherlands and the Netherlands Antilles were to agree on a program of eliminating the budget deficit and improving the efficiency of the economy along the lines suggested in this report. Holland would then allocate its aid to the maximum feasible extent to support the program. To avoid financing the budget deficit directly, ways could be found of assisting the Netherlands Antilles in carrying out some of the reductions in Government employment that are urgently needed with the minimum of social damage. Aid might be channelled to the Civil Service Pension Fund to help finance the pensions of civil servants retired early or declared redundant. Under present arrangements, the pensions of all but the lower civil servants are charged against the budget. Financial assistance tor the new or expanded institutions, described later in the report, that are needed if industry and agriculture are to develop on the scale required would be of high priority. Finally, an enlarged program of technical assistance will be needed for this purpose and to improve the management and operations of loss-making public utilities and enterprises. The types of assistance that might be needed include identiticationand selection of potential export industries, development planning, and strengthening administrativeand management functions within the Governments and development institutions. Expert assistance should be sought worldwide so as to ensure the most appropriate skills and experience for the purposes concerned.

2.28 The third revenue source is drawings on the reserves. Keserves have risen recently to the equivalent of six months' imports as the result of compensation payments by Shell. Drawings will occur in 1987 but should be held within prudent limits.

2.29 Foreign borrowing requires the approval of The Hague and could be part of the proposed agreement between the two Governments on the 'ontent and financing of an adjustment program. borrowing should be reserved for the financing of capital projects, not for current expenditures. The other sources of financing, if vigorously exploited, would seem to be ample to meet tne aeticits that will arise between now and 1990.

D. Conclusions

2.30 Closing the gap between public revenues and expendituresis seen as the number one priority because:

(a) The impending fall in toreign exchange inflows following the cessation of the Shell compensation payments and the decline in offshore banking activities will airectly affect Government revenues; - 26 -

(b) Governmentexpenditures on wages and salaries,and on the purchaseof goods,are a principalfactor in the size of the import bill, which must be reduced;

(c) Economicwaste and inefficiencyare found largelyin the public sector. The need to reduceexpenditures affords an opportunity to effectradical improvements in the efficiencyof public servicesand enterprises.The reverseis also true.

(d) Given the importanceof the publicsector, better budgetary con- trol and a determinationto reducecosts will have a beneficial rippleeffect throughout the economy. 2.31 Althoughthe budgetaryproblem that faces the Governmentis severe,it is by no meansinsoluble. An examinationof the possibilities suggeststhat the Governmenthas a numberof optionsfor reducing expenditureswithout cutting essential services, as well as for enhancing revenuewithout raising the ratesof the incometax. Actionis neededon both sidesof the accountif the budgetis to be balancedwithin the rext few years. However,because of the urgencyof reducingimports and improvingthe competitivenessof the economy,it is more importantto reduceexpenditures than to find ways to financethem at currentlevels.

2.32 The measuresoutlined in this chapterare illustrativeof the type of actionprogram the Governmentsshould consider adopting for the period1986 to 1990. The combinationand phasingof the variousmeasures are subjectto fullerstudy of theirfinancial and economicconsequences, as well as their politicaland administrativefeasibility. however without a programof this kind and withoutsetting objectives to be reachedwithin a definednumber of years,the budgetaryand foreignexchange problems will solve themselvesthrough a sharp and disruptivedrop in imports. - 27 -

Chapter III

THE PRODUCTIVESECTORS

The productive sectors of an economy, broadly defined, include servicesas well as primary and secondary industries. In the Netherlands Antilles,the economyis largelybased on services,of which tourism,trade and offshorebanking are the most important. Tourismis discussed extensivelyin this Chapterbecause it is not only an important contributor to GDP, but also a large employerand one of the main potentialsources of additionaljobs. Offshorebanking is treatedonly brieflybecause it is on the verge of declinefor reasonsoutside the controlof t e Netherlands Antilles. Wholesaleand retail trade is also not discussd at length. The level of trade will respondto changesin generaleconomic conditions, especiallyin income and taxation. Further,the organiza on of trade and its regulationby Governmentwarrant special study becauseit is widely believedthat there is a lack of competitionwhich contributesto high prices and hence the high cost structureof the economy. The missionwas not able, in the time available,to examinethe basis for this belief. Last, the prospectsfor expandingagriculture, fishing and manufacturing are consideredat some lengthbecause they are, with tourism,the main potentialsource of foreignexchange earnings (or savings)and additional employment.

A. Tourism

Recent Trends

3.1 The experienceof the differentislands of the Antillesin the tourismsector over the past 15 years has been remarkablydiverse. On the one hand, throughoutthis period St. Maartenhas maintainedan averagerate of growth (measuredby the number of visitorarrivals) that has been among the fastestin the Caribbeanand it hap become,with 346,000visitorsl/ in 1985, a major Caribbeandestination. On the other hand, Curacao,which experiencedfast growth during the second half of the 1970s,based mainly on increasingtraffic f-om Venezuela,experienced a declineafter 1980. By 1985,visitor arrivals numbered only 125,000,just 17 percentabove the 1970 level. Althoughboth islandsface some common problemsin the sector, the major issue for St. Maartenhas been how to providethe infrastructure and basic servicesto keep pace with the rapid growth of demand and the expansionof the economy,while protectingthe environmentand preserving the island'sphysical attractions. In Curacao,where tourismfaces a severe recession,major restrueturing/renovationis necessary with respect to the facilitiesprovided and market orientation.

3.2 The small islandsof St. Euatatiusand Saba have benefitedfrom the growth of tourismto St. Maartenbut mainly in the form of an increase in excursion(day-visitor) traffic, which has limitedeconomic impact. Tourismto Bonairerose during the 1970s,a trend that was, however, interruptedfrom the end of 1980 to 1985, when visitorarrivals went up by about 30 percentand reached24,000.1/

1/ Excludingvisitors from the NetherlandsAntilles. - 28 -

3.3 The contributionof hotelsand restaurantsto ouqputir the Antillesas a whole in 1985 was estimatedat NAf 76.8 millionin constant 1980 prices,or 4.6 percentof GDP. On the basis of the estimates available,it appearsthat the growthin St. Maartenhas been offsetby the declinein Curacao. Similarly,with respectto foreignexchange earnings from tourism,according to the statisticsof the CentralBank,_/ the declinein receiptsin Curacaomore than offsetthe increasein St. Maarten. As a consequence,total tourismreceipts declined from a peak of NAf 506 millionin 1981 to NAf 366 millionin 1985. However,the 10 percentgrowth in earningsin St. Maartenbetween 1981 and 1985 despitea 90 percentgrowth in stopovervisitors over this periodis hard to understandand, if correct,may indicatethat a smallerproportion of earningsfrom tourismis now recordedby the bankingsystem than formerly. While paymentsfor packageholidays are often prepaidby visitorsin their countriesof origin,and a numberof operatinginputs may be imported d'rectlyby hotel operators,the expansionof room capacityin St. Maarten between1980 and 1985 (approximately60 percent),the growth of employment in the sectorand the increasein locallypurchased inputs and local touristshopping all point to a significantlygreater increase in foreign exchangereceipts from tourismthan that recordedby the CentralBank. This conclusionis also consistentwith the figuresfor cruisetourism in St. Maarten,which, althoughpartly estimated, show an increaseof nearly 50 percent between1981 and 1985 and an approximatedoubling between 1984 and 1985 alone,when the foreignexchange receipts from tourismas reported by the CentralBank actuallydeclined.

3.4 Accordingto data from a specialsurvey conductedin 1985, employmentin hotelsand restaurantsin the Antillesnumbers about 5,000, or 8.7 percentof total employment. Where relatedactivities are generated in an active resortarea such as St. Maarten,it is estimatedlocally that additionaljobs are createdequal to those employedin hotels. Hence, in St. Maarten,tourism-related employment could number some 4,000-5,000.In Curacao,this ratio seems unlikelyto apply and the total employment generatedby tourismmay not exceed 1,500. In the smallerislands, tourism is the secondsource of employmentafter Government,but its absolute numbersare still small,except in Bonaire,where some 400-450work in the sector.

3.5 There are no recentstudies of the importcomponent of tourist expendituresin the Antilles,but a study made for Aruba in 1981 providesa rough indicationof the levelsfor Curacaoand St. Maarten. The Aruba study concludedthat just over 40 percentof touristexpenditures in hotels,shops, casinos and other touristservice establishments was spent on directimports plus expendituresabroad of the TouristBoard. In Curacao,where hotelsare mainlyin the publicsector and managedby local companies,this proportionseems unlikelyto be higher. In St. Maarten, however,where hotelsare financedlargely by foreigninvestors and in

2/ Bank of the NetherlandsAntilles, (Quarterly Bulletins. - 29 -

several cases are managed by foreign management companies, the import component of tourist expenditures is likely to be substantially greater.

Sectoral Problems

3.6 The tourism sector in the Antilles, and particularly the hotels, face a number of problems that reflect broader economic conditions in the islands. Although wages in the hotels are lower ':hanin other productive sectors, they are higher than in many other Caribbean islands, and social legislation modeled after that of the Netherlands has added markedly to the costs of labor. As is characteristic of the Caribbean region as a whole, staffing ratios in hotels are high relative to more developed countries, and labor legislation that protects the rights of workers makes it diffi- cult to lay workers off and to employ seasonal labor in response to fluc- tuations in demand. All these factors have increased labor costs, which now range from 25 percent to 40 percent of the total revenues of hotels, depending on the type of facility and level of occupancy. Other costs that are high by international standards are those for water and electricity, while practically all operating supplies, including food and most beverages, are imported. Thus, to be viable, hotels must have high occupancy rates, which are, however, hard to achieve, especially given the seasonal fluctuations in demand. hotels in St. Maarten have managed to maintain occupancy rates (e.g., 72 percent in 1985) sufficient to yield profits attractive enough to encourage investments in new capacity. In Curacao, however, occupancy rates fell from about 70 percent in the late 1970s to an average of 51 percent in 1983-85, and large operating losses have been incurred.

3.7 Because tourism developments in the five islands of the Antilles have differed markedly, they are treated separately below.

St. Maarten

3.8 Although there are inconsistencies in the various statistical series relating to visitor arrivals in St. Maarten, all indicate fast growth over the period 1970-85. Arriving passengers at the airport increased from 80,000 in 1970 to 388,000 in 1985, for an average annual growth rate of 11 percent. Some of the passengers were visitors to French St. Martin, but the bulk were coming to St. Maarten. Guests registered at hotels rose from 33,000 in 1970 to 225,000 in 1985, for a:iannual average growth rate of 13.5 percent. In the past five years, while tourism to Curacao was declining steadily, growth continued in St. Maarten, with visitor arrivals3/ rising from 182,00 in 1981 to 346,000 in 1985,4/ a rate exceeding 17 percent annually, faster than that experienced by any other Caribbean destination in this period.

3.9 Stimulated by the tax holidays on investment and with the encour- agement of St. Maarten's Government, which has facilitated the licensing

3/ Excluding visitors from the Netherlands Antilles.

4/ The difference in the official statistics of 121,090 between visitor arrivals and guests registered at hotels in 1985 is large. Part of this difference is accounted for by visitors who do not stay in hotels, but it seems likely that part may be the result of incomplete coverage in the statistical returns for hotels. - 30 - and other procedures required for establishingnew enterprises,private investors,primarily from North America, made possible a tast growth in visitor capacity. ln 19b9/7U, there were only about 401 hotel rooms in St. Maarten. This total had risen to 1,65U by 198U and about 2,b50 by 198b.

3.10 The fast growth of tourism brought an inflow of workers from other islands and rapid population growth. The population increased by nearly 8 percent annually between 19b9 and 198U, when it reached 13,UU0. by 198b, it is estimated the population has reached approximatelyZ2,000. This growth has put heavy demands on infrastructureand social services, some of which have been met while others have lagged. Electric power supply has been able to keep up with demand, and the capacity of the water supply (desalinization)plant has also been expanded (tor details see Chapter IV). There are, however, sutficient uncertaintiesabout the costs and the future capacity of the water system to meet the growth in demand to cause one large hotel to build its own desalinizationplant and several other hotels to consider doing the same. Finally, airport capacity has been expanded to meet the growth of traffic, and a new terminal and parking areas were completed in 1985. Despite some continued congestionat peak hours, this expansion representeda major advance in passenger handling capacity.

3.11 In other areas the provision of infrastructureand social services has lagged. Of particular significanceto the tourism sector, but also to the economy as a whole, are: the lack of a sewerage system in Philipsburg,with consequent environmentalpollution; the lack of a satisfactorysystem of solid waste disposal; inadequaciesin the road network; aeficienciesin the port; and an acute shortage of low-cost housing. Funds for upgrading the port and for constructingthe sewerage system for Philipsburghave been secured, and work on both projects is expected to start in 1986. While funds for some maintenance and minor upgrading of the road network are available, the amounts needed for major improvementsare not in sight. A study of the solid waste disposal problem is in progress, but the needed investmentsin new facilities have not yet been determined. The Government of St. Maarten is negotiatingwith foreign private investors to secure funds for the constructionof low-cost housing, but it still might not be affordablewithout subsidies, dependingon the terms for the funds. In this context, other approaches to providing low-cost housing, such as core housing, may need to be considered. The shortage of housing has led to higher rents, which in turn have boosted costs to the tourism sector by creating pressure for increasedwages. hence, the tourism industry, and particularlythe hotels, are interestedin working with the Government to find a solution to the housing problem, and they might reasonably be expected to contributefinancially to that end.

3.12 A further gap in support services for the tourism sector is the absence of a hotel and restauranttraining institution. The sector has met its staff needs by importingboth skilled and unskilled people and by "in- house' training. However, the size and importanceof the sector are now such that a more formal approach to training St. Maarten's young people for jobs in the island's leading sector should be seriously considered. The possibilityof setting up a school associatedwith a practice hotel, teaching lower and middle-levelskills should be studied to determine the appropriatesize of the facility, the courses to be offered and the costs and financing. - 31 -

3.13 On the assumption that measures will be taken to alleviate the infrastructure bottlenecks, there is scope for further expansion of tourism in St. Maarten. Several prime beach sites remain undeveloped, and more intensive use can be made of the sites already in use. A slower pace of development is, however, foreseen in the next several years. About 300 rooms are expected to be added by the end of the decade, bringing the total number to about 3,000 in 1990. A substantial part of this additional capacity will be In "time-share" units. It is not likely, given the economic environment of the next several years, that it will be difficult to attract the additional visitors to fill the new capacity. In the longer term, as Indicated above, St. Maarten has the potential for still further expansion.

3.14 In one respect, a slower pace of growth over the next few years will be beneficial, as it will allow a breathing space in which infrastruc- ture and social services can catch up with demand. It will also permlt St. Maarten to make adjustments that may be necessitated by the faster growth of tourism and of the economy foreseen for the French half of the island. It is expected that from 1,000 to 1,500 rooms will be added to the existing 500 rooms by the early 1990s. That expansion will put large additional demands on the infrastructure in St. Maarten, particularly on the international airport and the roads linking it with the new tourist facilities on the French side.

3.15 Consultations between the Antillean and French authorities on how to meet the costs of these additional services and on an equitable cost- sharing should be held without delay. Faster growth in St. Martin may also mean a significant shift in employment patterns, with those residents of the French side who now cross to work in the hotels and other establish- ments in St. Maarten remaining on the French side of the island to work. Such a shift would create additional demand for 'off-island' labor in St. .-aartenand add to the demands for low-cost housing and other services.

3.16 As noted, the fast growth of the tourism sector to date has strained the capacity of the Governments-both Central and St. Haarten's- to provide adequate infrastructure and basic services for the population. While much planning work has been done in the past, that capacity needs to be strengthened and attention given to establishing a clearer framework for future development. Having regard to the level of development to date, to the physical and space constraints limiting further growth and to the critical importance of preserving the island's assets and protecting the environment, consideration should be given to determining an optimal growth path for the tourism sector and to setting the planning parameters accordingly. Unless this approach is followed, there is a risk that unrestricted growth would impair or destroy the attractions of the island. In particular, it is important to complete the physical land use plan for the island (with appropriate regulations) and to take the necessary steps for its legal enforcement.

3.17 In the absence of a development plan for tourism in St. Maarten, there are no official projections or targets for visitor arrivals in the years ahead. However, taking into account the investments already under way or in an advanced stage of planning, a tentative assessment of traffic growth can be made. The expansion of hotel capacity under way and planned will accommodate an additional 25,000 to 30,000 stopover visitors. Given the favorable prospects for the growth of the market for Caribbean tourism - 32 - generally, an increase in the overall occupancy rate at existing accommoda- tions (from 72 percent in 1985) could most probably be achieved. Un this basis, a projectionof 28O,W00-300,000guests at hotels and other commer- cial accommodationsby 1990/9. appears feasible. The correspondingfigure for total visitor arrivals in St. Maarten by 1990/91would be about 4UU,OUU. The implied rates of growth would be much lower than auring the period 1980-85, reflecting constraintson the expansion of visitor capacity rather than on the growth of demand.

St. Eustatius and Saba

3.18 Data limitationsmake interpretationof the statisticson visitor arrivals in St. Eustatius and Saba rather speculative. According to the data available, visitor arrivals on both islands have ranged betweer,10U,UO and 15,000 annually since 1980, with no clear upward crend. No distinction is made between stopover visitors and excursionists(day visitors), but an estimate for Saba suggests that the latter make up about bU percent of all visitors. Data for St. Eustatius provide a breakdown of visitors by country of origin; these show that 50-60 percent are residentsof the NetherlandsAntilles. Assuming that approximatelythe same proportion applies in Saba, it appears that, for both islands, the number of visitors from outside the Antilles approximates5,UUU-6,OU0 annually and that the bulk of these are probably day visitors.

3.19 Visitors to both islands arrive by air and sea. Windward Islands Airways, which uses a ZU-seat Twin Otter STOL aircraft,has three flights daily from St. Maarten to St. Eustatius and Saba and two daily from St. Maarten to St. Eustatius and St. Kitts. There was a ferry service from St. Maarten to St. Eustatius during the high season of 19855d6,but it appears to have been uneconomic,possibly because of inappropriateequip- ment, and no longer operates. There is a weekly ferry from St. Maarten to Saba, but it, too, may be uneconomic,and its future is in doubt.

3.20 Visitor accommodationsin St. Eustatiusconsist of three hotels with about 60 rooms in total, plus supplementaryaccommodations totalling some 30 rooms. There are three hotels on Saba, which together provide 25 rooms. There are also some ld apartments in private homes.

3.21 While St. Eustatius has fine beaches, their relative remoteness, rough seas and the absence of infrastructurehave so far precluded inten- sive development. The principal tourist attractionsare therefore the historic remains from colonial times in the capital of Oranjestad and the snorkeling and scuba diving, which are presently being developed. Visits to the places of historic interest can be accomplishedin one day from St. Maarten, so the better prospect of attracting stopover visitors appears to be in the developmentof the diving market. here St. Eustatiushas a unique attraction--underwaterarcheological sites not found elsewhere in the Caribbean.

3.22 The most successfulof the island's hotels is aiming to expand its existing 20 rooms, possibly by taking over the managementof a neighboringproperty that also has 20 rooms. This facility could provide the basis for a diving operation,which conservativelycould attract approximately2,000 stopover visitors a year. In the absence of reliable data on present stopover visitors, the significanceof this figure is hard - 33 - to assess. If achieved,however, it would probablymean at leasta doublingof stopovervisitors. If the divingmarket were not to develop, it is hard to envisageany significantincrease in stopovertratfic to St. Eustatiusin the next severalyears.

3.23 Saba, wnich rises to nearly3,000 feet at its highestpoint, lacks beachesbut is an islandof great beauty,with rich vegetationand small picturesquevillages. Scuba divinghas been developedin recent years (two dive shops are now operating),and tourismpromotion efforts focus largelyon diversand hikers. An underwaternational park aroundthe islandhas been proposed,and technicalassistance in creatingthe park is being soughtfrom the Netherlands.As in St. Eustatius,tourism promotion effortsare beingassisted by a grant of LOU,OUUECU trom the EEC, to be spent over three years,but inadequatestaffing in the tourismpromotion officein Saba, whose totalstaff consistsof one man, is hamperingthis effort. 3.24 Saba clearlyhas tourismpotential, and the developmentof the divingmarket and increasedpromotion have generatedinterest in addingto visitorcapacity. one hotel is currentlybuilding 10 rooms,and another plans to add a similarnumber. Were both projectsto be completed,hotel capacityin the islandwould be nearlydoubled. This increasewould be relativelylarge for the island. To obtainadequate occupancy rates would requirecareful coordination with the developmentof transportservices and with expandedpromotion and marketingefforts. As in St. Eustatius,the staffingof the tourismpromotion office in Saba needs to be strengthened if expandedpromotion programs are to be attempted.

3.25 While both St. Eustatiusand Saba have potentialfor expanding tourism,the contributionof tourismto theireconomies is likelyto remain quite small.

Bonaire

3.26 As with the other islands,the statisticson visitorarrivals in Bonairecontain some inconsistencies,and any conclusionsmust be tenta- tive. Exclusiveof visitorsfrom the other islandsof the Antilles,total visitorsrose from some b,000 in 19T7 to 24,000in 1985. Urowthwas faster duringthe first half of this period. While the numbersof visitorsfluc- tuatedbetween 1981 and 1984,there was no markedgrowth until 1905,when the numbersrose by about20 percentto reach 24,049. Nearly70 percentof the visitorscame from the UnitedStates.

3.27 Bonairelacks the extensivebeaches of Aruba and St. Maartenand has been promotedmainly as a centerfor water sports,particularly scuba diving. The islandgovernment has been activein takingmeasures to pro- tect the environment,including creating a 13,000acre nationalpark at the northwesterntip of the islandand a marinepark that extendsto all the coral reefs of Bonaireand Klein Bonaire.

3.28 Accommodationcapacity totals about 400 rooms,of which approxi- mately30U are dividedalmost equally between the two principalhotels. With the growthin visitorsin 1985,peak demandcould not be met, and the more successfulestablishments achieved high annualoccupancy rates (80 percent). Diversconstitute a high proportionof all visitors. - 34 -

3.29 Furthergrowtti of tourismin bonaireis hamperedby inadequate air servicesas well as insufficientaccommodations ot the rightquality. Only ALM flies to Bonaireat present,with daily connectionstrom Curacao using Twin Utters,and direct0C9 connectionstrom Miami twicea week. EasternAirlines is not presentlyusing its trafficrights to Jionaire.The limitationon the numberof directflights from North Americaand the need to transferat Curacaofrom jet aircraftto Twin Ottersis a serious impedimentto the furthergrowth of tourism,except possibly tor the limitednumber of visitors(at present,primarily trom Europe)who visit Monairein the courseof a multi-destinationtour of the Antilles. hence, improvedair services,5/particularly from North America,are a necessary preconditionfor any stgnificantgrowth. At the same time,improved air servicesmust be coordinatedwith the furtherexpansion of accommodation capacity,as it in turn justifiesthe air services. Une impedimentto improvedair serviceshas been the lack of an aircraftrefueling facility at the airportin Bonaire,but that need is expectedto be met by the end of 1986. 3.30 The CaribbeaaTourism Research and DevelopmentCenter prepared a developmentplan for the tourismsector in Bonairein 1979. In retrospect, the trafficprojections of this study appearto have been over-optimistic: visitornumbers (including those from the NetherlandsAntilles) were esti- mated to range between32,00 and 43,000by 1985 and between51,000 and 92,1000 by 1990. The basis for these figureswas underminedby the world -economicrecession in the early 1980sand the devaluationof the Venezuelan currencystarting in 1983, but there can be littledoubt that thereis potentialfor a substantialexpansion of tourismin Bonairefrom the major marketareas, primarily North America,but also Europeand SouthAmerica, if the rightfacilities and servicesare providedand marketed appropriately.

3.31 The Governmentand peopleof Bonairedo not contemplateor apparentlydesire rapid growth in tourismsuch as has been experiencedby St. Maarten. The Governmenthas not yet determineda growthtarget, taking into accountthe likelyimpact of alternativegrowth rates on the environ- ment, employment,population growth, demand for publicservices, Government revenuesand expenditures,etc. While that determinationand the formulationof a tourismdevelopment plan (basedin part on an updatingot past studies)are complexundertakings, they would providethe framework neededfor formulatingpolicies for the sectorand for determiningthe extentand directionof tourism-relatedexpenditures by the Government (e.g.,expenditures on tourismpromotion).

