The Sixth International Critical Management Conference, July 13-15, 2009 Warwick Business School, The University of Warwick, UK Stream 2 - Open Stream Authors: Gordana Pesakovic, PhD Professor, Argosy University Olivia C. Saunders, DBA Associate Professor, The College of The Bahamas Paper Title: Negotiated Foreign Direct Investment: A Case Study of The Bahamas Abstract The views on FDI range from advocates of FDI who see it as a major development promoter, to those who demonstrate negative effects of FDI on developing/emerging countries. The Bahamas as a small, open and developing/emerging country has its door open for FDI. This paper uses the case study of The Bahamas and eight FDI agreements to evaluate their impact on the country. In the paper relevant legislations and the national investment policy are also discussed. The findings of the paper are that FDI policies have created a dual economy that places the commanding heights of the economy in the hands of foreigners. Recommendation for a broad-based development agenda is made so that the benefits of FDI can be maximised. Introduction The Bahamas The Bahamas is sandwiched between the richest nation in the hemisphere The United States of America (USA) and its nemesis, Cuba. It is also bordered by the poorest nation in the hemisphere, Haiti. The Bahamas is therefore strategically located on a number of levels. Politically it is a part of the Caribbean and a member of the Caribbean Community (CARICOM). The Bahamas is not a member of the World Trade Organization (WTO) but has applied. Generally speaking, The Bahamas is small, open, underdeveloped which typifies Caribbean type economies, and along with its geography, makes it one of the most vulnerable countries in the world as characterised by UNCTAD (2007). It is one of the ‘structurally weak, vulnerable small economies’. For well over half a century, The Bahamas has been an open economy welcoming and reliant on foreign investment to
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The Sixth International Critical Management Conference, July 13-15, 2009 Warwick Business School, The University of Warwick, UK
Stream 2 - Open Stream
Authors: Gordana Pesakovic, PhD Professor, Argosy University Olivia C. Saunders, DBA Associate Professor, The College of The Bahamas
Paper Title: Negotiated Foreign Direct Investment: A Case Study of The Bahamas
Abstract
The views on FDI range from advocates of FDI who see it as a major development promoter, to those who demonstrate negative effects of FDI on developing/emerging countries. The Bahamas as a small, open and developing/emerging country has its door open for FDI. This paper uses the case study of The Bahamas and eight FDI agreements to evaluate their impact on the country. In the paper relevant legislations and the national investment policy are also discussed. The findings of the paper are that FDI policies have created a dual economy that places the commanding heights of the economy in the hands of foreigners. Recommendation for a broad-based development agenda is made so that the benefits of FDI can be maximised.
Introduction
The Bahamas
The Bahamas is sandwiched between the richest nation in the hemisphere The United
States of America (USA) and its nemesis, Cuba. It is also bordered by the poorest
nation in the hemisphere, Haiti. The Bahamas is therefore strategically located on a
number of levels. Politically it is a part of the Caribbean and a member of the Caribbean
Community (CARICOM). The Bahamas is not a member of the World Trade
Organization (WTO) but has applied.
Generally speaking, The Bahamas is small, open, underdeveloped which typifies
Caribbean type economies, and along with its geography, makes it one of the most
vulnerable countries in the world as characterised by UNCTAD (2007). It is one of the
‘structurally weak, vulnerable small economies’. For well over half a century, The
Bahamas has been an open economy welcoming and reliant on foreign investment to
2
stimulate growth and development in the tourism and financial services sectors.
Legislations to encourage developments in these areas have under-girded this thrust.
The inflow of capital to The Bahamas for either construction of the tourism plant or
financial services institutions was drawn to the country in no small way because of the
absence of taxes on income, profits and capital gains. In fact, indirect taxation accounts
for about 83% of total government receipts. Even though customs duties and other
taxes on international trade account for the bulk of government revenues, some 58%,
major efforts to attract foreign investment include exemptions and concessions from
them. The Bahamian economy has a dual structure of Foreign and Bahamian owned
sectors to the extent that the commanding heights of the economy are owned and
controlled by foreign investors with key decisions regarding local operations are made
outside the country. (Saunders, 2007)
The investment policy initiatives and the agreements signed with foreign investors was
explained by the former Prime Minister1
Assessments of the impact of FDI have gone through a few controversial stages.
Providing a brief history of FDI, Sumner (2005) associates FDI as part of colonial
, "We have taken this initiative as a government
because we firmly believe that all Bahamians must share in the growth and
development of The Bahamas " and he maintained, “every available statistic indicates
that The Bahamas is experiencing the positive effects of this policy.” (The Bahama
Journal, 2007) He further stated that under his administration some 430 investment
proposals were received of which 48 were under construction and 192 were in
preparatory stages.
On the global level, the current financial and economic crises (since 2008) have slowed
down the flow of FDI and projections are that FDI will shrink by more than 20% in
2008/2009. According to UNCTAD (2009), 2007 was the record year for FDI ($1.8
trillion). Developing and transition economies are not as affected as some other regions.
However, economies that are tied closely to the US, like the Caribbean and Central
America are expected to be affected more seriously. (UNCTAD 2009)
1 Hon. Perry Christie, Prime Minister May 2002 – May 2007.
3
regimes in the primary sector but not until after World War II did it become a research
interest as “FDI grew at twice the rate of global output in the 1950s and 1960s”. (p.270)
During the Cold War era and the “doctrine of two markets,” FDI was mostly limited to
the “inside the block investment”. Since the collapse of the Soviet Union, and the
“tearing down of the Berlin wall”, the new Washington Consensus doctrine promoted
FDI (via requirements for market liberalization markets and privatization) as a panacea
for the economic development. Recently, new voices of discontent with FDI are being
raised, predominantly in the developing world. However, inside the developed world, the
existence and more so, the actions by sovereign wealth funds (from China and Middle
Eastern countries) are making governments nervous and protection oriented. Therefore,
Lall and Narula (2004) are suggesting that “a new agenda” for FDI and its role in
economic development may be needed.
