The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Freeport’s economy could lose up to 1,100 jobs if the Government were to ‘trade off’ employment for $80-$100 million in extra revenue generated by allowing the city’s key tax breaks to expire.

The report by international consultants McKinsey, which was finally made public yesterday, warns the Christie administration that failing to renew the incentives now due to expire on February 5 - particularly the real property tax and Business Licence exemptions - would have “significant” negative consequences for Freeport and Grand Bahama.

It estimated that the labour-intensive retail and tourism industries were most vulnerable to any change in Freeport’s business climate, and warned that some hotels “may be forced to close” if the sudden imposition of taxes provoked a further rise in operating costs.

McKinsey advised: “If the real property and Business Licence fee exemptions were allowed to expire, the Government could raise $80-$10 million in revenues.

“However, there could be approximately a 0.1-06 per cent fall in total GDP, and an estimated 125-900 direct job losses, with an additional 50-200 indirect job losses.”

Identifying those industries most reliant on maintaining Freeport’s taxation ‘status quo’, the report added: “The job-heavy service sector (hotel and retail) is most vulnerable.

“Many hotels and retail businesses on Grand Bahama struggle to break even, and may be forced to close or lay-off workers if taxes substantially raise operating costs.

“Expiration [of real property and Business Licence exemptions] could lead to an estimated 115-640 direct job losses.”

While the loss for the overall Bahamian economy from allowing Freeport’s tax exemptions was pegged at close to $50 million, a relatively small sum given an $8 billion annual GDP, McKinsey warned that the impact would be disproportionately felt on Grand Bahama.

However, seemingly justifying the Government’s desire to extract more tax revenue from Freeport, the report estimated that it was running a near-$50 million annual deficit on Grand Bahama.

Taking figures from the Government’s 2013-2014 Budget year, McKinsey said $69.2 million in revenues were collected on Grand Bahama, which received $89.2 million in public spending.

This, combined with $28.2 million worth of subsidies, resulted in a ‘Grand Bahama deficit’ of $48.4 million.

“The Government likely runs a deficit of 3.9 per cent of GDP on Grand Bahama versus a national primary deficit of 2 per cent of GDP in 2012,” McKinsey said.

Observers, though, are likely to point out that McKinsey was mistaken to lump Freeport, a ‘tax-free zone’, together with the rest of Grand Bahama in calculating and assessing the city’s contribution to the Government’s coffers.

The McKinsey report was finally disclosed yesterday in response to the Judicial Review challenge filed by Callenders & Co attorneys, Fred Smith and Carey Leonard, who are arguing that the consultation process over the expiring tax incentives and Hawksbill Creek Agreement review is “fundamentally flawed” because the Government failed to release it sooner.

The report bears a November 10, 2014, date, indicating that the Christie administration has withheld it from Freeport residents and businesses - anxious to know their futures - for some 14 months.

However, it is not a complete version because the Government has not disclosed sections that could reveal its negotiating strategy to the Grand Bahama Port Authority (GBPA).

Marvin Hanna, an attorney with the Attorney General’s Office, confirmed in an accompanying affidavit that sections detailing “objectives and possible strategies the Government could take with respect to the expiring taxes”, and its possible approach to discussions on long-term reforms to the Hawksbill Creek Agreement, had been cut from the version filed with the Supreme Court.

Still, setting out current conditions in the city, McKinsey said: “Freeport’s economy has been stagnant, with employment falling 20 per cent over the last seven years (2007-2014), likely due to the hurricane and lack of new investment.”

The report pointed out that Grand Bahama’s employed labour force in 2014 had shrunk by more than 5,000 workers compared to the pre-recession figures of 26,310 in 2007.

The 2014 number of 21,145 had increased to 25,090 in November 2015, the date of the last Labour Force Survey, but this is still 1,220 or 4.7 per cent below 2007 levels.

What Grand Bahama’s employed labour force statistics reveal above all is that Freeport’s economy, and workforce, have yet to rebound to pre-recession levels and are ‘having to run faster to stay in the same place’.

The McKinsey report, meanwhile, noted the absence of new investment in Freeport’s manufacturing sector, coupled with the absence of major real estate developments.

“Tourism is deterred by the lack of compelling hotel product and expensive airlift,” the report added.

“Grand Bahama International Airport’s (GBIA) arrivals fell 75 per cent over the last four decades, while Lynden Pindling International Airport (LPIA) arrivals have grown 92 per cent.”

Pointing out that Grand Bahama International Airport’s last renovation, in 2004, stood in start contrast to the “large infrastructure investments” at LPIA, McKinsey said Memories was the only resort brand to open within the last 15 years in Freeport.

“Freeport has few attractions, producing shorter stays (4.5 nights versus 10 in Barbados) and lower spending,” the report said.

“Growth has been stagnant in part because key assets have been under-utilised, and owners’ incentives are not sufficiently aligned with investments that could drive GDP and employment growth.”

McKinsey suggested this had created “a vicious circle between inadequate investment and demand”, with air fares from New York to Freeport the highest in the Caribbean. Yet air passenger arrivals were the lowest.