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Regeneration of Bermuda’s Economy

'He didn't know where he was going, when he got there he didn't know where he was and when he got back he didn't know where he had been…. and he did it all at the taxpayers expense' paraphrased from Winston Churchill. In October 2011 our first article in the Regeneration of Bermuda's Economy series was published entitled 'Bermuda's Economy in Crisis'. Included in the article was a brief snapshot of how the economy is structured, where we were financially and recommendations on how to stimulate the economy. We are pleased to see that the Government has or is in the process of instituting some of the recommendations in the article such as: n Relax ownership restrictions on married couples where only one is the Bermudian. Purchase of the 1st property would not require government approval n Liberalise immigration policy to allow for Bermudians to sell to non-Bermudians where property is above a set ARV n Reintroduce local entertainment back into the hotels n End senior benefits such as free land tax above a set ARV n End senior benefits of free car registration above a set vehicle class n Provide permanent residency and/or domicile status (High Net Worth Individuals) Although progress is being made, Bermuda still finds itself with: - Increasing unemployment - Decreasing national revenue - Increasing Government debt - Underfunded pension funds Bermuda's economy is still in decline and is unlikely to rise in 2012/13. There needs to be an action plan to stop the slide that our economy is on and restore pride and confidence in Bermuda and her people. We could also run the risk of a further downgrading of the country by the rating agencies if the economy does not stabilise and grow. Where is Bermuda Today in 2012? Following is a clear and non-partisan view of the economy using indicators over the past five years which helps build and show the final and true picture of where we find ourselves today. For easy reference, the peak period is in bold. Tourism (figures from the Department of Statistics [DoS]) Ÿ Tourism income (2011 is a projection): o 2007 - Air $443m Cruise $70m Total - $513m o 2008 - Air $344m Cruise $58m Total - $402m o 2009 - Air $266m Cruise $65m Total - $331m o 2010 - Air $323m Cruise $61m Total - $384m o 2011 - Air $351m Cruise $74m Total Expected to be around $425m. Tourism income fell from its 2007 peak. With a known reduction in cruise ship visits for 2012, Tourism is unlikely to get back to the 2007 level in 2012 or 2013. At $425m in 2011, Tourist income is still 17% lower than in 2007. Ÿ Tourist Arrivals: o 2007 - Air - 305,548 Cruise - 354,024 Total - 659,572 o 2008 - Air - 292,431 Cruise - 284,408 Total - 575,389 o 2009 - Air - 235,860 Cruise - 318,528 Total - 554,388 o 2010 - Air - 232,262 Cruise - 347,931 Total - 580,193 o 2011 - Air - 236,000 Cruise - 416,000 Total - 652,000 (Estimated...) Total Tourist arrivals for 2011 are one percent below 2007 levels while income is 17% below. Air arrivals have fallen significantly from 2007 levels and are not rising materially. Cruise arrivals have risen. Total Tourist numbers are staying high but total Tourist income has fallen, and is not rising materially. International Business(IB) (Figures from National Economic Reports [NER] and DoS) Ÿ International Business - Number on Register at end-period: 2007 - 15,358 2008 - 15,616 2009 - 15,634 2010 - 15,077 2011 - 14,825 The number of IB companies registered in Bermuda peaked in 2009. For 2011, company registrations are down 5% and are now below 2007 levels. Ÿ Fees paid in by International Companies: 2007 - $52.07m 2008 - $55.45m 2009 - $62.39m 2010 - $59.38m 2011 - $61.46m Fees and licences paid by International Companies are flatlining. Income of $61.46m was nine percent lower than in 2009. Fees were raised in fiscal year 2009/10. Ÿ Foreign Currency earned by International Business: 2007 - $2.06b 2008 - $2.15b 2009 - $2.09b 2010 - $1.96b 2011 - Not yet reported It is likely that in 2011, foreign currency earned by IB will be close to 2010 levels. Foreign currency earned in 2010 was nine percent down from the 2008 peak. The decrease in IB earnings ($130m reduction [6% decrease] from 2009 to 2010) are not being made up by the relatively large percentage increases in Tourism ($53m increase [16% increase] from 2009 to 2010.) National Workforce (Figures from Department of Statistics and Ministry of Finance) Ÿ National Workforce, Bermudians and non-Bermudians: 2007 - 39,851 workers 2008 - 40,213 workers 2009 - 39,520 workers 2010 - 38,097 workers 2011 - 37,379 workers The national workforce peaked in 2008. In 2011 the workforce had shrunk by 2,834 workers, an overall 7% loss in the workforce. Ÿ Number of persons employed in International Business Activity: 2007 - 4,689 2008 - 4,761 2009 - 4,431 2010 - 4,287 2011 - 4,077 The number of persons working in IB peaked in 2008 and has since fallen 14 percent. By 2011, IB had lost 684 people. Ÿ Number of persons (Bermudian and non-Bermudian) working in the private and Government sector which includes Quangos. The Quangos are BHB, BHC, BLDC, BMA, Wedco (PLEASE NOTE: Quango numbers are ±10 as we have not been able to obtain information requested.) 