The Sixth International Critical Management Conference, July 13-15, 2009 Warwick Business School, The University of Warwick, UK

Stream 2 - Open Stream

Authors: Gordana Pesakovic, PhD Professor, Argosy University Olivia C. Saunders, DBA Associate Professor, The College of The Bahamas

Paper Title: Negotiated Foreign Direct Investment: A Case Study of The Bahamas

Abstract

The views on FDI range from advocates of FDI who see it as a major development promoter, to those who demonstrate negative effects of FDI on developing/emerging countries. The Bahamas as a small, open and developing/emerging country has its door open for FDI. This paper uses the case study of The Bahamas and eight FDI agreements to evaluate their impact on the country. In the paper relevant legislations and the national investment policy are also discussed. The findings of the paper are that FDI policies have created a dual economy that places the commanding heights of the economy in the hands of foreigners. Recommendation for a broad-based development agenda is made so that the benefits of FDI can be maximised.

Introduction

The Bahamas

The Bahamas is sandwiched between the richest nation in the hemisphere The United

States of America (USA) and its nemesis, Cuba. It is also bordered by the poorest

nation in the hemisphere, Haiti. The Bahamas is therefore strategically located on a

number of levels. Politically it is a part of the Caribbean and a member of the Caribbean

Community (CARICOM). The Bahamas is not a member of the World Trade

Organization (WTO) but has applied.

Generally speaking, The Bahamas is small, open, underdeveloped which typifies

Caribbean type economies, and along with its geography, makes it one of the most

vulnerable countries in the world as characterised by UNCTAD (2007). It is one of the

‘structurally weak, vulnerable small economies’. For well over half a century, The

Bahamas has been an open economy welcoming and reliant on foreign investment to

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stimulate growth and development in the tourism and financial services sectors.

Legislations to encourage developments in these areas have under-girded this thrust.

The inflow of capital to The Bahamas for either construction of the tourism plant or

financial services institutions was drawn to the country in no small way because of the

absence of taxes on income, profits and capital gains. In fact, indirect taxation accounts

for about 83% of total government receipts. Even though customs duties and other

taxes on international trade account for the bulk of government revenues, some 58%,

major efforts to attract foreign investment include exemptions and concessions from

them. The Bahamian economy has a dual structure of Foreign and Bahamian owned

sectors to the extent that the commanding heights of the economy are owned and

controlled by foreign investors with key decisions regarding local operations are made

outside the country. (Saunders, 2007)

The investment policy initiatives and the agreements signed with foreign investors was

explained by the former Prime Minister1

Assessments of the impact of FDI have gone through a few controversial stages.

Providing a brief history of FDI, Sumner (2005) associates FDI as part of colonial

, "We have taken this initiative as a government

because we firmly believe that all Bahamians must share in the growth and

development of The Bahamas " and he maintained, “every available statistic indicates

that The Bahamas is experiencing the positive effects of this policy.” (The Bahama

Journal, 2007) He further stated that under his administration some 430 investment

proposals were received of which 48 were under construction and 192 were in

preparatory stages.

On the global level, the current financial and economic crises (since 2008) have slowed

down the flow of FDI and projections are that FDI will shrink by more than 20% in

2008/2009. According to UNCTAD (2009), 2007 was the record year for FDI ($1.8

trillion). Developing and transition economies are not as affected as some other regions.

However, economies that are tied closely to the US, like the Caribbean and Central

America are expected to be affected more seriously. (UNCTAD 2009)

1 Hon. Perry Christie, Prime Minister May 2002 – May 2007.

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regimes in the primary sector but not until after World War II did it become a research

interest as “FDI grew at twice the rate of global output in the 1950s and 1960s”. (p.270)

During the Cold War era and the “doctrine of two markets,” FDI was mostly limited to

the “inside the block investment”. Since the collapse of the Soviet Union, and the

“tearing down of the Berlin wall”, the new Washington Consensus doctrine promoted

FDI (via requirements for market liberalization markets and privatization) as a panacea

for the economic development. Recently, new voices of discontent with FDI are being

raised, predominantly in the developing world. However, inside the developed world, the

existence and more so, the actions by sovereign wealth funds (from China and Middle

Eastern countries) are making governments nervous and protection oriented. Therefore,

Lall and Narula (2004) are suggesting that “a new agenda” for FDI and its role in

economic development may be needed.

This paper evaluates 1. the role of the government in contracting FDI to The Bahamas

and 2. the effects of FDI on development. Eight of the Heads of Agreements (HOA)

(labelled projects A, B,C,D,E,F,G,H) signed between the government of The Bahamas

and foreign investors between 2004 and 2007 are reviewed2

2 These agreements are available because they were presented to Parliament February 2008. It is not the practice of the government to make Heads of Agreements public.

. The review includes

descriptions and proposed dollar (US) value of the projects, obligations of investors and

the government. Other aspects of the agreements and related matters are also

incorporated in the discussions where relevant. These HOAs are used to assess the

management framework of foreign investments in the country as regards quality of

investments from a developmental point of view. The sample of HOAs is of investments

outside of the main economic centres, New Providence and Grand Bahama, and is a

part of the government’s attempts to improve island economies throughout the country.

