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Regenerating Bermuda's economy

Bermuda's economy in crisis Tourism contributing less to Bermuda's economy

Don't expect food prices –to fall any time soon Government to allow access to pension funds for tenants in rental arrears Immigration policy–threatens recovery

Lost dividends cut off income stream in Bermuda economy If anyone knows of jobs, even if it's part-time ... Please let us know

These are just some of the headlines that we have been seeing in the media which are reflecting the current economic crisis that Bermuda is facing. Bermudians are hurting and are looking for some guidance and relief. The following is designed to initiate discussion at a public forum being held at Cathedral Hall, Church Street on Thursday, September 13 from 12pm to 2pm and again at 5pm to 7pm. What is happening… l Businesses are closing or laying off people l Rapid decline in jobs l Increase in homes for sale and empty rental properties l A growing number of people cannot pay mortgages and other bills l Charitable donations are on the decline l Rapid decrease in money for travel, school fees, medication, etc. l Rapid decrease in money for public infrastructure improvements l Dividends & profits from businesses have declined considerably l Civil servant pension funds are underfunded by over 66%. l Crime levels are still very high. l Money for maintenance of public services buses, ferries, etc. has decreased l Money for renovation of commercial properties has decreased l Home foreclosures are increasing l Tourism income is declining and cruise line managers are cutting back on planned Bermuda cruises l International Business is relocating to other jurisdictions l Bermuda has had a ratings downgrade l Now our major banks are at risk of being downgraded Why is this happening? Bermuda has two pillars to its economy: 4International Business 4Tourism These sectors earn us our Foreign Currency Exchange - the US dollars that are earned by Bermuda and are used to pay Government debt, private sector debt and all overseas transactions. Our Bermuda dollar is strictly for domestic use. All other transactions are done in US dollars. International Business represents 85% of Bermuda's economy generating foreign exchange (US$) earnings of over $1.9b in 2010. Tourism represents 4% of our GDP and generated only $384m in 2010. Year Arrivals Contribution 2010 347,931 (Cruise) $61m 187,000 (Air Leisure) $260m 45,393 (Air - Business) $63.0m As we can clearly see we need to embrace International business and its workforce as it is where we obtain the majority of our foreign exchange, the lifeblood of our economy. Population and Workforce The 2010 Census counted 64,237 residents in Bermuda, of which 50,565 were Bermudian. Noting our existing national business model, past experience and recalling our economic peak in 2008, in order to maintain a successful and healthy national economy, Bermuda's national workforce (NWF) count must be around 40,000 - or higher. At 40,000 NWF count, Bermudians would comprise approximately 27,000 and non-Bermudians approximately 13,000. In 2011 the NWF dropped to 37,399. We are unsure of the figure for 2012; but it is likely to be even lower. Therefore, we have already dropped below a number that maintains the basic viability of a successful and healthy economy. The population of 50,565 Bermudians includes: n Men n Women n Children n Retired Seniors n Physically challenged n Mentally challenged Our birthrate has been steadily decreasing. Only 581 Bermudian babies were born in 2010, and about 475 Bermudians died in that same year. So, only about 106 more Bermudians were added to our Bemudian population in 2010. The proportion of our ageing population has been increasing and there has been a migration of Bermudians moving away to live, which might bring our Bermudian population closer to zero growth. When we take all of these different aspects of the Bermudian population into account, we cannot fill all the jobs that are necessary to maintain a viable national economy. Non-Bermudians must be employed to fill the gap. From 2009 to 2011, guest worker manpower has seen an overall decline of 13.9%. It continues to decline in 2012. What we need to do is to increase the employment level back to the 40,000 level from its current and decreasing level of about 37,000. Since there is a limited and non-increasing pool of Bermudians from which to draw upon, we have no other alternative but to turn to the foreign workforce in order to stop the decline in the overall population and in the standard of living of Bermudians. Government's Financial Position Until 2005, no more than 48% of Government's revenue was used to cover personnel costs and debt. Assuming that Government collected all funds due to it, in 2011/12, at least 72% of Government's current revenue had to be used to service personnel costs, and debt. Comparing the last four years of Government spending, this spending pattern appears (in millions of dollars: 2009-10 2010-11 2011-12 2012-13 Annual revenue 917.3 996.7 870 909.6 Debt service cost 40.2 84.6 95.7 115.8 Personnel costs 577.4 599.7 597.3 535 Balance available 299.7 312.4 177 258.8 for goods/services Borrowings to fund 209.1 246 267.4 172.1 goods/services Total spent 1126.4 1242.7 1137.4 1081.7 Total spent on 508.78 558.36 444.4 430.9 goods/services The balance available for Good/services is what is left to use for maintenance of all public services, consultancy services, shortfalls in other revenue generating areas and planned capital expenditures. The totals spent on personnel + Debt Service in each of those years is captured here:

