How can Bermuda bounce back?
How will the Bermuda economy get back on its feet after a recession unlike any other the island has ever seen? Today, The Royal Gazette is inviting readers to offer their ideas.
More than 9,000 people have been laid off in the space of two months, a multitude of businesses starved of revenue and tourism brought to a complete halt.
Curtis Dickinson, the finance minister, has forecast a contraction of as much as 12.5 per cent in gross domestic product. He has invited “bold ideas” to spur a recovery and assembled an Economic Advisory Committee to work out the way forward.
If you have any thoughts on what the island can do to kick-start the economy, in the near term or the long term, please e-mail them to firstname.lastname@example.org by 5pm on Tuesday.
Please give your name, phone number and write “Recovery Ideas” in the subject line. We will try to include as many of your ideas as possible in our coverage next week.
To help get your creative juices flowing, some analysis follows, examining options that may potentially already be on Mr Dickinson’s radar.
BermudaFirst was commissioned by David Burt, the Premier, to produce recommendations for transformative change to improve the lot of Bermudians. The initiative involved about 90 Bermudians from many different walks of life, none of them politicians, assessing the island’s greatest challenges and making recommendations on how to address them.
Although the group’s Future State Report was published last September, long before the Covid-19 crisis gripped the world, it has frequently been referenced in recent weeks as a potential platform on which to build a recovery plan.
BermudaFirst’s recommendations included several whose implementation could bear fruit in the longer term, such as the formation of an independent education authority tasked with improving the public schools system to better prepare young Bermudians to participate in the modern economy. Also the group visualised an outcome-based healthcare system that they argued could cut healthcare costs by ten to 15 per cent.
On immigration, BermudaFirst said it would like to see a “a growing population with enhanced immigration policies that expand opportunities for Bermudians and make Bermuda a destination of choice for diverse talent who will be a productive part of our community”.
The group argued that some roles had to be filled by those whose skills and expertise met global standards if the island wanted to remain competitive and innovative. This would inevitably sometimes necessitate bringing in workers from overseas.
BermudaFirst’s top three recommendations for immigration reform that would produce “more jobs for Bermudians than the present immigration regime” are:
• Aligning the Government’s goals (GDP growth, attractive international business domicile, increased population) with immigration policies
• Shifting the mindset of the Immigration Department so that it recognises the needs of the business community, and the balance BermudaFirst is seeking to achieve
• Resolving issues associated with family and long-term residency
However, decision-makers rereading the Future State Report today may be tempted to look more closely at the “quick-win” recommendations for clues on how to kick-start the recovery. Among them are:
• Liberalise ownership restrictions on commercial real estate to encourage a positive response to economic substance requirements and to encourage urban renewal
• Allow the importation of second-hand electric cars
• Increase collaboration between international business and regulators to act quicker to capitalise on opportunities and defend against threats to this key industry
Another of BermudaFirst’s priorities was lowering the cost of living, particularly by decreasing the costs of staple food items, energy, healthcare and rents. It suggested that the Government could help by reviewing tax policy because taxes contributed to the cost of items such as energy and food.
Other priorities were moves to strengthen the island’s charitable sector, the provision of affordable housing for at-risk populations, a better transportation system, including public and private elements, amendment of the 60:40 rule to stimulate inward investment, and implementation of a debt management programme to deal with the country’s “unsustainable” debt level.
While BermudaFirst was clearly planning for the long term, its chairman Philip Butterfield stressed back in September that “the status quo is not an option”. Talks between BermudaFirst executive committee members and the Government have been progressing behind the scenes, but there has been little in the way of concrete legislative progress towards implementing BermudaFirst’s ideas.
Given that most of the recommendations involve political hot potatoes, that may not be surprising. But with the economy in a state of emergency and thousands out of work, politicians no longer enjoy the luxury of procrastination.
Encouraging foreign investment
The 60:40 rule, which mandates majority Bermudian ownership of most local businesses, was earmarked for reform even before the crisis. In the Budget Statement three months ago, Mr Dickinson said the Government intended to flip the ratio with a Bill that would require a minimum of 40 per cent local ownership, while maintaining the requirement for the board of directors to be at least 60 per cent Bermudian.
The Premier has long argued the case for relaxation of the 60:40 rule, given that it may help to keep money earned on the island, by permanent resident’s certificate holders, for example, within the Bermuda economy. It has the added benefit of fuelling the growth of local companies and the wealth of Bermudian owners in the process.
As Mr Burt pointed out before an international business audience in January 2018: “You can own 100 per cent of a $50,000 business or 40 per cent of a million-dollar business — clearly most people would prefer the latter.”
In February, the move announced by Mr Dickinson was viewed as a move to stimulate foreign investment. Now the need for capital is a matter of survival for some local businesses.
Concerns were expressed in February that the requirement for a majority Bermudian board would deter the desired investment.
As Sir John Swan, a former premier and successful businessman, said after the Budget, the proposal was like giving something with one hand and taking it back with the other.
“We say ‘Bermuda is open for business’,” Sir John said. “We want people to come here and invest their money. But we are saying ‘give us your money, we will let you have four directors’. But the other six directors will decide the policy of the company.”
Such concerns should be taken doubly seriously now, given that competition for capital will intensify in the battered global economy.
