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Mckinsey Wrong On Freeport Tax Monies, Business Licence Fee

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The McKinsey report on Freeport’s economic future is flawed in its assessment of the city’s tax contribution and potential Business Licence fee earnings, an outspoken QC believes.

Fred Smith QC, the Callenders & Co attorney and partner, said the Government’s consultants had committed the fatal error of combining Freeport with the rest of Grand Bahama in evaluating the city’s impact on the Public Treasury.

And he described McKinsey’s forecast that the Government could earn almost $20 million from the imposition of Business Licence fees as “misconceived and irrelevant”, given that this ‘tax’ cannot apply to Freeport.

Mr Smith agreed, though, that the report should have “driven home” to the Government how badly Freeport’s economy would be impacted if it failed to renew the investment incentives due to expire in less than two weeks’ time.

Tribune Business exclusively revealed last week how McKinsey had warned the Christie administration that up to 1,100 jobs could be lost in Freeport if it were to ‘trade off’ employment for $80-$100 million in extra revenue generated by allowing those incentives to ‘sunset’.

Mr Smith argued that such a trade-off would be “catastrophic” for Freeport and its 60,000 residents, as the failure to renew its real property, capital gains and income tax exemptions would undermine the city’s economic foundations.

Calling for the subsequent report by the Government-appointed Hawksbill Creek Agreement Review Committee to also be made public, the well-known QC warned the Christie administration it would both “terrify and scare away” investors by seeking to reclaim the Grand Bahama Port Authority’s (GBPA) quasi-governmental powers.

Mr Smith, whose Judicial Review challenge to the committee’s consultation process forced the McKinsey report’s grudging ‘11th hour’ release, argued that the consultants had “mixed apples and oranges” in assessing Freeport’s impact on the Public Treasury.

Seemingly justifying the Government’s desire to extract more tax revenue from Freeport, McKinsey 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.

Mr Smith, though, said 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.

He argued that the Government’s tax earnings from, and spending in, Freeport needed to be ‘broken out’ and separate from the rest of Grand Bahama to show whether the city was a ‘profit generator’ or burden for the Public Treasury.

“They were mixing apples and oranges,” Mr Smith told Tribune Business. “If you are looking at changing the tax base in Freeport, then comparing taxation and expenditure for the whole island is critical.”

Whether Freeport is a burden on the Public Treasury, as was asserted by Obie Wilchcombe, minister of tourism, in the House of Assembly pre-Christmas is critical for another reason.

For the GBPA is obligated to compensate the Government for any ‘shortfall’ between revenue and expenditure it incurs in Freeport, meaning that the Public Treasury should never, ever be in a deficit position in the city.

If the Government has regularly been in such a position, it raises questions as to why it has not been holding the GBPA to account for its obligations.

Mr Smith, meanwhile, said McKinsey had also failed to take into account that Business Licence fees cannot be legally applied in Freeport.

This, he argued, is because Freeport;’s 3,500 businesses are licensed by the GBPA - not the Government.

“The McKinsey report completed failed to appreciate that the Business Licence Act does not apply to 99.8 per cent of the licensees in Freeport,” Mr Smith told Tribune Business.

“No one in Freeport is required to obtain a licence from the Government, as they are licensed by the Port Authority until the year 2054.

“The entire premise and extrapolation and guess-estimates of the report’s Business Licence section is misconceived and irrelevant.”

McKinsey had estimated the Government could earn an annual $19.8 million from the imposition of Business Licence fees in Freeport, with the major contributors being the Container Port, BORCO and other industrial operators.

Mr Smith added that their report was “full of estimates or guess-estimates”, and suggested that some of the data sources employed by McKinsey were outdated and inaccurate.

“Unfortunately, the McKinsey report is using statistical information from different periods for different matters that it addressed,” the QC added.

“Because of the lack of information and participation by licensees, it had to extrapolate from other inaccurate sources, the effect of the imposition of Business Licences or real property taxes.”

“A co-operative exercise, a legitimate exercise, would have encouraged licensees to embrace the opportunity to provide accurate statistical information to the committee or McKinsey to inform the decision-makers.”

Still, Mr Smith agreed that McKinsey’s findings further ‘made the case’ that extending the incentives due to expire on February 5, 2016, is essential for Freeport’s economic viability.

“The fundamental point driven home by the McKinsey report is how fragile and sensitive Freeport’s economy is to dramatic tax changes,” he told Tribune Business.

“What has been documented in the redacted report is how catastrophic it can be, tinkering in an uninformed and secretive way, with the lives of 60,000-70,000 people.

“I hope the Prime Minister appreciates this teachable moment, whereby the report should have been disclosed to the public so informed consultation can take place,” Mr Smith continued.

“It is regrettable that consultation has to occur through confrontation to extract publicly paid-for studies.’

The McKinsey report also set out possible strategies for the Government to employ in negotiating with the GBPA and Grand Bahama’s largest investor, Hutchison Whampoa, using the expiring incentives as leverage to extract development commitments, greater taxes and/or a handover of regulatory power in Freeport.

The report confirms that a natural consequence of the Government’s objectives is the return of regulatory power to Nassau, and away from the GBPA.

Opposing such intentions, Mr Smith said the Government needed to “embrace” the governance vested in the GBPA, and seek to harmonise the latter’s regulatory functions with the rest of the Bahamas.

“No matter how much political twisting, turning and posturing takes place, this is a fact of legal life in the Bahamas,” he told Tribune Business of the GBPA’s powers.

“Instead of fighting it all the time, this should be embraced and harmonised with the economy of the Bahamas generally.

“These secret plans and the Government’s avowed intention to take away the regulatory powers of the Port Authority will terrify our investors and licensees, and scare potential and future investors and licensees away.”

Mr Smith then called upon the Government to publish the Hawksbill Creek Agreement Review Committee’s report, which is thought to have been heavily influenced by McKinsey’s earlier work.

He said the latter’s report had revealed “fundamental objectives” given to the committee that had not previously been disclosed.

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