Total spent on Personnel and debt service: 2009-10 2010-11 2011-12 2012-13 617.6 684.3 693 650.8 In February 2012, $115.8 millionwas budgeted for interest payments plus Sinking Fund contribution for fiscal year 2012-13. This year's budgeted debt service costs have now increased to about $315,000 a day. In June 2012, a total of $475m was taken up in a ten year bond. About $375m was used to repay the 2011 May to September four-part $200m Loan Facility, a $75m note due in 2014, and close out existing Overdrafts. The net amount of new and additional borrowing was about $180 million.

It gets worse next year. In the June Bond Prospectus, Government reports a deficit of $267.4m for Fiscal Year 2011/12. This is a deficit of 31 percent. It is the highest ever deficit. It means that out of every $100 that Government spent, $23.50 came from or would have to come from, borrowed funds. We borrowed to pay interest and we borrowed to make up our current account shortfall - unsustainable. National Financial Position Government's accumulated debt including obligations to underfunded pension funds and other Government controlled entities is $4.8 billion. Government pension funds should be approximately $1.6b but it is only approximately $400m unsustainable. The private sector has an accumulated debt of $5.2 billion. This debt is not Government's responsibility but it is still debt that needs to be serviced and repaid by private sector earnings of mostly US$. If we take all of the financial commitments that are owed both by the private sector and government:

Each Bermudian (every man, woman & child population 50,565) owes approximately $197,765 to Bermuda's private and public sector debt which needs to be repaid mostly in US$. (Government debt is payable by taxes collected from the general public therefore it has to be considered as owing by each Bermudian.) Graphical Representation of Revenue and Spending The following graph shows the Government's revenue, spending, national debt and the national debt service cost. Between 2004-05 to 2011-12: l Government revenue rose from $782.5m to $870m - about 12% l Government spending rose from $799.5m to $1.137bn - about 42% l Net National debt rose from $130.4m to $1.236.7bn - about 850% l Annual full (*) debt service costs rose from $11.4m to $95.7m - about 840%. * Full debt service cost is made up of interest payments + 2.5% Sinking Fund contribution.

