Much to be applauded in Budget but real growth will take time
Budget time is always an interesting part of the calendar for Bermuda because it is a time when the focus of public discourse is the economy, government finances, taxes, debt and our future prospects as a country. Unfortunately, this focus wears off as the budget season passes.
It is unfortunate because this focus needs to be year-round for us to come to grips with the economic and financial issues of our time.
It should be remembered that the Government has always had the ability, at its discretion, to breach the 60:40 barrier by issuing a so-called Section 114b licence — referring to the section of the Companies Act — that allows such an action. Telecommunications companies have availed themselves of 114b licences for many years. However, the big one was with the Bank of Bermuda, the island's flagship corporation, being purchased by HSBC.
Today, the entire banking and telecommunications sectors are controlled by foreign shareholders. It should also be remembered that the hotel sector has been foreign-controlled for many decades via Section 114b. In aggregate, the majority of private corporate capital based in Bermuda is already owned and controlled by foreigners. And then there is international business that is, by definition, owned by foreigners.
So what's all the fuss about? What's left? The answer is: medium-sized and smaller businesses, and while their capitalisation may not be that great, there are many of them.
Notwithstanding these facts, I am very pleased that David Burt, the Premier and Minister of Finance, has made a commitment to address the issue of the 60:40 rule. In my book, Bermuda: Back from the Brink, there is listed ten obstacles to economic growth — called “Challenges” — that I identified at the beginning of the One Bermuda Alliance administration that had to rectified to get Bermuda back on the path to sustained economic growth.
One of the Challenges is called “Open up or Die: Increase Competition in Monopolies/Oligopolies”. Unfortunately, time did not allow it to be achieved, even though we started the ball rolling with the admission of some overseas law firms.
The capitalist system requires that there be competition between members of the private sector to automatically control prices to customers. It is this competition that drives private-sector managers to constantly look for ways to increase efficiency in their operations and innovation in their product offerings to get an edge on the competition. It is competition that automatically seeks to optimise value for money. (This is precisely why it is so difficult to control costs in government — no competition.)
The 60:40 rule reduces that potential competition by restricting the access to capital, and in a small island, it engenders monopolies, duopolies and oligopolies. These restrictive market structures encourage less price competition, thereby increasing the cost of living to consumers. It is one of the principal reasons why things are so expensive in Bermuda.
The 60:40 rule was created by the old oligarchy to protect its members' interests and economic privileges, so it is ironic that many people who are not of that ilk are ardent supporters of 60:40. One can make an argument that it once worked for Bermuda, overall, in the past, but that was principally because there was then an excess of capital on the island, and 60:40 tended, along with exchange control, to keep that capital in Bermuda to be invested internally.
However, exchange control created huge imbalances in investment opportunities, as wealthy people hired professionals to take advantage of loopholes in the system that the average person did not know existed.
Today, without exchange control, without a supportive banking system and without an effective local capital market, the Premier is correct — 60:40 drives permanent resident's certificate holders to export their savings instead of reinvesting them in Bermuda. Moreover, after the economic overheating followed by the “Great Bermuda Recession”, the excess of local capital has turned into a deficit. The only thing 60:40 is protecting Bermuda from now is future growth and prosperity. Who wants to be protected from that?
Furthermore, 60:40 inhibits local business people from accessing foreign capital to help to grow their businesses. The banking environment in Bermuda today is more focused on anti-money-laundering issues as opposed to supporting local entrepreneurs. To access capital, local businesses will have to look overseas.
However, this will not be a panacea and there are still many details to come to grips with. For example, a problem lies in the area of loan collateral. If a local entrepreneur accesses capital from abroad in the form of a combination of equity participation and debt — a common structure — the entrepreneur will not be able to pledge any local real estate as collateral for that debt because of restrictions in the Immigration and Protection Act. As real estate is a very common form of collateral in Bermuda, this is a real issue. Protectionism runs very deep in Bermudian legislation and manifests itself in many different places.