This paper evaluates 1. the role of the government in contracting FDI to The Bahamas
and 2. the effects of FDI on development. Eight of the Heads of Agreements (HOA)
(labelled projects A, B,C,D,E,F,G,H) signed between the government of The Bahamas
and foreign investors between 2004 and 2007 are reviewed2
2 These agreements are available because they were presented to Parliament February 2008. It is not the practice of the government to make Heads of Agreements public.
. The review includes
descriptions and proposed dollar (US) value of the projects, obligations of investors and
the government. Other aspects of the agreements and related matters are also
incorporated in the discussions where relevant. These HOAs are used to assess the
management framework of foreign investments in the country as regards quality of
investments from a developmental point of view. The sample of HOAs is of investments
outside of the main economic centres, New Providence and Grand Bahama, and is a
part of the government’s attempts to improve island economies throughout the country.
The main sections of the paper are the Literature Review, Relevant Legislation for FDI
in The Bahamas, The National Investment Policy, The Heads of
Agreements/Description of Projects, The Effects of FDI on The Bahamas, Implications
for Development and Conclusion.
4
Literature Review
Although The Bahamas has been traditionally an outward looking and export oriented
economy, and welcomed foreign investment, much of the developing world, particularly
former colonial territories have experimented with import substitution and more inward
oriented industrial policies. (Lall and Narula, 2004) Most countries have lowered, if not
eliminated restrictions on inward and outward movement of foreign capital, as foreign
investment has become a substitute for aid and borrowing from a financial perspective
and an important source of technology. While at the same time, capital has become
more volatile and mobile, “searching the world for lower cost, more efficient production
sites and for new markets.” (Lall and Narula, 2004, p. 448) Moreover, governments that
once spurned foreign investment and the presence of multinational firms, came to see
them as catalysts for economic transformation. (Barclay, 2004) The idea ‘development
by invitation’ was proposed by Sir Arthur Lewis more than half a century ago.
An important purpose of developing/emerging country governments in seeking to attract
FDI is to grow the economy so that ultimately developmental goals can be achieved.
FDI is usually identified in the literature as an economic growth agent. This argument
was extensively used during 1980s and 1990s when FDI was promoted as a new
economic development solution. Latin America and transition economies in East Europe
were fertile ground for such experiments. However, after 15-25 years of experimenting,
mixed results were reported.
FDI and growth
FDI can be beneficial for the recipient country in two ways: substituting for insufficient
domestic savings, and positive spillover effects. Spillover effects can be demonstrated
through: a. transferring of technology and know-how; b. assisting a company’s
development and restructuring; c. facilitating a country’s integration in the world
economy (via trade); d. increasing competition in the economy; and e. supporting
human development formation in the host country. (OECD 2003)
Mengistu and Adams (2007) show that FDI is positively correlated to economic growth.
It does appear though, that FDI also contributes to income inequality. (Mengistu and
Adams, 2007; Sumner, 2005) Porzecanski and Gallagher (2007) looked to determine
5
the relationship between economic reforms and FDI in Latin America, and FDI and
spillover effects. Firstly, they identify the most significant motives for FDI flows to the
region as: market size, economic growth rates and export orientation, while trade and
investment agreements and weak environmental regulations showed mixed results.
Secondly, they show that FDI “resulted in very limited productivity “spillovers” for the
region.” Mencinger’s study (2003) focused on 8 (most economically advanced) East
European transition countries, and “found the negative impact of FDI on economic
growth.”
Barclay (2004) in the case of FDI in Trinidad and Tobago’s natural gas industry
demonstrated that “FDI-facilitated development only occurs when governments in less-
developed countries pursue credible intervention policies”. Unfortunately, in the case of
Trinidad and Tobago FDI facilitated development was solely left to the foreign
companies. Therefore, it is no surprise that FDI “has played virtually no role in
The issue of whether FDI crowds in or crowds out domestic investment is another
important issue from a developmental perspective. Agosin and Machado (2005)
conducted a comprehensive analysis of 12 countries in Africa, Asia and Latin America,
from 1971-2000 looking for the answer to the following question: Does FDI in
developing countries crowd in domestic investment? In other words, what effect does
FDI have on the domestic investment: neutral effect (total investment will increase as
much as FDI), negative effect (crowd out) when the increase in the total investment will
be smaller that the increase in FDI, or positive effect (crowd in), when total investment
will be higher than FDI? Their results are discouraging. They did not see positive
impacts of FDI on total investment in countries (crowd in), quite the contrary, very often
total investment increased less than FDI. Further, Kentor and Boswell (2003) centre
their analysis on foreign capital dependence and development. Their study of 39 less
developed countries from 1970 to 1995 led to alarming findings. Foreign investment
concentration (“proportion of a host country’s FDI stocks owned by the single largest
investing country”) has a significant long-term negative effect on growth.
6
Attracting FDI
Developing/emerging country governments devise strategies which include incentives to
attract FDI. The OECD (2003) identifies guiding principles for designing incentive
policies.
1. A predictable and non-discriminatory regulatory environment and an absence of undue administrative impediments to business more generally.
2. A stable macroeconomic environment, including access to engaging in international trade.
3. Sufficient and accessible resources, including the presence of relevant infrastructure and human capital. (p.7)
Some of the issues to take into account when assessing the value of these incentives
are subsequent increases in domestic production, distributive effects on the capital
markets and allocation of financial resources. (Quan, 2006) A strategy different from
the ‘picking winners’ strategy “based on converting rising national champion companies
into world-class exporters which proved so successful for some East Asian countries” is
proposed by Mortimore and Vergara (2004, p.500). Their proposal is ‘target winners’
strategy where foreign investors are targeted specifically for their ability to assist with
national developmental goals and initiatives. This is different from the traditional reliance
on ‘spillovers’.
The massive expansion in FDI flows since the 1980s resulted because “commercial
bank lending dried up ..., aid fell, and privatisation presented major investment
opportunities” (Sumner 2005, p.270) Kolstand and Villanger (2008) compared the
Caribbean region (13 countries) with other countries (122) from 1980-2002 seeking to
find whether the Caribbean is different as it relates to FDI inflow. They argue firstly that
the Caribbean has in fact attracted more FDI than comparable countries in other
regions. Secondly, FDI is more responsive to changes in political stability in the
Caribbean than in other regions. Thirdly, the region is perceived as a haven from
regulations.