3.32 Bonairehas establisheda reputationin the divir.gmarket, which appearsto offer the best prospectsfor growthin the mediumterm. hence, even in the absenceof a plan for the sectoror prior to a plan being formulated,continued promotion of this marketsegment by the Government would be appropriate,particularly in the lightof the limitedresources availablefor promotionexpenditures in the island'sbudget.b/ Further

5/ Servicesthat do not requirea changeof plane in Curacao.

6/ While the tourismpromotion budget of NAf 1.1 millionin 1986 is an increaseover the NAf 956,U00of 1965,actual expenditures have been well below the budgetfigure, as the funds have not been available. - 35 - promotionefforts should be linkedto the developmentof improvedair services. here, the divisionof Uovernmentalresponsibilities between the IslandGovernment, which is responsiblefor tourism,and the Central Government,which is responsiblefor civil aviation,is a complicating factor. It is importantthat bonaire'sinterest in developingtourism be given full weightby the CentralGovernment when determiningaviation policiesand the futurerole of ALM. These decisionswill be criticalto Bonaire'stourism growth and shouldbe closelycoordinated with the formul- ation of a tourismsector plan for the island.

Curacao

3.33 The tourismsector in Curacaofaces the need for major adjust- ments if it is to regainits profitabilityand establisha basisfor future growth. The sectordeveloped strongly during the 19bUslargely on the basisof businesstraffic and vacationtraffic from North America, attractedby Curacao'sclimate, casinos and duty-freeshopping. The major hotels,developed largely with supportfrom the CuracaoIsland Government, were operatedby well-knownU.S. hotelcompanies during this period.

3.34 The situationchanged after the riotsof 19b9. Facedwith increasingdifficulties in theiroperations, the U.S. hotel management companiespulled out in the early 1970s. As servicesdeteriorated, Curacao'sreputation in the traveltrade sank, and trafficfrom the U.S. declinedsharply. This fall-offwas, however,offset, beginning in the mid-1970s,by the fast growthof trafficfrom Venezuela,which boomedas that country'soil revenuesjumped, starting in 1973/74. Visitorsfrom Venezuelaapproximately tripled between 197T and 1980 to reach 93,0UU, approximatelyhalf of all the visitorsin the latteryear. Venezuelan tourismwas partlyvacationers, but was mainlybusiness-oriented, drawn to Curacaoby the prospectof shoppingfor items (largelytextiles and clothing)that could be resoldin Venezuelaat a substantialprofit. The Venezuelantraffic continued at a high level through198Z. Then, in 1983, when the Bolivarwas first devalued,shopping in Curacaowas no longer profitableand visitorsfrom Venezuelanumbered only 26,U00in that year. Subsequentdevaluations kept trafficfrom Venezuelasuppressed, and by 1985,total visitor arrivals at 125,500were 32 percentbelow the peak in 1980 of nearly185,000.

3.35 With the fall in Venezuelantraffic, which was not offsetby a significantincrease in trafficfrom other sources,average hotel occupancy rates fell from just over 70 percentin 1978-81to just over 50 percentia 1983-85. As a result,most hotelsincurred large operatinglosses, which in total have been in the rangeof NAf 12-15million in the past three years. Becausemost of the major hotelsare in the publicsector (which accountsfor 74 percentof the internationalstandard hotel capacity), these operatinglosses have ultimatelybecome an obligationof the Curacao IslandGovernment.

3.36 The large operatinglosses have precludedthe hotelstrom refurbishingtheir fixed plant and equipment,following years duringwhich replacementsand refurbishingwere neglectedbecause the hotelswere able to securegood occupancyrates without incurring such cost on the basisof the high demandfrom short-termVenezuelan visitors. Large sums now need - 36 - to be invested to refurbish the public sector hotels, and the Government has commissioneda well-known consulting firm to evaluate the alternatives and recommenda refurbishingprogram. The costs are being analyzed. The Government has already spent approximatelyNAt 25 million, and it is estimated that perhaps another NAf 50 million will be needed. If Zull funding cannot be secured, the consultantswill recommendwhich units should be given priority.

3.37 The Curacao Island Government has stated that it intends to divest itself of the hotels by selling them to private owners. It feels, however, that without refurbishing,it is in a weak position to negotiate the terms of sale and hopes to demonstratea year or two of protitable operations in at least one or two properties to encourage potential buyers. As long as the hotels are publicly owned, however, it may be difficult to reduce operating costs by introducinggreater flexibilityinto wage and manning structures and to secure productivityincreases that will be necessary for the hotels to become financiallyviable. This situation reflects the rigidities tlowing in part from the laws designed to protect labor, referred to above, and to the strength of the hotel workers trade union. Moreover, as long as the major hotels are publicly owned, there is an understandabletendency of workers and management to rely on the Government to meet operating losses; the only alternativemay be to close one or two hotels for varying periods and terminate the contracts of employment, providing severancecompensation as determined by statute.

3.38 Another required step is for Curacao to reorient its marketing and promotion programs. Each hotel has a role to play here, but in addi- tion the Government'sTourist bureau needs to focus more intensivelyon the North American market. While the bureau's budget request for 198b, still to be approved, was reduced to NAf 21 million, it had been spending NAf 26-28 million annually in recent years and has had representativeoffices in 11 countries. The representationin Argentina, Brazil, Peru, Mexico and Spain does not appear to be justified in the light of the small numbers of their visitors and the limited prospects for attracting more. The otfices in Puerto kico, the Dominican Republic and Colombia need to be evaluated in the light of a realistic assessment of the market potential, while Curacao's representationin North America needs to be strengthened,and continuedrepresentation in Venezuelamay be necessary politically, regardlessof the potential for vacation tourism now. To provide a firmer basis for orienting its promotion programs, the Tourist bureau needs to improve the quality of the analysis of tourism statistics.

3.39 Tourism promotion efforts need to be reorientednot only geographicallybut in terms of the market segments to be exploited. In this context, a realisticassessment of Curacao'sattractions for the holiday visitor must be the starting point. A number of studies of attractionsand potential has been made.7/ As Curacao lacks the extensive sandy beaches of many of the Caribbean'smajor holiday destinations,the emphasis in its promotion efforts must be on its other attractions,chief among which, it is generally agreed, is the concentrationof Dutch colonial architecturein the historic town of Willemstad.

7/ The most recent is the study by Arthur D. Little International,Inc., of June 1985. - 37 -

3.40 Whileparts of historicWillemstad are well-preservedand con- siderableprogress has been made in restoringhistoric structures, large sectionsof the old town and many tine buildingshave falleninto decay. Part of the iutch and EEC aid is beingmade availablefor restoration work, and a major advancewill be the reconstructionof the seweragesystem in the westernhalf of the old town (Utrobanda)and the upgradingof pedestrianroutes there.

3.41 It is clear,however, that publicfunds will be insufficientfor all the desirablerestoration and that privatefunds also need to be mobilized. Many formerdomestic structures probably can only be preserved if put to differentuses (e.g.,office or other commercial/officialuse). As the costs of restorationare high and likelywill be uneconomicfor the privateinvestor, the Governmentneeds to provideincentives (e.g., capital grants,tax reliefor soft loans)to encouragethe necessaryprivate investment.The justificationis that the benefitsof the investment (e.g.,increased tourism) would be diffusedthroughout the economyand could not be recoveredat all or only in part by privateinvestors.

3.42 Thoughmuch planningof the old town has been done and an inven- tory of historicstructures has been compiled,a programtor restoration and redevelopmentthat identifiesthe priorityareas and projectshas not yet been formulatedand acceptedas a goal by the publicauthorities. Were this step to be takenafter consultationwith the privatesector, it would providethe necessaryframework"in which privateinvestments in restoration/renovationcould be made and assisted,and publicinvestments programmed.An essentialelement in the programformulation would be an estimateof the costsand an economicevaluation, together with an assessmentof the resourceslikely to be forthcomingfrom the privateand publicsectors. As the economicbenefits of the programwould likelycome largelyfrom increasedtourism, a contributionfrom the tourismsector to the costs,possibly through a touristtax, shouldbe considered.

3.43 With regardto Curacao'sother touristattractions, Willemstad has been in the past and is still a shoppingcenter visited by tourists, but in view of the developmentof duty-freeshopping in many other Caribbeanislands, Curacao's ability in the futureto attractNorth Americanvisitors largely on the basisof shoppingis uncertain, Apart from the older sectionsof Willemstad,Curacao has a numberof historic "landhouses" in the countryside,some of whichhave potentialas tourist attractionsfor day visitors. There are also a numberof small bays/beacheswhere developmentof small-scalehotels and of favorablesites for sailingfacilities and water sportswould be possible. The interestof potentialNorth Americaninvestors in developingthese possibilitiesis now being exploredin a secondphase of the ArthurD. Littlestudy.

3.44 Scubadiving is anotherattraction. A divingcenter associated with the new Seaquariumoutside Willemstad is beingdeveloped and is expectedto cater to 200 diversa week by the end of 19b6. This project appearsto be highlyprofessional and has good marketingconnections. Nevertheless,even if it were able to attractdivers over most of the year and to achievea 70-60percent occupancy rate, the numberof divers visitingCuracao would not exceedabout 8,000 annually. 3.45 The publicand privatesectors in Curacaoare also jointlypromo- ting businessvisitor traffic by developingan internationaltrade center (ITC)that is to serveas a connectingpoint for trade flowsbetween Latin - 38 -

America, the Caribbean, North America, Surope and Japan. It is proposed that the center be developed in four phases, with each phase taking about four years. The design for the first phase has been prepared,and the prospects for finding the necessary financing are good. Besides providing space for permanentand temporarytrade exhibitions,the LTC would include facilities for conventionsand conferencesand a trade informationcenter.

3.4b To support this facility,which is planned for a site near Piscadera bay close to two existing hotels that together contain 3UU rooms and 90 villas, there is a proposal to build two new hotels on adjacent land; these together would provide another 500-550 rooms. Negotiationson financing the first of the hotels are under way. The promoters intend that internationalhotel management companies with strong marketing connections run both new hotels. The proposed addition to hotel capacity in the area would ultimately result in a total capacity ot about 950 rooms, which is related to the capacity of the proposed 1,U00seat auditoriumat the new ITC. The site selected also has space for the developmentof recreational facilities and is within easy reach (two miles) of Willemstad.

3.47 While the prospects for the ITC project are generally promising, Curacao's ability to attract conventionsfrom the United States will be determined largely by whether the expenses of attending conventionscaa be written off for tax purposes by U.S. companiesand individuals. This issue is being negotiated by the two countriesin the context of the C.B.I., but the outcome is not yet clear.

3.48 If this issue is resolved favorably, the Tourist Bureau should consider supporting the ITC in attracting conventions. This market segment is highly organized and competitive,and continuous promotionwork is necessary. The Tourist Bureau should also consider helping to promote diving in Curacao, as well as Curacao's cultural tourism, among appropriate market segments in North America and Europe, particularlyin the Netherlands. This effort should be possible,given that, when measured against visitor numbers, the budget of the Tourist bureau is high as com- pared with Aruba and St. Maarten (208 NAf per visitor in Curacao, 31.5 NAf per visitor in Aruba and 4.2 NAf per visitor in St. Maarten in 19S5). Clearly, there is scope for major economies and a major reorientationof spending,which should be closely integrated with the hotel rehabilitation program and progress with the ITC project.

3.49 The Government of Curacao intends in the near future to seek assistance from the Caribbean Tourism Kesearch and DevelopmentCenter (CTRC) in formulatinga developmentplan for the sector. This step is timely and would provide a basis for the necessary policy changes and for a coordinatedprogram of public sector investmentsin tourism,as well as the framework needed to guide private investmentsin the sector.

3.50 Simultaneouslywith the formulationof a developmentplan for the sector, the Government should consider strengthening its agencies respons- ible for tourism. The task of planning tourism development is at present dispersed among several agencies, including the Holding Company (for hotels), the Tourist bureau, D.ReO.V.and S.B.P. The Commissionerfor Tourism has no professionalstaff to guide and coordinatethese agencies, and the present administrativestructure does not appear to be well-suited to achieve the required coordination and to formulate policies and investment programs for the sector. - 39 -

3.51 Pending the formulationof a development plan for the tourism sector in Curacao, there are no ofticial projectionsot tuture visitor arrivals. The rehabilitationof the existing internationalstandard hotels could provide for an additional40,U00-50,000 guests at these hotels by the end of the rehabilitat'onperiod. These figures compare with the projection of foreign visitors to the ITC of some 3b,000 per year by the end of phase 1 of the 1TC developmentprogram. As indicatedearlier, the numbers of divers attracted to the new diving center near Willemstadare projected at 8,UOO annually. hence, allowing for some growth in other business and vacation travel, it is possible to foresee visitor arrivals in the range 18U,0U0 to 200,000 by 1990/91, when phase 1 of the ITC project is expected to be completed. Additional internationalstandard hotel capacity will be needed to accommodate the increase in visitors foreseen in subsequent phases of the ITC project.

B. Industry, Primary Production and the Prospects for Employment

3.52 Industrialactivities in the NetherlandsAntilles contributed 13.2 percent to GUP in 1985, a decline from the 17.b percent of 1980 that was largely attributableto the fall ln oil prices. Oil refining and related activities still accounted for more than half of the share of industry in GOP in 1985 and of the numbers employed in the sector (5,628 people). Agriculture'scontribution to GUP (U.7 percent in 1985) and to employment is very small.

3.53 After a brief review of the oil industry, this section focuses on the present state of manutacturingindustry and primary productionand the prospects for their absorbing an increasing share of the labor force.

The Oil Industry

3.54 The principal industrialactivity in the Antilles for much of the present century has been, and still is, oil refining. However, on Curacao, the falling profitabilityof operations resultingfrom the drop in crude oil prices led Shell, the owner of the big refinery on the island, to withdraw in 1985. It sold the refinery and its installationsfor a nominal sum to the Curacao Island Government,which in October of that year then leased it to the Venezuelan State Oil Company for a term of five years, renewable for successive two-year periods, at an annual rental for the first five years of US11 million. The lessee is obliged to spend a minimum amount each year on maintainingand upgrading the facility,while the Government for its part is obliged to upgrade the water and power plant at the refinery.

3.55 The main benefit of the present situationis that the refinery continues to provide employment for a substantialpart of the local labor force, which in turn generates tax revenues and further employmentwithin the island. However, only 85 percent of the former Shell employees were rehired by the new management,or 1,700 people, although the number employed has increased since then to about 1,800. Moreover, average remunerationwas reduced 14 percent by abolishing the Christmasand vacation bonuses, and the employer's contributionto the pension fund was also substantiallyreduced. As noted in Chapter 1, these changes have resulted in a significantloss of foreign exchange and income for the economy, as compared to the recent period under Shell's ownership. - 40

3.56 Other oil-relatedactivities include the Curacao Oil Terminal (CUT); CUkulL, the oil distributioncompany, which is profitable;the oil terminals in Bonaire and St. Eustatius; and an asphalt lake on Curacao. Total employment in the oil sector is some 3,0U0 people and is likely to remain stable at about that level during the term of the oil refinery lease. The future of the refinery after 1990 is uncertainand will depend on whether Venezuela will continue to find it economical to refine some of its crude oil there rather than expand its own refinery capacity. There is little prospect of reviving the former trade with North America.

Manufacturing

3.57 Government policy is to promote industrialdevelopment through protection. In Curacao and Bonaire, tariffs can be granted to local indus- tries producing for the domestic market through temporaryor permanent increases in the import duties on competingimported products. Further- more, the import of certain goods can be banned temporarilyor perman- ently. Raw materialsand semi-manufacturedgoods used in production can be exempted for only 10 years at the most. The excise duties on imported spirits, beer and cigarettesare higher than those for local products. Establishmentof an enterprise that aims to produce, process or manufacture goods that are the same as those of an existing or planned operation can be banned for up to 10 years. In cases where the products of the protected enterprise constitutean input for another enterprise establishedin the NetherlandsAntilles, the protection may be extended to 25 years. These measures do not apply to the Windward Islands. In St. Maarten, which dominates the Windwards,a free trade atmosphere has developedalongside the growth of tourism.

3.58 Initially,protection produced an increase in employment in the Leewards;recently however, there has been a slowdown in the additional jobs created. This situation is not surprising,given their limited market. The industries that survive because of protectionusually have become high-costand inefficientor else enjoy high profits. The consumer ends up paying for any increase in employment through higher prices, and the companies have no incentive to reduce costs and be competitivein a wider market.

3.59 If Guraeao and Bonaire are to expand employmentthrough manufac- turing, they will have to pursue the export markets. towever, the present protective policy does not encourage this strategy. As such, existing measures that protect local industry should be dismantled over, say, a five-year period so as to encourage these firms to initiate cost savings gradually. Those that cannot survive on the difference between their prices and the c.i.f. price of the imported product plus a modest revenue- raising tariff probably have no place in Curacao and bonaire'sindustrial futures. Those that survive are the ones that can lower their costs suffi- ciently to be competitive.The exceptioa to this strategy would be industries that were promised a certain level of protectionand whose multi-year plans are based on that factor. They may require some compensatorymeasures to ease them over the adjustment period.

3.60 The main argument for the present policy is that it has been necessary to provide infant industry protection. dowever, the time provided for protection seems excessive, and there is no clear indication that protectionhas been removed once the need has been eliminated. Tariff - 41 - protectionand bans are not the only way to provideinfant industry protection,and they do resultin generaldistortions in the economy. If infant industryprotection is needed,then it shouldbe centeredon the reason,i.e., training,technology transfer absorption and the subsidyand any additionaltariffs, and phasedout as the need declinesover a defined and limitedperiod. Industriesthat need permanentprotection should not be started.

3.61 There is now a packageof fiscalincentives based on tax holidays and accelerateddepreciation that is designedto encourageindustry. The Governmentprovides advance factories on each islandexcept St. Maartenfor businessesto move into. Curacaohas a Free Zone and an industrial estate. At present,however, the Free Zone is availableonly for the storage,packaging, assembling and exhibitionof goods.

3.62 Both the Free Zone and industrialpark are fully maintainedby CURINDE,a wholly owned corporationof the IslandGovernment that has a supervisoryboard with a privatesector majority. The conceptbehind CURINDEis to providea one-stopshop for investors,with other Government departmentsbrought in as necessary. However,the different responsibilitiesand requirementsof the Islandand CentralGovernments with respectto licensingand permitsmay make a one-stopshop difficultto operate.

An Export-OrientedStrategy

3.63 As noted, the NetherlandsAntilles needs an export-oriented industrialstrategy rather than an import-substitutionone. There is also a need to createspecialist export industries. The Centraland Island Governmentsshould consider whether the currentincentives and help given to industryare sufficieatlyconducive to an export-orientedstrategy. It should,for example,be providingan incentivescheme that not only promotesnew companieson the islands,but also helps existingones to expand,particularly into exportmarkets.

3.b4 The NetherlandsAntilles could providetax creditsbased on the value added by a company,or the net local contentof its inputs,or a combinationof the two, with differentrates for exportersand for domestic producers. Both new and expansionprojects would qualify. Export manufacturers(including those sellinggoods to tourists)could be allowed to importraw materialsand parts duty-freeso as to make them cost-competitive.A companynot makingprofits in the initialyears could defer using its tax creditsuntil it becameprofitable, or sell its credits to other companies. Such a systemwould e-couragecompanies to earn their tax creditsthrough performance.

3.65 Incentiverates shouldbe set consistentwith the GATT rules to avoid countervailingduties. They shouldalso be set with an eye to correctingthe distortionsin the economy,especially for exporters,and to providingthe varioussectors (primary,manufacturing and services)with equal benefits. The systemshould be gearedto objectivesand be automatic,simple to understandand easy to administer. It would require the productionof timelyaudited accounts, a disciplinethat in itself would help companiesbecome more efficient.

3.66 These changesshould be matchedby improvementsin the procedures - 42 - for issuingbusiness licenses. A clear,automatic system that minimizes bureaucraticdelays is needed,with the proceduresas simpleas possible and not subjectto discretionaryjudgments by officials. The presentpro- cedureof submittingapplications to the Chamberof Commercefor comments as to suitabilityis not consistentwith a freer trade policy. Similarly, the grantingof work permitsand the immigrationprocedures for key personnelshould be streamlinedand made semi-automatic(with a few quick checks)so as to allow businessesto get the best staff. At the same time, the trainingprograms and requirementsfor the replacementof foreign personnelover time shouldbe retainedand built into the system.

3.07 The less bureaucraticthe Antilleansystem of regulatingthe establishmentof new businesses,the greaterwill be the islands'attrac- tivenessto foreigninvestors and even domesticentrepreneurs.

Manutacturingand Employment

3.68 Employmentin manufacturingin Curacaoamounts to some 2,000 people,with a further175 in Bonaireonce the newly built rice mill becomesoperational and 32 in St. Maarten(with a possibleadditional 15 if the electronicassembler expands as planned).

3.69 Two companiesemploying 74 peopleexport manufactured parts for oil tools and bulk pharmaceuticalproducts. The rest of the companiesare import-substitutingor makers of productsthat are not readilyimported (ice, ice cream,soft drinks,bakery products, etc.). In Bonaire,the three manufacturingcompanies are engagedin the productionof salt by solar evaporation,clothing and rice milling,respectively. St. Maarten's two companiesfreeze and store fish and assembleelectronic equipment.

3.70 There are no definitivefigures on manufacturingin the islands, but these figureslikely cover most activities,except for some cottage workersmaking handicraft articles for the touristindustry.

3.71 Discussionswith the Chamberof Commercesuggest that roughly half of those employedon Curacaomiake products that are not readily imported,while of the other half manaywould not have jobs were it not for the protectiontheir companiesreceive. The implicationis that about 1,500people are employedin companiesthat eitherhave naturalprotection or are protectedbut still likelyto be efficient.

3.72 The 2,U00 employeesin Curacaoare employedin b2 companies producing:

No. of Companies

Food, beveragesand tobacco 18 Wood products,including furniture 10 Paper and paper products 3 Chemicals,rubber and plasticproducts 17 Non-metallicmineral products 9 Basic metal industries 8 Fabricatedmetal products,machinery and equipment 15 Uther manufacturing 2 - 43 -

An assessment by the Exports Promotion Division (EPD) of the Department of Economic Affairs has identitied 24 companieson Curacao as having export possibilities,and eight are already exporting. In bonaire, one company exports all its product (solar salt), while the rice-millingcompany hopes to export as well as serve the Antillean market. The third company supplies uniforms and has a specialist local market in which it is competi- tive. In St. Maarten, landed tuna is frozen and stored for transshipment abroad. The electronics assembly operation exports all of its output.

3.73 Discussionsduring visits to the various manufacturing enterprises support the view that some of them could compete against imported products. There is little doubt that some protected companies enjoy above-averageprofits. While the phasing out of tariff barriers would reduce their level of profits, it should not turn them all into loss-makers. The phasing out of protection,provided it is not too sudden, should give companies that have needed protection time to initiate cost savings. As noted earlier, some may require temporary interim assistance in making the transition to a free trade environment.

3.74 Concern was expressed to the mission about dumping and smuggling of cheap Venezuelan products, which are unfair competitionfor domestic manufacturers. The proposed reduction in tariffs will reduce the motivation for illegal smuggling,and more effective policing of the Leeward Islands coastline would reduce it. The smugglingof any particular item is likely to be sporadic and should not seriously interferewith the regular supply of good quality merchandisefrom local manufacturers. Dumping is more serious and where authorities believe that imports are excessivelysubsidized, and thereforeproviding unfair competitionto domestic producers,a surchargeor additional tariff snould be placed on the goods from the offending country.

ComparativeAdvantages and Disadvantages

3.75 The comparativeadvantages and disadvantagesof the Netherlands Antilles have been chronicled in many reports. The main ones are merely listed here:

Advantages Disadvantages

Well-educatedlabor force Few natural resources Politicalstability high wage rates Favorable climate Rigid worker dismissal laws Location on major trade route Lack of skilled middle management Proximity to North & South America Outward migration of technically CBI/EEC association qualifiedpersonnel Developed private sector "Inward-looking"private sector Investmentincentives high utility cost structure Good port facilities High handling costs at ports Existenceof offshore banking Small domestic market facilities Commercialbanks indisposedto lending to industry - 44 -

3.7b ilanyof the disadvantagesstem from the structure of the economy that has taken shape over the past 40 years. Thus, the country has a well- educated and generally well-paid labor force but with limited skills and experience;a well-developedprivate sector but with an inward-lookingand narrow focus; and good port facilities that are costly, as are the public utilities as well. Although the Leeward Islands are near both the South and North American markets, they only import from them. The islands also have a sophisticatedoffshore banxing system, but the onshore banks are conservativeand not disposed to invest in industry.