2007 Private - 32,843 Government & Quangos 5,094 + 1,914 = 7,008 2008 Private - 32,708 Government & Quangos 5,569 + 1,936 = 7,505 2009 Private - 31,544 Government & Quangos 6,006 + 1,970 = 7,976 2010 Private - 30,272 Government & Quangos 5,823 + 2,002 = 7,825 2011 Private - 29,549 Government & Quangos 5,793 + 2,037 = 7,830 The number of persons (Bermudian and non-Bermudian) employed in the private sector has been falling since 2007. By 2011, private sector employment had fallen by ten percent or 3,294 jobs. Conversely, the number of Government and Quango employees rose by 11 percent or 822 jobs. This 11 percent rise in Government and Quango employment was counter-cyclical to the 10 percent fall in private sector employment. In 2007, there was one Government and Quango employee for every five private sector employees. In 2011, there was one Government and Quango employee for every four private sector employees. Ÿ Number of Bermudians who are unemployed: 2007 - not known 2008 - not known 2009 - said to be 4.5% - 5.0% (Budget Statements 2010/11 and 2011/12) 2010 - not known 2011 - not known In March 2012, the number of Bermudians identified as unemployed is still unknown. Recent public estimates and guesses by Cabinet Ministers and other officials and public figures range from 1,000 to 4,000. GDP and general national economic activity (Figures from National Economic Reports [NER]) Ÿ Gross Domestic Product: 2007 - $5.89b 2008 - $6.10b 2009 - $5.80b 2010 - $5.76b 2011 - Not yet reported but projected to be 1.5% to 2.5% lower than in 2010 [NER 2011]. Bermuda's GDP peaked in 2008. It has been falling since. In 2011, NER 2011 projects that GDP may be as low as $5.62b, placing it just above the level that GDP reached in 2006. National Debt and annual Debt Service expense (Figures from Ministry of Finance) Ÿ National Debt and annual Debt Service expense (Interest payment + Sinking Fund contribution) excluding all Quango debt: 2007 - $278.3m - annual expense - $23.3m 2008 - $483.3m - annual expense - $27.6m 2009 - $969.0m - annual expense - $34.8m 2010 - $1,001.9m - annual expense - $84.1m 2011 - $1,201.9m - annual expense - $100.2m In calendar 2012, Debt will rise to at least $1.40b and the annual expense will be $115.8m. Debt and Debt expense will rise again in 2013. Plan of Action for The Future If our GDP continues to fall and debt continues to rise we run the risk of another downgrading by the rating agencies. This is of critical importance as our ability to borrow in order to service our debt and subsidise our shortfalls diminishes. Therefore, it is paramount that we reduce Government personnel costs and grow our economy which would reduce our need to borrow. Government spends over 60 percent of its revenue to service its personnel costs. It employs approximately 20 percent of the national workforce and 80 percent of unionised workers in Bermuda work for the Government. Quangos are also part of this equation as they are quasi-governmental organisations that are financed and/or subsidised by government and also expose the government to financial obligations. This puts the Government in a difficult position of not having many options when it comes to reducing personnel costs. Option 1: Reduce the size of Government personnel. This is an option of last resort as it would create further unemployment. Option 2: Put every government and quango employee on a rotating four-day work week across the board and reduce salaries accordingly. This could potentially save the Government $160m. Option 3: Reduce civil servants 20 percent by attrition through retirement and a freeze on personnel hiring, including quangos, over a five-year period. Potential savings are $250m. Option 4: Cut salaries of Ministers by 40 percent and Members of Parliament by 30 percent. These changes would be in conformity with the private sector who has been adjusting to the changing economic times by reducing personnel, reducing rents, dividend freezes, etc. in order to stay in business and therefore the Government should be doing the same. These options would also in effect reduce the liability of the pension funds which is currently underfunded by approximately $900m which equates to ⅔ of where pension funds should be. In order for the Government to restore revenue and Bermudians to regain rents, dividends, jobs and opportunities, the economy must grow. To do that, there must be a clear defined plan of how Government can facilitate the private sector in restoring an inflow of capital, labour and product through policy and legislative changes. The following are recommendations and suggestions received from members of the public that could help in this process:

City of Hamilton n Extend the city limits to allow for the development of high rise condos by International Business for 'key' employees. Most foreigners are used to living in a city environment and this would keep the outlaying country areas available to Bermudians and their families. n Make City of Hamilton an Economic Zone l Duty free on materials for construction & Payroll Tax concessions This would stimulate the construction sector. l Remove restrictions on law & accounting firms They can encourage current clients to move their legal and financial services to Bermuda. n Development of the Waterfront to include: l Convention/Entertainment Center l Casino l Restaurants l Retail shops l Marina This should be a high priority and can be achieved via a Public Private initiative. This would bring life back into the city and make it an exciting, viable and attractive destination for visitors and locals alike.

Commercial Business n Remove the 60/40 rule except on commercial landholdings This would encourage businesses to bring their financial and intellectual capital here. Also, with Bermudians retaining the land, they would benefit from the rent received.

High Net Worth Individuals n Allow for approval in principle to bring 'key' employees, both professional and domestic, with them They would have to pay payroll tax for these employees which would translate into additional Government revenue.

Property Ownership n Lift ownership restrictions on PRC holders to allow for the purchase of one property PRC holders are told that they can reside in Bermuda until they die, but yet are restricted from having a house to die in. Allowing them to purchase a home would be the right thing to do and again translate into Government & private sector revenue. n Remove the purchase tax on property for PRC holders In qualifying to become a PRC holder the individual has already made a contribution to Bermuda. Therefore, when they are allowed to purchase a home they should not have to pay a high purchase tax. n Restrict land ownership of companies after 60/40 removal to: l Major Infrastructural Projects (such as the Airport and other government related projects): 100 percent foreign ownership of the facility with long term leasehold on the land. Company must be listed on the BSX l Major Service/Utility Companies: Foreign ownership of real estate for the purpose of operation and management of the business. Company must be listed on the BSX In both cases above, Bermuda would have first class infrastructure facilities to compete with the rest of the world and Bermudians would still have the opportunity to be a shareholder of the Company and collect dividends. l Commercial/Retail Business: Foreign ownership and management with Bermudian's retaining real estate This would improve the high end shopping for tourists and locals, employ Bermudians and Bermudians would also collect rents.

Status/Residency n Open residency rights to a wider qualifying group Implemented by Government Jan.1.12 to 'Key' employees of companies who meet certain requirements. Individuals who are very philanthropic should also be considered for PRC even if they do not employ Bermudians. n Grant Bermudian status to a limited number who are existing PRC Holders Bermudian status should be an honour that is granted and not bought. This process could be done by way of nomination, similar to Queen's Birthday honours and every Bermudian would have the opportunity to nominate someone.

Taxes n Payroll taxes should be reduced to zero for at least three years for employers paying full-time Bermudian employees and self-employed individuals (e.g. Taxi drivers) receiving less than $50,000 per annum This would lift the burden on persons who are already struggling to provide for themselves and their families. n Offer a two-year payroll tax holiday for: l new international or local business which hires Bermudian employees l new Bermudian employees hired by existing businesses This would encourage businesses to give Bermudians jobs. n Remove tax on boats and increase mooring fees to enable Bermuda to become an international boating centre This would encourage more foreigners as well as Bermudians to bring their boats here. This would translate into more jobs at marinas and an increase of revenue to the Government 'Queen's Bottom'.

Telecommunications n Bermuda should free up the telecommunications market to maximise new opportunities in technology and minimise cost as a result of competition This would increase competition and make Bermuda more relevant in the international stage. Due to our limited resources when the latest technology is offered we should have an open mind to make Bermuda as current and efficiently connected as possible e.g. most places worldwide are into a 4G network and quickly moving beyond that. Bermudians would also benefit as they would be able to get more for their dollar.

Work Permits n Allow companies during the incorporation process to apply to immigration for approval in principle of 'key' employees and both processes should be executed in a prescribed time period This would facilitate the companies' ability to raise capital by satisfying investors that they can get certain 'key' employees. Immigration should be able to tell the company that they can have 'X' number of employees as key. n Remove term limits on work permits This would be for 'key' corporate employees. These are only a few recommendations that could help to remove ourselves from this downward spiral and help to relieve the level of stress that the community is experiencing as a result of not seeing a promising future. This can be achieved through a collective vision shared by all political entities to ensure future growth for Bermuda and her people. Get involved and send us your thoughts. This continues to be a collective effort by all Bermudians and we need your continued support, comments and ideas. For further information or to express your views, e-mail us at economy[AT]challengerbanks.bm or visit us on Regeneration of Bermuda's Economy.