I was disappointed that further relaxation of 60:40 was not achieved under the OBA rule. However, moving the amount of foreign ownership to 40:60, in the final analysis, may not be enough. The key to a successful outcome on this front is for relaxation to be done in an orderly, non-bureaucratic and transparent fashion. The public must know exactly what is going to happen and when, with ample notice and a minimum of red tape.
There has been great emphasis on economic growth by the Premier. I agree with this and applaud it. My government faced the same challenge when we took office in 2012, but of course the situation was far worse than it is now. Our response to the challenge of growth was to revive tourism by forming the Bermuda Tourism Authority — a resounding success — cutting government red tape by forming the Economic Development Committee, which I am pleased that the new government has continued, and, lastly, to encourage and to implement foreign direct investment into the island to lift the Bermuda economy.
The FDI component was also a great success and is providing economic lift to the economy as we speak: Morgan's Point/Caroline Bay, Hamilton Princess Hotel and Beach Club, St Regis in St George's, Azura, The Loren, Tucker's Point and, of course, the airport terminal.
The 35th America's Cup was a combination of FDI and tourism. These are economic stimulus measures that totalled more than $1 billion and definitely moved the growth needle. It is notable that none of these had any direct link to international business, which, overall, was a drag to growth in recent years.
Let's be clear on two important points:
• Net growth in the Bermuda economy must be fuelled from abroad, either by earnings or investment capital
• Sustainable growth can be achieved only with growth in the private sector, not the public sector
A compelling value proposition in Bermuda is a prerequisite to grow the number of private-sector jobs. A value proposition is like a coin with two sides: a value proposition for customers on one side and a value proposition for investors on the other.
A local entrepreneur must provide a product or service that customers find not only useful, but good value for money. On the other side of the coin, the business must provide the investors who put up the capital for the business a compelling value proposition by providing an attractive return on their investment.
The recent US tax cuts have dealt a blow to the investment value proposition for reinsurance companies based in Bermuda — it is to be hoped not a mortal blow. What is absent from the Premier's Budget speech is any indication of what the Government is going to do to assist private enterprise to promote a compelling value proposition for their customers and investors. Only then can there be an increase in jobs on the island.
Advocating growth is great, but you cannot flip a switch and “presto” it appears. It takes time, and time is money, and for those greatly in debt, such as the Bermuda Government, lots of it.
There was a time-lag associated with all the OBA economic stimulus endeavours. Despite all my pushing and badgering, it took three years to break ground at the airport. It took 4½ years to break ground in St George's. AC35 took three years to blossom. The point is, no matter what the initiative, whether it is infrastructure stimulus such as what the OBA did, or whether it is some fintech or similar type of initiative, it takes time to get it off the ground. Some of that time is inherent to anything new and some is because of government bureaucracy. However, my guess would be the newer and less familiar the initiative, the longer it will take to get it off the ground and to move the overall Bermuda economic needle.
That begs the question, assuming the best results from the Premier's new growth initiatives — even though he has given virtually no specifics: “What happens in the interim?”
More to the point: “What happens to the deficit, the debt, the debt service and the prospects for a balanced budget in the interim?”
We are all hopeful about the brave, new high-tech world that is envisioned, but without making any comment on that, how does the Government intend not to be swallowed up by debt and debt service until the hoped-for revenues from future growth materialise?
Therefore, owing to the time-lag before the growth initiatives take root, the Government must still focus on what it can do in the here and now. It can further curb spending and reduce the size and cost of the Civil Service — right now. Committees, commissions, reports and the like consume lots of time. Each day that passes means another $340,000 in interest payable. No growth initiative will be able to bail out the Government from ballooning debt if today's spending is not strictly controlled.
The narrative that Bermuda faces a stark choice between either austerity or growth misses the point. It is not an either/or situation. To be successful, the Bermuda Government will have to control its own spending and develop growth initiatives — at the same time. As the saying goes, the Government has to “jump and chew gum at the same time”.
• Tomorrow: Taxes
• Bob Richards is a former Deputy Premier and Minister of Finance in the One Bermuda Alliance government