3.77 The unfavorable characteristicsof Lhe economy need to be minimized and the favorable ones strengthenedin order to adapt the economy to the straitened circumstancesin which it has to function. Technical assistance can help the economy become export-orientedso that employment opportunitiescan be developed; training would need to be provided in both the management and skills needed to support new industries. There is an urgent need for cost reductionprograms in the ports and utilities, and improved productivityof labor throughoutas well as reductionsin wage costs. All these measures will help markets that at present do not appear feasible, or because the country is currentlynot competitive.

3.78 The later discussion on agricultureadvocates the developmentof a small agriculturalsector to serve the local populationand tourists. In the area of manufacturing,however, there does not seem to be much scope for significantexpansion in the domestic market. If products are not being made under the current protective barriers, they are unlikely to be made in the future. On the other hand, there may be scope for expanding existing efficient companies into the export markets. While the Antilles cannot compete in mass-produced,labor-intensive industries becauseof its high labor and utility costs, it should be able to compete in areas where labor and utilities do not form a large part of the total cost of the ex-factoryprice. An examinationof the cost structure of the companies visited during the mission suggests that their success is indeed based on this relationship.

3.79 A market-relatedstrategy centered on the developmentof high-tech, high-value products in special industrialparks would be appropriatefor the Antilles,with the Curacao Free Zone and industrial parks (or halls) forming the base. The Free Zone is narrowly focused at present, however, and would need to be extended to cover manufacturingand not just transshipment. bonded excise goods should also be added for transshipment.

3.80 While the Antilles has a well-developedprivate sector, it is not experienced in the identification,evaluation and promotionof investment opportunities,particularly those related to exports. The Government should not attempt to establish actual ventures, but its assistance is needed if the country is to acquire expertisein project identificationand evaluation;promotion and attraction of foreign investment;and development of export markets relating to these investments (as well as existing industry). Assistance in these areas, oriented to achieving results and combined with the training of counterpartstaff, is an essential element in the strategy of developing industry. It is not only a matter of culti- vating export markets but also of exploring alternativesources of supply for the domestic market. One reason for the high cost of living and there- fore high wages is said to be rigidity of the current sources of imports. - 45 -

The study of exportmarkets could be extendedat low marginalcost to identifyimport sources as well.

3.8i This approachto investmenthas been used successfullyin many developingcountries. Projectprofiles of investmentopportunities are generatedby specialistteams; they cover markets,supplies, technology, costs and revenues,and likelyrates of return. This informationis then used to generateinvestor interest in that country. The degreeof "aggressiveness"in marketingthe profileshas variedfrom countryto country;an aggressivesales pitch is advocatedhere. 8/ 3.82 A third part of the strategywould be to raise the generallevel of skill of managementand the work.force. As noted,given the present level of unemploymentand the need to reducethe size of (overnmentsector, there is a big demandfor jobs. If the privatesector is to absorbthe additionsto the labor marketand meet its own needs,a substantialtrain- ing effortis warranted.

3.83 One approachthat meritsserious consideration would be to set up an autonomous non-profit fotndation,to be .un jointly by the private sectorand the Governments.This organizationcould have as its objective to train peoplein the skillsneeded by both the privateand public sectors. Part of its role would be to help identifythe skill gaps, form- ulate policiesand take requisiteactions. Over time, this institution could developinto a regionaltraining center and be linkedto the interna- tionaltrade centerof Curacaoand to the university.The existingagency of FEFFEKshould be absorbedinto this,as FEFFEKas it currentlystands is too narrowand limitedin scopeand focus.

3.84 One constrainton industrialnew facilitydevelopment is that local commercialbanks are conservativein their lendingpolicies and generallyhave not providedmedium- to long-termloans of the type required by manufacturing.While the DevelopmentBank is mandatedto provide venturefunds, it is underfundedand its ruleslimit the size of its loans. There is also a recentlyformed triumvirate of the Curacao Government,unions and employersthat is attemptingto generatesmall-scale businessesin Curacaousing a fund set up by the IslandGovernment, the crisisfund and a local surtaxon income. While the DevelopmentBank coversthe whole nation,Korpodeko's mandate is restrictedto Curacao. There is merit in linkingthe activitiesof the two groupsfor greater effectiveness. 3.85 A betterfunded Development Bank shouldalso work closelywith the commercialbanks in order to providefinancing for industrial ventures. Moreover,the experienceand contactsof the offshorebanking sectorcould be put to use in helpingto attractoverseas investors. The ITC shouldalso be helpfulin this regard.

A Vehiclefor InvestmentPromotion

3.86 There is now a proliferationof investmentpromoting agencies in

8/ A currentinvestment promotion venture (to extendover 15 months)in a Malaysianstate has generatedcommitments for 14 projectstotalling $130million in investment,and creating1,029 jobs. - 46 -

the Antilles,each with its own focus,some of them overlapping.This situationleads to diffusionof effortand resourceswhere concentrationis Weeded. CURINDEfocuses on Curacao,while the ExecutiveCouncils of other Islandsaddress the needs of their own areas,with the help of the Departmentfor DevelopmentCooperation. The Departmentof Trade, Industry and Employmentalso has an investment-generatingrole. In addition,there to the DevelopmentBank.

3.87 It is recommendedthat an Investmentand ExportDevelopment Authority(IEDA) be set up to promotethe NetherlandsAntilles. Staff from existingagencies responsible for these functionscould be transferredto the Authority. The duplicationof functionsshould in any case be avoided. However,CURINDE would still manage the Free Zone and industrial park, and any other such estatesas may be developed. In effect,this approachdistinguishes between policy, planning and promotionon the one hand (IEDA),and managementon the other. IEDA would be responsiblefor trade promotionand trade informationservices for marketdevelopment and would help in designingsystems for incentivesand duty-freeimport of goods for exporters. It would also be responsiblefor attracting Investment. Models for IEDA'sinvestment functions can be drawn from the agenciesset up to attractinvestiment and employmentin localitiesof developedcountries that have experiencedthe declineof old, traditional industriessuch as coal, shipbuildingand steel.

3,88 IEDA shouldbe establishedwith specialistexpatriate management and a full-timecounterpart team. Over a periodof, say, two years,the counterpartteam would be trainedin the identificationand evaluationof projects,the marketingof investmentopportunities, and exportpromotion. Targetsshould be set in terms of jobs created. The best available expatriateteam irrespectiveof nationality,could be fundedinitially using Dutch aid, but over time the trainedcounterpart team would be funded by the Government.

3.89 The IEDA shouldbe completelyindependent in day-to-dayopera- tions and free from politicalinterference. The IEDA'sobjectives should be clearlystated and it should be judged on the achievementof those objectives.

3.90 The DevelopmentBank shouldalso be strengthened,particularly Its funding. The DevelopmentBank would in practicebe the bankingarm of the IEDA responsiblefor links with commercialbanks, and where necessary providingventure capital. The DevelopmentBank and IEDA would work togetherto developa systemof short-termcredits and creditguarantees for exporters.

ftimaryProduction

Agriculture

3.91 There is littleagriculture on the islands,except on Saba, where agricultureis proportionatelymore importantthan on the other islands.

3.92 When the economywas prospering,comparative advantage led to &Aportsof food ratherthan domesticproduction, and the earliertraditions - 47 - of farmingand horticulturewere lost. While it is no longereconomic to importfood in the quantitiesof the past, farmingwill not return overnight,even thoughthere is scope for efficientproduction of certain fruitsand -egetables.Three factorsare thoughtto hamperefficent productionin the Antilles: market size; water supply and soil conditions; and the willingnessof the populationto farm. The picture,however, differsamong the islands,and so they are examinedindividually.

3.93 Curacao. With respectto market size, it shouldnot inhibitthe growth of an efficientagricultural sector in Curacao. The local population,combined with tourists,provide a sizablemarket that is currentlybeing met with imports. A regularhome-grown supply of good quality fruitsand vegetableswill find a ready market,particularly among hotelsand restaurants.Fresh produceof good qualityshould be able to competewith the cheap but poor qualityimports (with littleor no shelf-life)available to local consumersin the floatingmarket.

3.94 The other two obstaclesare greaterproblems. However,the evidenceis that irrigationcan renderthe soil productive. On the other hand, water is neitherplentiful nor cheap. The normalsupply, which is piped to most parts of the island,is expensivedesalinated water. However,the terraindoes allow rain to be collectedbehind dams. The feasibilityand cost of buildingnew small dams, and of rehabilitating existingones, shouldbe examined. There is also some undergroundwater that can be pumpedto the surface,although it ; insufficientto supporta growingagricultural sector,

3.95 Idle land around existingand futuredams shouldbe zoned for agriculturaluse. Those owningidle land who are unwillingto farm it should be obligedto rent or lease it to willingor would-befarmers for periodslong enoughfor returnson investmentto be realized. Disputes about land titlesor boundariesshould be resolvedas soon as possible,and the very limitedGovernment staff needs to be augmentedto eliminatethis backlog. It is true that at presentthe numberswilling to farm are small, but they are likelyto increaseas the recessionbegins to bite and the opportunitierin and returnsto agricultureare perceived.

3.96 To developagrieulture will also requirethe resolutionof some technicalproblems, particularly with respectto the use of irrigation systemsand generalknow-how about the type of farmingappropriate to Curacao'sconditions. An agriculturalextension system needs to be developedto help farmersproduce and marketmore efficiently.

3.97 A similarsituation exists with livestock,where the rearingof chickens,goats and pigs is being undertakenon a small scale. This activitycould be expandedon the basisof the touristand local markets.

3.98 The CuracaoFederation of Workershas prepareda detailedpro- posal for a feasibilitystudy of intensivegrowing of vegetables,raising of sheep for meat and the establishmentof a broilerfarm, along with a separateproposal for the provisionof technicalassistance in extending the irrigationsystem. This study would be a timelycomplement to the presentextension services and is necessaryif the full potentialof the sectoris to be realized. - 48 -

3,99 donaire. The general comments about Curacao apply also to Bonaire. However, with the establishment of a rcie mill there, the scope for livestock production is better, because livestock feed can be produced as a by-product.

3.100 Saba. A wide variety of fruits and vegetables is being produced on Saba, which, althougL mountainous, 's less arid than the other Antilles. Saba, however, has a problem in marketing what it produces. St. Maarten is a natural market, but Saba's producers need tc be organized to exploit it. An Agriculture Development Program has been approved, but the required technical assistance has not yet uwterialized. For such a program to be successful, Saba producers will have to become more knowledgeable about markets and marketing and to stop shying away from cooperative action.

3.101 St. Eustatius. There is little agricultural activity on St. Eustatius apart from a Government experimental station and a few individuals engaged in drip-irrigatedhorticulture and peanut growing. There is no cooperative action among the growers, which is essential if they are to exploit the potential market of St. Maarten.

3.102 St. Maarten. There is also little agriculturalactivity on St. Mlaartenbecause of the current high opportunity cost of labor. So long as the boom in tourism continues, it is unlikely that agriculture will be economically feasible or desirable.

Fisheries

3M103 The Leeward Islands. Fishing, like agriculture,has not been developed as an industry. Instead, individual fishermen supply their own needs and sell their excess to hotels and restaurants. However, as with the market for produce, there should be sufficient demand to offer scope for development in both scale and organization,given the right help in coordinatingthe markets and supply.

3.1U4 Aquaculture of many species has been mentioned as a feasible option, given the surrounding waters and other favorable conditions. Some work conducted at the Marcultura Laboratory at Bonaire suggests that a shrimp hatchery is feasible. The proposal of the Curacao Federation of Workers includes a marine shrimp farming project.

3.105 The Windward Islands. At present, there is no fishing on a com- mercial scale in the Windward Islands. There is, however, a Japanese freezing and storage facility on St. Maarten for the transshipmentof tuna, mainly to Puerto Rico for canning; it is supplied by long-haul trawlers fishing beyond the Antilles.

3.106 All the evidence suggests that a Windward Islands fishing indus- try would be profitable. The Saba fishing bank is said to be very produc- tive. The Island Government of St. Eustatius has proposed the purchase of two fishing boats and an onshore freezer, to be financed with Dutch aid. The mission also met a St. Maarten-basedfishing entrepreneur who plans a fishing operation, with a processing facility at Saba. However, this plan is currently being held up fo.'lack of export markets, which ar needed to make the operation viable on tuiescale envisaged. Marketing assistance is proposed under the technical assistance package discussed later. - 49.-

3,107 The developmentof a fishingindustry (both conventionaland fish farming)by the privatesector, including foreign participation, should be pursued. The Governmentcan play a role throughthe provisionof extension servicesto help exisitingand potentialfishermen with harvestingand marketing.

EuployMentTargets

3.106 The presentlabor force of the NetherlandsAntilles (excluding Aruba) is about 70,000,of which l1,000are officiallyestimated to be unemployed(nearly 26 percent). Net additionsto the labor force (assuming no net migration)will bring the total to about 7b,500 by 19"5. If unemploymentcould be reducedto 15 percent by that year, the number employedand the number of new jobs needed to be found would be:

Labor force in 1995 76,500 Unemployedin 1995 11,500 Employedin 1995 65,000 Employedin 1986 52,000 New jobs required 13,000

However,a reductionin employmentin the publicsector is proposed,so that the number of jobs to be createdin the privatesector would have to be largerif overallunemployment is to be kept to 15 percent. A shake-out from the public sector of 3,000 would raise the number of new jobs required in the privatesector to 16,000.

3.109 Tcurismand the ITC could be expectedto employ,directly and indirectly,some 3,500 additionalpeople. Increasingthe numbersworking in agricultureand fishingto 5 percentof the labor force would also add about 3,500. Some 9,UUO jobs would thereforeneed to be createdelse- where. Limitedgrowth of employmentin construction,transport, commerce and other non-governmentalservices is to be expected,but the lion'sshare would have to be providedby an expansionof manufacturingenterprises, say, by an additional7,500-8,000 jobs. Employmentin manufacturingwould then be about 10 percentof the total labor force in 1995. Those suggested shares for agricultureand manufacturingmay be comparedwith the correspondinglevels in other islandsof the Caribbean:

Share of Labor Force In: Population Agriculture Manufacturing Country (000's) (percent)

Barbados 252 9.5 13.1 Montserrat 12 9.5 11.2 Trinidad& Tobago 1,050 9.8 16.4 Grenada 92 28.7 5.b Dominica 77 13.1 5.5 Antigua& Barbuda 78 9.0 7.4 St. Kitts and Nevis 45 17.2 13.3 Suriname 374 11.3 10.4 - 50 -

3.110 These targetsare illustrativeof the effortthat will have to.be made to providenew employment;however, they are subjectto refinementon the basis of more accurateinformation than is now availableon the size of the labor force and actualunemployment. As to the latter,it is likely that some of those counted . unemployedreally have full- or part-time jobs in the so-called "infoimal sector". There has also been a steady outflow of Antilleans to other countries, which means that a significant part of the officiallyestimated unemployment has been exported. The numbersleaving permanently for abroadare not known, but the following informationon the migrationof Antilleanresidents to and from Hollandhas been providedby the Dutch authorities:

Entering Leaving Net Year Holland Holland Immigration

1980 5,497 2,316 3,181 1981 4,438 2,808 1,630 1982 4,001 3,199 802 1983 3,887 2,891 996 1964 3,867 2,641 1,226 1985 6,632 2,065 4,567

1985a/ 1,160 619 541 198ozt 1,212 454 758

Source: CentralBureau of Statisticsof the Netherlands. a/ First four months.

These statisticsinclude Aruba and cover Antilleancitizens, Dutch citizens and foreigners. However,the large majoritywere presumablyAntillean citizens. The sharp rise in Antilleanresidents entering Holland in 1985, which occurredin the latterpart of the year, may be associatedwith the closingof the Lago refineryin Aruba on March 31, 1985. In 1986, emigrationfrom the Antillesas a whole appearsto have droppedto more normal levels.

3.111 While it is not known how many of the immigrantsinto holland were of workingage (or how many left the Antillesfor other countries),it does appearthat the unemploymentproblem is less severethan the official estimateswould suggest. To that extent,the pressureto createnew jobs is reduced. On the other hand, the Antillescannot count on a continued outflowof their citizensseeking jobs elsewhereand would be wise to plan on providingemployment for them at home.

C. The OffshoreBanking Sector

3.112 The NetherlandsAntilles emerged as an offshorefinancial center in the mid-1960s. There was a proliferationof financecompanies incorporatedin Curacaoas wholly-ownedsubsidiaries of international companies,created to raise funds in the Eurodollarmarket for on-lending to the parentfirm. Under the 1963 tax treatybetween the US and the - 51 -

Netherlands Antilles, interest paid by the parent US companies to their finance subsidiaries in the Netherlands Antilles was exempt from the US withholding tax on interest payments to non-residents.

3.113 Prior to July 1984, when the US repealed this tax, these finance companies were the core of the offshore financial sector in the Netherlands Antilles. They contributed about bU percent of the profits tax received by the Curacao Island Government from the otfshore sector (most of the balance was contributed by trust companies or trust departments of commercial banks engaged in real estate transactions). The profits tax on offshore finan- cial activities is levied at a low rate (2.4 percent on the first NAf 10U,000 of net profit and 3 percent on amounts above that level) but nevertheless accounted in 1965 for 50 percent of the total revenue of the Island Government before revenue-sharing transfers, and 40 percent of the consolidated revenue of the Central and Island Governments. This sector also accounted for 27 percent of the country's balance of payments inflow on the current account (see Table A12 in the Annex).

3.114 Employment in the offsnore sector is, however, modest. A survey in April 1984 of the 20 members of the Association of Offshore Bankers in the Netherlands Antilles (OBNA) revealed 215 local staff and 36 expatriates in 24 banks. Support services are provided by lawyers and accountants. Still, total jobs in the sector may not exceed 300.

3.115 Kepeal of the US withholding tax in June 19b4, and rulings of the US Internal Revenue Service in October of that year intended to eliminate the tax advantage of channelling credits between a company and its subsid- iaries through the Antilles9/ have severely reduced the attractivenessof the latter as a conduit for Eurodollar loans to the United States. As a result, few new transactionsof this kind have been made in the last two years. While bonds and other borrowings concluded before July 1984 have not been affected by the changes, the substantial drop in international interest rates since then has given borrowers a strong incentive to refinance at the lower rates. There is no special advantage in doing so through the Antilles, and a rapid retiring of the Eurobonds and loans held by the offshore financial companies is to be expected.

3.116 Changes in US tax law have also affected real estate transactions in the Antilles. In June 1980, the Foreign Investment in Keal Property TaX Act (FIRPTA) imposed a tax on capital gains realized by non-resident individuals or companies. More stringent provisions in the Tax Reform Act of 1984 further eroded the advantages of investing in US real estate through the Antilles.

3.117 The Netherlands Antilles also benefitted in the past from the preferential treatment the Netherlands accorded dividends paid by its companies to certain firms in the Antilles. This absence of a dividend tax attracted money from third countries channelled through the Netherlands. Under a change in the tax regime of the Netherlands, however, such dividends paid from January 1, 1986 onwards face a withholding tax of 7.5 percent, although the rate may be reduced if the Antilles decides to tax them itself.

9/ I1S rulings 84-152 and 84-153. - 52 -

3.118 Normalcommercial banking has not been affectedby these various changes,and it is noteworthythat the Dutch and foreignbanks that have a real presencein Curacao(about half the US banks are registeredto do businesson the island)have not departed. That, Curacaoremains an importantbanking center, with its location,experience and skills attractingbanking business from other parts of the world,especially South America. Leadingmembers of the industryfeel that businesscould be furtherdeveloped and could compensatein some measurefor the loss of Curacao'sstatus as a tax haven. However,the Governmentwould need to liberalizethe regulationsand restrictionsthat hamperbanking activities, especiallywith respectto the employmentof expatriatesand the dismissal law. A well-developedbanking sector could certainlybe of considerable help in marshallingforeign private investment for the tourismand manufacturingindustries.

3.119 The overalltax treatybetween the NetherlandsAntilles and the U.S. expiredin 198U, and at the requestof the latter,several rounds of negotiationshave taken place. A new treatyis presentlybeing prepared, and it may restoresome of the previousadvantages of the Antillesas an offshorefinancial center, provided that arrangementscan be made to restrictsu^h activitiesto legitimatetransactions. Pending the outcome of the negotiations,it would,however, be prudentto assume that the revenuesfrom offshoreactivities will begin to declinerather steeply from 1987 on. In recentconsultations with the IMF, the tax authoritiesof the Curacao IslandGovernment forecast that these revenues,which reached NAf 375 millionin 1985 (see Table A36 in the annex),will declineto NAf 1UU millionin 1989-90. This estimatewas used in the projectionsof budgetaryreceipts and expendituresdiscussed in ChapterII. - 53 -

Chapter 1V

GOVERNMENT, INFKASTRUCTUREAN) SUCIAL SEKV1CES

4.1 This chapter looKs at the provision of critical puolic services--intrastructuraland social--thathave a strong influenceon economic development. by way of context, the chapter opens with a review of the nature and operations of governmentin the NetherlandsAntilles, since they have a profound impact on the provision and strengtheningof the public service base. It then examines the current intrastructuralsystem and needs (specifically,water services, electric power, ports, internationaltelecommunications and aviation),and social services and needs (health, education and housing).

A. Government

4.2 The NetherlandsAntilles has a complex system of government that has become excessively large and inerticient. The problems basicallyfall into three categories--structure,operations and personnel-related--which are reviewed below. A positive developmentis that the various Governments have recognized the need for reform and have already taken some important steps. The section also looks at these steps and suggests some further measures.

The Nature of Government

Structure

4.3 The Netherlands Antilles has a two-tier structure of government intended to reconcile the need to govern the Antilles as a single autonomous unit within the Kingdom of the Netherlandswhile recognizingthe diversity and geographical separation of the individual islands. Each isldnd has its own elected Council and set of administrativeunits that perform many of the main functions of government. The Central Government of the Antilles, elected separately,is responsiblefor general policy and control and provides certain services to the islands. Chief among these are justice, police, post office, telecommunications,assessment of the income and profit taxes, and collectionof indirect taxes. For their part, the Island Governmentscollect direct taxes. There are also revenue- sharing arrangementsbetween the Central Governmentand some Island Governments (see Chapter I).

4.4 The public sector includes a number of operatingenterprises owned either by the Central Governmentor one of the Island Governments. They include the national airline (ALM), the Wuracaoury Dock Company, the large refinery on Curacao formerly owned by Shell, several hotels, and com- panies that provide water and power. The main public financial institu- tions include the central bank, the Social Security Bank, the civil service pension fund and the Girodienst, a savings bank owned by the Curacao Island Government. - 54 -

GovernmentOperations

4.5 Budgettingand PlanninB. The CentralGovernment plans to hire a consultant(para. 4.29), one of whose tasks should be to examinethe financialand budgetary machinery of government. The annual budgetsof the Governmentscontain gaps and inconsistenciesand bear little relationto actual revenueeand expenditures.A sound and timely budgetarysystem is the most importantsingle tool of good administrationand intelligent planning. Withoutit, a governmentcannot judge how economicpolicy should be framed in order to correctimbalances or deploy resourceseffectively, nor can it determinewhether policies are being implementedproperly and at the approvedcost.

4.6 The currentoperating budget in the NetherlandsAntilles provides estimatesfor wages and benefits,goods and services,and capital expenditures. There is also a breakdownof expendituresby functionand/or spendingdepartment, but it does not appear to be used. The practicehas been to use the budgetaryexpenditures and estimatesof costs of the previousyear as the basis for developingthe succeedingyear's budget. Explanationof the budgetallocations has tended to be minimal,and little use has been made of workloadmeasurements, cost, staffingstandards or targetsfor accomplishment.Once passed,the budgetshave not imposed disciplineon the spendingdepartmeats and hence have had little relation to actual expenditures.Excess departmental expenditures have routinely been coveredby supplementarybudgets, while other departmentshave spent well short of their budgetary allocations. Spending departments and agencies should be requiredto explainand justifytheir annual requests, which would be subject to review by a specialunit reportingto a senior minister. Variations from previously approved expenditures should also be explainedand justified.