The main sections of the paper are the Literature Review, Relevant Legislation for FDI

in The Bahamas, The National Investment Policy, The Heads of

Agreements/Description of Projects, The Effects of FDI on The Bahamas, Implications

for Development and Conclusion.

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Literature Review

Although The Bahamas has been traditionally an outward looking and export oriented

economy, and welcomed foreign investment, much of the developing world, particularly

former colonial territories have experimented with import substitution and more inward

oriented industrial policies. (Lall and Narula, 2004) Most countries have lowered, if not

eliminated restrictions on inward and outward movement of foreign capital, as foreign

investment has become a substitute for aid and borrowing from a financial perspective

and an important source of technology. While at the same time, capital has become

more volatile and mobile, “searching the world for lower cost, more efficient production

sites and for new markets.” (Lall and Narula, 2004, p. 448) Moreover, governments that

once spurned foreign investment and the presence of multinational firms, came to see

them as catalysts for economic transformation. (Barclay, 2004) The idea ‘development

by invitation’ was proposed by Sir Arthur Lewis more than half a century ago.

An important purpose of developing/emerging country governments in seeking to attract

FDI is to grow the economy so that ultimately developmental goals can be achieved.

FDI is usually identified in the literature as an economic growth agent. This argument

was extensively used during 1980s and 1990s when FDI was promoted as a new

economic development solution. Latin America and transition economies in East Europe

were fertile ground for such experiments. However, after 15-25 years of experimenting,

mixed results were reported.

FDI and growth

FDI can be beneficial for the recipient country in two ways: substituting for insufficient

domestic savings, and positive spillover effects. Spillover effects can be demonstrated

through: a. transferring of technology and know-how; b. assisting a company’s

development and restructuring; c. facilitating a country’s integration in the world

economy (via trade); d. increasing competition in the economy; and e. supporting

human development formation in the host country. (OECD 2003)

Mengistu and Adams (2007) show that FDI is positively correlated to economic growth.

It does appear though, that FDI also contributes to income inequality. (Mengistu and

Adams, 2007; Sumner, 2005) Porzecanski and Gallagher (2007) looked to determine

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the relationship between economic reforms and FDI in Latin America, and FDI and

spillover effects. Firstly, they identify the most significant motives for FDI flows to the

region as: market size, economic growth rates and export orientation, while trade and

investment agreements and weak environmental regulations showed mixed results.

Secondly, they show that FDI “resulted in very limited productivity “spillovers” for the

region.” Mencinger’s study (2003) focused on 8 (most economically advanced) East

European transition countries, and “found the negative impact of FDI on economic

growth.”

Barclay (2004) in the case of FDI in Trinidad and Tobago’s natural gas industry

demonstrated that “FDI-facilitated development only occurs when governments in less-

developed countries pursue credible intervention policies”. Unfortunately, in the case of

Trinidad and Tobago FDI facilitated development was solely left to the foreign

companies. Therefore, it is no surprise that FDI “has played virtually no role in

enhancing indigenous technological capability”. (p.501)

The issue of whether FDI crowds in or crowds out domestic investment is another

important issue from a developmental perspective. Agosin and Machado (2005)

conducted a comprehensive analysis of 12 countries in Africa, Asia and Latin America,

from 1971-2000 looking for the answer to the following question: Does FDI in

developing countries crowd in domestic investment? In other words, what effect does

FDI have on the domestic investment: neutral effect (total investment will increase as

much as FDI), negative effect (crowd out) when the increase in the total investment will

be smaller that the increase in FDI, or positive effect (crowd in), when total investment

will be higher than FDI? Their results are discouraging. They did not see positive

impacts of FDI on total investment in countries (crowd in), quite the contrary, very often

total investment increased less than FDI. Further, Kentor and Boswell (2003) centre

their analysis on foreign capital dependence and development. Their study of 39 less

developed countries from 1970 to 1995 led to alarming findings. Foreign investment

concentration (“proportion of a host country’s FDI stocks owned by the single largest

investing country”) has a significant long-term negative effect on growth.

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Attracting FDI

Developing/emerging country governments devise strategies which include incentives to

attract FDI. The OECD (2003) identifies guiding principles for designing incentive

policies.

1. A predictable and non-discriminatory regulatory environment and an absence of undue administrative impediments to business more generally.

2. A stable macroeconomic environment, including access to engaging in international trade.

3. Sufficient and accessible resources, including the presence of relevant infrastructure and human capital. (p.7)

Some of the issues to take into account when assessing the value of these incentives

are subsequent increases in domestic production, distributive effects on the capital

markets and allocation of financial resources. (Quan, 2006) A strategy different from

the ‘picking winners’ strategy “based on converting rising national champion companies

into world-class exporters which proved so successful for some East Asian countries” is

proposed by Mortimore and Vergara (2004, p.500). Their proposal is ‘target winners’

strategy where foreign investors are targeted specifically for their ability to assist with

national developmental goals and initiatives. This is different from the traditional reliance

on ‘spillovers’.

