The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A typical restaurant in Freeport’s Port Lucaya Marketplace “regularly fails” to earn 50 per cent of what is required to ‘break even’ on a daily basis, the Government has been warned.

The international consultants hired by the Government to outline Freeport’s future economic development options, given that several key tax incentives are due to expire in less than three weeks, painted an extremely grim picture of the city’s retail and tourism services sector.

McKinsey’s report to the Christie Cabinet warned: “Many businesses and restaurants have large operating losses (the primary exception is jewellers).

“A representative restaurant in Port Lucaya needs $4,000 per day to cover costs. It regularly fails to break $2,000, and tax would add additional pressure.”

The latter statement is a reference to the possible imposition of real property tax and Business Licence fees on Freeport’s private sector, given that those exemptions are due to expire on February 5, 2016.

The McKinsey report, produced in November 2014 but still as relevant today, given that there has been no change in either Freeport’s economic health or the status of its tax exemptions, provides a clear warning to the Government that allowing the latter to expire could be ‘the kiss of death’ for Freeport’s largely Bahamian-owned small and medium-sized business segment.

The report contains quotes from unnamed business owners, such as: “We call ourselves the biggest charity in the Bahamas.” Another added of allowing the tax breaks to expire: “Go ahead if you want to see every restaurant on the street shut down.”

Tribune Business exclusively revealed earlier this week how McKinsey warned the Government that it faced a ‘job losses versus increased revenue trade-off’ if it lets Freeport’s expiring incentives, which also include capital gains and income tax exemptions, sunset.

The international consultancy estimated that Freeport’s economy could lose up to 1,100 jobs if real property taxes and Business Licence fees were imposed on the city - a move that could generate between $80-$100 million in extra government revenues.

Most observers believe that, as a result of the McKinsey report and pressure from other quarters, notably Hutchison Whampoa, Freeport’s largest investor, the Government will ultimately renew and extend the expiring tax incentives.

It is likely to implement another six-month extension prior to February 5, 2016, but will also eventually add conditions - such as development commitments to occur within a certain timeframe - in return for preserving them.

“The highest job losses would be in the low margin service sector,” McKinsey said of the non-renewal consequences, “with taxes also harming future investment.

“Taxes would be large relative to revenues, difficult to pass on, [and] unable to be absorbed given current losses.”

McKinsey quoted more business owners, who warned that the real property tax burden “in particular, could be very substantial”. Others added: “Our customers are extremely price sensitive. Raising rates more than 5 per cent is out of the question.”

The report said Grand Bahama hotels “may be dangerously close to closing”, with the island’s average daily room rate (ADR) some “60 per cent below the national average” of $205. It was even further behind New Providence’s $229 average.

“Hotels pose a higher risk of job loss because they are not typically well-positioned to pass on taxes to customers,” McKinsey told the Government.

“Grand Lucayan’s tax liability could put further strain on its already precarious financial position.”

For those reasons, McKinsey estimated that between 115-640 jobs could be lost in Freeport’s hotel and restaurant sector if the city’s existing tax incentives are allowed to expire.

“The largest direct employment risks are to the Grand Lucayan (50-470 jobs), retail and restaurants (60-170 jobs), and the Container Port (0-90 jobs),” it added.

When it came to total (direct and indirect) jobs at risk, McKinsey said as many as 573 workers were potentially exposed through the Grand Lucayan, and up to 257 in the retail and restaurant sector.

It further described most retail and restaurant businesses as “operating at subsistence”, with a limited ability to increase prices by absorbing any tax increases.