Montero (2008) focussing on Latin America, identifies start–up and operational costs,
opportunity cost of not setting up business at the right time and place and political and
economic risks as factors influencing FDI. He suggests that these factors come together
7
under the umbrella of macroeconomic stability as the key determinant of FDI flows to
the region. From the home country’s perspective there are three major motives for FDI:
resources-seeking, market-seeking and efficiency-seeking. The level of a host country’s
economic development is most likely going to determine home country’s motive. The
major motive for FDI in less developed countries usually is resource-seeking, while
market- seeking is important in the countries at the “catching-up stage”. Efficiency-
seeking motive will dominate in FDI in more developed economies (Lall and Narula
2004) On a social dimension Blanton and Blanton (2007) found that respect for human
rights was a positive factor in attracting FDI in developing countries.
Relevant Legislations for FDI in The Bahamas
The attraction of foreign investment to the country is facilitated by various pieces of
legislation which either directly supports the inflow of foreign investment or in their relief
are used as incentives. The legislations relevant to the agreements are discussed in this
paper but it should be noted that other incentive legislations exist.
The Stamp Act: This Act came into force in 1925 with subsequently more than forty
amendments primarily to change the rates. This Act requires the ‘stamping’ of various
legal and business transactions. This is an important component of the tax revenues
and exemplifies the indirect tax regime of the country. Stamp tax is assessed for
example on all goods entering the country, conveyance of land, petitions under various
Acts, appeals to the courts, certain affidavits, company registration, transference of
shares in a company, and certain financial transactions.
The Tariff Act: In modernising the Act, the government made revisions in 1996 “to make
new provision for the imposition and collection of customs duties, and to give effect to
the Harmonized System of Tariff and for other matters connected therewith.” It was
passed to modernise and harmonise (with international standards) the collection and
administration of customs duties. The rates of duty fixed according to the classification
of the goods. Customs rates vary and range from a possible 0% for some goods, for
example some baby products to a maximum possible 300% for goods such as beef,
poultry and fish. The actual rates are generally determined annually during the passing
8
of the fiscal budget. This Act declares that unless otherwise stipulated in any other law,
tariffs or customs duties are applicable to all goods entering the country.
The Hotels Encouragement Act: This Act was originally passed in 1954 with several
amendments, with the last in 1999. It is designed “to encourage the construction of
hotels in The Bahamas by providing for the refund of customs duties and emergency
taxes and certain other concessions, and for the exemption of such hotels from certain
taxation, and to relieve existing hotels from certain taxation.” It applies to concessions to
be granted by the relevant Minister with respect to the importation of construction
materials for new hotels and the refurbishment of hotels, for hotels outside of New
Providence, concession is available from stamp duties. Allowance is made as well for
exemptions from real property taxes, any direct taxation on earnings from hotel
operations and dividends declared by the company. With respect to human resources,
key personnel and special workmen may be brought in under this Act so long as at least
75% of the all persons employed are Bahamian. The Act also protects hotels from
discriminatory legislation, regulation or other conditions by the government vis-à-vis
other hotels.
The Economic Development Enterprises Act: This Act passed in 2007replaces the
Family Islands Economic Enterprise Zones Act of 2003.The principal incentive is
exemption from or variation of stamp and customs duties on capital investment which
includes construction of buildings for residences, businesses, farming, agriculture,
fisheries, floating docks, and marinas. This Act is directed specifically to foster
developments on economically depressed islands.
International Persons Landholding Act: This act was passed in 1993 “to facilitate the
holding of land by non-Bahamians and by companies under their control”. The Act
stipulates the requirements for non-Bahamians to transfer land to other non-Bahamians
where the non-Bahamians are resident or not, or whether the company although foreign
owned is registered in The Bahamas. The Act also covers certain types of leases
between non-Bahamians.
The Bahamas Vacation Plan and Time-haring Act: Passed in 1999, this Act defines
time-sharing and the requirements for licences. It also makes provision for application,
9
conditions, duration and transfer of licences, exemptions from customs duties, among
other things. Management of the enterprise is also a major component of the Act.
National Investment Policy
Foreign investment and certain Bahamian investments in The Bahamas have been
promoted by the government through the establishment of the Bahamas Investment
Authority (BIA) which is a part of the Office of the Prime Minister, and an investment
policy which BIA manages3
... is designed to support an investment friendly climate; guarantees the
complementarity of Bahamian and overseas investments; fosters appropriate
linkages with all sectors of the economy, in particular, the tourism and financial
services sectors; encourages the exploitation of our natural resources in an
environmentally sound and sustainable manner; provides for the maximum level
of employment; guarantees an acceptable level of economic security and
generally fosters the economic growth and development of The Bahamas.
. The government outlines its role, commitment and
facilitation of investment in the National Investment Policy which
4
• Strategic location – just off the coast of Florida, USA
The policy encourages partnerships between foreign and Bahamian investors and
outlines sectors which the government specifically seeks to have foreign investment but
as well distinguishes those sectors which are reserved exclusively for Bahamians.
These are shown in table 1. Four sectors for investment are emphasised in promoting
The Bahamas as a country for investment: hotel, second home ownership, financial
services and ship registry. The features of The Bahamas which are usually advertised
to potential investors are:
• Political stability – a British parliamentary democracy dating from 1729
3 The BIA was incorporated into the Ministry of Financial Services and Investment under the previous administration. 4 http://www.thebahamas.com/islandsc/p12.htm#import, this policy published in 2002
• Tax haven – no taxes on capital gains, inheritance, profit or profit remittance,
royalties, sales, personal income, dividends, payroll and interest
• Infrastructure - adequate police constabulary, health and education facilities,
utilities, roads, and ports
Table 1: Sectors for Investment - Foreign and Bahamian
Sectors where foreign investment encouraged Sectors reserved for Bahamians
• Touristic Resorts • Upscale Condominium, Time share and
Second Home Development • International Business Centre • Marinas • Information and Data Processing Services • Assembly Industries • High-Tech Services • Ship Repair and other services • Light Manufacturing for export • Agro-Industries • Food Processing • Mariculture • Banking and other Financial Services • Captive Insurance • Aircraft Services • Pharmaceutical manufacture • Off-shore Medical Centres
• Wholesale and Retail Operations; • Commission agencies engaged in the
import / export trade; • Real estate and domestic property
management agencies; • Domestic newspapers and magazine
publications; • Domestic advertising and public relations
firms; • Nightclubs and restaurants, except
specialty, gourmet and ethnic restaurants, restaurants operating in a hotel, resort complex or tourist attraction;
• Security services; • Domestic distribution of building supplies; • Construction companies, except for special
structures for which international expertise is required;
• Personal cosmetic / beauty establishments;
• Shallow water scale-fish, crustacea, mollusks and sponge-fishing operations;
• Auto and appliance service operations; and
• Public transportation. International investors may engage in the wholesale distribution of any product they produce locally.