The preceding has been prepared to provide you with general information. In organising this report, we have used figures provided by Ministry of Finance, Auditor General's reports. A key fact to be remembered is that in early August 2012, the Ministry of Finance admitted that 2012/13's Payroll Tax receipts were running below expectations. The combination of Payroll Tax (known to be down) and Customs Duty receipts (expected to be down also) account for 56 percent or $512m of the revenue projected for 2012/13. If there is an overall five percent reduction in that tax combination component, then revenue will come in about $25m lower. Additionally, the Ministry projected $10m revenue from sales of Government real estate. However, in Bermuda's current real estate market, the likelihood of realizing $10m from real estate sales by March 31, 2013 is nil. Thus another $10m of revenue that is unlikely to be realised. Overall, the $909.6m that was projected as Government revenue for 2012/13 is far more likely to be $875m to $890m; which would be between one to three percent higher than the $870m realised in 2011/12; and which would be about 4% under the $909.6m projected. How to stimulate the economy… With public and private debt rising and revenue decreasing, we are running out of options to look after our people and meet our financial commitments unless we find ways to stimulate the economy. Recognising the financial constraints on Government and the financial state of the country, the following recommendations can be implemented with the legislative and policy support of the Government without any financial outlay. These are not intended to be the ultimate answers on how to stimulate the economy and surely they will not all be popular, but they can go a long way to restore the growth of our economy which would increase our national income, reduce our necessity for borrowing and provide jobs, rent and dividends in the private sector. Airport l Increase air traffic flow through our airport to retain US Pre-Customs clearance l We have to implement an 'ease of entry' procedure for business and high net worth individuals as well as tourists to minimize time spent waiting to clear immigration (This has been actioned.) l Improve the private jet facilities and procedures City of Hamilton Development of the Waterfront to include: n Casino n Restaurants n Retail shops n Marina n Convention/Entertainment Center n Parks n Waterfront Market 4 Consider allowing retail shops managed, financed and owned by non-Bermudians 4 Extend the city limits Within the new city limits allow international companies, 'key employees', PRC Holders and employees of high net worth individuals to purchase high rise condos. Most foreigners are used to living in a city environment and this would keep the outlaying country areas available to Bermudians and their families. Domestic Business n Remove the 60/40 rule on commercial activity but retain real estate. (This has been actioned.) Economic Zones n Look at making the following economic zones: n Dockyard including Ireland Island n Southside n All of extended Hamilton Environment n Give tax incentives to people who import and utilize environmentally friendly products/services Financial Services n Initiate legislative reform to encourage trust companies, non-retail banking and fund management to establish here High Net Worth Individuals n Provide permanent residency and/or domicile status n Allow private possessions and assets to be imported without duty n Reduce property purchase tax to ½ its current assessment n Allow for approval in principle to bring 'key' employees, both professional and domestic, with them Infrastructure Projects n Infrastructure projects such as Waterfront, Airport and any other revenue generating project could be allowed to be privatized (majority ownership by non-Bermudians) which must be listed on the Bermuda Stock Exchange (BSX) or should be private/public structures n Projects that are without revenue should be developed in a private/public partnership in concert with a revenue generating project e.g. the causeway in conjunction with the Airport International Business n Make it easier, more efficient and welcoming to do business in Bermuda. Bermuda has to realize the competitive environment is different and cannot do business on its own terms we have to adjust to our customer's needs and wants n Any public utilities or broad service organizations that impact on the general Bermuda public which are exempt from 60/40 should be listed on the BSX Property Ownership n Lift ownership restrictions on PRC holders to allow for the purchase of one property. n Change condo ownership policy to allow for Bermudians to sell to non-Bermudians where property is above a set ARV n Restrict land ownership of companies after 60/40 removal to: n Major Government Infrastructural Projects: 100 percent foreign ownership of the facility with long term leasehold on the land. Company must be listed on the BSX n 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 n Commercial/Retail Business: Foreign management with Bermudian's retaining real estate Status/Residency l Grant Bermudian status to a limited number who have acquired PRC status and whose continued presence would enhance the employment opportunities and skills of Bermudians Tourism l Develop a plan that helps to define Bermuda as a destination which would include development of the waterfront and other amenities that would cause people to come to Bermuda. l Encourage development of accommodation of hotels, time-shares, condos and fractional ownership properties l Incentives to encourage both destination and accommodation development are: 4Free payroll tax 4Import duty relief 4 Free licensing fees Taxes l Decrease taxes on fractional, residential and condo ownership l End senior benefits such as free land tax above a set ARV. (This has been actioned.) l End senior benefits of free car registration above a set vehicle class. (This has been actioned.) l 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 l Offer a two year payroll tax holiday for: 4 new international or local business which hires Bermudian employees 4 new Bermudian employees hired by existing businesses l Remove tax on boats and increase mooring fees to encourage Bermuda to become an international boating centre Telecommunications n Bermuda should free up and upgrade the telecommunications market to: n Allow for increased speeds n Minimize cost as a result of competition n Allow for the use of cost saving technologies n Attract a new industry to Bermuda Intellectual Capitalism Work Permits l 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 l If someone is 'key' and is moving to Bermuda consider granting their corporate and/or domestic employee a permit in concert with the 'key' employee l Remove term limits on work permits Are you prepared to change and support? The traditional mindset of doing and seeing things is no longer applicable or working in today's environment. There are some quantum leaps in policy changes, business changes and overall attitude changes that must happen if we are to survive. Are you prepared to embrace change that will continue to offer you the comfort and standards that you have enjoyed? We can either help to make a change or when Bermuda fails; we will have no one to blame but ourselves. All of us have a vested interest in Bermuda and we all need to participate in this discussion to help enact change and make the future more positive. Therefore, a forum is being held at Cathedral Hall, Church Street on Thursday, September 13, 2012 from 12pm to 2pm and again at 5pm to 7pm to allow the public to come and give their views on these and other ideas on how to stimulate Bermuda's economy and shape our future. This is a collective effort and we need your support, comments and ideas. For further information or to express your comments email us at economy@challengerbanks.bm or visit us on FACEBOOK - Regeneration of Bermuda's Economy.

Bermuda's economy depends on international business