4.7 As to capitalexpenditures and developmentplanning, no single entity has an overviewof the projectsin progressor of the continuing maintenanceand operationalcosts associatedwith completedones. At the centrallevel, the Departmentfor DevelopmentCooperation (DEVCO) assists the islandswith developmentplanning, programming and implementation. DEVCO has produceda five-yearplan for each island,but they are really only advisoryin nature,since the Antilleshas called on the Netherlands to allocatedevelopment aid. Dutch technicalassistance, on the other hand, is providedlargely on a first-come,first-served basis. In neither case does the CentralGovernment exercise a strong hand in controlling projectaid or technicalassistance, nor does it look at projectmerit.

4.8 The CentralGovernment could assume strongercontrol over developmentprogram funding and strengthenand improveboth the form and use of the developmentbudget. A well-conceivedand comprehensivepriority listingcould well result in a distributionof developmentaid different from currentallocations, depending on the relativesignificance, impact and merit assignedto proposedprojects. Since it is not realisticto deny an island aid in a given year becauseits proposedprojects rank relatively low, one approachwould be to guaranteea minimumallocation to each island based on a formula, with the balance of the project and technical assistance funds awardedalong efficiencyand prioritylines. This approach would comply with the guarantee of "equivalent facilities" for ali the islandsbut at the same time would introduceefficiency criteria Into the process. - 55 -

4.9 Two other recommendationsfor planningare; (1) that all capital and developmentprojects be reviewedand clearedthrough a single agency; and (2) that each projectbe requiredto includeestimates of its continuingmaintenance and operationalcosts in the overallopera- ting budget. In particular,all the costs that will occur in a specified budgetaryperiod should be identified.

4.10 One weaknesshas been delays in completingthe budgets. As of April 198b, neitherthe 19M4 nor 1915 budgetshad been completed,and the 1986 budgetdocuments lacked many entriesin the centralaccounts and those for Government-supportedenterprises. As such, the totalsand projected deficitsare suspect.

4.11 At the island level, the budgetsare often unrealisticin that they assumesupport from the CentralGovernment that will not be forth- coming. Bonaire,for example,projects NAf 20 millionfrom the Central Governmentin 198b, whereasCentral Government documents anticipate NAf 14 million. The Islandand CentralGovernment budgets need to be better coordinated.

4.12 A number of more sophisticatedbudgetary systems could be adopted,all of which stress programand performancedata and careful accountability.However, the presentsystem could be readilyimproved and developedas a planning,decision-making and managementtool by: (a) applyingstaffing and servicestandards, e.g., secretarialto professional ratios,inspections per man-month,and maintenanceand securityrequire- ments per facility;and (b) improvingexpenditure control through a quarterlyreporting procedure.

4.13 The successof the latter dependson timelyand accurateinforma- tion and the capacityto keep departmentswithin their budgetallotments. Once the budgetsare adopted,the departmentswould file quarterlyexpendi- ture statementsthat show actual expendituresin the quarterin the various budgetarycategories. The staff componentshould show permanentversus temporarypositions and count the latter in man-weekor man-monthequival- ents. Once the spendingand manningproposals have been acceptedby the appropriateauthority, routine reviews need to concentrateon divergences, with the burdenof explainingthem on the spendingdepartment. If not approved,the divergenceswould be offset by compensatingadjustments in later quarters.

4.14 InformationSystems. budgetaryand planningsystems are only as good as the informationon which they are based. The qualityand time- linessof the informationavailable to Governmentsin the Antillesin virtua±lyevery area and at all levels leave much to be desired. The nationalaccounts are not up-to-date. The missionhas providedcurrent estimates(Tables I.1-4), in collaborationwith the Centralbureau of Statistics,which should be recalculatedannually. The data on public financesare unreliableand often late. Planninginformation has significantgaps, while workloadinformation among the agenciesis virtuallynon-existent. basic data from the 19b1 census ueed to be reviewedand broughtup-to-date at regularintervals, possibly by using samplingtechniques. For example,a sample of individualsengaged in intormalactivities (that is, remuneratedemployment or trade not recorded - 56 - in the officialstatistics) would throw lighton the degreeor true unemploymentand the levelot personalincome.

4.15 When resourceswere ample,there was no perceivednee for good data as a basisfor decision-making.Information was not emphasizedin the budget,staffing Or planningprocesses; instead, allocations were made more on the basisof politics. The divisionsin Government,both betweenthe Centraland IslandGovernments and among the islands,were rigidly observed,and no consolidationof informationwas sought,perhaps because it was seen as impingingon the islands'independence and self-determination.Similar independence was the rule for the many departmentswithin the variousGovernment structures. Unfortunately, these conditionsare stillpresent despite the shiftin financialtortunes, althoughthere has been some recognitionthat informationis an important planningand decision-makingtool. Now, however,a wide rangeof technical limitationshamper the use of information.Although computers are increasinglyused in Governmentoperations, they are not linkedaccording to any consistentplan, but in any event thereare no connectionsto permit those linkages.

4.1b The Governmentshould seek technicalassistance, possibly from the UnitedNations, to help it organizeits statisticsand information- gathering.Attention should be paid to detiningthe informationneeds, creatinga properorganizational structure for controland managementof informationprograms, developing program links, ensuring compatibility of equipment,and trainingpersonnel in data input,control and management.

4.17 The Audit Function. The Centraland IslandGovernments other than Curacaol/have not carriedout effectiveaudits. In fact,an outside reviewof the Governmentsector accounts for the period1971-b3 was completedonly recently,and the resultshave not yet been officially released. Auditsof otheraccounts also lag substantially,a situation that poses substantialdangers. The civilservice pension fund, for example,has not been reviewedsince 1978,although it may be insolventor at least seriouslyunderfunded, because Governments have been withholding theircontributions in orderto fund theirannual deficits. On the other hand, the auditsthat have been completedhave not had much effect,as thereis no follow-upor responseto the findings,and no sanctionsare imposedfor bad performanceor non-response.

4.18 One reasonfor theseproblems is that the audit functionis essentiallyrudderless. It is supposedto be controlledby a five-member Board,but only two seatsare filled,so that the boarddoes not even have a quorumfor transactingbusiness. Moreover,board membersare understand- ably not very interestedin theirjobs, given how littlevalue is asso- ciatedwith them. To supportand encouragethe Board,the Government shoulddeclare its intentionto have a viableaudit function,should fill the vacancieson the Boardand in the staff,and shoulddevelop a meaningfulwork agendafor the staff,based on Governmentpriorities.

1/ To its credit,Curacao, with technicalassistance from the Netherlands, has refinedand updatedits budgettingprocess. The CentralGovernment is now undertakingsimilar reforms. - 57 -

4.19 Taxation. Over the longer term, tax simplificationand policy changescould be considered. For example,the currenttax form for individualsis four pages long, in ofticialDutch and difficultto interpret. Simplerfiling and reportingrequirements would considerably increase taxpayercompliance and simplifyprocessing.

4.20 As regardspolicy, the Governmentshould considermoving as fast as possibleto a "pay as you go" system of taxation,which alreadyapplies to civil servants,and modifyingpresent laws regardingthe reportingof interestpayments and user taxes. The Governmentis not receivingthe yield it should from those sources. based on a small sample,the mission estimatesthat less than 10 percentof the taxableinterest is reportedon the tax forms. As existinglaws do not permit banks to provide information,reporting is a matter of conscience. User taxes are also impossibleto verify. Moreover,although on the books,user taxes are not activelyenforced or administeredby the Departmentof Taxation. One reason is the difficultyof administration.For example,the reaters'tax is almost impossibleto administerand in fact inducestax evasionby both rentersand lessors. It couldwell be replacedby an increasein the real estate tax. In contrastto this situation,good tax administrationis built on sound law that is well-understood,verifiable and enforceable.

4.21 ketraining. In the coming years, therewill be extremepressure on the public sector to trim its workforceand becomemore efticient. Currently,there is a shortageof a number of skills that are necessaryto upgradeperformance, especially accounting and finance,auditing, project monitoringand evaluation,data processing,and managementand supervision. Since staff can be added only in very specialcircumstances, the emphasismust be on upgradingpersonnel. Improvementsin this area will requirea good understandingof staff needs, an assessmentof the educationand skills of existingpersonnel and the provisionof appropriate trainingand educationalopportunities.

4.22 For thosewho face an involuntaryloss of jobs, an organized programis needed to identifyand/or develop opportunities for employment in the privatesector, to retrainredundant public servants for such jobs and to help place them. A proposalfor a joint public-privatefoundation with theseobjectives was discussedin ChapterIII.

Personnel-Relatedlssues

4.23 It is widely acknowledgedamong ministers, officials and the public that Governmentin the NetherlandsAntilles has grown too largeand should be scaled down, both to reduce public expenditures and to increase efficiency. There is a long tradition of awarding jobs for political reasons, a situation found elsewhere. However, in the Antilles, the "old guard" has not been replacedwhen Governmentshave changed. Instead,more positions,offices and departmentshave been createdto accommodatethe new appointees. The CentralGovernment now has 40 departments,the Island Governmentof Curacaohas 4b, and many of their functionsoverlap. The fragmentationof publicadministration on this scale,and the competing claims of politiciansand officialsat the two levels,make it very difficultto bringdepartments together that should be cooperatingto carry out the Government'spolicies or to addressspecific problems. This situationmilitates against the delegationof powers to departmentheads, - 58 - inhibits decision-makingand affords a constant temptationfor politicians to intervene in the day-to-dayoperations of the departmentsand publicly-ownedenterprises. At the island level, the difficultyof coordinatingpolicy and administrationis compoundedby the fact that the Commissioners,although many of them are able and experienced,have no elected leader equivalent,say, to a Prime Minister who can provide direction and resolve disputes.

4.24 Even with public enterprisesexcluded, Governmentis now by far the largest employer, accountingfor 37.5 percent of employmentin l9bl and an estimated 42 percent in 1985 (Table 1.8). As total employmentfell during this period by some 5,300 persons, the civil service rolls were increased,whether intentionallyor not, as a form of work relief.

4.25 The growth of the civil service is, in fact, mainly responsible for the rise in Governmentexpenditures of nearly 14 percent ir real terms between 198U and 1964. As a consequence,the share of Governmentservices in LDP in that period went from 17.1 percent to 22.9 percent, and even further to 23.5 percent in 1965 (Table 1.2); this increase occurred at a time when the economy as a whole was shrinking. If public enterprisesare added, the public sector as a whole accounted for at least 50 percent of GDP. It is clear, therefore,that any significantadjustment in the Antilles' straitenedeconomic circumstancesmust involve the size and cost of the public sector.

Streamliningand Rationalizingthe Government

4.26 both the Central and Island Governmentshave taken some actions and are consideringothers in an attempt to cut public spending and incr--iserevenues. In February 198b, the Central Council of Ministers announced a hiring freeze for at least one year that extends to Central Government-aidedinstitutions as well as the civil service; it also callea for an early retirementplan and other measures intended to reduce expenditures.

4.27 These measures and others under study are laudable as far as they go and as far as they will be implemented. However, they touch only the fringes of the problem. The proposed divestituresof some public enter- prises and reduction of subsidies,the intent to acceleratethe collection of outstandingdebts, and the strong atfirmationof the hiring freeze and existing rules on personnelmanagement are necessary further steps in the right direction.

4.28 An additionalpositive sign is the existence of the "Commission baank," a committeeof five departmentheads charged with identifying problems and needed approachesin the areas of finance, revenue, personnel proceduresand Prime Minister/Ministercommunications. The Commission could serve as a continuinginstrument for f.mprovingthe efficiencyof the public administration. At present, there is little incentive tor those who perform well, and virtually no penalty for those who perform poorly or who do not conform to the laws or regulations. The Governmentcould strengthen the Commission'sability to carry out its tasks by providingadditional staff support. - 59 -

4.29 The Government is proposing to hire an outside consultantto assist it with a more fundamentalreview of the governmentalstructure and budget, public administrationand decentralization. This consultanthas already worked on several of the islands and, in fact, completed its work on bonaire at the end of April 1965. Its principal task will be to pro- pose, in light of the separation of Aruba, a program for achieving a more rational and effective structure of Governmeit than the present two-tier system, with its host of overlappingdepartments and functionsand inflated manpower.

4.3U This study will be important, as much of the original logic behind the two-tier structureof government disappearedwith the separation of Aruba. No longer is there a need to balance the needs and demands of Curacao and Aruba, the main axis of the former group. Instead, tne situation now involves a relationshipin which the islands of bonaire, St. Eustatius and Saba depend on Curacao, while St. Maarten is largely self-sufficient. The size, ecology, cultural oackgroundand economic prospects of all the islands are very difterent. There is no obvious constitutionalor administrativearrangement for the governance of such a disparate group. A centralized,unitary form of government would probably be unworkable becauseof the disparitiesamong the islands and the strength of local sentiment. Upinion thereforeappears to be moving in favor of a federal-typestructure with strong local autonomy, although that approach carries the risk of moving the Antilles toward eventual break-up.

4.31 Under such a system, the functionsof the Central Government might be limited to essential common services (justice,police, post office, central banking, economic planning, statisticalservices, etc.), with a consequent reduction in the number of departmentsand civil servants. Fewer staff and a rationalizationof their functionsshould permit the developmentof a truly competent, professionalcivil service.

4.32 Considerationshould also be given to replacingthe present staggeredsystem of Central and Island elections. In effect, no Government now can count on more than two years in which to carry out its program, because of the effect a change in Governmentat one level has on the other. Either the local and national elections should take place at the same time, or else representativesmight be elected every four years to serve in the local assemblies,which in turn would elect delegates to the national Parliament. There are other variations on these themes.

4.33 A few points also need to be made here concerning the island Governmentsof bonaire and St. Maarten specificially. Bonaire has had a continuing problem with deficits and cash flows. There is evidence that payments to vendors are nearly a year in arrears. As a result, vendors now require cash in advance or substantiallyincrease their prices or refuse to do business with the Government. Therefore,a financial audit is a pressing need.

4.34 On the positive side, a major review of the Governmentalstruc- ture and systems of Bonaire was just completed. It has already produced results in terms of better project management and reporting. The review proposed a series of actions aimed at restructuringand consolidatingthe Government and reducing the workforce. The major features of its reorgani- zation plan are to consolidatecurrent departmentsand divisions into eight - 60 -

departments (Finance,Transport, bocial and welfare, Public Works, Personnel,Agriculture, Tourism, and Trade and Industry)and to provide a professionalstaff for the Island Executive Council. A program for early retirementincentives is proposed that would yield NAf 1.5 million in savings from the fourth year on. Minimal work measurementand project management techniqueshave also been introducedthat will improve schedules and costs rapidly.

4.35 over the longer term, a case is made for privatizingsome Governmententerprises and services. Preliminarytalks are under way for the sale of a Government-ownedhotel, and both security and some of the maintenancework could be let to private contractors. Actions and pro- posals along these lines could well be followed on the other islands.

4.36 As to St. Maarten, it has a loose and rather personalizedform of Government administration: there are some 20 administrativedivisions but no plan defining organizationalrelationships or assigning responsibili- ties. Actions are initiated,approved or modified by the Executive Council. There is little delegationof authority from the Council to other units and few routine operationalprocedures. Given the vigorous economic growth the island has been experiencing,this approach has afforded its leadershipconsiderable flexibility to respond to opportunitiesor crises. Another good feature is that staffing levels are not as inflated as on the other islands. On the other hand, the system is very dependenton a few leading individualsand does not permit the developmentof a competentand motivated staff. It would be advantageousto move toward a more organized administrativestructure, which should be possible without sacrificing flexibility.

4.37 In need of particularattention is St. Maarten's fiscal situa- tion. A recent review that covered the 19b8-83 accounts indicatesan accumulateddeficit of NAf 20 million, a finding that suggests the need for an objective audit. The Island Government has financed its budget deficits in part by failing to make the required payments into the pension fund, which should also be audited. Tax assessmentsand collectionsare seriously in arrears; there was not even a tax assessor on the island until the spring of 198b, when one was posted there. kiisarrival is timely, inasmuch as the island has agreed to make an annual transfer to the Central Government of 25 percent of its revenues, as in the case of Curacao.

b. The Infrastructure

Water Service

Curacao Water Supply and Sewerage Service

4.38 Curacao, as noted, is a dry island: its two rainy seasons (May-July and October-February)produce an average rainfall of only 575 mm a year. Temperaturestend to be high (averaging27.5°C) with an average of 70 percent sunshine and a windspeed of 7 meters per second (m/sec). This combiaationof conditionsresults in a high rate of evaporation. Further, because the island is long and narrow with very small water catchment basins, there are limited possibilitiesfor run-off storage by dams. Inasmuch as the ground is fairly porous, some rainfall is stored in the - 61 -

aquifers, but it too is limited. In the end, the island must rely on desalinated seawater as the main source of potable water, although private wells are used to irrigate gardens.

4.39 Water Supply. Water service levels are high in Curacao. In 1985, 97 percent of Curacao's population had house connections,a steady increase from the 70 percent of 19bU. There were almost 41,000 domestic and 2,640 industrial/commercialconnections in 1984 (Annex A.17). Average per capita consumption is 114 liters per capita per day (lcd), a relatively high usage rate, considering the expense of the service.

4.40 Urganization. The Water and Power Company (Kompaniadi Awa i Elektrisidat, KAE) produces water and power only. It sells the water to the Water Supply Service (Dienst Water Distributie, DWLi), the power to the Water and Power Production and Distribution Company (Kompania di Produkshon i Distribushon di Awa i Elektrisidat, KUDELA). This latter company also handles the billing and collection for DWD. KAE and KODELA are Government- owned companies, while DWD is a Government service without financial autonomy.

4.41 The rationale for combining the production of water and power under one agency , KAE, was to allow the waste heat trom the power genera- tion to be used for the seawater desalinization,an approach that results in cost savings. Previously, KAE also sold water to and bought water from the Shell refinery when needed. Now that both KAE and the refinery are Government-owned,it is not clear how this relationshipwill develop.

4.42 KAE appears to be the most efficient organization in its sector, although it is overstaffed and its salaries are high as compared to similar entities on the island, which have forced their employees to accept reduc- tions in salaries. KAE has not renegotiated its labor contract, even though the contract expired over a year ago, for fear that a striKe would shut down both the power and water operations.

4.43 DWD is responsible for operating and maintaining the water dis- tribution system. It manages the system as if it were simply providing a basic social service. That is, it pays little attention to waste and cost recovery. Losses run as high as 30 percent, while only 50 percent of con- sumers are actually paying for the service. As of March 1, 196b, NAf 90 million (US450.3 million) in bills were outstanding for the period 1982-85. This record is very unfortunate, given that the cost of water at USA4 m3 is 10 times more expensive than in Europe and America, and that less than 10 percent of the water goes to people who might not be able to pay for it. This situation is compounded by DWD's poor planning and by political interference.

4.44 KODELA operates both the power distribution system and the diesel power generators for KAE, and bills and collects for water. This company appears to be reasonably well-managed and has absorbed experienced staff from the now defunct private power distribution company. Its inability to collect for the water supply is attributable to local politics and DWD's inefficiency rather than poor commercial practices. KODELA plans to intro- duce joint power and water supply billing, with sanctions for non-payment of one or both of the bills. This step may solve some of the problems resulting from UWD's inability to induce consumer payments. - 62 -

4.45 Water Production, The water supplysystem uses desalinizedsea- water producedby KA&. KAE has a water productioncapacity of 47,000 m3/day,of which 37,000m3/day is reliable(Annex A.18). The volumeof water sold to DWD increasedfrom an averageof 23,000m3/day in 1980 to 26,000m 3/day in 1984.

4.46 KAE's six oldestplants (Multi-Stage Flash Evaporators,MSF) require intensive maintenance because of the high temperatures and result- ing corrosion. The newestplant (Low-TemperatureVapor Compression,LT-VC) is expectedto requiremuch less maintenance.A realisticestimate of the useful life of these plantsunder local conditionsis 15 years at most, and three of the oldestare expectedto be taken out of serviceshortly.

4.47 The only other major water and poverproducer is the Government- owned oil refinery. The refinery'sdesalinization plant. needs to be replaced,and the CentralGovernment recently issued invitations for tenders.

4.48 Water Distribution.The water distributionsystem covers practicallyall urban areas. Its lengthis huge comparedto other water supplysystems (one reasonis that the lengthper connectionaverages 50 metersversus thte more normal 10 to 20 meters). Total reservoircapacity is 120,000m3, which is seven times the averagedaily consumption. Unaccounted-forwater increasedfrom 15 percentin 1964 to 23 percentin 1973 and about 30 percentin 1985. The percentageshould be no more than 10 percent.

4.49 The reasonsfor the high percentageare several. The first relates to metering:

- Productionmetering. There has been a consistentdivergence betweenKAV's more reliableproduction metering and that of DWD. There appearsto be no submeteringof identifiablegroups of con- sumersfor controlpurposes.

- Consumptionmetering. The domesticmeters in use since 1978 are not appropriatefor meteringsuch high cost water becausethey are not accurateenough. DWD has no systematicmeter replace- ment, maintenanceor monitoringprogram.

4.50 Anotherproblem is the house connections:most are registered, but it is likelythat illegalc- nectionshave becomeincreasingly commou. A secondpoint is that house connectionsare mostlymade of galvanizediron and are often poorlyprotected against vandalism or accidents.

4.51 The conditionof the distributionand trunk mains gives cause for concern. A combinationof corrosivewater and the use of a mixtureof inappropriatematerials (i.e., galvanized iron, cast or ductileiron pipes withoutcement lining) in the distributionsystem has resultedin many leaks. The high numberof reportedrepairs suggests that the distribution systemis in poor condition.

4.52 'inally, thereare problemswith storageand pressurecontrol. The absenceof centralizedoperation of the distributionsystem (by remote - 63 -

control)has resultedin overflowingreservoirs and excessivepressure, which has increasedthe water losses. ieservoircapacity is large,which is probablythe result of DWI attemptingto protectItself (at considerable cost) againstthe possibilltyof a system breakdown.

4.53 Tariffs. becauseof DWD's inefficiency,it is meaninglessto comparethe cost of water distributedwith presentwater tariffs. It water were efficientlyproduced and distributed,the tariffswould be expectedto cover the costs of operationsand maintenancebut not investments. In addition,the tariff structure(see Annex A.19) is not sufticiently progressiveand does not penalizelarge water consumersand wastage.

4.54 Finances. KAE showeda profit before taxes of NAf 9.4 million (U05.4 million)in 1984; this figure is overstated,however, because KAK uses historicalvalues to depreciateits assets. The price that KAK chargesDWD for water seems high, becauseKAE should be able to profitfrom economiesof scale and the use of waste heat from its power generation. In addition,the allocationof costs (40 percentfor water and 60 percentfor power)appears to be arbitrary;it may be that power subsidizeswater.

4.55 UWD posted a financialloss of almost NAf 54 million (US$31 million)in 1984 alone (see Annex A.20), withouttaking into accountthe Indirectsubsidies from the Governmentand the use of historicalvalues for depreciation.As DWD does not cut customersotf for non-payment,over half its customersdo not pay for their water. LWD has also failed to develop systemsand incentivesto conservewater. Moreover,VWD is overstaffed(7 staff per 1,000 connectionsfor distributionservices alone), and its personnelare not motiveted.

4.56 KODELA showed a profit before taxes of NAf 5.5 million(US$3.1 million)in 1984, but the same financialreservations apply as for KAE. KODELAwrote off dubiousreceivables in 1984--NAf3.8 millionfor its power operationsversus NAf 25.8 million for water supply.

4.57 Insufficientdata were collectedto make an investmentforecast. iowever,inasmuch as the state of the economydemands drastic measures to improveefficiency and to controlwaste, and given that demand is expected to decrease,no major investmentsshould be made in the near future.

4.58 'kecommendaiions.Considering the high level of developmentand income of Curacao, management of the public water supply is unconscionably poor. iesponsible financial and technicalmanagement of the water supply and finances seems to have a very low priority. As the financial resources availableto the Governmentwill be severelyreduced in vhe near future, the subsidiesgiven to the water supply and power utilitieswill have to be eliminated. Therefore,unless conditionsare impioved,the service providedwill run down.