Realtors would also like to see restrictions for non-Bermudian property buyers lightened to stimulate a property market that produced a record low of about 200 transactions last year, according to Brian Madeiros, of Coldwell Banker Bermuda Realty.
Speeding up the application for an “alien licence”, which can take as long as six months to process for foreign buyers, and also opening up the condominium market to work-permit holders, could help to stimulate the industry, and generate work for others, such as builders, decorators, architects and lawyers, realtors say.
Bob Richards, the former finance minister, used to compare the island’s economy to a plane with one engine, because it is so reliant on international business and particularly insurance. While its official contribution to the island’s gross domestic product is about 25 per cent, IB’s indirect benefit to other sectors, from business services to real estate, to hospitality and charity, as well as being the source of about a third of government revenue, makes it a much more important part of the local economy than statistics would suggest.
Preserving the IB we have will naturally be at the forefront of the island’s response to today’s crisis. The reality is that others, onshore as well as offshore, will look jealously at our insurance sector as they seek solutions to their own economic messes. They will offer carrots and larger countries may wield sticks, testing the commitment of international companies to the island.
Bermuda can arguably get ahead of the curve in meeting this challenge by revisiting ideas that have previously proven politically unpalatable. Appealing to the decision-makers within these companies is key.
It has been painfully apparent in recent years that when top executives decide to relocate departments or their own offices to other places, whole teams and Bermudian jobs disappear with them. Their decisions have an outsize impact on the economy.
Immigration policy could be a tool of persuasion. Many executives have shared privately over the years that uncertainty over their status, and that of their children, and restrictions on buying property, have made them feel like they do not belong.
The Cayman Islands brought in bold immigration reforms a few years ago that gave clear guidelines to expatriate workers. Foreign workers who have lived in Cayman for nine years can apply for permanent residency and those who have lived in Cayman for 15 years, provided they have had PR for five years, can become naturalised, become a Caymanian citizen and get a British passport as an British Overseas Territory Citizen.
Simply mirroring this approach would probably struggle to find support in Bermuda during normal times. However, in a crisis situation, some adaptation of this to suit Bermudian sensitivities may find favour. As well as helping to retain and attract international businesses, such a bold move would also address the problem of the shrinking working-age population.
The number of work-permit holders on the island was sliding well before the crisis hit. There were 9,396 work-permit holders on island in 2018, down 37 per cent from six years earlier, according to the 2019 Digest of Statistics.
More expatriates leaving in the wake of the crisis will shrink the Government’s tax base, as well as the customer base of local businesses. Fewer workers will be paying into the system to support a growing cohort of seniors. These were concerns before the crisis and will be exacerbated by the repercussions of Covid-19.
Cayman’s Enterprise City may also offer some pointers on attracting new and more diverse businesses. CEC companies receive a Special Enterprise Zone trade certificate, whose benefits include “exemption or partial exemption from aspects of the immigration law, the trade and business licensing law, customs law and other legislation”, according to the Cayman Resident website.
CEC zones include Cayman Tech City, Cayman Commodities and Derivatives City, and Cayman Maritime and Aviation City. Our fellow British Overseas Territory has rolled out the welcome mat to the exempt companies looking to set up there, who can obtain “renewable five-year work visas within five days”, says the CEC website, and be fully operational within four to six weeks.
Economic substance regulations resulting from European Union concerns about multinationals channelling profits through shell companies offshore offer further opportunities. The rules require companies to have “adequate” staffing levels, premises and on-island expenditure to conduct their core revenue-generating activities.
CEC-type inducements could arguably help Bermuda win out over rivals, especially as Cayman is on an EU blacklist for jurisdictions deemed noncooperative on tax matters.
The ranks of unemployed Bermudians are growing. Some will try to get back to work by launching their own business.
Bermuda has great resources for those seeking advice to get a start-up off the ground, such as the government-backed Bermuda Economic Development Corporation and the private-sector business accelerator, Ignite Bermuda.
Erica Smith, executive director of the BEDC, believes risk-takers will need more freedom to help inspire a recovery. “We, as a country, need to become very comfortable with throwing away the rulebook in order to be as innovative, creative, and disruptive as possible,” Ms Smith said.
“Entrepreneurs will solve the world’s issues. We see it every day in action and this applies to Bermuda. But we must foster an enabling environment for entrepreneurs to grow.”
The Regulatory Authority’s Integrated Resource Plan envisions Bermuda generating 85 per cent of the island’s electricity supply from renewable sources by 2035. Such a transformation would require huge investments in solar panels, wind turbines and electric vehicles, creating green-economy jobs. The result would be more clean, home-produced energy and fewer dollars leaving the island to pay for fuel to fire Belco’s generators.
The source of the required, upfront capital is a matter for debate. Algonquin Power and Utility Corp, the Canadian company that has agreed to buy Belco and is awaiting regulatory and government approval, has pledged to invest $300 million in alternative energy projects on the island to help make the IRP’s vision a reality.
A potential alternative source is the Bermuda Infrastructure Fund, set up two years ago with nearly $90 million of private-sector capital for the purpose of supporting local projects, both public and private sector. The BIF is the main investor in the start-up wireless internet provider Horizon and has backed an electric rental car hire company. It may well have the capacity to fund green infrastructure projects too.
• Jonathan Kent is Business Editor of The Royal Gazette and has an MSc in international management
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