Source: Bahamas National Investment Policy
11
The BIA comprises about eleven professionals and oversees the administration of
legislation relative to foreign investment, among other things. It receives applications for
foreign investment and prepares briefs for the National Economic Council (NEC, the
cabinet). Applicants are advised to engage the services of a local attorney and to
incorporate in The Bahamas prior to submission of applications. Principals and
companies are vetted to ensure their legitimacy and financial viability. The NEC grants
approvals for projects based primarily on employment possibilities, time to completion of
project, the size of the investment in relation to relevant communities and given
negative experiences and trends, environmental factors. Economic impact assessments
are not required.5
Heads of Agreements (HOAs)/Description of Projects
The government of The Bahamas contracts with foreign investors using HOAs. In this
section an overview of eight agreements is presented. With some two-thirds of the
population residing on the capital Island, New Providence (Nassau), the focus of the
government has been to provide employment opportunities in the other islands (the
Family Islands). The brief descriptions of the islands are provided in table 2 and signify
sparsely populated communities.
Table 2: Descriptions of Relevant Islands in the Heads of Agreements
Project Name of Island or Island Chain Geography
Population and Population per Square
Mile (2000 Census)
G The Exumas Central Bahamas; Comprises more than 360 cays, 112 square miles
Total pop = 1, 696, Pop. per sq mile = 32
H The Berry Islands Northern Bahamas;12 square miles
Total pop = 709 Pop. per sq mile = 31
D Cat Island Central Bahamas; Approximately 48 miles long, 150 square miles
Total pop = 1,647 Pop. per sq mile = 11
B Crooked Island Southern Bahamas; 93 square miles
Total pop = 350 Pop. per sq mile = 4
A, C, E, F Eleuthera Central Bahamas; East of New Providence stretching some 110 miles long, 187 square miles
Total pop = 7,999, Pop. per sq mile = 43
Source: Report of the 2000 Census of Population and Housing, Department of Statistics, Ministry of Economic Development, Nassau, Bahamas. (April, 2002)
5 Interview with Tyrone Wood, Bahamas Investment Authority, 21 April, 2009.
12
• Project A was signed in March 2004 to develop a luxury resort and marina in
Governor’s Harbour, Eleuthera to include an up to 200 condo/hotel suites/rooms, up
to 40 room oceanview or oceanfront hotel with between two and three bedrooms
each, along with a marina with up to75 slips. The total investment is to be $40
million and the project is to be completed within three years.
• Project B was signed in April 2005. This project is to take place on Crooked Island
with a value of $35 million and includes 50 residential homes three 6-unit townhouse
buildings, rehabilitation of an existing 13 room hotel, a swimming pool with
recreational amenities, and an 8 acre 40 slip marina. This project is to be completed
within four years.
• Project C was signed May 2005 for the settlement of Deep Creek on island of
Eleuthera. The value of $34 million to include a 60 bedroom hotel, 30 townhome
villas and a 20 slip marina. This project is to be completed within four years.
• Project D was signed in January 2006 for Cat Island, just north of the town of Port
Howe. The project entails a five-star hotel consisting of 250 bedrooms, a casino,
beach clubs, restaurants, bars, and spa. Also included is a high-end residential
subdivision consisting of a minimum of 100 estate homes. The total value of this
project is $30 million. This project is to be completed within 3 1/2 years.
• Project E was signed in April 2006 for the Island of Eleuthera just outside the capital,
Governor’s Harbour. It is to include 41 resort homes, private pools and 3 bungalows.
Also included is a clubhouse with the usual amenities. This project is valued at $50
million and is to be completed within three years.
• Project F was signed in December 2006 for 3 islands off the north coast of
Eleuthera. The project is to include 300 hotel rooms, up to 220 residential units, spa,
golf course, helipad, tennis courts and a marina to facilitate 200 vessels. The total
value of the project is $700 million and is to be completed within 11 years.
• Project G was signed in April 2007 for three of the islands in the Exuma chain. The
project is to include six guesthouses, 18-hole golf course, sea plane landing dock, a
13
helicopter pad, a yacht dock, a church, tennis courts and a 20 slip marina. The total
value of this project is $100 million.
• Project H was signed May 2007. This project involves three islands within the Berry
Island chain. The project includes the development of 135 residential lots, a luxury
boutique hotel of up to 50 rooms, 65 club villas, a club, two swimming pools, two
tennis courts, a 100 slip marina, bone-fishing club, 72 large luxury residential units,
art gallery, and a sports centre. This project is to be completed within nine years.
The estimated value of this project is $485 million.
These projects are all touristic in nature. They include hotels, residential units which are
upscale or luxury and marinas. One includes a casino and one includes and golf course.
These projects total $1,439 million which is a little under one fifth of the country's gross
domestic product.
The Effects of FDI on the Bahamas
The HOAs are evaluated sing four criteria: Incentives, Environmental and Heritage
Protection, Spillovers and Linkages, and Cost /Benefit.
