ORG Economic Development Report points to new opportunities for growth

ORG Economic Development Report points to new opportunities for growth

The Bahamas could enjoy a multi-million dollar jobs and economic diversification boost with policy reforms to facilitate targeted investment in key industries, amid warnings that “major economic assets are at risk”.

A new Oxford Economics report commissioned by The Organization for Responsible Governance (ORG) described the economy as “at a crossroad” and “underperforming”, with real GDP per capita now lower than it was in 2000.

The report offers that reforms to facilitate agriculture/manufacturing import substitution, shipping and logistics investment and boutique hotel/vacation home expansion would generate both much-needed diversification and economic growth for the Bahamas.

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas could enjoy a multi-million dollar jobs and economic diversification boost with policy reforms to facilitate targeted investment in key industries, amid warnings that “major economic assets are at risk”.

A report commissioned by the Bahamas-based Organisation for Responsible Governance (ORG), released yesterday, described the economy as “at a crossroad” and “underperforming”, with real GDP per capita now lower than it was in 2000.

The report, produced by the Oxford Economics consultancy, suggested that reforms to facilitate agriculture/manufacturing import substitution, shipping and logistics investment and boutique hotel/vacation home expansion would generate both much-needed diversification and economic growth for the Bahamas.

Noting that visitors to the Bahamas spent $496 million on purchasing food and manufactured goods in 2015, the report for ORG said $103 million of this sum was spent on goods “in which the Bahamas has no production” - such as watches and gasoline.

It added that most of the remaining $393 million came from imports but, if just 10 per cent of this was shifted to Bahamian-produced goods and food, this nation would see a $21.8 million GDP boost.

Manufacturing would receive the bulk of this, at 51 per cent, the ORG study projected, with another 25 per cent aiding the agriculture industry.

“This corresponds to 489 new jobs, 40 per cent in agriculture and 36 per cent in manufacturing,” Oxford Economics said in the study for ORG.

“It is worth noting that the $5.4 million impact on the agriculture sector represents a 4 per cent increase in the Bahamas’ current agriculture GVA (gross value added) of $143 million.”

The ORG study recommended that the Bahamas focus on import substitution, and Bahamian manufacturers and farmers supplying domestic needs, rather than targeting export markets where they will have to compete with rivals who have greater economies of scale.

When it came to shipping and logistics, the ORG report urged the Bahamas to exploit existing infrastructure in Nassau and Freeport to target the ‘break bulk processing’ market, where container loads were broken down and repackaged into smaller consignments before heading to their final destination.

The Oxford Economics analysis suggested that an investment in this sector, sufficient to create 100 jobs, would boost economic output (GDP) by $7.2 million and lead to the addition of 47 indirect jobs.

“The largest impact is in the transport, storage, and communication sector, which alone accounts for 78 per cent of the GDP and 74 per cent of the employment gain,” the report for ORG predicted.

“Additionally, as we discuss above, development of break-bulk cargo processing might also lead to the development of allied manufacturing in the Freeport area. Therefore, we also model an expansion of manufacturing activity in the Bahamas equivalent to 200 new manufacturing jobs, which we estimate corresponds to approximately $28 million in new manufacturing output.

“This scenario results in a GDP impact of $18.8 million, including direct, indirect, and indirect effects, 68 per cent of which is in the manufacturing sector and 10 per cent in the business services sector. This corresponds to 343 new jobs overall, 63 per cent of these in the manufacturing and 11 per cent in the wholesale and retail trade sectors.”

Freeport, with its existing harbour and port facilities, and tax advantages under the Hawksbill Creek Agreement, has long been seen as suited for a logistics industry that could exploit trade liberalisation and rules-based agreements that the Bahamas is entering into. However, little has been done to examine such an opportunity.

Meanwhile, the ORG study also called for the Bahamas to exploit the growing second home and vacation rental market, suggesting the benefits could be “quite substantial” for government taxes, land values, construction and foreign currency inflows.

“According to the Airbnb data, there are currently 908 active Airbnb rentals in the Bahamas with an occupancy rate of 17 per cent,” the study said.

“This implies a total of 56,000 room days of rentals. We further assume an average of two people per Airbnb property, and a total of 6.7 nights per visitor to the Bahamas, for a total of 16,700 tourists to the Bahamas currently staying in Airbnb out of 1.5 million overnight visitors.

“With an average spending of $1,500 per overnight visitor to the Bahamas, this implies spending of $25 million by those staying in Airbnbs, including their spending on the Airbnbs themselves.”

The Oxford Economics study said an increase in visitors equivalent to 50 per cent of current Airbnb activity would add 8,350 tourists annually, and $13 million in visitor spending.

Excluding 50 per cent of that $13 million from its analysis, as that represented lease costs, the ORG study said: “The full economic impact - direct, indirect, and induced - of additional spending by these new tourists is estimated at $9.8 million of additional GDP and 225 new jobs.

“The sectors most affected are community, social and personal services, which receives 35 per cent of the GDP impact and 50 per cent of the jobs impact, and hotels and restaurants, which receive 23 per cent of the GDP and 18 per cent of the jobs impact.”

To unleash these potential growth opportunities, the ORG study said the Bahamas needed to tackle structural impediments such as high energy and labour costs, and relatively low productivity.

It noted how one Bahamas-based manufacturer revealed for every $100 it made in gross margin (sale minus raw material costs), electricity costs were absorbing $33 or one-third of cash flow total.

“Such a sizeable impact on potential profit would have been enough to undermine the viability of the whole operation were it not for the fact that, in this example, the company received a substantial tax benefit as a consequence of its location in Freeport,” the study for ORG added.

When it came shipping and logistics, “corruption and inefficiency” at Customs were cited as major obstacles, with 100 per cent of cargo inspected compared to the 2 per cent in “modern sampling techniques” elsewhere in the world.

The study suggested that the law and rules surrounding vacation homes also needed to be simplified to encourage investment in these areas.

Explaining that the three industries studied were chosen because of their potential and lack of previous work, the ORG report said “bold new steps” were required to turn the Bahamas’ economic trajectory around.

“The economy of the Bahamas is at a crossroad,” it warned. “Many of its key economic assets are at risk. The country’s position as an international financial centre, its tourism, shipping and manufacturing industries all face multiple pressures. The potential for damaging consequences was highlighted dramatically in December 2016 when Standard & Poor’s downgraded the country’s bonds to junk status.....

“The consistent message from over a dozen business leaders throughout the Bahamas was a sense of discouragement, frustration at the difficulty of doing routine business, and a lack of confidence in the economic future of the country.

“At the same time, many of these leaders argued that bold new steps could re-engage investors in the economic future of the Bahamas, and they articulated a range of insightful and proactive ways to help turn the situation around,” the study added.

“The most pressing concern, which ultimately trumped all others, was a perceived lack of confidence by investors in the integrity and efficiency of government economic development programmes. Without this, it will be all but impossible to attract the level of investment needed for the Bahamas to reach its full potential.”

Still, finishing on a positive note, the ORG study said: “The Bahamas does face economic challenges but its core competitive strengths remain intact.

“What we believe would be most effective for improving investor confidence is for the Government to begin taking measured steps to introduce at least some of these measures so that business leaders and the public regain confidence in the Bahamas ‘economic future.”

http://www.tribune242.com/news/2017/apr/24/governance-studys-multi-million-diversifying-boost/