4.59 In light of these problems,power and water productionshould be mergedunder the same managementto ensure that the most efticientinvest- ment and operationaldecisions are made. Now that both K(A and the refineryare Government-owned,they need not be split. In addition,the Governmentshould contract with a water supplymanagement consulting firm to review KAEs management,operations and investmentsand determinehow they can be streamlined.The real split betweenthe costs of power and water productionshould be determined. - 64 -

4.60 All water distributionactivities should be transferredto KODELA as soon as it can contractwith an experiencedwater supply management team. This team shouldbe recruitedtrom abroadand servea minimumof five years,during which time it shouldtrain local personnelto take over. KUOELAwould absorbOWD's staff only after each employeehad been thoroughlyevaluated and had completeda one-yearprobation period.

4.61 The KODELAwater supplymanagement team shouldimmediately; (a) draw up a programto reducelosses to 15-20percent within a year; and (b) start an intensivecustomer relations campaign to get users to pay, backed by servicecut-off s when bills are not paid. The successof thesemeasures also dependson full Governmentsupport and a determinationnot to inter- fere with day-to-daymanagement.

4.62 As a medium-termtask, the KUUELAmanagement team shouldprepare and executean administrative,financial, technical and operationalmaster plan that shouldinclude:

(a) Standardizationof the materialsused in the distributionsystems and on consumers'premises. The materialsshould also be orientedtoward water conservation(e.g., low water-usetoilets, spring-operatedfaucets). They shouldalso be capableof with- standingthe corrosivenessof desalinatedwater (e.g.,pipe materialssuch as ductileiron with cementlining, etc.);

(b) The introductionof dynamiccontrol of water pressuresin the distributionsystem to minimizelosses (e.g., centralized control of pressureand water levelsin reservoirs,use of lowestwater pressurepossible, block metering,etc.); and (c) Adoptionof more appropriatedesign standards for connectionsand replacementof all water metersby highlyaccurate volumetric meters. This processshould be ongoing,with periodicchecking of the metersfor accuracy(e.g., all large consumermeters shouldbe checkedat least yearly).

4.63 Those in genuineneed of tinancialassistance should receive help from Governmentalsocial agencies to pay theirwater bills. Those agencies are much betterequipped to determinethe needs of the poor than is a water supplycompany. This approachwould enable the publicutility companies to requirethat consumerspay the real cost of the servicethey receive. 4.64 Any fundsmade availableto the water supplysector should be used solelyto hire KUDELA'swater supplymanagement team and to support KAE's management,operations and investmentstudy. 4.65 Sewerage. About 40 percentof the populationis connectedto the publicsewerage system; the remainderuse septictanks with infiltration pits and latrines. The latterdo not seem to pose a problem,as the sub- soil is ratherporous. The centerof Willemsted(Punda and Otra Banda) dischargessewage into the sea. 4.66 Since 1980, considerableinvestments have gone into the construc- tion of the seweragesystems, including improvements and capacityincreases - 65 -

at treatment facilities. Keuse of sewage effluent is being actively considered.

4.b7 The Department of Public Works has requested Dutch aid in finan- cing a master plan for sewer constructionand sewage effluent reuse. Justification of this request is based on the high value of water and the possibility of controlled reuse of treated sewage effluent in agriculture.

St. Maarten

4.bb Rainfall on the three Windward islands of the Netherlands Antilles, of which St. Maarten is the largest, is high (about 1,UU0 mm a year), and people rely heavily on roof collection of rainwater and storage in cisterns. Saba and St. Eustatius have no public water supply, and people rely on rain water collection in cisterns. St. Maarten is discussed below.

4.09 Water Supply. The proportion of people served by the public system in St. Maarten is lower than on the Leeward islands. A rough estimate is that about 60 percent of the houses on St. Maarten have a direct connection. People without a connection rely on rain water collec- tion and purchased water. The recent rapid development of the economy in St. l.irten has caused connections to grow 15 percent a year since 1980. Neve.-.ieless,there are still b4 percent tewer water than power connections.

4.70 Organization. A Government agency, the Ilecticity Company of the Windward Islands (GemeenschappelykElectriciteitsbedryf Bovenwindse Eilanden, GBBE) produces and distributes both water and power. Prior to !977, GEBE was partly owned by a private management company, OGEM, that participated extensively 'n its management. When the power distribution contract with OGEM expired, however, the Government bought back the shares held by OGEM. Beginning in 1970, GEBE also took over management of water production and distribution, as well as their financial/commercialadminis- tration, without, however, any legal mandate. This situation was regular- ized on January 1, 1981.

4.71 It is apparent that GEBE's efficiency has deteriorated since the Government took over. The best indicator is that unaccounted-forwater is now 19 percent in the distribution system alone (10 percent is the maximum with a well-run system of this small size). On the French side of the island, St. Martin, water production was recently turned over to a private company, UCDJE, while operation of the distribution system, including metering, billing and collection, was contracted out to a private company, SOBEA.

4.72 Production. To meet the rapid increase in demand, GEBE con- tracted with Water Services of America (WSA) for the installationof 1,200 m3/day Reverse Osmosis (R.O.) plants. WSA will also operate these plants. These facilities are in addition to three existing desalinizationunits with a total capacity of 3,000 m3 a day (see Annex a.21). These units are well-operated and maintained and are in relatively good working order.

4.73 GEBE faces a ditficult problem with respect to its sales to the important hotel industry. The biggest hotel (Mullet bay) has already - 66 -

installed its own R.O. plant, and others are considering doing so also. The reasons are that the new kind of R.0. plant can produce desalinated water more cheaply. Moreover, if privately owned, the cost would not include the additional overhead, subsidized tariffs designed to help poorer people, and system inefficiencies that are incorporated in GEBE's charges. Moreover, the hotels can control operational reliability better if they own their own water supply.

4.74 Distribution. Since 1978, a start has been made in replacing some of the older parts of the distribution system and extensions. The original system used asbestos-cement and galvanized iron pipes, which are not suitable for the operating conditions in St. Maarten because of the desalinated water. The latest extensions are of ductile iron, which is the best material, so long as the pipes are cement lined. A distribution system for costly desalinated water should use the best materials (e.g., ductile iron) so as to have the lowest possible leakage rate. All connec- tions are metered, and the kind of volumetric meter in use is appropriate.

4.75 The system includes 11 reservoirs with a total capacity of 28,050 A3 The oldest steel tanks date from 1970 and, with good preventive maint- enance, should last another 10 years. GEBE's design specifications call for a usable reservoir capacity of 12 days' average water use, which seems excessive.

4.76 Tariffs. Taking into account the water losses and system inefficiencies, the cost of water sold is about NAf 12/m3. The water tariffs for both domestic and commercial use are substantially below this price (Annex A.22). Even the water tariff for hotels is only two-thirds (NAf 8/m3 ) this average cost.

4.77 Finances. Water operations have been a large loss-maker for GEBE. Total losses over the period 1980-84 were on the order of NAf 94 million (US$54 million), with the losses in 1984 alone just over NAf 22 million (US$12.6 million), or NAf 1,100 per capita (US$ 630 per capita) (see Annex A.22). GEBEhas planned rehabilitation and extensions to the distribution system on the order of NAf 11.7 million (US$ 6.7 million) over the period 1986-90, which translates into an investment of NAf 615 per capita (US$350 per capita). That level is very high.

4.78 Conclusions and Recommendations. A reliable potable water supply (and public utility services in general) is a prerequisite for the develop- ment of the tourist trade. However, a reasonable price is also important. At present, because the water supply service is inefficient, the hotel trade has every reason to start producing its own water at much lower cost. As more hotels do so, GEBE's excessive overhead and inefficiency costs will be borne by a smaller number of consumers, which will put an extra tax for inefficiency on them. In addition, GEBE's investment program for the distrib'ttion system alone and its design criteria are questionable, given the high cost of NAf 615 per capita. This cost will also have to be borne by the consumer.

4.79 The production and distribution of high cost desalinated water should be managed by professionals, with incentives to do so efficiently. The Government should only play a Dolicy-setting role. The most sensible - 67 - approachseems to be that chosen by the Frenchside of the island: it has put its water supplyin the hands of specializedfirms with worldwide experience. bonaire

4.80 Bonaire'sclimatological conditions and terrainare similarto those of Curacao,and the islandcan be classifiedas dry. Some low-yield wells have been used, mostlyfor irrigation,and peoplealso collectwater from their roofs.

4.81 Water Supply. The public healthservice estimates that about 2UU out of the 4,223 houses (5 percent)on the islandare not connectedto the water supplysystem. Since the systemonly has 3,2U0 meteredconnections (includingcommercial and hotel connections),about 25 percentof the housesare beingserved by somebodyelse's connection.

4.82 Organization.The organizationof the water supplysector is simliarto that of Curacao,in that water productionand distributionare separated. The Water and Power Company (Wateren Energiebedryt, WEB), an autonomouscompany with in-linemanagement assistance from &0DkSLA,produces both power and water but distributesonly the former. The Water DistributionService (Dienst Water Distributie,DWD), the Government agency,is responsiblefor operatingand maintainingthe distribution system,the meter readingand the billing. The localGovernment collects the money. The DWD is a typicalGovernment service in terms of overstaft- ing (the staffingcoefficient is 13 per 1,000 connectionstor distribution alone). KODELAseems much more professional.

4.83 Production. Two new desalinizationplants (capacity1,6U0 m3 day) startedoperations in early 1986, replacingthree existingplants built in 1963 and 1975 (see Annex A.23). hven thoughtwo of the three older plants date back to only 1975, they are in such a poor conditionthat they shouldbe scrapped. The reasonfor their deteriorationis that, prior to 1986, productioncapacity was so limitedthat the operationsof the three plantscould not be stoppedfor periodicmaintenance. The two new Low TemperatureVapor Compression(LT-VC) plants were boughtdirectly by WEB, while the third ReverseOsmosis (K.0.) plant is operatedby a private company. It has a contractto produce600/m3 a day at a price of NAf 7,33/r3 (USS4.19/m3). The power is suppliedby WEB at a fixed price of US*0.13 per kwh.

4.84 Water productionincreased from 3.3 millionm3/yr in 1977 to 4.5 millionm3/yr in 1984,which representsan averagegrowth rate of 4.5 percenta year.

4.85 Distribution.Dutch aid is financinga nearlytotal replacement of the water distributionsystem and reservoircapacity. The total cost of this work is estimatedat over NAf 17 million (US*9.7million), excluding the cost of the new water productionfacilities of WEs. This figurebreaks down to about UbS1,00Uper capita,compared to a normalcost of USSlUUto $300 elsewhere,depending on local conditions.

4.66 Unaccounted-forwater is estimatedat roughly25 percent. The maiu reasonsfor the discrepanciesare probablyinaccurate meters and/or - 68 - meter reading, as well as distribution system losses. Replacement of all ineters is planned, and the new meters, which are of sufficiently good quality, have already arrived. Their installation awaits the completion of all the distribution work.

4.87 Taritfs. All consumption of domestic water up to 10 m3 a month is subsidized. After that, the water tariffs increase with water use (see Annex IV.3), and there is also a minimum monthly charge. Water sold by the tin costs NAf 0.10 per 5 gallons (NAf 5.5/m3); water suppiies for ships are charged at NAf 20/m3 .

4.88 Finances. Few data could be obtained from DWD,except that 401,690 m3 were bought from WES and 311,742 m3 were sold in 1985. These figures translate into NAf 3,343,592 paid to WEB and NAf 2,34b,176 billed to the consumer. Translated another way, even if all customers paid their bills, DWDwould have run a financial loss of NAf 1 million. tHowever, many people have not been paying. because of the difficult financial situation of the local Government, in January 1986 VWUdid start a collection campaign, using water cut-off as the convincing argument. This effort was very successful, and of the NAf 225,330 billed, NAf 21b,290 (96 percent) were paid as of May. The lesson is that when the company shows resolve, people pay.

4.09 The most seri.ous problem for Wth is that the Island Government collects the water receipts but does not pay WEB regularly. In 19b5,the island Government paid it only NAf 45,OU0, while the total unpaid bill increased to NAf b.3 'million (US$3.6 million).

4.90 Conclusions and Recommendations. Bonaire has an almost com- pletely new water supply infrastructure. With good management and operation, few additional investments will be needed over the next five years.

4.91 Given that Bonaire is such a small community, it is difficult to justify having two separate entities, II)W and WEB. Water production is already in the hands of WEB, and it has a much better (and computerized) billing and accounting system, while I3WD'sbilling is still manual. As such, DWD'sfunctions should be transferred to Whb.

4.92 The water tariffs are realistic compared to the production cost of water and taritfs elsewhere. The financial losses are, however, much too large and cannot be supported by the Government over the medium term. This situation is one more argument for streamlining the water and power supply organization. Moreover, the Government must continue to support the strict payment policy. Otherwise, the result will be a rapid degradation of the new infrastructure, as no money will be available for periodic main- tenance. In addition, the people who profit most from non-payment of their water bill are mostly the middle- and higher-income consumers who do not need subsidies.

Electric Power

4.93 The pattern of electrical energy production and consumption among the five islands of the Netherlands Antilles varies considerably, as do the - 69 -

possibilities for exploiting renewabilesources ot energy. Curacao, bonaire and the Windward Islands are therefore discussed separately.

4.94 As the previous section made clear, given the high energy content and costs of distilled water, the "unexplained" losses in water distribu- tion on all ahe islands also represent a serious waste of energy. The most effective and immediate way to conserve energy and thus unnecessary expend- itures on imported tuel is to reduce the losses in the distribution of desalinated water.

4.95 Other issues facing the power sector that the mission reviewed pertain to production, management, capacity and planning, distribution, costs, and alternative, renewable energy options. The opportunities for the cost reductions and efficiency improvements in each of these areas are explored.

Curacao

4.96 Production. As described in the previous section, power is pro- duced by KAE in a joint process with the distillation of seawater into potable water. Imported fuel oil is the primary energy source for power production. It has been suggested that separating water and power produc- tion might result in greater overall efficiency, in view of new low temper- ature and reverse osmosis technologies for water distillation. This possibility should be studied.

4.97 lManagement. Both KAE and KODELA (which handle distribution) are Government-ownedand operated companies that are intended to be independ- ent, self-supporting agencies which provide power to the island (excluding the refinery, which has its own power facility). In practice, Government interferenceand a non-commercial environment have resulted in heavy over- head and low efficiency, the end result being higher cost power to con- sumers. If the costs are to be reduced, KAE and KODELA must be encouraged and assisted to operate along strictly commercial lines. Enactment of an incentive scheme that encourages cost control and overall operating efficiency should be considered.

4.98 Capacity and Planning. Present capacity is about 104.2 MW (134.4 MW nameplate) as against a peak load of about b6 MW. Capacity planning is curried out by extrapolating from past trends, and on this basis KAM has concluded that it will need to add a 25 MW unit to its system to replace the units coming out of operation and to provide tor projected load needs. This unit was selected on the basis of a least cost analysis carried out in 1984 by DHV Consultants,using projected loads. The recent slowdown in the economy suggests that these projections are high, however, and future capacity needs should be revised based on sectoral needs. Now that the refinery has become Government property, its power capacity and the load requirementsof the refinery should be integrated into the overall assessment of future capacity needs.

4.99 Distribution. KODELA is responsible for power distribution and tariff collection. In contrast to water, the collection of electricity tariffs is timely. However, the losses in distributionare high-about 11 percent-and savings of about NAf 1 million could be obtained for every - 70 -

percentagepoint reductionin losses. A targetof a I percentagepoint reductionin lossesin each of the next threeyears shouldbe attainaDle, for an eventualannual saving of NAf 3 million.

4.100 Costs. The productioncost is about NAf U.1b per kWh, a high level that reflectsthe high overheadcosts and lack of cost-controlincen- tives. Costs shouldactually be on the low side,given that Curacao benefitsfrom relativelylow fuel costs becauseof the refineryand proxim- ity to Venezuela. It seems that significantimprovements in production costs could be obtainedby reducingoverhead and by bettermanagement.

4.1Ul AlternativeEnergy Sources. The above-mentionedDtV study exploredalternative options for reducingproduction costs, including the use of importedcoal and localasphalt as alternativefuels. In the end, wind energywas found to be the only alternativeworth furtheranalysis.

4.102 The mission'sanalysis supports the view that wind energywould be viableand suggestsa feasibilitystudy to exploreit. This sourceof energyappears attractive given the favorablewind profilein Curacao,with its low month-to-monthvariations and diurnaldistribution that tends to peak at the same times as demand. Wind poweralso allowssmall increments to capacityto be made as needs are identified,an importantfeature in a systemwhere futuredemand is uncertain.Cost calculationsindicate that wind power would be competitive(NAf 0.14 per kWh) with conventionalpower and would thereforecontribute to reducingoverall power costs. Develop- ment of wind power also offersCuracao the possibiltyof buildinga demon- strationfacility and technologicalexpertise for possibleexport within the region. The establishmentof a wind turbinecomponents assembly industry,to serve the countryand for regionalexport, is anotherpossib- ility.

4.103 AlthoughCuracao has a high averagelevel of sunshineand little variationfrom month to month,solar water heatinghas limitedpossibili- ties. Privatehouseholds generally do not heat theirwater, and neitherdo many of the smallerhotels. Some of the largerhotels tend to use the exhaustheat from their centralair-conditioning systems, while othersuse gas. Given the financialcondition of the hotels,few if any would find it attractiveto retrofitfor solar water heaters. Nonetheless,for new hotels,the solarwater heatingoption should be exploredas an alternative.

Bonaire

4.104 Production.Electric power is producedby the Governmeit-owned and managedWater en EnergieBedrijf, WEB. In contrastto Curacao,only dieselgenerators are used, and water and electricityare produced separately(except insofar as residualheat from the dieselgenerators is used in low temperaturedistillers). 4.105 Management.As in Curacao,the IslandGovernment has direct accessto and influenceover the operationsof WEB and determinesthe tarifflevels. WEB has only limitedmanagerial staff, which the Utility ServicesCo., a sistercompany of KOIELA,is meant to support. - 71 -

4.106 Capacityand Planning. Installedtotal capacityat WEB is 10.5 MW, as comparedto a peak load of 4 MW. This capacityprovides a comfort- able margin, however,several of the machinesare old and will need to be replaced,yet no capacityplans exist. Becauseof the poor conditionof some of the generators,partial power failuresare not uncommon.

4.107 Distribution. WEB reportslosses of about 8 percentin distribu- tion, which are not exceedinglyhigh. However,they could probablybe reducedfurther. At a cost of about NAf 0.29 per KWh, each percentage point reductionin lossesrepresents NAf 75,000 a year. For a small opera- tion, such potentialsavings are not insignificant.WEB mentionedthat it is studyingthe possibilityof switchingover to a 220 service (insteadof the existing110 V) to reduce the distributioncosts. This switchwould Increasethe overallcosts to the economy,and the proposalcannot be endorsed.

4.108 Costs. The cost of productionis NAf 0.29 per kWh, of which NAf 0.11 representsfuel costs and NAf 0.085distribution costs. At the presentaverage tariff of about NAf 0.28 per KWh, power is subsidizedat a rate of about NAf 0.01 per KWh.

4.109 AlternativeEnergy Sources. The high cost of power suggeststhat alternativeforms of energy are likely to be viable. The potentialfor wind energyin Bonaireis significant,although wind speedsare somewhat lower than on Curacao. However,the higher cost of electricitywould com- pensatefor that difference. Moreover,as with Curacao,the diurnalload distributioncoincides well with the wind profile. The considerableage of severalof the existitgdiesel generators and the fact that they will need to be replacedcreate an idealsituation for includingwind er,rgy in future capacityreplacement plans. As noted above, given that future capacityneeds are uncertain,wind energy is all the more attractive becauseit permitssmall incrementaladditions.

4.110 A projectto installa 300 kW wind turbinehas been approved,to be financedby the EEC (40 percent)and the Netherlands. The principleis sound, but it might be advisableto proceedin smallerincrements, partly for the reasonalready stated and partly to spreadwind power generation among several smaller machines. The experience in Curacao with a similar 300 kW machine and the somewhatlower wind speed in Bonairesuggest that smaller machines with lower rated wind speeds would yield more power at greater cost effectiveness.

4.111 G'ven the high cost of energy,it might seem tbat solar water heatingwould be appropriatein the hotel sector. However,existing hotels would not find it worthwhileto retrofitto solarwater heaters. Nonetheless,future hotels shouldconsider this option seriously.

St. Maarten,Saba and St. Eustatius

4.112 Production. Power is producedby dieselunits on all three islands. There is no shortageof capacityon St. Eustatiusand Saba, but they experiencefrequent power failuresbecause of a lack of local technicalsupport. Waen somethinggoes wrong, they have to rely on someone being flown in from St. Maarten. The most effectiveway to improvethis situationis to provideintensive technical training to someonefrom each islandwho would be responsiblefor maintenanceand repairoperations. - 72 -

4.113 Management. Powerproduction and distributionare the responsib- ility of the Government-ownedGEBE. Althoughthe UtilityServices Co. is responsiblefor providingmanagement support to GEiE, in fact it provides littleassistance. Politicalforces strongly influence the cadre,composi- tion and other operationalfactors at the utilities.

4.114 Capacityand Planning. In St. Maarten,the projectionfor peak demand in 199U is about 18 MW, as againsta presentcapacity of 23 MW (nameplate;18.4 MW actual). G1EB is planningto add a 2.5 KW generator beforethe end of 1986 and another10 MW unit next year. These should alleviateany power shortagesand resultantpower failuresthat could have been expectedunder presentcapacity. Beyond these two units,no additionalcapacity will likelybe neededover the next five years.

4.115 Costsand Distribution.The cost of productionand distribution of electricityin St. Maartenis estimatedat NAf U.iO per KWh, about 35 percenthigher than in Curacao. iowever,electricity tariffs are also high, averagingabout NAf 0.33 (US4U.183)per KWh. They cover the costs fully. In fact, there has been a surplus,which is used to cross-subsidize the lossesin the productionof water. Lossesin power distribution,which run 9 percent,could be reducedsomewhat. Each 1 percentagepoint loss representsabout NAf 300,000.

4,116 AlternativeEnergy Sources. Averagewind speedsare low in the WindwardIslands, and productioncosts for wind energywould be higher. Moreover,the islandslie within the hurricanebelt, so that the risks and overallcosts of wind energywould be too large to be viable. St. Maarten has a combinationof conditionsconducive to the use of solar water heating,and, in fact, some 20 percentof the hotelsuse solar water heatersto some extent. Analysisshows that hotelsusing electricityto providehot water couldexpect a high rate of returnand short payback periodon their investment. Given that St. Maartenhas about 2,700 rooms, and assumingthat solarwater heaterswould replace50 percentof the total water heatingenergy requirement,over 3,100 MWh of electricpower equival- ence could be replaced,for an annualsavings of NAt 1.15 million (US$640,000),including NAf 500,U00(US$ 275,000)in importedfuels. Thus, as new hotelsare built or old heatingequipment is replaced,solar water heatersoffer an economicalalternative that shouldbe encouragedby tax incentivesor othermeans.

Port Facilities

CuracaoPort

4.117 The CuracaoDry Dock Company(CDM), which operatesthe port at Curacao,is 85 percentowned by the Islanduovernment, with a minority shareholdingby the CentralGovernment and smallerholdings by private interests. CDM has a NAf 17 millionloan from privatesources, a NAf 4.7 loan from a privateinvestment bank and a NAf 35 millionspecial subsidy from the IslandGovernment. The interestpayments for 1985 were deferred, and CDM will make the same requestfor 198b. Annex A.24 shows the staffing and performanceof CDM from l9bO through1985. Despitedrastic cuts in 1982 amountingto 23 percentof total compensation,the net loss as a percentageof total revenueincreased trom ZU percentin 1982 to 24 percent in 1985, althoughstaff was reduced19 percentover this period. - 73 -

4.118 Shipyardshave a very high overhead,and a yard the size of CI1's cannothave a very constantworkload. 'he last columnin Annex IV.8 is based on the assumptionthat 20 percentof the staff are overheadsupport staff and thus unbillable. The load factor,or the ratio of billable man-hoursto total man-hours,should be approximately60 percentin order to have a profitableyard. To achievethat level at Curacaowould require a furtherreduction in staff or an increasein work.

4.119 Mecentexperience with cleaningand repairinga large Venezuelan vesselindicates that COM's costs are competitivefor similarwork in Venezuela. however,C0M must also competewith yards at Cartagena, Colombia,and Veracruz,Mexico, where costs are much lower. The average billingrate at Curacao,which consistsmainly of labor costs,was 055 per hour in 1981 and $45 in 1985 (derivedfrom AnnexA.24). This latterrate compareswith labor costs of $18 per 8-hourday at AstillerosUnidos de Veracruz.