Incentives
Some of the provisions incorporated in the HOAs conform to the OECD(2003) definition
of incentives, “Measures designed to influence the size, location or industry of a FDI
investment project by affecting its relative cost or by altering the risks attached to it
through inducements that are not available to comparable domestic investors” (p.12)
Although general legislation provides legal basis for incentives, the government includes
in the HOAs measures and inducements to influence or encourage FDI generally and
specifically. Common in the HOAs are statements of the government’s desire to
increase employment opportunities for Bahamians. However, each includes provisions
to facilitate foreign workers where Bahamians are not available or do not have requisite
skills. There are also statements exhorting investors to utilise locally grown products
and local suppliers. Again the government agrees to allow imports of goods and
materials as needed when they cannot be procured at ‘reasonable’ prices. It is
important to re-iterate that The Bahamas is not, nor has it ever been an industrial
economy and no policy pronouncements over the last two decades provide any
14
indication that this will change. The main focus of FDI in The Bahamas is therefore to
expand and deepen existing industries – tourism and financial services. Further, unlike
many developing countries that attempted industrialisation by way of import substitution,
The Bahamas has always been export (tourism) oriented. So the government is not
really giving up anything in allowing for these incentives.
All developing/emerging countries are in competition for FDI and The Bahamas uses
‘regime competition’. The country has deliberately held on to its ‘tax haven’ status of not
imposing taxes on capital gains, inheritance, withholding, profit remittance, corporate,
royalties, sales, personal income, dividends, payroll and interest as a key approach in
attracting FDI. The National Investment Policy outlines other ‘environmental’ aspects of
The Bahamas which are deemed attractions for FDI. These include: parliamentary
democracy; a legal environment which has the Privy Council of England at its apex;
stable exchange rates and free trade. It is expected that investors would have
confidence in an English style democracy and legal framework to provide political
stability and safeguarding of investments. These ‘regime’ incentives are externally
motivated and reflect under-development vis-à-vis inward oriented systems that better
serve local needs6
Environmental and Heritage Protection
.
The Bahamas is renowned for its natural beauty. Aspects of the Bahamian natural
environment that are seldom, if ever advertised yet are important as the environment
and its protection have attained global importance and attention. For example, The
Bahamas has the third and fourth largest barrier (coral) reefs in the world; some of the
purest limestone in the world, over 98% calcium carbonate; the largest saltwater flats in
the world; and the largest concentration of aquatic nursery system in the world. Further,
85% of The Bahamas is water or the marine environment and 80% of the country is
within five feet of mean sea-level. Availability of fresh water into the capital island is
6 For example: the efficacy of a parliamentary system of government where so much power lies in the prime minister in a low populated archipelagic country is questioned daily; the rulings of the Privy Council have been criticised because they do not reflect the culture of the country; and the exchange rate parity with the United States dollar distorts local pricing, leads to balance of payments pressures and discourages local investment.
15
through tapping into fresh water lenses, reverse osmosis, or by barge from nearby
Andros Island. Certain types of developments especially golf courses and marinas are
watched closely by environmental groups as they both are potentially harmful to the
environment and in particular to fresh water preservation.
All of the agreements contain sections for environmental protection and include
provisions for an environmental impact assessment (EIA) which investors are to
conduct at their own expense and to be approved by the government's Bahamas
Environment Science and Technology (BEST) commission. The EIA is complemented
by an Environment Monitoring or Management Plan (EMP) for all projects except project
A. Generally, the investors commit to working along with relevant government agencies
in avoiding and minimising negative impacts on the environment.
The BEST commission7
Historically, the country’s heritage has not been the most prominent feature of
Bahamian tourism. Heritage became a political issue when about ten years ago there
were public protests against plans to place a luxury tourist resort on the sight of a
former slave plantation. Four of the agreements, C, F, G, and H include provisions for
investors to preserve, conserve and restore antiquities and historical sites on the
was established in 1994 to among other things, to coordinate
the national effort
To protect, conserve and responsibly manage the environmental resources of The Bahamas; To develop national environmental strategies and related action plans; To identify suitable scientific and technological advances that can contribute to the development of The Bahamas; To propose legislation to enforce the provisions of the national environmental plans and policies;
It is an advisory body to the government with no regulatory functions. It coordinates “the
review of commercial, industrial, and residential development projects to be considered
by the Government of The Bahamas.” This puts into question the value of guidelines or
strategies for environmental protection when there are no enforcement powers.
7 See, http://www.best.bs/index.html
16
properties being developed. This involves development of a training manual, creation of
easements and buffer zones, complying with guidelines set by the Antiquities,
Monuments and Museums Corporation (AMMC). The AMMC differs from the BEST
commission in that it is a statutory body with authority from the Antiquities, Monuments
and Museum Act, 1998 with a mandate which includes the establishment and operation
of museums in the country. The Act requires that discovery of antiquities is to be
reported and makes it illegal to spoil any designated monument. The AMMC does have
enforcement power.
The HOAs have slightly different provisions. Each requires the developer to cooperate
with AMMC in the preservation of antiquities. For project C, the developer is requested
to observe and perform requirements of AMMC and provide access to its personnel. For
projects F and G, the developers are to pay for the preparation of a training manual for
construction workers in the event antiquities are found on the property. The developers
of project F are also to pay the cost of an archaeologist if necessary. Protective
covenants are to be placed in property deeds in project H and the developer will review
site plans to ensure compliance.
The Act already sets out the obligations and responsibilities of the government and
others. Although repeating some of these conditions in the agreements cannot hurt,
differing wording of clauses tends to suggest different obligations and responsibilities for
different investors. It should be expected that in the preservation of historical sites there
would be consistent and common rules and guidelines for all persons, local or foreign
investor, resident or visitor.
Linkages and Spillovers
In the agreements the government seeks to encourage investors to utilise Bahamian
suppliers and products. For example, in project G the investor is, “to use its best efforts
to utilize Bahamian materials and services” (p.7); project B to “purchase marine,
agricultural and other products from Bahamians where available, subject to competitive
terms, price, delivery, efficiency and quality.” (p.8); and project C, “to the maximum
extent possible make the utilization of Bahamian farm products and marine products a
stylistic and theme-based feature of the development.” (p. 12).
