The Tribune

By HUBERT EDWARDS

Hubert Edwards, in the fourth of a five-part series, identifies the areas that require attention if The Bahamas is to improve its value proposition.

Regional or similar-sized competitor jurisdictions essentially have the same value proposition as The Bahamas. What becomes clear relatively quickly is there are marked differences in how each do the same thing, the extent to which it is done and the value it communicates to investors. Their tax, regulatory and legislative regime all operate on similar principles. The implementation of each is usually the difference-make for their financial services jurisdictions.

According to a paper by the Securities Industry Association: “Many diverse factors contribute to the creation of a long-lived and reputable world-class financial centre. They reflect some combination of at least four important features: 1) A stable and open political and economic regime; 2) fair, transparent, efficient and reasonable legal, regulatory and tax regimes; 3) A skilled labour force and flexible labour regime; and 4) High quality physical infrastructure.” A number of these are present in The Bahamas, but to create a major strategic shift all must be comprehensively looked at.

Therefore, beyond the big vision and tinkering of strategic arrangements, there are necessary and practical matters which must be addressed. These factors impact the value proposition of the financial centre and become fundamental to it being long-lived, reputable and world-class. This section of the recommendation tackles this reality.

Legal and professional services sector

The Bahamas should consider how it can open up the legal and professional services sectors to competition. To create greater vibrancy, international practitioners must be allowed to create a physical presence in The Bahamas, providing services on a competitive basis with local practitioners. While there is some level of competition in other professional areas, the legal sector is generally closed to foreign practices. Any ambition to advance beyond what currently exists will require a careful look in this direction. Against the backdrop of a struggling economy, with its leading industry limping, it is imperative that all productive capacities and avenues are leveraged for the benefit of The Bahamas. The legal sector represents an important part of the financial services cluster, and can provide significant market access, for example, especially in the area of fund management. A closed approach in this sector will continue to exert negative influences on the development of the financial services industry.

The Taxation regime

The Bahamas should set up a task force of industry participants, with support from tax experts, to study and make recommendations on the future taxation regime that The Bahamas will employ. The terms of reference should be to recommend the best approach, having studied the full range of options available. The objective is to implement a regime that enables the government to finance its obligations; provides for capital and infrastructure development; and allows The Bahamas to effectively manage its deficit and debt without harming the jurisdiction’s competitiveness. The recent European Union (EU) demands should create some urgency here. In my opinion, there are limited options, and therefore a full study should be undertaken to inform the eventual solution being informed by same.

There is a clear recognition that this issue is politically sensitive and emotive. However, the assessment must be done within the context of the current tax system’s continued viability and the extent to which the future development of the Bahamian economy will be impacted. Proposed changes must seek to address the fact that government revenues have shown evidence of shrinking, and the fact that a top-flight financial services industry requires the existence of a well-functioning economy where fiscal deficits are controlled, and the performance of the economy is healthy over time. Taxation methods should bear in mind the need for The Bahamas to remain competitive as a jurisdiction and not erode its value proposition.

I am aware of work that was at least started in this area, but am not sure if there are any definitive conclusions. Those studies must now be completed, and the national discourse initiated, with a view to determining how any decision will impact the economy. It is possible that the answers already exist. Therefore, if the “foot on neck” threat is real, the space for manoevering is limited, and what must be focused on is how to best implement a direct taxation system without harming the local economy. I will return to this in a subsequent paper.

Infrastructure and cost of doing business

The infrastructure of The Bahamas can generally be considered reasonable, but it needs further improvement and development. The cost of doing business in The Bahamas tends to be high, but it holds the advantage of location, currency value and population size over Caribbean rivals. Reducing the cost of operating from The Bahamas will increase its competitive advantage and position it to be more attractive to investors. In this regard, attention must be placed on Bahamas Power & Light (BPL) as a means of reducing the cost of energy. The recent thrust to privatise and liberalise the telecommunications industry is paying dividends. The same approach may be required for other utilities. Physical infrastructure such as airports, seaports, roads attractions and office spaces must continue to receive attention. The project underway with Nassau’s cruise port, and discussions around the redevelopment of Bay Street, should be viewed as important linkages with the financial services industry. The general environment within which a financial centre exists must be of a consistently high standard.

Educational strategies for financial skills

The government must immediately move to establish a long-term strategy for addressing educational training with one eye on impacting the financial services industry. The long foreshadowed creation of a chair at the University of The Bahamas (UB) for financial services studies should be initiated and developed with a sense of urgency. While UB will be the point of output for the industry, there must be clear linkages to secondary education. Defined strategies must be employed to secure more finance/banking inclined students flowing into the tertiary system. As a matter of national policy, the ministries of financial services and education should work out annual plans for skills development geared towards the financial services industry. The development of specialised studies at UB should be assessed by these two ministries on a collaborative basis.

Skills development should not be limited to formal educational pursuits. Through public-private partnerships (PPPs), a creative means of expanding the knowledge base should be explored and implemented. Areas such as mentorship, secondments and tours of duty can be addressed at policy levels. Inducements for employers to train should be actively enforced within the immigration regime. The government should also consider creating a means for incentivising long-term training programmes.

The ever-changing nature and complexity of financial services demands that studies in areas such as financial engineering and risk management become more central to the skill-set being prepared for the industry. These areas, as examples, represent viable options for offshoring for major international financial institutions. The development of educational standards must necessarily be looked at from an economy-wide perspective, and as a strategic imperative for economic development. But there must be dedicated policymakers looking out for the interest of the financial services industry in this regard.

Capital markets and stock exchange

The approach to capital market development needs to become more focused and holistic. All government securities should be immediately listed on BISX. Initiatives to increase education and understanding, within the general population, on how capital markets and investing work must be immediately employed. Both BISX and industry regulators should be mandated to provide this kind of information for general public consumption. The embedded actions of the investing public are usually “buy and hold”, which fails to fuel the market.

Consideration must be given to the need to further liberalise exchange controls to eliminate the restrictive influences they have on the capital market, and the flow of capital in and out of the country. This is recognised as an area requiring very delicate and careful balancing. While immediate dismantling is not an option, there should be a clear signal as to the extent to which the Government wishes to go with a reasonable timetable supported by a practical plan that does not harm the country’s competitiveness.

The importance of the recommended approach speaks for itself. When we consider some of our competitors in the region, all have better-performing stock exchanges and more vibrant capital markets than The Bahamas. A wider review of leading financial centres shows that none exist without viable stock exchanges or capital markets. These are imperative for the development of a competitive financial centre. The Bahamas must therefore radically adjust its approach of not paying enough attention to the development of the stock exchange, especially the international side of the operation. Monetary or fiscal policies which work against the free flow of capital must continue to receive attention, and be adjusted in a way which benefits the economy in general, and facilitates growth in the financial services industry without imperiling the current exchange regime.

Immigration

The Immigration Department, in concert with the financial services industry, should undertake a review of the current Immigration policy with a view to determining whether it is conducive to the long-term planning and development of companies in the industry. Any policy should establish clear and concise service-level agreements, which are not binding but are like social contracts, between the industry and the department. I wish to reiterate the need for clear requirements for training, understudying and skill development with proper enforcement.

To be continued.....