4.120 0DM managementsays that the natureof its businesshas changed and that it is doing more cleaningand paintingthan it used to. The actualgrit blastingand paintingare done by a subcontractor.CDM maintainsthat it could do this work more cheaplyon its own and that it could then be more competitivein vesselrepair, cleaning and painting. Detailedanalysis would be requiredto establishthis point. It may be more economicalto enter into more subcontractingon a competitivebid basis,rather than CDM's takingover this work, and to programfurther reductionsin staff. The overallemployment effect would be about the same, but the costs should be lower.

4.121 there is littlealternative use for the shipyard. A local entre- preneurattempted to do some ship-breakingwith old inlandlake bulk carriers,but the operationis in bankruptcy,and the vesselshave been abandonedalongside the servicepier at the shipyard. (Ship-breakingis a labor-intensiveoperation, and it is difficultto visualizeits being successfulin Curacao.)

4,122 Cousiderationwas given to convertingthe port to marina condominiums,as has been done at many old ports of the world. However, Curacaois not on the normalcruising routes for pleasureboats, and it is unlikelythat the operationcould be economicallyfeasible.

CuracaoContainer Terminal

4.123 The new publiccontainer terminal at Curacaowas completedonly recently. It has a roll-onroll-off (Ko Ro) berth tor containerships that is 50) meters long. There are three ko Mo ramps,one of which is at the north end of the main containerberth, so that a ship at this ramp occupies one of the two or three containership berths. There is one rail-mounted containercrane with a liftingcapacity of 50 tons. The terminalhas room for 1,600 20-footcontainers (TRUs) and 350 trailers.

4.124 Managementis realisticabout the potentialof the terminalbut is also well aware of the difficultyof attractingtransshipment traffic when there is such a small amountof local traffic. There is also competi- tion in the region. Jamaica,where local trafficis generatedby a popula- - 74 - tion of 2.1 million and which lies on the main shipping route between the Panama Canal and the U.S. east coast and kurope, has developeda much larger container terminal than Curacao's and has a much lower labor cost and a much lower unit capital cost. It can thertfore attract much more transshipmenttraffic. However, there are possibLlitiesfor further cost- cutting that the Curacao port management is pursuing.

4.125 Getting to Curacao requires a one to one-and-a-halfday diversion from the routes between the Canal and the U.S. east coast and Europe. On the other hand, Curacao is well-positionedgeographically tor the new round-the-worldcontainer line services and for services from the Far East through the Panama Canal along the east coast of South America, although it still faces considerablecompetition from Kingston, Jamaica, and San Juan, Puerto Rico. It is understood that Venezuela prohibits the import of containers that have been transshipped. If that is the case, it rules Curacao out as a transshipmentterminal for Venezuelan-boundcargo.

4.126 Management is concerned that possible breakdownsof the single container gantry crane might be a deterrent to transshipmenttraffic, The Curacao Port Authority is therefore acquiring a mobile tower crane, to be delivered in December 1966. It is intended primarilyas a back-up for the large container crane. However, since the 500 meter wharf can accommodate three smaller containerships simultaneously,the mobile crane will also be able to work one ship or one part of a ship while the gantry crane handles the bulk of the work. At one time, the port hired one or two large mobile cranes from the Curacao Dry Dock Company, and it could do so again if transshipmenttraffic does not pick up as expected and the new mobile crane does not pay its way. The new crane could then be sold.

4.127 The Curacao Port Authority is attempting to attract transshipment container traffic by charging it only the marginal cost for these services. That strategy leaves local traffic to bear the cost of the terminal,equipment and normal staffing. This approach is correct and is the best way to measure the attractivenessof the terminal. If the rates were cut below the marginal cost to attract traffic, a later attempt to recover at least the marginal cost of the operation might cause the business to disappear overnight,given the cost-sensitivityof the market. It will be another two or three years before the success of these efforts to attract transshipmenttraffic to the new terminal can be judged.

Curacao Oil Terminal 4.128 Almost all of the tanks at the Curacao Oil Terminal (CUT) are empty, while those at the Bonaire Petroleum Corporation(BOPEC) terminal are mostly full. The IOPEC terminal was built primarilyfor transshipment traffic - to unload the very large crude carriers (VLCCs)that at the time could not dischargeat ports in the United States and that had to transfer their cargo to tankers which could serve U.S. refineries. The terminal is now used primarilyas a storage terminal, presumably by speculators;this change is the result of the drastic decrease in the price of crude oil, which has caused oil storage policies to change a great deal. It should be possible for COT to attract some of that traffic, and the Curacao Island Government might consider asking the managers at BOPEC (Pakhoed)to manage COT on an incentive basis. - 75 -

bonairePort Facilities

4.129 Bonairehas very good port facilitesfor generalcargo and cruiseship traffic. There are two cozucretepiers and two Ko ko ramps,one on each side of the South Pier. These are more than adequateto accommod- ate local trafficrequirements for many years. The port has also requested a mobilecrane to handlecontainers with King Ucean Lines vessels. This cranewould be similarto the one that will be deliveredto the Curacao ContainerTerminal. The need for the crane at Bonaireis not clear,as most of the vesselsthat sail regularlybetween Curacao and Bonairehave a ramp or boom for handlingcargo. 4.130 A rice mill was recentlyconstructed at bonaireand wes to begin operatingin May 198b. The ships bringingthe rice to the mill will be IU to 12,000DWT with a self-dischargingcapability. They will dischargeinto portablehoppers that will transportthe rice to the mill.

4.131 The cargo piers at Bonaireare of recentconstruction, and the standardof maintenanceappears to be generallygood, altnoughthere are severalbroken piles along the inshoreside of the North Pier. 4.132 Two 3,000hp tugs tie up at the North Pier; they are on charter to BOPEC. The crews have all been local since 1977. The tugs are primarilyfor assistingtankers at the BOPEC terminal,but they are also used to assistlarger vessels at the generalcargo piersand at the Salina terminalpier at the southend of the island. About threeto four ships of 10 to 40,000IWT capacityload salt at the Salinaterminal every month. In addition,there is a 1,000DWT vesselthat loadsfrom bUO to b60 tons of ealt per week for Trinidad. 4.133 Approximatelyfive cruiseships a year call at Bonaire,each Just for the day. The Queen ElizabethLI and the Canberrahave both been there. St. MaartenPorts

4.134 St. Maartenhas one publicgeneral cargo facilityin Philipsburg.There is anotherfacility on the Frenchside of the islandat Marigot. The facilitiesat Philipsburgconsist of an L-headconcrete pier, a steel sheet pile bulkheadwharf and a landingpoint for landingcraft. There is a small,shallow draft concretepier at Marigot. The pier at Marigotis more substantialand is in much bettercondition than those at Philipsburg.

4.135 The wharfat Philipsburgis 200 meterslong and has a 4 meter water depth. For a berth in activeuse, it is in very poor condition. Jiowever,the Governmentis about to award a contractfor its reconstruc- tion. The ClaudeA. WatheyPier was built in 1964. It is used for berth- ing about four cruiseships a week and also largercargo ships. lt, too, is in a very poor state of repairand shouldbe attendedto while it is still possibleto do so. 4.136 The approachroad from the town to the pier is unpaved. It is understoodthat pavingwill be includedin the wharf reconstruction contract. - 76 -

4.137 Cruiseships call regularlyat St. haartenon differentdays of the week. They arrivein the morningand dock alongsidethe WatheyPier, exceptfor one largeship that anchorsoffshore. The passengersgo ashore for the day, and the ship leavesafter they return.

4.138 A fleetof fishingvessels on charterto a Japanesecompany has been using St. Maartenas its base since 19b1. There are 15 to 20 contract ships in this fleetand about 15 to 20 on spot charter. Thesevessels spend three to five monthsat sea, then come into port for maintenanceand to rest the crew.

4.139 St. Maartenis well-situatedfor frequenttreight service from MLimi,San Juan and Guadeloupe.Most of the freightis handledin con- ta ners acrossthe Jato JanassenKade, the wharf that is scheduledfor reconstruction.Some small inter-islandschooners also use the Kade for break-bulkgeneral cargo.

4.140 When the reconstructionof the Bato JanssenKade is completed, the islandwill have more than adequategeneral cargo handling capacity for many years,provided the WatheyPier is repairedsoon.

St. Eustatius

4.141 St. Eustatius'pier was badlydamaged during Hurricane Claus. As a result,containers that once were off-loadedthere now go to PuertoRico and are transferredto smallerboats for transshipmentto Statia. The islandis currentlyserved by four boats a month. Some cruiseships of up to 250 passengershave visitedthe island,as have pleasureyachts. The revenuefrom the user chargesis insufficientto cover the operatingcosts.

Saba

4.142 The Saba pier is in bad conditionand needs repair. It has a crane used for dredging,which the EEC financed. There is no water supply to the pier, and lightingis poor.

4.143 There is a masterplan for the harborthat entailsbuilding a new pier and a new harborfor yachts. There has been a steadyincrease in yachtsvisiting Saba, but dockinghas been a problem. A suggestedinterim solutionis to builddocking buoys at Seaswell.

InternationalTelecommunications 4.144 Lanasradio,a centralGovernment department, is responsiblefor the long-distancetelephone, telex and telegramsystems. The local, includingintra-island, telephone system is an IslandGovernment responsib- ility;however, on the smallerislands, Landsradio manages the local company. The financesof Landsradioare includedin the CentralGovernment budget,which is unsuitedto the operationsof a publicutility and does not permita view of true profitability.A start has been made on keeping separateaccounts, and by January1987 Landsradioshould have its own budgetand operatewith a commercialbookkeeping system. - 77 -

4.145 Long-distancerates are set by the CentralGovernment; 10 percent returnon capitalinvestment is built into the rate base, and a build-upof recervesis permitted. Localcalls and subscriptionrates for telephones are set by the IslandGovernments. A disputeof long standingabout the divisionof revenuesbetween Landsradio and the local companieshas been resolvedand shouldallow appropriateaccounting (in the past, long- distancetariffs subsidized the cost of local calls). Anotherproblem is that, like other utilitiesin the Antilles,Landsradio is overstaffedbut has littlecontrol to do anythingabout it. Personnelaccount for 60 percentof the total costs. The system could operateefficiently with 10 percentfewer staff and a eonsequentsaving in costs.

4.146 At present,there is a waitinglist for telephonesand telex connections,and there is a lack of outsidelines. There are also coordin- ation problemsbetween Landsradio and the local companies,as one provides the lines and the other the telephonesets.

4.147 Landsradiostill handlesall telecommunicationsfor Aruba. Externallinks from Aruba pass throughCuracao, and Aruba has the right to use the internationalsystem, with cost-sharingprovisions for the telex and telephoneswitches. All equipmentin Aruba,however, is now owned by the Aruba Government. When that Governmentdecides to buildits own tele- communicationssystem, the overallcapacity of the systemwill be increased 30 percent.

4.148 Landsradiohas been slow to adopt moderntt-ecommunications technology,partly as a resultof Governmentintervention and delays,and the systemis not efficientby modernstandards. The rapid growthin demandon St. Maartenis a particularproblem. ilowever,certain improve- ments have been made, and othersare planned. A new local switchhas been installed,and an internationalswitch will be installedin two to three years'time. Switchesfor St. Eustatiusand Saba will also be reviewedat that time. Plans for the installationof two earth satellitestations, which will almostdouble the existingcapacity, were finalizedin 1985. A stationfor Curacaohas been orderedat a cost of NAf 7 million,and a furtherinvestment of NAf 1 millionhas been approved. The link with Venezuela,installed in 1972,also needs to be renewed.

4.149 Furthereconomies of scale could be achievedby integratingthe localcompany in Curacao(SETEL) with Landsradio. Moreover,a recentstudy has recommendedimprovements in planning,accountancy and training,which would also lead to greaterefficiency.

4.150 There would be advantagesto linkingthe Antillessystem with other systemsin the Caribbeanregion, for example,in terms of the coordinateddevelopment of satellitestations and the use of the fibre- optic cablesavailable through Cable and Wireless.Such linkageswould prove usefulin the proposeddevelopment of the InternationalTrade Center as a communicationscenter for the region.

Aviation

4e151 Air serviceto and within the Antilleshas developedin line with the trendsin tourismand the demandof inter-islandtraffic. Service betweenthe LeewardIslands and St. Maartenis providedby ALM and between - 78 -

St. Maartenand Eustatiusand Saba by WindwardIs_dnd Airways. AIM has also operatedbetween the U.S. and the Antillesas well as from Colombia and Venezuelato Curacao. ALM's share in the trafficfrom North Americato St. Maartenhas been much smallerthan the combinedshare of the U.S. carriers,principally American Airlines, Eastern Airlines and Pan American. Becauseof its strongorientation to the North Americanmarket, St. Maarten has been interestedin attractingU.S. carriers,boths scheduled and non-scheduled(charter), on as liberala basis as possible. AIM has a larger share of North Americantraffic to Curacao,which is also servedby AmoricanAirlines and EasternAirlines. U4evertheless,U.S. routesare unprofitable,in part becauseof the heavy costs involvedin acquiringthe larger aircraft(MD-8Os) needed to serve the North Americanroutes and the failureof U.S. trafficto Curacaoto grow as projected. As a resultof other factorsas well, includingexcess staff, high staff remunerationand undercapitalization,ALM as a whole is runningsubstantial losses, totallingNAf 100 million,with the prospectof a furtherNAf 50 million.

4.152 ALM's problemshave been compoundedby the differencesbetween the NetherlandsAntilles and Aruba on the future role of the airline. Aruba favorsan open skies policywith the U.S. in the interestsof stimulatingthe furthergrowth of tourism,while the NetherlandsAntilles favorsa continuedrole for ALM beyondthat of a domesticcarrier. It has been agreedthat AIM will continueto operatedomestic services between Aruba and Curacao but will no longerroute internationalservices through Aruba. Flights between Curacao and Aruba have been resumed.

4.153 As noted, ALM faces large continuing losses over the next Live years unless there is a major reorganization of its operationsand capital structure. Decisions must be made on whether ALM is to be a regional carrier,serving the Antilleson internalroutes and neighboringCaribbean islands,together with Venezuelaand Colombia,or whetherit is also to fly on routesto the U.S. beyondMiami. The interestsof the differentislands of the Antilleson this basic issue diverge,at least in some aspects,and need to be reconciled.While all the islandsenvisage the futuregrowth of tourism,the natureof the marketwill vary. It is clear that for Aruba, St. Maartenand Bonaire,the overwhelmingpart of visitortraffic will con- tinue to consistof vacationersprimarily from NorthAmerica. In Curacao, however,it is likelythat an importantpart of visitortraffic will be businessvisitors. The air servicesrequired by these two major market segmentsdiffer in importantaspects, and these differencesmust be taken into accountin designingthe futurescale of operationsand route networks of ALM.

4.154 A study of variousoptions for the airlinewas made by consultantsearly in 1986. The study clearlyidentified the importantrola of ALM as a domesticcarrier and the varyinginterest of the different islandsin its internationalservices. AIM's role in transporting vacationersto the two major touristdestinations of the Antilles-- St. Maartenand Aruba -- is minor,but it has a much mole importantrole in visitormovements to Curacaoand Bonaire. Unfortunately,the study did not identifywhich of AIM's routesand serviceswere more or less financially viable,and withoutsuch an analysis,the study providedonly limited guidanceon how AIM might be appropriatelyrestructured. - 79 -

C. SocialServices

4.155 TLieprovision of health,education, retirement and publichousing in the Antillescompares with that in middle-incomeindustrialized nations,in part becausepublic spending on healthand educationhas increasedsteadily over the years. Educationand healthcare servicesare now availablefree of chargeor at a nominalprice to most people.

Insuranceand PensionSchemes and HealthServices 4.156 Socialsecurity--insurance and pensionschemes and health services--ishandled by a numberof agenciesand as a resultis complex and inefficient.He4lth insurance is providedby the Centraland Island Governments,the SocialSecurity Bank (SVB)and privateinsurance firms. The SVB also providesold age pensionsand accidentinsurance for lower paid Governmentempl3yees. The healthinsurance provided by the Island and CentralGovernments, which are self-insured,covers two contrasting groups--thepoor, and higherincome Government employees. The Central Governmentalso handlespensions for higherlevel (that is, salaried) civil servantswho are not coveredunder the SVB's retirementplan or a separatecivil serviceretirement plan known as APNA. At separationon January1, 1986,Aruba took over SVB's responsibilitiesfor Aruban citizensand now has its own SVB. Aruba remainsa participantin APNA but intendsto createits own APNA in due course.

4.157 The SocialSecurity Bank. As noted,the SVB handlesinsurance againstsickness and accidents,as well as pensionsand death benefits, for certaingroups. By law, the employerof workersand of Government employeesearning less than NAf 20,280(US$11,330) a year must provide insuranceagainst sickness, including hospital and doctorcoverage and wage compensation.The employerdoes so by payinga premiumrepresenting 7 percentof the workers'wages to the SVB. As to accidentinsurance, the premiumranges between 0.5 percentand 5 percentof a worker'swages, dependingon the risks of the job. Again,it is paid by the employerto the SYB.

4.158 The employeralso must contribute4.85 percentof an employee's salaryto the retirementfund of the SVB, while the employeecontributes 3.395 percent.'Wnder the old age provision,residents of the Netherlands Antilles60 years of age or more are entitledto a fixedpension of NAf 497 (US$278)a month if marriedand NAf 297 (US$166)a month if single.

4.159 The healthand accidentbenefits paid by SVB cover 100 percentof medicalcosts, inclusive of doctorsfees, hospitalcharges and medication.Dependents are also covered. If the physicianin chargeof a case recommendsspecialized medical treatment not availablein the Antilles,SVB must providefor traveland costs incurredabroad. The patientmay be accompaniedby a familymember at the expenseof SVB.

4.160 The instranceschemes also providefor incomepayments. In the case of sickness,married men or heads of householdsare entitledto 80 percentof their dailywage, while singleemployees are entitledto 70 percent. Sicknessinsurance payments can be claimedfor a maximumof two - 80 -

years. In the case of work-relatedaccidents, che insurance provides for 100 percent of the wage during the first year for married workers and 70 percent for single workers and all women. Insurance payments may continue for up to seven years after the occurrence of the accident. After the seventh year, the case is examined by the SVB. Insurance payments are indexed under the same provisions as are the wages and salaries of civil servants,

4.161 Until recently, the actual insurancepremiums were collected by the Island Governments,to be deposited in a fund and transferredpromptly to the SVB. However, the Island Governmentsand the Central Government have been in arrears, except for the Island Government of Curacao, which is almost current, and Aruba, which has been paying off its arrears on a regular schedule since 1979 (see Table V.1). These arrears have caused liquidity problems for SVB, which has had to obtain short-term commercial bank credits to meet its expenditures. Given this problem, in 1985 SVB began to collect the health and accident insurance premiums itself. SVB hopes to collect the contributionsfor the retirement fund itself as well, as soon as the necessary legislationhas been enacted.

Table IV.1 Social Security Bank (Cumulativearrears due to SVB, millions of NAE)

1985

Curacao 0.76 Bonaire 12.22 St. Maarten 32.98a Saba 0.62 St. Eustatius 1.04 Aruba 2.00

a. Estimate.

4.162 The premiums for the retirementfund, dependents of deceased persons fund and accident fund, if collected promptly,are sufficient to cover the forecast expenditures. Hoviever,the health fund of SVB has not been able to cover its expenses since 1975, and in 1985 the accumulated deficit was NAf 114.2 million. A radical change in the provisionof benefits and/or contributionsis called for.

4.163 Non-SVB Coverage. The Governments,as noted, provide health coverage themselves for two diverse groups: the poor, who enjoy full and free medical coverage; and salaried (that is, higher level) Government employees. The civil servants covered by the Governments'schemes pay a premium equivalent to 1 percent of their salaries,unrelated to the number - 81 - of family members insured. The Guvernmentscover 90 percent of actual medical costs, whi'e the employees are responsiblefor the remaining 10 percent. Retired salaried civil servants on pensions and dependent family members are also covered by the schemes, but their premiums range from 2.5 percent of the first NAf 500 of the pension to 5 percent above that amount.

4.164 Controlling Health Care Costs. Hospital care is available according to three classes, depending on the level of the civil servant, witk a clear differentiationin terms of the services rendered and the number of beds per room by class. Individualsearning less than the minimum wage or who are on welfare, and who are able to establish that they have no adequate means of support, are provided with a health care card, called the P.P. card (from the French, "pour les pauvres"), that entitles them to full health care coverage at no cost. Interestingly,the average cost of health care per P.P. cardholder,who are admitted as third-classpatients, is h gher than that .or civil servants. The reason is that welfare patients stay significantlylonger in the hospital, as is also true for retired people. In these cases, the hospital appears to be serving more as a nursing home or welfare hostel.

4.165 As most developed countries have found, medical costs have been escalating rapidly, reaching 6 to 11 percent of CDP. The Netherlands Antilles has been no exception (Tables IV.2 and Annex A.25). However, authorities there so far have not taken any steps to control costs, for example, by setting limits on the amount they are prepared to pay for certain treatmentsand procedures. As no deductible or cost- sharing scheme applies either under the SVB or the Government schemes (except for the share paid by the civil servants),patients have no cost consciousness. For their part, doctors lack the incentive to discharge patients promptly, as their fee is based on the number of weekly hospital visits. The average hospital stay in the Antilles is thus more than twice as long as in the United States and is negatively correlatedwith patient income. Moreover, doctors have the discretion to send patients abroad for treatment,which can cost as much as US$25,000 per case. This policy in particular should be subject to careful review. In th} case of hospital stays, costs could be reduced by making alternativeaccommodations available for old people who need custodial care but not the services of a fully equippee (and expensive) hospital.

4.166 To ease the burden on public funds and to instill cost- consciousnessamong both the general public and health care personnel, health insurance schemes should be contributory. That is, policy holders should pay to SVB a share of their premium, as is the case with retirement pensions and civil servant health insurance. An appropriate amount might be, say, 2 percent of salary. Policy holders might also be required to pay an annual deductible. For higher level civil servants who are not covered by SVB, an independenthealth insurancefoundation might be established,financed by premiums paid by both the Government and the employees.

4.167 The Governmenthas in fact announced its intention of increasing the proportion of medical bills paid by patients who are higher level civil servants to 25 percent from 10 percent.. This proposal has not been confirmed. A smaller increase, together with an annual deductibleof NAf 100 per person covered, may be more acceptable. - 82 -

4.168 Measuresof this kind will naturallybe resisted. Nevertheless, contributoryschemes are a necessaryway to help controlmedical costs and to reduceGovernment expenditures.

Table IV.2 Curacao- Expenditureson Health (in millionof NAf)

1983 1984

Total Expenditures 200.4 214.2 PhysicalIllness 137.0 144.6 Of which for hospitalstay 65.7 67.8 MentalIllness 24.7 25.9 Of which for hospitalstay 16.5 16.7 Basic HealthCare and PreventiveCare 23.6 28.2

Memo Items Per CapitaExpenses for PhysicalIllness 896 936 (NAf per person) Per CapitaExpenses for MentalIllness 161 168 (NAf per person)

Source: Data providedby Antilleanofficials.

The PublicServant's Pension Plan (APNA)

4.169 This generalpension fund for salariedcivil servantspresently has 9,000active contributors and providespensions to 3,500 former permanentGovernment employees living in the Antillesor abroad. Aruba continuesto be includedfor the time being. The systemworks as follows. Retiredcivil servantseligible under the fund are entitledto an annualpension equal to 70 percentof the last year'sactual salary plus some elementof the bonusesreceived. Duringtheir employment, these employeescontribute 2 percentof their salariesto the fund; the employer Governmentsare to contribute26 percent. The Governmentsare to collect both contributionsand to transferthem to the CentralGovernment's Departmentof Finance. In turn, the Departmentis to transferthose funds to APNA.

4.170 Unfortunately,this procedurehas not been followed. The various Governmentshave not been transferringtheir full sharesto APNA , and as a result,it has been able to pay out only NAf 15 milliona year,an amountthat is just a fifth of the pensionsearned. Even those funds are

* In the case of Aruba,the arrearshave been paid almostfully. - 83 - availableonly becauseof the proceedsfrom its investmentportfolio, plus some limitedcontributions from the IslandGovernments. For its part, the CentralGovernment pays its contributiondirectly to the pensioners. Becausethis amountplus APNA'spayments fall short of what the pensioners are entitledto, the variousGovernments make up the difference,a shortfallthat has been runningNAf 60 millicn. If the systemwere operatingas intended,the Governmentsmight not have this additional budgetaryburden of NAf 60 million,as the fund would presumablybe self-financingor close to it.