17
The National Investment Policy is referenced as a reminder in each agreement (except
project G) in relation to the operation of certain businesses on the development’s
premises. Project C states, “ensure that all retail stores and facilities, scuba diving,
fishing and other water sports and related recreational and entertainment within the
Development are operated by Bahamians.” (P.12) Developers are required to use local
transportation operated by Bahamians. On the same line, the investor in project H is “to
designate to the extent possible and area on the Island to be used for the purposes of a
Bahamian Craft and Straw Market.” (p. 22) The other projects (except A) use language
such as in projects B and E, “endeavour to use” or in projects C, D, F, and G “acquire
and utilize as far as possible Bahamian artwork in decorating” the resort of
development. The benefits sought extend further.
It can be expected that much of the benefits from FDI projects are ‘spillovers’ which are
crucial for enhancing the development process. For the government of a small island
developing/emerging state, the desired spillovers are in the line of transmission of
technology and know-how, human capital formation, linkages with local businesses and
therefore local business development, and increases in international trade. For the
projects reviewed in this paper, an increase in international trade refers to increases in
visitor arrivals and expenditure. Lall and Narula (2004, p.450) suggest that, “the quality
of FDI spillovers depends on the scope and competence of the subsidiary” which must
“build on the advantages that already exist in the host economy – local capabilities
matter.” The requests for collaborations with local institutions and for education and
training programmes suggest inadequate local capabilities. The motives for investment
matter as well. The projects reviewed fall under the category of asset-exploiting
particularly resource-seeking of the beauty and of the natural environment of The
Bahamas. The spillover benefits of these types of investments are low compared to
market seeking FDI. (Lall and Narula, p.451)
A country’s capacity to absorb spillovers is an essential consideration for “development
because it allows domestic actors to capture knowledge that exists elsewhere”. (Lall
and Narula, p.454) It might be correct to say that The Bahamas has a comparative
advantage in tourism, but persistent current account deficits indicate insufficient FDI
linkages to local businesses. Clearly industrial policy has not kept pace with policies to
18
facilitate FDI. As the mainstay of the economy for well more than half a century, tourism
has not led to parallel growth in local business development in the areas of
manufacturing, agriculture, fisheries and other areas for possible linkages to tourism. In
this regard, The Bahamas has been a champion for neo-liberal policies even before
they were in vogue. Market forces however, have not led to meaningful (in the sense of
development) strengthening of linkages or expansions of local entrepreneurship.
Further, and drawing on history and present day conditions as indicators, it is unlikely
that these HOAs will cause increases in domestic absorptive capacity and business
capacity building specifically. The evidence lies in the very low level of Bahamian
ownership in the hotel and tourism resort sector.
Even where the government urges investors to engage local professionals, the past
does not provide confidence that this is an area where Bahamians involvement in FDI
projects to the extent one would expect assuming a developmental intent. Davis,
Rahming, Diggiss and Manoo-Rahming (2008)8
...foreign investors, when seeking Governmental approvals, come with design
schemes prepared extra-territorial which leaves little opportunity for Bahamian
professionals of the Built Environment, such as Engineers, Architects, Quantity
Surveyors and Environmental Consultants; participating in the design process
[and] sadly, there has been little consultation between the Government and the
professional bodies representing the Built Environment. ... To further exacerbate
this situation, the Bahamian work force is unprepared for project implementation
address this issue.
The authors relate a scenario of $5 and $6 billion worth of foreign investment
construction start-ups emanating from approvals of foreign investments exceeding $20
billion over a five year period. This compares to the $300 million of local investments.
The foreign investments were targeted to touristic and second home sectors which led
to a very robust construction. However,
8Davis, D., Rahming, H., Diggiss, M. and Manoo-Rahming, L. (2008) CIB W107 Construction in Developing Countries International Symposium, “Construction in Developing Countries: Procurement, Ethics and Technology”, 18-20 January 2008, Trinidad and Tobago, W.I. These authors include an architect, engineers and a senior public officer.
19
due to lack of skills and the lack of foresight of the Government in preparing the
workforce through technical and vocational training. (p.2)
The authors also speak to the government’s lack of support for training programmes.
Also, the authors suggest failings on the part of the government in enacting legislation
to regulate the professions. “to legally ensure that there is participation by the Bahamian
Professionals of the Built Environment, especially in the large scale projects.” (p.5)
This explains the non-specificity of language in the agreements as regards use of
professionals etc. This lack of thrust towards creating, supporting and sustaining
training initiatives is not reflective of a government serious about capturing spillovers
and forging business linkages with FDI.
Costs and Benefits
The OECD cautions against “wasteful strategies” (ibid, p.14). These are strategies that
are either ineffective or where benefits derived from the project do not outweigh costs of
incentives. This can only be measured where economic impact assessments or cost-
benefit analyses are conducted. These are not done in The Bahamas in assessing the
merits of investment projects.
The direct costs to the government are the concessions it grants to the investors. Each
of the agreements rewards the investor with concessions under the Hotels
Encouragement Act which includes exemption from stamp, import and export taxes on
equipment, machinery and materials used in the construction or refurbishment for the
project. Also included in the Act is exemption from Real Property tax for up to 20 years.
Exemptions under The Family Islands Economic Enterprise Zones Act, 2003 is provided
for in project B as well as exemption from import duties on petroleum products. Project
H includes exemptions under the Economic Development Act 2007. Benefits to the
government are in having the investors provide facilities for public use. The operators of
project B are also given permission to establish and maintain a port, in accordance with
the Customs Management Act. For the building the community centre and other public
areas and amenities, relevant materials and equipment are exempt from import duties
under the Customs Act as they represent gifts to the government. As regards, projects
D and E, the government agrees to build an airport in the settlements. For project D the
20
agreement obligates the government to repair and upgrade roads leading to the airport
while the government commits to having electricity available to the property.
Government’s assistance in marketing and promoting the developments are also part of
the agreements for projects A and E.
Additionally, appointment of a senior government official to oversee the project is
included only in project F. This will mean either hiring a new officer specifically for this
project or adding these duties to an already overwhelmed public officer. Also exclusive
to project F is the issuance of annual cruising permits for vessels docking in Bahamian
arenas. Normally, cruising permits are required each time a vessel enters Bahamian
waters. 50 year leases of government owned land is granted to projects G and H.
Project G’s lease involves islands and rocks that are to be left in their natural state.
