By NEIL HARTNELL
Tribune Business Editor
Bahamian contractors yesterday pledged to seek a "waiver" or six-month transition to 12 percent VAT to prevent those locked into existing contracts from being "wiped out".
Leonard Sands, pictured, the Bahamian Contractors Association's (BCA) president, told Tribune Business that fears of having to now "eat" or absorb the 60 percent VAT hike were a major topic at the organisation's monthly luncheon.
With construction industry margins relatively thin, Mr Sands said the 4.5 percentage point VAT increase could result in many contractors being pushed into a loss on existing projects where they - and their clients - have already budgeted for a 7.5 percent rate.
Material, supplier and construction services prices are set to increase on July 1 when the new rate takes effect, and Mr Sands said the government was "playing with something extremely explosive" for the sector.
He added that clients were unlikely to obtain additional funding to cover the VAT-induced cost increases from risk-averse commercial banks already reluctant to lend, which risked a halt to - possible non-completion of - construction projects already underway.
Warning that the construction industry was "too big to let it fail", Mr Sands said he "spoke very strongly" at yesterday's BCA meeting on the need for it to receive similar transition treatment as the hotel sector. The Bahamas' largest private employer was yesterday given an extended transition period to 12 per cent for contracts already pre-booked (see other article on Page 1B).
"That is the most significant concern," he told Tribune Business. "We have a number of contractors who are like: 'We just signed a contract yesterday with a commercial bank. When July 1 hits we're already committed to 7.5 per cent.' They now have to pay 12 per cent. Where's that lost income going to come from to pay creditors and suppliers?
"We're already working through the Association. We're finalising a document to ask the Government for a special waiver for contractors facing that scenario. The 30-day implementation period is too short for us to adjust and negotiate.
"The only thing we can do is ask the Ministry of Finance and VAT Department for a waiver for those contractors caught in this scenario. This is a very real, significant thing."
Mr Sands estimated that 40 per cent of contractors were relying on just one contract that was already in progress, pointing out that the 4.5 percentage point VAT increase could amount to millions of dollars in unanticipated costs depending on its scale.
"There needs to be a special waiver," he added. "If they don't, you're going to potentially put a significant amount of construction companies out of business. It's the fact these guys will not be able to pay that extra in VAT.
"What we know also is that the banks are not being very favourable to construction contracts. Once you get a mortgage, the sum is fixed. The banks are not going to adjust that mortgage and advance more money.
"This is a very complex issue, and I don't think the Government new it, appreciated it. It's very serious. They have to give that waiver. We don't feel it's exceptional to ask for the same concessions for our industry given that the hotel industry is mostly foreign-owned," Mr Sands continued.
"We talk about the construction industry being mostly owned by Bahamians. We want to give them an opportunity not to be wiped out." Should the Government decline to grant a "waiver" on existing contracts, Mr Sands added that it could also provide a six-month 'transition period' where such projects continued to pay VAT at 7.5 per cent.
"Failing that, we could see a very bad scenario play out for the construction industry," he warned. "The Government is playing with something extremely explosive. While they may earn $400 million in new VAT revenues, they may lose $500 million in activity from construction and related services."
Suggesting that construction generated $1.5 billion in annual economic activity for the Bahamas, the BCA chief argued that the Government "can't let it fail" given that the potential fall-out will be felt throughout society - especially among the unskilled workers it helps to employ.
With VAT structured as a regressive consumption tax, Mr Sands said the ability of Bahamian families and individuals to qualify for home mortgages will fall as a result of the proposed 12 per cent rate, "eroding the already small home building consumer base" that many contractors rely upon.
He added that this had been brought home to him when a client recently called him and asked if he could reduce his construction quote from $160,000 to $130,000, otherwise she would not qualify for a bank loan.
Addressing yesterday's BCA luncheon, he said VAT's introduction in 2015 had already contributed to "a definite softness" in the industry as fewer persons qualified for mortgages as a result of the increased costs.
Mr Sands said this was borne out by the $24 million, or 20 per cent, decline in the total value of construction starts in 2016 compared to the prior year. Suggesting this reflected the impact of VAT's arrival, he added that the modest improvement in 2017 starts suggested the market had by then adjusted and 'bottomed out'.
Yet the BCA chief warned: "There is a concern appreciated by many contractors that the local lending environment has not resulted in a positive forecast, and we can only envision even further challenges if the proposed VAT increase to 12 per cent becomes a reality.
"What we know is that we have seen our residential mortgage business decline 50-60 per cent because of two factors; local banks' increased scrutiny and the introduction of VAT. It is not to say that that banks did not suffer significant losses over the past few years that prompted these internal changes to banks' lending practices. What we are noting is the fact that our pool of customers has as a result shrunk considerably.
"We can only expect that the remaining customers that wish to engage in either a renovation or new construction will have to meet the same stringent guidelines imposed for local banks, as well as feel the impact of 12 per cent VAT added to their residential mortgage product," Mr Sands continued.
"Essentially what we are saying is that in 2014 a $170,000 home would cost you, after VAT $188,125, and today if the new VAT rate is implemented, that same home will cost the consumer $196,000. The point that we are making is that there already exists a dwindling base of consumers that can afford to build a new home, and the proposed VAT increase will further shrink that number."