4.171 There is no up-to-dateinformation on the actualfinancial positionof the fund. The last auditedaccounts are for 1980,and efforts to updateand audit them sincehave encountereddifficulties, including a lack of cooperationfrom the CentralGovernment. In fact, the accounts have not even been settledsince 1983. However,the unpaidcontributions by the CentralGovernment apparently now amountto NAf 30 millionand are increasingat a rate of NAf 0.3 milliona month,while the unpaid contributionsby the IslandGovernments reached NAf 74.0 millionin 1985. The Islandand CentralGovernments have used thesearrears to the pensionfund (and to the SocialSecurity Bank) to help financetheir budgetdeficits.

4.172 APNA used to investits fundsmainly in Governmentpaper but recentlyhas diversified.It is now investing15 percentlocally, all of it outsidethe Governmentsand with the emphasisin mortgagelending and lendingto publicutilities with Governmentguarantees, and 85 percentin U.S. bonds,foreign real estateand commercialpaper, a practicethat has added to the flow of funds abroad. The averagerate of returnis, however,only 7 percent.

Education

4.173 Educationis not compulsory,but a high proportionof children attendschool at both the primaryand secondarylevels. Pre-primary schoolsare also widespreadand well-attended.At the primarylevel (ages 6 to 11), enroll.mentis 99 percent,at the secondarylevel (ages 12 to 17) 86.4 percent,of the respectiveage groups. There are some disparities among the islandsin the provisionof secondaryeducation; Saba and St. Eustatiuiare farthestfrom the nationalaverage because of their small populationsand consequentlack of facilities.

4.174 The great majorityof the schoolsare private,largely religious, foundations,but the IslandGovernments still pay the teachers'salaries and benefits. Teachers,therefore, are Governmentemployees, although their remunerationis signficantlyhigher than that of regularcivil servantsof comparableseniority (Annex A.26).

4.175 Attendanceat institutionsof highereducation is approximately 18 percentof the age group 18 to 22, a substantiallyhigher proportion than in other countriesof the region. Highereducation institutions are found only on Curacaoand Aruba. The Universityof the Netherlands,which is in Curacao,is an autonomousinstitution financed by the Central Government.The IslandGovernment of Curacaoalso financesother tertiary educationalinstitutions. - 84 -

4.176 There is a substantialStudy Abroad Program, which, although not formally part of the educational system, plays an important role, especially at the higher level. The Central Government administersa number of scholarshipsfinanced out of Dutch aid, and -he Island Governments also give grants.

4.177 The educational system in the islands is diversifiedand complex. There are two main branches at the secondary level--generaland vocational/technical,each with a series of sub-branches. The upper sub-branch of the general secondary schools leads to the university,while the sub-branchesof the specialized schools lead either directly into a job or into an intermediateor high.ertechnical or vocational training institution. The choice is made early, and there is little opportunityto cross from one stream to another later on. The number of separate divisions within the system and the decline in the birthrate have resulted in low pupil-teacherratios in some of the secondary schools and in underused facilities.

4.176 The organizationaland administrativestructure o. Che education system reflects the character of the Governmentalstructure in the Antilles. The Central Government has the power to legislatewith respect to all aspects of all levels end branches of the education system; the Island Governments ha'e autonomy regardingall other resoects, that is, personnel recruitmentand management, curriculum design and development, -indfinance, the exception being the university.

4.179 A frequent comment made by those who have studied and reported on the system is that it is unduly rigid. Apart from the educationalissues that that feature raises, it is likely that the complexity and rigidity are factors in the high cost of the system. Greater flexibilitywould ease the problems of staffing and teacher training and reduce the administrativecosts. At the primary level, a particular problem is the *useof Dutch, beginning in the third grade, as the medium of instruction. Since Dutch is not one of the languages the great majority of children speak on entering school (they are taught in Papiamento in the Leeward Islands and in English in the Windwards until Dutch cakes over), this requirement causes : number of children to bive to repeat a grade, which also adds to the costs.

4.180 Inasmuch as education is the largest single item in the budgets of the islands, ranging from 25 to 38 percent (except in Saba, where it is only 14-15 percent), measures aimed at bringing Government expenditures into line with projected revenues will have to address the educational system. Restructuringof the secondary system seems to be called for and will likely yield significantsavings.

Housing

4.181 According to the Census, approximately6,000 Antilleans were withcut adequate shelter in 1981. The Public Housing Foundation in Curacao, the largest foundation of this kind in the Antilles,estimates that an a-lditional2,000 are in immediateneed of new or substantially improved housing. - 85 -

4.182 After a major restructuringin 1978,the PublicHousing Foundation(FKP) now functionsas a non-profitprivate enterprise. Its primarygoals are the constructionof low-cost,adequate quality public housingin Curacaoand direct lendingto low and low-mediumincome groups for home improvementor construction,mainly in Curacao. The FKP also functionsas a mortgageoank and providestechnical advice to smaller housingorganizations on the other islands.

4.183 The HousingFoundation was initiallyendowed with capital contributedby the CuracaoIsland Government and Ducch developmentaid. The CuracaoIsland Governmeut presently contributes land for new public housingprojects and some rent subsidies.

4.184 Rents and profitsfrom mortgagesenter into a revolvingfund gearedfor housingmaintenance and upgrading. Both mortgagesand rentsof dwellingsare set in accordancewith the incomeof the recipient;mortgage rates vary between7 and 10 percenta year. The averagemonthly rent for publichousing is WAf 350; rent collectionis good. New tenantspay only 70 percentof their rent and graduallycontribute the full amount. The tilanceof the rent is a directsubsidy to the individual.The usefulness and economicrationale of thLissubsidy are questionable.Workers when unemployedpay a small fractionof the rent,NAf 20 a month,to the HousingFoundation, while the remainingamount is a directsubsidy from the CuracaoIsland Government to FKP.

D. Implementingtbe AdjustmentProgram

4.185 The programof major structuraland administrativemeasures proposedin this reportcalls for continoussupport and directionat the politicallevel if it is to be carriedout successfully.It also needs the supportof an informedpublic, and the cooperationof the private sector,the trade unionsand other non-govevamentalinstitutions concerned with economicand socialaffairs.

4.186 The programcuts acrossdepartmental boundaries and involves reformsand actionsat both the Centraland IslandGovernment levels. It thereforerequires the establishmentof a mechanismto coordinate activitieswithin the programand to superviseprogress. Withoutsuch a mechanism,the impetusof the programwould quicklybe lost under the pressureof day-to-daybusiness and the particularconcerns of individual governmentsand departments.

4.187 One possibilitywould be to set up a high-levelcouncil, composed of a representativeof each of the islandsand the CentralGovernment, togetherwith a group of prominentcitizens knowledgeable about important aspectsof the nation'seconomic and sociallife. ro give the Council (whichmight be calledthe NationalEconomic Development Council, or NEDC) due weightand authority,it shouldbe chairedby the PrimeMinister or a seniorminister reporting to him. A DeputyChairman, able to devotemuch of his time to the Council,would servealso as Chairmanof an Executive Committeeresponsible for carryingon the work betweenmeetings, which would be held not more than three or four times a year. The Counciland - 86 -

ExecutiveCommittee would be servedby a small secretariatdrawn maini.y, but not exclusively,from the civil service.

4.188 The first task of the Councilwould be to draw up the list of measuresand activitiesto be includedin the program,in consultation with the governmentsconcerned, jand a timetablefor their implementation.Representatives of specil interests,including the churches,private business And tne trade unions,would be invitedto presenttheir views on the programor measuresof particularconcern to them. After approvalby the appropriateauthority, the departmentsor agenciesconcerned would be requiredto reportto the Councilat regular intervalson their progressin implementingthe measuresfor which they were responsible.Since the programwould not have the ch2racterof an integrateddevelopment plan with a definedstarting date, measures and activitiesshould be initiatedas soon as they were approved.

4.189 The Councilwould have the power to call for or commission studiesand reportson specialtopics, and to engageexperts as necessary. For this purposeit wouldneed accessto funds,which might be suppliedfrom Dutch aid. Unlessconsidered confidential, such studiesand reportsshould be published. The Councilitself should issue an annual reporton its activities. - 87 -

ANNEXES - 88 -

Table Al Netherland Antilles: Basic Data on Stayover Tourism

1980 1981 1982 1983 1984 1985

(Number of Visitors in Thousands)

Bonaire 14.4 19.7 20.3 17.2 18.1 24.0 Curacao 184.7 176.3 173.4 111.0 130.0 125.5 St. Maarten 204.7 182 .4b 204.8 254.4 308.2 346.3

Total 403.8 378.4 398.5 382.6 456.3 495.8

(Average Stay (Night))

Bonaire 4.7 4.6 4.5 5.3 4.4 6.6 Curacao 4.8 4.2 4.5 4.4c 4 4 5.4 St. Maarten ......

(Percent of Total)

Bonaire United States and Canada 50.7 52.3 56.4 62.7 69.9 71.O Venezuela 15.5 16.6 21.5 13.5 9.5 7.0 Netherlands 12.6 10.8 9.3 13.5 13.7 9.9 Other 21.2 20.3 12.8 10.3 6.9 12.1

Curacao United States and Canada 14.9 17.2 12.6 21.3 23.6 24.9 Venezuela 50.4 46.9 54.1 23.2 23.2 21.3 Other America 24.1 25.9 23.9 42.2 44.6 41.9 Europe 9.1 7.9 7.3 9.8 7.8 10.5 Other 1.5 2.1 2.1 3.5 0.8 1.4

St. Maarten United States and Canada 58.9 69.2 67.4 74.3 75.5 71.1 Continental Fraace 11.9 13.2 12.4 10.5 9.6 11.2 Other Caribbean 5.4 6.5 9.1 6.9 6.3 9.2 Other 23.8a 11.1 11.1 8.3 8.6 8.5

Source: Bank of the NetherlandsAntilles, Quarterly Bulletin,various issues, and mission estimates.

.. Not available. a. Including Antillean residents. b. Influencedby the closure of the Island's largest hotel in the third quarter of 1981. c. Estimate. d. Including Guadeloupe and Martinique. - 89 -

Table A2 NetherlandsAntilles: Basic Data on Cruise Tourism

1980 1981 1982 1983 198( 1985

(Number of Visitors in Thousands)

Bonaire 2.9 12.0 6.8 0.3 2.9 2.7 Curacao 16.0 129.4 110.0 107.1 121.0 108.8 St. Maarten 105.5 106.0 92.8 73.0 69.1a 146.1

Total 277.4 247.4 209.6 180.4 193.0 257.6

(Number of Cruise Calls)

Bonaire 5 23 10 1 4 4 Curacao 253 195 183 170 182 162 St. Maarten 213 148 153 181 122 246

Total 471 366 346 352 308 412

Source: Bank of the NetherlandsAntilles, Quarterly Bulletin,various issues, and mission estimates. a. Estimate based on average number of passengers per cruise call in 1980-83. -90 -

Table A3 NetherlandsAntilles: Revenue of the Curacao Government (-Mllionsof MAf)O

1980 1981 1982 1983 1984 19858

Taxes on Incomes and Profits 340.3 417.0 490.4 588.9 634.2 642.5 Income Tax 33.3 33.0 34.3 34.2 28.0 36.2 Wage Ta:: 144.7 176.3 188.4 180.4 169.8 172.1 Profit Tax 162.3 207.7 267.7 374.3 436.4 434.2 Of Which: Shell 28.0 28.0 28.0 28.0) 28.0 so Offshore Sector 99.0 118.9 189.9 292.2 330.0 375.0 Other 35.3 60.8 50.0 54.1 78.4 59.2

Taxes on Property 31.3 7.5 21.9 1(.1 3,' 3.3 Land 4.4 5.9 3.7 2.4 2.9 2.5 Occupancy 0.6 1.1 0.9 1.0 0.6 0.8 Tank BullenbaaiTax 26.3 0.5 17.3 6.7 .. ..

Taxes on Goods and Services 10.7 11.6 12.3 12.0 14.1 14.6 Motor Vehicle Fees 8.8 9.3 9.7 10.1 10.4 10.7 Gambling Licenses 1.2 0.9 1.7 1.1 0.9 0.9 Hotel Room Tax 0.7 1.4 0.9 0.8 0.8 1.1 Other ...... 2.0 1.9

Stamp Duties 14.5 18.9 19.5 14.0 15.0 14.4

Total Revenue 396.8 455.0 544.1 625.0 666.8 674.8

Revenue-sharing Transfers (net) .. -1C.0 -37.8 -57.0 -88.8 -91.2

Total Revenue after Revenue-sharing Transfers 396.8 445.0 506.3 568.0 578.0 583.6

Source: InternationalMonetary Fund.

.. Not available. a. Preliminaryestimates. - 91 -

Table A4 NetherlandsAntilles: Expendituresof the CuracaoGovernment (millionsof NAf)

1980 1981 1982 1983 1984 1985

CurrentExpenditures 365.3 412.4 472.6 515.0 539.4 563.0 Wages 161.4 183.7 204.6 227.0 263.9 274.5 InterestPayments 14.9 11.8 14.2 13.0 16.0 14.3 Subsidies 50.0 62.6 76.9 90.0 101.8 109.4 Other 139.0 154.3 176.9 185.0 157.7 164.8

CapitalExpendituresa 19.9 25.8 25.2 26.0 55.0 49.1

Total Expenditures 385.2 438.2 497.8 541.0 594.4 612.1

Source: NetherlandsAntillean officials.

a. Locallyfinanced capital expenditurea only. - 92 -

Table A5 NetherlandsAntilles: CentralCovernment Revenue (millionsof NAf)

1980 1981 1982 1983 1984 1985a

Tax Revenue 143.3 163.5 179.8 178.0 188.3 185.6

ExciseTaxes 41.1 44.0 43.0 49.9 62.3 76.9 Of Which: Beer,Liquor and Tobacco 36.0 38.6 38.6 40.3 40.1 39.2 Gasoline 5.1 5.3 4.4 9.4 22.2 37.7 GamblingLicense 2.4 2.1 1.9 2.1 2.3 2.5 ImportDuties 74.2 86.1 105.2 96.0 82.0 68.5 ForeignExchange Tax 11.5 15.6 15.8 16.7 23.3 23.3 Other Taxesb 14.1 15.7 13.9 13.3 13.7 14.4

Non-taxRevenue 46.6 33.0 68.8 67.2 61.3 57.5 Of Which: CentralBank Profits 6.0 8.0 13.0 24.5 13.2 17.3 Post OfficeSurplus 10.2 11.0 11.6 10.9 11.2 11.8 Landsradiodienst 13.0 14.0 15.0 16.0 17.0 17.0 Other 17.4 .. 29.2 15.8 19.9 11.4 TotalRevenue 189.9 196.5 248.6 245.2 249.6 243.1

Revenue-sharing Receipts(net) 4.7 12.8 51.5 88.0 113.8 109.4 Aruba 4.7 2.8 13.7 31.0 25.0 18.2 Curacao .. 10.0 37.8 57.0 88.8 91.2

Total Revenue,Including revenue-sharingReceipts from Aruba (net) 194.6 199.3 262.3 276.2 274.6 261.3

TotalRevenue including Revenue-shiring Receiptsfrom Aruba and Curacao(net) 194.6 209.3 300.1 333.2 363.4 352.5

Source: InternationalMonetary Fund.

.. Not available. a. Includesthe revenueof the CentralGovernment in Aruba. b. Consistmostly of propertyand propertytransfer taxes, and of death,customs serviceand CentralGovernment stamp taxes, - 93 -

Table A6 NetherlandsAntilles: Expendituresof the CentralGovernment (millionsof NAf)

1980 1981 1982 1983 1984 1985a

CurrentExpenditures 235.9 280.2 367.0 409.4 395.3 388.4 Wages 154.7 192.5 233.8 248.0 248.0 242.2 Transfersto Bonaire and the Windward Islands 20.7 17.4 25.8 22.7 24.0 20.3

Transfersto Households 9.4 10.6 10.0 9.3 9.3 9.8 EconomicSupport 2.3 3.6 25.2 27.9 11.7 25.1 Other 48.8 56.1 72.2 101.5 102.3 91.0 Of Which: InterestPayments 10.3 15.5 18.8 27.7 23.5 24.9

CapitalExpendituresb 12.2 5.1 5.1 5.4 5.6 3.1

Total Expenditures 248.1 285.3 372.1 414.8 400.9 391.5 Revenue 194.6 209.3 300.1 333.2 363.4 352.5

Source: InternationalMonetary Fund. a. Includesexpenditures of the CentralGovernment in Aruba. b. Locallyfinanced capital expenditures only. Table A7 Netherlands Antilles: Monetary Survey, 1979-85 (end of period; millions of NAf, unless otherwise indicated)

1979 1980 1981 1982 1983 1984 1985

Money and Quasi-money (M2) 859.4 946.7 1 067.6 1 214.1 1,275.5 1 301.4 1,370.0 (percent change) (9.3) (10.2) -'(12.8) (13.7) (5.1)

Counterparts to NS Met Foreign Assets 193.7 245.9 342.3 433.0 385.8 315.8 438.1 Domestic Credit 802.7 851.6 923.2 1 007.1 1,115.0 1,220.S 1 176.1 (percent change) (11.3) (6.1) (8.4) (9.1) (10.7) (9.5) (-3.6)

Claims on Government met 160.6 133.9 61.4 50.3 23.6 119.1 144.8 Central Governmentg 93.6 90.2 85.2 136.0 124.5 129.4 118.6 Island Covernmentsb 67.0 43.7 -23.8 -85.7 -100.9 -10.3 26.2

Claims on the Private Sector 642.1 717.7 861.8 956.7 1,091.4 1,101.4 1,031.3 (percent change) (4.1) (11.8) (20.0) (11.0) (L4.1) (0.9) (-6.4)

Hiscelianeous Other, Net -136.9 -150.8 -198.0 -225.9 -225.3 -234.9 -244.2

Sources: Bank of the Netherlands Antilles, Quarterly Bulletin; and International Monetary Fund. a. Claims on the Central Government (net) include Central Bank and commercial bank advancesi,as well as coins issued by the Central Covetiment, minus Central Government deposits (including the special deposits under the Multi-Annual Development Plan). b. Claims on the Island Governments are net of their deposits with the Central Bank and commercial banks; consequently, M2 also does not include the Island Covernment's deposits. Table AS Netherlands Antilles: Components of Money and Quasi-Money, 1979-85

1984 1985 1979 1980 1981 1982 1S83 Sept. Dec. Mar. June Sept. Dec.

(Millions of NAt, Fnd of Period)

Money (Ml)a 393.0 403.0 440.8 486.2 483.1 478.3 471.1 522.6 487.8 440.4 549.0 Notes and Colas 137.7 139.1 160.9 167.1 162.6 160.9 167. 166.2 158.3 142.8 137.3 Dmand Deposits 255.3 263.9 279.9 319.1 320.6 317.4 303.3 356.4 329.5 297.6 411.7

Quasi-money (,2-Q1)a 466.4 543.7 626.7 727.9 792.4 839.0 830.4 827.6 831.4 812.2 821.0 Time Deposits 54.6 69.3 96.4 106.7 136.3 139.5 142.9 144.2 144.7 144.9 147.7 Savings Deposits 411.8 474.4 530.3 621.2 656.1 700.3 687.3 683.4 686.7 667.3 673.3

Money and Quasi-money (M2)8 859.4 946.7 1 067.5 1.214.1 1.275.5 1.318.1 1,301.4 1.350.2 1.319.2 1.252.7 1.370.0

Excluding Aruba ...... 1t014.9 1,019.7 1,035.9 1,030.4 982.3 1,114.6

(Perefntage Changes)b U'

Money (MI)a 6.7 12.5 9.4 10.3 -0.6 1.3 -2.5 7.6 -1.9 -7.9 16.5

Quasi-money (M2-M1) 11.5 16.6 15.3 16.1 8.9 7.5 4.8 -1.2 -1.2 -3.3 -1.1 Time Deposits (72.8) (26.9) (39.1) (10.7) (27.7) (9.8) (4.8) (2.3) (5.4) (3.9) (3.4) Savings Deposits (6.5) (15.2) (11.8) (17.1) (5.6) (7.0) (4.8) - .9) (-2.4) (-4.7) (-2.0)

Money and Quasi-money (M2)a 9.3 10.2 12.8 13.7 5.1 4.0 2.0 2.0 -1.4 -5.0 5.3

Excluding Aruba ...... 0.4 1.5 -3.7 9.3

Source: Bank of the Netherlands Antilles, Quarterly Bulletin; and InternationalMonetary Fund.

.. Not available. a. Excluding deposits of the Island Governments. b. Percentage changes are calculated over 12-month periods. - 96 -

Table A9 Netherlands Antilles: Commercial Bank Credit, 1980-85

1981 1982 1983 1984 1985

(Millions of NAf: Amounts Outstanding, End of Period)

Loans to the Private Sector 839 922 1,042 1,043 982 Business Loans 585 620 746 754 779 Consumer Loans 125 152 138 124 114 Mortgage Loans 129 150 158 165 15 Loans to Public Sectora 12 li 13 16 10

Total 851 938 1,055 1,059 992

(PercentageChanges)b

Loans to the Private Sector 18.7 9.9 13.0 0.1 -5.8 Business Loans 17.2 6.0 20.3 1.1 3.3 Consumer Loans 20.2 21.6 -9.2 -10.1 -28.2 Mortgage Loans 24.0 16.3 5.3 4.4 -30.9

Loans to the Public Sectora 33.3 25.0 -13.3 23.1 -37.5

Total 18.9 10.2 12.5 0.4 -6.3

Scurce: B-nk of the NetherlandsAntilles, Quarterly Bulletin; and International Monetary Fund. a. Narrowly defined, i.e., including only loans to Central and Island Governments. b. Percentagechanges are calculatedover 12-month periods. - 97 -

Table A10 NetherlandsAntilles: 'nterestRates (percentper year,end of period)

1985 1982 1983 1984 March June Sept. Dec.

OfficialDiscount Rate 9.0 8.0 8.3 8.0 8.0 8.0 8.0

Depositaates PassbookSavings 5.1 5.1 5.2 5.2 5.2 5.2 5.3 Time Depositsa 7.1 6.3 6.2 6.2 6.5 6.5 6.7

LendingRates Prime Rate 11.4 11.0 11.2 11.2 11.6 11.6 11.7 MortgageRate 12.8 12.5 12.4 12.4 12.4 12.4 12.5

TreasuryPaper 3-monthPaper 7.5 7.25 7.25 7.25 6.75 7.5 7.0

EffectiveGovernment Bond Yield 11.0 10.5 9.9 10.45 9.05 10.02 8.6

MemorandumItem: InterestRate Differential with U.S. Dollar DepositRateb -2.9 -4.0 -3.8 -4.0 -2.6

Source: Bank of the NetherlandsAntilles, Selected Monetary Figures (monthly); and IMF, InternationalFinancial Statistics.