Project H’s lease involves Salt Ponds which are to be dredged and Sea Beds for
construction. The payment for these leases is nominal.
It is estimated that customs and stamp duties on imports for construction materials and
furnishings would total around 50%. Foregone taxes can possibly exceed $700 million.
The relevant Real Property tax rate for projects reviewed in this paper is 2% with the
possibly of near $29 million tax revenue lost annually. It can be argued that without the
tax exemptions and derogations, the projects might not materialise but the opposite
argument can also be tested.
Initial infusions of foreign currency derived from FDI is of utmost importance along with
the foreign currency earnings during operations. With respect to the projects reviewed,
foreign currency is earned from tourist spending. The rationale must be then that once
the projects become operational, the short term lost tax revenues will be made up in the
long term by way of a stimulated economy and more tax revenue opportunities. It is not
possible to assess (quantify) in this paper how effective these agreements are from a
cost-benefit perspective. The Bahamas has used this model of attracting FDI for more
than three decades and over this period the country has run persistent budgetary and
concurrent account deficits. (Saunders, 2009) There is no reason to believe this will
change for these projects. Without the business linkages goods and services will
continue to be sourced mostly from abroad. This fact makes it quite uncertain how much
21
of the FDI results in actual capital inflows and even where goods are sourced locally,
because there is a dearth of industry, these locally sourced goods are likely to have
been imported! The pressure on the balance of payments is great and because of
import leakages, the investment multiplier is small. Another cost that might be
overlooked is the repatriation of profits that face no local taxes and are not re-invested
in the local economy.
Whether the incentives/concessions offered are efficient (maximising benefits and/or
minimising costs) or not is also difficult to measure for the purpose of this paper. As
regards the private construction of public places, the initial cost to the government is
zero. However, the cost of maintenance over the long term rests with the government
which will require additional tax revenues for this purpose. Further, by not using the
equivalence of tax revenues foregone in attracting FDI, perhaps the highest costs are
the opportunity costs of the government not investing to develop local industries and in
human capital development.
Employment
The benefits of the FDI in these agreements are associated principally with
employment, but other benefits include infrastructure upgrading and social
contributions. It is clear from the projects that the government seeks to extract as many
benefits as it can directly from the investor. This can be viewed as a substitute for
income and profit taxes. As regards employment table 3 shows that these projects are
expected to employ 3, 381 persons. The government agrees to provide approvals for
work permits for non-Bahamian staff where Bahamians do not hold the expertise or are
not available. Assuming an average wage of $3369
9 Occupations and Wages in the Hotel Industry, The Department of Statistics, Ministry of Finance, Nassau, Bahamas, 2003
per week, employment benefits to
the country have the potential to exceed $59 million annually.
22
Table 3: Value of Projects and Projected Employment
Project Value of Project $(millions)
Projected Employment
A 40 150 B 35 81 C 34 200 D 30 250 E 15 60 F 700 2,000 G 100 215 H 485 425
Total 1,439 3,381
Further, each of the agreements except A and E exhorts the engagement of Bahamian
professionals - musicians, entertainers, architects, engineers, etc. Project B refers to
musicians and entertainers and requires the use of Bahamians in minor marine repair
and maintenance. Included in project E is a reminder for the need to “involve a
Bahamian real estate agent” (p.6) in accordance with the Real Estate (Brokers and
Salesmen) Act. As discussed above, there is not much confidence that these urgings
bring about suitable employment levels. Leading entertainers continually complain
about the under-utilization of Bahamian entertainers in tourist resorts.10
Infrastructure
Additional benefits are in the form of construction of modern infrastructure. The
government has sought to ensure adequate infrastructure is built and maintained in the
developments, although no such provisions are included in agreement A. These clearly
have environmental implications as well. Incorporated into each agreement are
stipulations for:
• Sewerage system (projects B, C, D, F, G, H,)
10 See, The Bahama Journal, May 19th 2006, Kendea Jones reporting http://www.jonesbahamas.com/news/156/ARTICLE/8858/2006-05-19.html
• Laying of utility cables and pipe lines (C, E, F, G, H)
• Solid waste incinerator (projects G, H)
• Solid waste disposal and sewerage pump for marina (B, G)
• Construction and maintenance of roads (C, D, G, H)
In some cases developers are obliged to construct additional facilities to house
government offices and for example for project G the developer is to, “meet the initial
and ongoing cost of office accommodation, housing, salary, transportation and any
other expenses whatsoever associated with Government officials ... and the provision of
such additional education, health, environment, environmental health, police and
community related facilities as may reasonably be required.” (p.6) Similar requirements
are included in agreement B. A requirement in projects B and H is the construction of a
police station, fire station, and customs and immigration facility. Project F provides for
the investor constructing public dock facilities including dredging of the harbour, land
reclamation, public parking lot, a welcome centre, and restrooms (the reclaimed land
will be leased from the government “on nominal terms.”),
It would appear that the government is ensuring that investors bear the costs for some
of the public goods they receive. And where the newly built infrastructures connect with
communities, the benefits are enhanced.
Social Contributions
Recognising limitations for housing in relevant communities, in some cases, the
government has required the developer to construct housing for construction workers
(project H). Further, projects C, F, and H contain provisions for the developer to make
social contributions as shown in table 4.
24
Table 4: Description of Social Projects
Project C: construction of a community centre, a park/playground, a basketball park, a softball field, a 400 metre track, beach facilities and covered pavilion, public facilities and picnic area on an outlying cay.
Project F: make golf course available to the Bahamas Golf Federation and Bahamas Junior Golf Federation for scheduled events.
Project H: the developer contracts to “cause to be established” a day care, an Institute of Hospitality, an Artists Residence, Music and Video Production Centre, an Institute of Caribbean Music, Amphitheatre and Institute for Sustainable Living. Additionally, the developer is to follow a ‘proposed Marina Policy’ (not yet completed); join the Bahamas Hotel Association, and the Bahama Out Island Promotion Board; provide infrastructure for the subdivision, a public park, a clinic to be operated by the Ministry of Health; and public dock facilities.
Undoubtedly these are valuable benefits which in some cases, are supplemented by
requirements for the developer to contribute to education and training.
