The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Freeport could generate “significantly more” revenue than Value-Added Tax (VAT) on its own, if its ‘free trade zone’ model was allowed to grow the city to its 300,000 resident-strong maximum.

Dillon Knowles, a Grand Bahama Chamber of Commerce director, told Tribune Business that the Government needed to decide between ‘economic growth’ or ‘taxation’ as the strategy it wanted to pursue to correct its fiscal woes.

Speaking after the GB Chamber unveiled its ‘Freeport 2015 vision paper, which described VAT as incompatible with the Hawksbill Creek Agreement’s intent, Mr Knowles said the new tax’s implementation would likely be “a tipping point” for many of the city’s residents.

While unsure whether the Government and Grand Bahama Port Authority (GBPA) would act on the GB Chamber’s recommendations, Mr Knowles said it was vital they did so if Freeport was to have a sustainable future.

And he suggested that Hutchison Whampoa and the GBPA, via Port Group Ltd, were in non-compliance with the Hawksbill Creek Agreement over how their 50/50 joint venture, the Grand Bahama Development Company (DEVCO), was using its Freeport landholdings.

With Freeport’s existing 50,000 residents “paying more than their fair share of taxes”, Mr Knowles said the city could eliminate the need for a nationwide VAT if it were to reach its target 300,000 maximum population.

“If we were able to build out Freeport to its maximum 300,000 inhabitants, we could see there being a significant increase in revenue to the Government,” he told Tribune Business. “We believe this could be significantly more than what the Government anticipates getting nationwide from VAT.

“One of the things we seem not to appreciate in the Bahamas is that the residents of Freeport pay the same taxes as the rest of the Bahamas. It’s the businesses that have those exemptions, and they are not significantly different from those the Government gives on an ad-hoc basis to other industries and businesses in the Bahamas.”

The Christie administration is projecting that VAT will generate $400 million in gross revenues for the Government during the 2015-2016 fiscal year - its first full year in operation.

This number, though, is matched by the projected revenue increase the GB Chamber believes that Freeport could produce at full population size - an expansion driven by the full embrace of the ‘free trade zone’ model.

‘The Future of Freeport - 2015 and Beyond’ paper says: “Freeport is a fiscal solution for the Bahamas. Growth in Grand Bahama from Hawksbill Creek Agreement redefinition can significantly fund the Government of the Bahamas.”

Explaining how this could occur, and outlining the potential impact, the Chamber said: “Freeport/Lucaya can physically support 300,000 residents. If 50,000 residents contribute a net $100 million plus to the Treasury, it is envisaged that a population of 300,000 residents would at least increase this to $500 million.”

In the same breath, the GB Chamber warned that the proposed VAT was incompatible with Freeport’s ‘free trade zone’ model as set out in the Hawksbill Creek Agreement.

With the Government selecting VAT as the preferred method for fiscal consolidation, the GB Chamber warned: “The Government’s planned strategy is incongruous with the ‘Freeport model’, which.... seeks to stimulate investment, particularly foreign direct investment through tax incentives.”

Fearing VAT’s likely impact on already-streteched Freeport residents, Mr Knowles told Tribune Business: “Freeport is in a very delicate position. There’s lots of residents struggling to stay above water.

“To have what is, in effect, a 7.5 per cent tax on lower and middle incomes, as they spend their whole salary is, going to be a tipping point for a lot of people. Their purchasing power will be 7.5 per cent less, and it will be a struggle to keep their noses above water. This will be a big issue.”

The GB Chamber director argued, though, that the Government could instead use Freeport to ‘grow its way’ out of fiscal trouble, rather than employing VAT to ‘tax its way’ out.

“The Government really has to decide whether it wants to engage in economic development via a free trade zone,” Mr Knowles told Tribune Business. “The first decision the Government has to make is: Is a free trade zone beneficial to the economy of the Bahamas?

“If the decision is, yes, it is, the Government must do everything congruent with supporting that.”

This, Mr Knowles said, meant levying no new or increased taxes on Freeport - something it is now, again, attempting to do with VAT, and has tried repeatedly in the past.

“The question is: Is growth a strategy that the Government wants to support, or is taxation a strategy that it wants to support?” asked Mr Knowles. “We believe that one will be beneficial to the country, and the other could be detrimental to the country.

“If we can grow the economy, the Government can add additional revenues without adding new tax measures, and everybody benefits. If we choose not to grow the existing economy, but tax the existing economy, we will have a shrinkage.”

Mr Knowles said the GB Chamber’s ‘2015 vision’ paper had given the 3,500 GBPA licensees, who “for decades have been ignored”, an opportunity to influence their city’s future development in a structured way.

“I think it’s very important for the powers that be to act on the recommendations [in the paper],” he added. “It’s important to re-establish the ‘free trade zone’ in Freeport, not only for the benefit of Freeport but for the country as a whole, and re-establish that it be administered in a transparent way.”

That is a reference to the GB Chamber’s call for the Port Authority’s quasi-governmental and regulatory powers to be transferred to an independent trust, controlled by GBPA licensees.

Such a recommendation, though, is unlikely to be willingly adopted by the GBPA’s current owners, the Hayward and St George families, as this authority represents the source of their power and income.

“I really couldn’t tell you how likely it is,” Mr Knowles conceded of the independent trust proposal. “It is important efforts are made to go in that particular direction.”

He indicated that unless fundamental reforms were undertaken at the GBPA, and to Freeport’s governance, the city’s population would continue to steadily decline as licensees and households moved elsewhere.

“As with everything in life, it’s important to do you best and how things work out, no one knows,” Mr Knowles added. “If you don’t understand who your customers are, and engage with your customers, if they get an opportunity to leave they will usually do so.”

He told Tribune Business that it was vital Port Group and Hutchison, through, Devco, altered their land administration policies if fresh investment was to come to Freeport.

“There’s no investment going to happen unless they say, because they can withhold property from any investor,” Mr Knowles said, urging Devco to develop policies that benefited all parties.

“The land granted to the Port Authority, in the first place, was on the basis it be used for development. As the Hawksbill Creek Agreement says, for the betterment of the country,” he added.

“For it not to be used in that way has not been to the benefit of anybody, except Hutchison and Port Group at the moment.”