.. Not available. a. Depositsof NAf 10,000,12-month maturity. b. In percentagepoints; rate on NAf time depositsminus LondonInterbank Offer Rate on 12-monthU.S. dollardeposits. - 98 -

Table All NetherlandsAntilles: EffectiveExchange Ratesa (annualchanges in percent)

Estimate 1980 1981 1982 1983 1984 1985

Export-weightedb Nominal -0.1 1.7 0.5 1.4 11.1 2.5 RealC -0.1 2.3 -0.4 0.2 6.7 -3.1

Import-weightedd Nominal -0.3 7.5 4.0 7.1 3.7 1.2 Realc 2.3 10.0 3.4 5.9 1.4 -1.5

Total trade-weightede Nominal -0.2 4.6 2.3 4.0 7.8 2.3 Realc 0.9 6.1 1.5 3.1 4.6 -1.8

Sources: IMF, InternationalFinancial Statistics and Directionof Trade Statistics;Bank of the Netnerlands.Antilles,Quarterly Bulletin; and staff estimates.

a. Where possible,imports and exportsof Aruba are excluded. b. Exportweights are derivedfrom the geographicaldistribution of merchandiseexports, receipts from tourism,and receiptsfrom transportation and revenuesfrom other services,including the operationalexpenditures of the offshoresector. The geographicaldistribution of tourism receiptsis calculatedby multiplyingtotal receiptsfrom tourismby the proportionof total touristsarriving from a given country. c. As measuredby consamerprices. d. Importweights are derivedfrom the geographicaldistribution of non-oilmerchandise imports. e. The total trade-weightedeffective rate is calculatedby assigning weightsto the export-and import-weightedeffective rate in proportion to the relativeimportance of "competitive"exports and imports,as definedabove, in total "competitive"trade. - 99 -

Table A12 NetherlandsAntilles: Balanceof Payments (On a cash flow basis,and in millionsof NAf)

1980 1981 1982 1983 1984 1985

Merchandise -1,363.6 -1,298.7 -1,449.9 -1,406.6 -1,296.3 -1,362.1

Services 1,445.0 1,568.9 1,674.2 1,443.6 1,383.1 1,484.6

InvestmentIncome -97.1 -80.7 -5.9 15.9 4.7 38.8

PrivateRemittances -89.0 -94.9 -112.4 -134.5 -162.4 -169.3

CurrentAccount Balance -104.? 94.6 106.0 -81.6 -70.9 -8.0

OfficialCapital 151.2 111.2 61.8 112.4 93.0 103.3

PrivateCapital -18.4 -130.0 -95.0 -123.0 -125.4 1.5

CapitalAccount Balance 132.8 -18.8 -33.2 -10.6 -32.4 104.8

Errorsand Omissions 24.1 20.3 18.0 45.0 33.3 25.4

OverallBalance 52.2 96.1 90.8 -47.2 -70.0 122.2

Net Changein Inter- nationalReserves, Increase(-) -52.2 -96.1 -90.8 47.2 70.0 -122.2

Of Which: Officialreserves (-38.5) (-74.?) (-89.8) (38.7) (83.7) (-104.6)

Source: Bank of the NetherlandsAntilles, Quarterly Bulletin, various issues. - 100 -

Table A13 NetherlandsAntilles: Cash Flow Statement, Inflows (millionsot NAf)

1980 1981 1982 1983 1984 1985

Merchandise 263.0 265.2 208.C 93.4 136.7 136.1 Aruba 86.0 78.2 74.2 29.4 26.0 23.0 Curacao and Bonalre 169.0 179.8 123.3 53.7 99.9 95.9 Windward Islands 8.0 7.2 10.5 10.3 10.8 17.2

Services 1,767.5 1,976.3 2,096.9 1,918.5 1,797.0 1,884.2 Tourism 714.7 785.7 759.4 576.5 574.8 590.6 Aruba 246.2 279.9 291.9 205.2 212.3 226.5 Curacao and Bonaire 273.7 295.4 253.1 148.7 128.7 134.1 Windward Islands 194.8 210.4 214.4 222.6 233.8 230.0 Refininga 263.2 347.0 513.4 444.2 306.7 277.8 Aruba 101.1 178.0 269.1 238.8 139.8 101.9

ruracao 162.1 169.0 244.3 205.4 166.9 17 5 .9b Offshore Sector 241.9 309.6 386.9 518.7 533.2 575.1 Taxes 100.5 120.8 193.7 299.4 321.1 357.8 Operational Expenditures 141.4 188.8 193.2 219.3 212.1 217.3 Ship Maintenance (drydock) 103.6 97.2 86.3 43.2 36.1 51.8 Storage 174.8 183.9 108.2 88.2 75.5 93.9 Other Transportation 214.8 193.1 182.8 185.2 213.5 244.2 Other Services 25.5 37.0 31.2 37.0 29.0 26.7 GovernmentServices 29.0 22.8 28.7 25.5 28.2 24.1

Total Merchandiseand Service Inflows 2,030.5 2,241.5 2,304.9 2,011.9 1,933.7 2,020.3

InvestmentIncome 62.2 101.1 116.5 117.0 128.6 116.9

Privtte Remittances 47.1 51.4 45.8 40.0 37.5 33.3

Total, Current Inflows 2,139.8 2,394.0 2,467.2 2,168.9 2,099.8 2,170.5

Sources: Bank of the NetherlandsAntilles, Quarterly Bulletin; and Internationa. Monetary Fund.

a. Net of oil deliveriesfor local use. b. Of which NAf 31.4 million on account of the newly managed refinery. Loan repaymentsand restitutionsto the pension fund are deducted from the current inflows. - 101 -

Table A14 NetherlandsAntilles: Cash Flow Statement,Outflows (millionsof RAf)

1980 1981 1982 1983 1984 1985

Merchandise 1,626.6 1,563.9 1,657.9 1,500.0 1,420.1 1,498.2 Aruba 362.2 400.8 419.1 399.7 353.1 325.6 Curacao and Bonaire 1,048.3 946.8 1,021.6 823.1 786.5 810.1 Windward Islands 216.1 216.3 217.2 277.2 280.5 362.5

Services 322.5 407.4 422.7 474.9 426.8 399.6 Travel 104.0 118.0 141.5 193.1 182.9 130.8 Aruba 18.0 19.3 24.0 35.4 41.6 31.4 Curacao and Bonaire 79.7 93.0 110.6 151.5 129.5 92.3 Windward Islands 6.3 5.7 6.9 6.2 11.8 7.1 Transportation 113.3 165.6 253.9 132.3 110.9 97.4 Government,n.i.e. 12.7 13.4 12.9 6.4 6.8 6.0 Other Services 92.5 110.4 114.4 143.1 126.2 165.4

Tocal Merchandise - and Service Outflows 1,949.1 1,971.3 2,080.6 1,974.9 1,846.9 1,897.80 Of Which: "Free" Importsa 1,303.3 1,279.7 1,385.3 1,402.7 1,274.0 1,365.9

Investment Income Payments 159.3 181.8 122.4 101.1 123.9 78.1

Private Remittances 136.1 146.3 158.2 174.5 199.9 202.6

Total, Current Outflows 2,244.5 2,299.4 2,361.2 2,250.5 2,170.7 2,178.5

Source: Bank of the NetherlandsAntilles, Quarterly Bulletin;and International Monetary Fund. a. Total merchandise and service outflows, excluding the direct import requirements of the export sectors. The latter outflows are estimated to be one-thirdof total merchandise and service inflows, excluding taxes and storage receipts and including imputed revenues from oil deliveries by the refineriesfor local use. - 102 -

TableA15 NetherlandsAntilles: The CapitalBalancea (millionsof NAf)

1980 1981 1982 1983 1984 1985

Net Private gapital Securities 0.2 -57.6 -29.4 -59.1 -65.5 -6.1 Real Estate 3.8 -0.3 -2.5 -9.0 -6.2 -7.7 Loans 10.4 2.2 25.4 57.1 56.9 129.5 Repayments -46.7 -28.8 -32.6 -55.9 -112.5 -1'J9.1c Borrowingsof Commercial Banks 13.9 4.6 -10.9 -7.2 -9.6 -7.1 Other4 .. -50.1 -45.0 -48.9 11.5 2.0 Total,Net PrivateCapital -18.4 -130.0 -95.0 -123.0 -125.4 Y13 GovernmentCapital ForeignAide 179.1 108.1 82.0 115.0 106.4 121.9 Loan Repayments -13.8 -11.1 -13.2 -11.2 -10.4 -6.0 Other -14.1 14.2 -7.0 8.6 -3.0 12.6 Total,Government Capital 31.2 11:.2 61.8 112.4 93.0 103.3

CapitalBalance 132.8 -18.8 -33.2 410.6 -32.4 i04.8

Source: Bank of the NftherlandsAntilles, Quarterly Bulletin; and International MonetaryFund.

NNot available. a. Figuresmay not sum up becauseof rounding. b. A largepart of the net acquisitionof foreignsecurities represents operationsof the pensionfunds in longerterm securities.The 1985 figure includesrestitution by the formerShell refinery to the pensionfund of the refineryemployees (NAf 72.0 million). c. Includingloan repaymentsof the formerShell refinery to domesticcommercial banks (NAf 43.5 million). d. Changesin net balancesheld abroadby residentsincluding transactions in securities,with a maturityof less than one year by the pensionfunds. e. Includingthe Fund for Social,Educational and CulturalProjects. - 103 -

TableAIG NetherlandAntilles Debt ServicePayments FundedDebt Towardthe Netherlands and DutchDevelopment Aid to the NetherlandsAntilles (millionsof Netherlandsguiliders)

1980 1981 1982 1983 1984 1985 1986 1987

CentralGovernamnt 10.5 10.5 10.7 10.9 10.0 13.6 14.3 14.7 Redemption 4.3 4.3 4.6 4.6 4.6 7.2 7.9 8.3 Interest 6.2 6.2 6.1 6.3 6.4 6.4 6.4 6.4

FundedDebt December31 167.0 170.2 177.5 180.3 187.0

Curacao 17.1 17.1 19.7 20.3 21.1 26.4 29.3 30.7 Redemption 6.3 5.8 7.7 7.9 8.0 13.3 16.2 17.6 Interest 10.8 11.3 12.0 12.4 13.0 13.1 13.1 13.1

FundedOett December31 293.3 319.5 348.6 366.1 387.3

Total 40.3 40.5 44.8 45.8 47.1 56.9 61.9 64.4 Redemp*lon 16.1 15.6 19.1 19.6 19.7 29.5 34.5 37.0 Intorest 24.2 24.9 25.7 26.2 27.4 27.4 27.4 27.4

FundedDebt December 31 626.3 670.7 713.4 740.5 780.8

DutchDevelopment Aid 167.2 209.1 204.8 232.2 245.0 263.2 ODA 153.7 187.3 177.7 199.0 204.1 216.0 Non-ODA 13.5 ;18 27.1 33.2 40.9 47.2

Source: Bankof the NetherlandsAntilles, Quarterly Bulletin, various issues. - 104 -

Table A.17 Netherlands Antilles and ArubaWater SupplyIndicators - 1984

Aruba Bonaire Curacao St. Maarten 5/

Number of Connections Domestic 15,300 40,970 3,300 Ind & Business 3,0WU 2,640 b9o Large Consumers (13) ( 130) (8) Total WaterConnections 18,300 3,200 43,610 3,990a/ Total PowerConnections 18,30U 3,20U 44,217 6,257 Total households 15,102 2,427 34,620 5,067

Inhabitants/DomWater conn. 3.3 3.1 3.6 5.b

P-roduction and Consumption Production Capacity m3 : 25,500 1,600 37,000 4,200 Avg. Produce m3/d 20,200 b/ 1,200 25,876 3,432 Metered Cons. m3/d 19,000 18,4b7 2,729 Unace.for Waterm3/d 1,200 7,409 703 Unace.for WaterX 9% 20% 29% 19% Water Proc'.1/cap/day 420 c/ 123 125 181 Water Cons. 1/cap/day Ibo d/ 10U 114 105 c/

Length Distribution (xIOOUm) Trunk Mains 54 583 Distribution Mains 30 1,587 To.tal 400 64 2,170

'm)/connect. 22 26 50 (m)/hab. 6.6 8.4 14.7

LeaksRepaired/Yr. 8,650

ReservoirCapacity (m3) 45,6b0 25,000 120,000 28,500 Capacity/Capita(1) 760 2,5U0 8U0 1,500

Personnel Production 8 e/ 140 f/ Distribution 43 295 d/ Total 537h/ 51 435 22d/

Staff/000 connect. 9 h/ 18 10 6

a/ Number of connections have grown at a rate of 15% a year since 1960. b/ 1985 production excluding LAGO was 13,500m3/day. El Includes large consumers such as hotels, refinery,etc. d/ The repartition by GEBE of 22 for water and 102 for powerindicates possible undercharging for water. e/ WEB, staff for water production estimated at 6 out of a total employed of 59. f/ KAE staff 40% for water and 60% for power of total staffof 350. DWD+ 5% Kodelco staff - 275 + 05 x 400. h/ For water operations only. - 105 -

Table A.18 Curacao:KAE - Water Production Installations

Nominal Type - Plant Capacity Year put m3/day into service

(1) Richardson Westgarth (MSF) (V9) 4,800 19b3 (orig. cap. bUOO Om3d)

(2) RichardsonWestgarth (MSF) (Vio) 2,80W 19b3 (orig. cap. b000 m3/d)

(3) DeSchelde/ (MSF) (V12) 2,4u0 1971 Weir Westgarth (orig. cap. 2x4000 m3/d)

(4) Stork/Werkspoor (MSF) (VI) 8,500 1977

(5) Stork/Werkspoor (MSF) (V2) ,500 1978

(t) ESMIL (MSF) (V3) 10,000 1984

(7) Israel vesalte Lng. (LT-VC) (V4) 10,000 1986

Source: KAE, "Iistory Drinking Water Supply," Curacao.

Note: MSF - Multi Stage Flash Evaporators LT-VC - Low Temperature Vapor Compression - 106 -

Table A.19 Water Taritfs-1985 - 86 a/ t, with US$I - NAF 1.75)

Type of Users Aruba Nonaire Cura*ao St. Maarten St. antin (Fr.) (since';1/81)

3 3 3 3 3 to 10 m /m -2.50 to . b/ 3.75 c/ 0-10 O 4 0-3 /e "/c Domestic 0-4 4 7 5 0-4 a /m - /s - m3 - 2.50 0-20 - 20 FP/s 3 5-7 3/ - 4.00 --10 .3/ - 7 4-10 a /m - 5.50 20-50 m3/a - 40 FF/a - 4 to 10 m3/m -4.75 8-lom3/m - 7.00 -10 o3/l - 6.00 -50 *3/m - 60 FF/m3 11-12m3/m -10.00 -13 -13.00

Business + 3 Industrial, 0-4 m3/m - 5.00 / 7.5 8.00 65 Fi/a 3 Hotels 4 . 8 5 d/ -4 m /m -13.00

Average Billed a, to Consumers 4.30 7.5 5.8 9.73 Production Cost e/ 7.20 7.33 f/ 5.7 g/ 5.30 h/ 3/ F,/m3t/ Total Cost (prod. + distt.) I1.99 a/ All tariffs are approximate as they are periodically adjusted for fuel cost. Dl Depending on estimated rental value of house (NAPIOO to NAF 500/mouth) a minim.m paymet lncreasing from NAllO to 47.50 per mouth is billed. Tariffs also iocresse with rental value. c./ The first 4 m3 is a minimum billed consumption. 3 d/ A minimum payment for 3 to 25 m /month is billed depending on type of use and business. s/ 1984 data. t Production cost of the R.O. contract (Bonaire fixed Kwlh price of US$13 C), while WEB's average sale price was NAY 7.69/mi I Average price of water bought from KAt. h/ The cost price water delivered by Gt8E ia NAF 12, while the price paid by GEt8 for water bought from the privately ma_nagedR.O. plaot in only NAP 5.30/i3 . For additional data, see Annex . i/ Price of water bought from the privately (UCDtE) managed plant. - 107 -

Table A.20 Curacao - Water Distribution - Lncome Statement (Current NAf millions)

1981 1982 1983 1984

OPERATING REVENUE Water Revenue 37.326 35.125 34.949 39.165 Constructionfor Otners,Etc. 217 190 162 111 Rent Interest & Miscellaneous 18 18 22 33 Adjustment for Prev. Years (1.625) 703 (268) 2.100

Total OperatingRevenue 35.936 37.040 34.865 41.409

OPERATING COSTS PersonnelCost 8.925 9.615 9.331 8.967 Offices 156 190 200 221 Pumps, etc. 580 456 501 801 DestributionSystem & Meters 544 691 540 441 Transportation 328 405 361 298 Administration 986 856 644 508 KODELA CommercialAdministration - 768 1.288 1.310 Miscellaneous 85 121 134 2 Water Boughtfrom KAE 49.376 49.274 48.494 54.012 Losseson Receivables - 8.998 8.700 25.800

Total OperatingCost 60.988 71.374 70.193 92.360

Incomebefore Depreciation a/ (25,052) (34.334) (35.328) (50.951) Depreciation 1.129 1,317 1.170 1.173

OperatingIncome (26.181) (35.651) (36.498) (52.124) InterestExpense 1.599 1.879 1.814 1.875

Net Income(Loss) (27.780) (37.530) (38.312) (53.999) a/ Depreciation is on historical cost. - 108 -

Table A.21 St. Maarten - GEBE: Water Product.on Installations

Nominal Capacity, Year Put Type Plant m3/day into Service

(1) Atlas - Mak. Krupp (4SF) 1,000 1971 (2 x 500)

(2) Werkspoor Water (MSF) 2,000 1979

(3) Water Services 1,200 1985 of America (WSA) a/ (R.0.) (2 x 600)

I/ GEBE is obliged to buy, at cost of Naf 5.16/m3 (US$2.95m3): 1Hn.

M4in.143 Max.t3 Period 18,000 36,000 lonthtly 84,000 96,000 Quarterly 175,000 190,000 Half Yearly 365,000 365,000 Yearly - 109 -

TableA.22 St.Maexten - (w: Ibkta on Cost and SevenweWater &ipply (k)

19b4 1983 1982 1981 19W

Water Distribution m3 Recei,me.from Production 1Z5,9YU 955,7UW 785,900 b3b,7AX bW3,IW

Sold to: Dbmestic 316,900 25U,100 19b,3W0 198,000 171,100 k.irness 297,40U 195,700 166,500 140,54U 18U,bwI LargeCons. 361,800 352,000 297,UOO 2U0,700 Lb1,700

Total 976,100 797,800 btl,b80 541,2(0 533,400

Lbaccunted-for Water m3 149,800 157,9Y0 124,100 95,500 89,700 Unaccmnted-for wter X 13.3 16.5 15.8 15.0 14.4

NJmberof Co(netions 3,5U1 2,952 2,478 2,167 1,9W1

WJJled (NAfLm3) iknestic 4.98 4.87 4.8b4 5.00 4.97 alisness 12.30 11.26 1O.96 11.42 10.27 large (Cns. 11.76 11.25 10.84 11.35 1U.36 average 9.73 9.25 9.04 9.05 b.

A'tualCost (NAL/m3) Production 7.35 b.70 7.24 b.23 7.27 Water lxgt 12.05 13.3U - 12.42 9.33 Average 7.74 b.70 7.24 8.54 7.33

Unaccaunted-for Watet 1.22 1.36 1.36 1.45 1.24

Adjustnpnt for Storage - u.05 0 0.10 p.m.

Delivered Water 8.92 b.11 b.(0 1U.09 8.57 lLstribition 2.63 2.45 3.11 1.23 U.99 Administration U.38 0.40 u.40 0.56 0.47 Mitceilartxxs 0.06 0.62 0.57 0.6D 0.63

Tbtal 11.99 11.56 12.68 12.48 1U.6b

LossWater op. (BE&in NAf/m3 (2.26) (2.33) (3.64) (3.43) (2.0b)

LossWater op. in NAf (muil.) (22.1) (18.6) (24.1) (18.6) (11.0) - 111)-

Table A.23 Bonaire- WEB: Water ProductionInstallations

Nominal Type Plant Cgpacity Year Put mJ/day into Service

(1) Weir - Westgarth(MSF) a/ 600 1963

(2) Werkspoorwater- (MSF) a/ 600 1975

(3) Werkspoorwater- (MSF) a/ 600 1975

(4) IsraelDesalt. Eng. (IDE) (LT-VC) 2 x 500 1986

(5) Water Servicesof America(WSA) (..O.)b/ 600 1986

a/ These threeMSF plantsshould be written-off. It is possiblethat one WerkspoorMSF plant could still be partiallyrehabilitated by cannabalizingthe other Werkspoor-MSFplants, but only for a limited time.

2/ Three year managementcontract for the productionof 600 m3/d at a cost of US$4.19/m3 (with fixed power price of US$0.13/kwh).Total water cost estimatedat NAf 4.63/m3. - ill -

Table A,23 Bonaire- WEB: Water ProductionInstallations

Nominal Type Plant Capacity Year Put m3/day into bervice

(1) Weir - Westgarth(M8F) a/ 600 1963

(2) Werkspoorwater- (MSF)a/ 600 1975

(3) Werkspoorwater- (MSF)a/ bOU 1975

(4) IsraelDesalt. Eng. (IDE) (LT-VC) 2 x 5U0 1986

(5) Water Servicesof Amirica (WSA) (Ro0e) b/ooU 1986

a/ These threeMSF plantsshould be written-off. It is possiblethat one WerkapoorMSF plant could still be partiallyrehabilitated by cannabalizingthe other Werkspoor-MSFplants, but only for a limited time. 2, 3 -/ Three year managementcontract for the productionof 600 m /d at a cost of US$4.19/m3 (withfixed powerprice of US$0.13/kwh).'Total water cost estimated at NAf 4.63/m3. - 112 -

Table A.24 Curacao Dry Dock Company

Total Profit a/ b/ No. Revenue Revenue (Loss) Percent Man-hours Load Year Staff Man-hours (NAf mil.) (NAf mil.) Subcontracted Billable Factor

1981 1,142 1,100,000 109.1 6.8 1,900,288 58 1982 1,158 824,000 b3.3 (16.7) 11 1,92b,912 43 1983 1,034 621,500 41.3 (38.0) 9 1,720,576 36 1984 995 706,000 52.4 (21.7) 13 1,655,680 43 1985a/ 942 767,000 b2.0b/ (14.6) 15 1,567,488 49

a/ 1985 figures are approximate pending issuance of the audited report for that year. b/ Includes NAf 1.9 million in revenue trom equipment rental. r/ No. staff x b0% x 2,080 hours. cli Assumed billable man-he,urs divided by revenue man-hours. - 113 -

Table A.25 Expenditures and Number of Cases for Medical Treatment by Provider

1981 1982 1983 1984

Social Security Bank Total Expenditures (NAf million) 13.1 13.8 15.2 15.3 Number of Cases (thousand) 22.0 26.0 30.0 31.7 Average Cost per Case (NAf thousand) 0.60 0.53 0.51 0.48

Welfare Cases (holders of P.P. Cards) Total Expenditures (NAf million) 55.1 65.5 74.6 75.1 Number of Cases (thousand) 52.0 61.0 64.0 68.1 Average Cost per Case (NAf thousand) 1.06 1.07 1.17 1.10

Island Governmentof Curacao!1- Salaried Employees Total Expenditures(NAf million) 5.3 4.7 6.6 6.2 Number of Cas-s (thousand) 11.9 13.0 12.0 12.7 Average Cost per Case (NAf thousand) 0.45 0.36 0.55 0.49

Island Government of Curacaot-/-Wage Earners Total Exoenditures(NAf million) 2.7 2.9 4.2 3.6 Number of Cases (thousand) 3.9 4.0 4.0 3.9 Average Cost per Case (NAf thousand) 0.69 0.73 1.05 0.92

Central Government Employees5/ Total Expenditures(NAf million) 3.6 4.4 5.0 6.8 Number of Cases (thousand) 8.3 8.0 9.0 8.9 Average Cost per Case (NAf thousand) 0.43 0.55 0.56 0.76

Retired Employees rotal Expenditures(NAf million) 3.7 4.3 5.4 6.9 Number of Cases (thousand) 2.0 2.5 3.2 4.0 Average Cost per Case (NAf million) 1.85 1.72 1.69 1.73

Private Insurance Total Expenditures(NAf million) 47.1 53.2 Number of Cases (thousand) 31.0 25.2 Average Cost per Case (NAf thousand) 1.5 2.1

Source: Data provided by Antillean officials. a/ Covers 90 percent of the cost for the worker and family members. b/ Cover 100 percent of the cost for the worker and family members. c/ Includes upper and lower income groups. For lower income group, 100 percent of expenses are covered by the Covernment. For the upper income group, 90 percent are covered by Governmentand 10 percent by ewployee contributions. - 114 -

Table A.26 Netherlands Antilles: Monthly Salaries of Teachers by Level of Education and Career Status for the year 1982 a/ (NAf)

Level of Education Upper Career Status Pre-Primary Primary Secondary University

Beginning 1,640 1,750 2,410 4,280 Middle 1,s55 2,915 3.775 6,295 End 2,300 4,60U 5,865 7,775 At the Fifth Year of Service 1,950 2,180 2,915 5,320 At the Tenth Year of Service 29,300 2,790 3,630 b,295

Average Salary 1,930 3,055 4,013 6,156

Source:- a/ Pension fund is not included in these figures, but it amounts to about 77 percent of the annual salary for pre-primary teachers, 31 percent for primary, 32 percent for secondary and upper secondary, and 33 percent for university teachers. NorthiPoint 68, Atlantic Ocean

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