The agreements except B and G require the investor “to implement during the
operational phase of the project multi-disciplinary on-the-job technical skills-training and
apprenticeship programs designed to equip Bahamian employees with the level of
technical proficiency necessary.” This is to be done by liaising or in collaboration with
the Ministry responsible for education and training, local national education and training
institutions and programmes. For project C, “provide training for its Bahamian
employees at similar projects and developments of the Developer or affiliated/subsidiary
companies”. (p.11) For project F, “render assistance towards the capital and curriculum
development of the School of Hospitality at The College of The Bahamas and/or the
Bahamas Technical and Vocational Institute”. (p.12) Project D also has a provision to
render assistance to the development of the School of Hospitality. For project E, the
investor agrees to cooperate and “provide reasonable assistance to encourage the
development of highly skilled personnel and other vocational and technical training
required to the hospitality industry”. (p.6)
The value of these benefits, in some instances cannot be quantified, but as is
suggested by the OECD ex post and ex ante evaluations are possible to review
completion of these direct benefit activities, quality and usage in order to have some
25
valuation of the benefits to the communities. No such evaluations are incorporated in
the agreements. Where measurement is possible, there is no stipulation in these
agreements as to specific amounts to be spent or percent of budgets to be allocated for
example, to fulfil for example, educational and training obligations. The number of
employed Bahamians are projected and not specified even as to a minimum number.
Implications for Development
Development can have varied meanings but underlying all must be building a country’s
internal capacity to better (sustainably) exploit physical and human resources for the
benefit of its citizens. The requirement for investors to assist in social developmental
(education and training) activities infers a low level of government capacity to deliver the
education and training needed for workers to benefit from the FDI. This is particularly so
in the Family Island communities. This derives in part from a narrow tax base which is
narrowed even further with tax exemption and tax derogation incentives! It is a
questionable policy that relies on outside investors to perform social and public good
functions especially as in these agreements where no specifics are given.
Clearly there is no development plan or agenda which the government is following.
Such imprecise ‘requirements’ are likely to lead to imprecise results. Further, these
HOAs reveal a government that is not striving to develop its people for greater self-
reliance or a sustainable economy. It is in fact fostering greater and greater
dependence, as local professionals and businesses are crowded out. As the
government signs more of these foreign investment agreements in the absence of
attention to local human capital development it is in fact under-developing the local
economy. Saunders (2007) suggests a divide between the ‘foreign economy’ and the
‘Bahamian economy’ where the former is dominant and rising and the latter is
subordinate and shrinking.
One troubling aspect of the agreements relate to penalties for non-performance
particularly as regard implications for development. Projects B and G do not outline any
provisions for delays or non-performance. Where there are delays due to hold-ups in
granting of permits by the government, extensions for performance are provided for in
project A, C, D, and E. Extensions will also be given for project A for unavailability of
26
labour or economic recession. Where provisions are made for delays and where there is
non-performance, the government is to reduce concessions and further for projects C
and F termination of agreement. Project H only addresses the possibility of termination
by either party in the event of default by the other party. There is no effective penalty
therefore for non-performance even if concessions have been used or if the government
has fulfilled its obligations.
In describing foreign investment strategies of Trinidad and Tobago in the early 1970s,
Barclay (2004) speaks to the domination of foreign investment in the manufacturing
sector while “the government made little attempt to augment the modest managerial and
technology capabilities of domestic firms” (p.489). While this strategy shifted not much
was done in “formulating and implementing functional and selective intervention
policies”. This reflects the Bahamian condition. It is evident that local technological
capabilities and know-how have not advanced meaningfully over the years relative to
the high levels of FDI. Training and workforce development have been more in line with
specific needs of the investor as the government has taken a much too passive and
non-focussed role.
Conclusion
The views on FDI as discussed in the literature review are polarized: from advocates of
FDI who see it as a major development promoter, to those who demonstrate negative
effects of FDI on developing/emerging countries. This paper used the case study of The
Bahamas and eight FDI agreements to evaluate the impact on the country.
The Bahamas has a significant number of legislations designed to promote and regulate
FDI in the country. Legislation however, is necessary but not sufficient to guarantee
favourable FDI effects. The Bahamas as a small, open and developing/emerging
country has its door open for FDI. Its political stability, democratic system based on
English law, combined with stable currency, free trade, and tax free regime are
attractive inducements for the foreign investors. These incentives have been successful
in attracting foreign capital. However, effects of FDI on the local economy are not
necessarily positive. These policies have created a dual economy: “foreign economy”
27
and the “Bahamian economy”, where the former is dominant and rising and the latter is
subordinate and shrinking.
The “foreign economy” is operating under advantageous condition (none or reduced
taxes; limited obligation toward social, environment and national heritage protection). Its
effect on employment is under the potential level due to the fact that foreign investors
can always rationalise the use of foreign labour and the government’s willingness to
accommodate them. The government is not forceful enough in demanding more local
content in the sourcing of goods and services. Further, the government is not
convincingly providing purposeful education and training of the local people, nor
ensuring the maximum use of local professionals.
Possible benefits from ‘spillovers’ have been negligible. Although major FDI is in
tourism, this industry has not led to parallel growth in local business development in
manufacturing, agriculture, fisheries nor other areas related to tourism. Even though,
the Bahamas has a comparative advantage in tourism, the persistent current account
deficits indicated insufficient FDI links to local business. Tax free benefits for FDI
severely hampers government revenues. More positive effects were found in the area of
infrastructure and social contributions. Overall, role and effects of FDI on the Bahamas
and its economy are mixed. FDI is not helping development of the local business, nor
does it contribute significantly to the government’s budget. FDI has had a limiting effect
on local ownership in tourism and financial sector. Partially it does assist in training.
The role of the Bahamian government in stimulating FDI is positive. However, its role in
stimulating meaningful development is less favourable. Its policies have fostered a dual
economy. This is polarizing the society, and can in the long run jeopardize FDI. A
broad-based development agenda is recommended. This can lead to more serious and
directed role of government in education, training, and support of local professionals,
protection of environment and national heritage and enforcements of laws that
maximises the benefits of FDI.
28
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