The massive expansion in FDI flows since the 1980s resulted because “commercial

bank lending dried up ..., aid fell, and privatisation presented major investment

opportunities” (Sumner 2005, p.270) Kolstand and Villanger (2008) compared the

Caribbean region (13 countries) with other countries (122) from 1980-2002 seeking to

find whether the Caribbean is different as it relates to FDI inflow. They argue firstly that

the Caribbean has in fact attracted more FDI than comparable countries in other

regions. Secondly, FDI is more responsive to changes in political stability in the

Caribbean than in other regions. Thirdly, the region is perceived as a haven from

regulations.

Montero (2008) focussing on Latin America, identifies start–up and operational costs,

opportunity cost of not setting up business at the right time and place and political and

economic risks as factors influencing FDI. He suggests that these factors come together

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under the umbrella of macroeconomic stability as the key determinant of FDI flows to

the region. From the home country’s perspective there are three major motives for FDI:

resources-seeking, market-seeking and efficiency-seeking. The level of a host country’s

economic development is most likely going to determine home country’s motive. The

major motive for FDI in less developed countries usually is resource-seeking, while

market- seeking is important in the countries at the “catching-up stage”. Efficiency-

seeking motive will dominate in FDI in more developed economies (Lall and Narula

2004) On a social dimension Blanton and Blanton (2007) found that respect for human

rights was a positive factor in attracting FDI in developing countries.

Relevant Legislations for FDI in The Bahamas

The attraction of foreign investment to the country is facilitated by various pieces of

legislation which either directly supports the inflow of foreign investment or in their relief

are used as incentives. The legislations relevant to the agreements are discussed in this

paper but it should be noted that other incentive legislations exist.

The Stamp Act: This Act came into force in 1925 with subsequently more than forty

amendments primarily to change the rates. This Act requires the ‘stamping’ of various

legal and business transactions. This is an important component of the tax revenues

and exemplifies the indirect tax regime of the country. Stamp tax is assessed for

example on all goods entering the country, conveyance of land, petitions under various

Acts, appeals to the courts, certain affidavits, company registration, transference of

shares in a company, and certain financial transactions.

The Tariff Act: In modernising the Act, the government made revisions in 1996 “to make

new provision for the imposition and collection of customs duties, and to give effect to

the Harmonized System of Tariff and for other matters connected therewith.” It was

passed to modernise and harmonise (with international standards) the collection and

administration of customs duties. The rates of duty fixed according to the classification

of the goods. Customs rates vary and range from a possible 0% for some goods, for

example some baby products to a maximum possible 300% for goods such as beef,

poultry and fish. The actual rates are generally determined annually during the passing

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of the fiscal budget. This Act declares that unless otherwise stipulated in any other law,

tariffs or customs duties are applicable to all goods entering the country.

The Hotels Encouragement Act: This Act was originally passed in 1954 with several

amendments, with the last in 1999. It is designed “to encourage the construction of

hotels in The Bahamas by providing for the refund of customs duties and emergency

taxes and certain other concessions, and for the exemption of such hotels from certain

taxation, and to relieve existing hotels from certain taxation.” It applies to concessions to

be granted by the relevant Minister with respect to the importation of construction

materials for new hotels and the refurbishment of hotels, for hotels outside of New

Providence, concession is available from stamp duties. Allowance is made as well for

exemptions from real property taxes, any direct taxation on earnings from hotel

operations and dividends declared by the company. With respect to human resources,

key personnel and special workmen may be brought in under this Act so long as at least

75% of the all persons employed are Bahamian. The Act also protects hotels from

discriminatory legislation, regulation or other conditions by the government vis-à-vis

other hotels.

The Economic Development Enterprises Act: This Act passed in 2007replaces the

Family Islands Economic Enterprise Zones Act of 2003.The principal incentive is

exemption from or variation of stamp and customs duties on capital investment which

includes construction of buildings for residences, businesses, farming, agriculture,

fisheries, floating docks, and marinas. This Act is directed specifically to foster

developments on economically depressed islands.

International Persons Landholding Act: This act was passed in 1993 “to facilitate the

holding of land by non-Bahamians and by companies under their control”. The Act

stipulates the requirements for non-Bahamians to transfer land to other non-Bahamians

where the non-Bahamians are resident or not, or whether the company although foreign

owned is registered in The Bahamas. The Act also covers certain types of leases

between non-Bahamians.

The Bahamas Vacation Plan and Time-haring Act: Passed in 1999, this Act defines

time-sharing and the requirements for licences. It also makes provision for application,

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conditions, duration and transfer of licences, exemptions from customs duties, among

other things. Management of the enterprise is also a major component of the Act.

National Investment Policy

Foreign investment and certain Bahamian investments in The Bahamas have been

promoted by the government through the establishment of the Bahamas Investment

Authority (BIA) which is a part of the Office of the Prime Minister, and an investment

policy which BIA manages3

... is designed to support an investment friendly climate; guarantees the

complementarity of Bahamian and overseas investments; fosters appropriate

linkages with all sectors of the economy, in particular, the tourism and financial

services sectors; encourages the exploitation of our natural resources in an

environmentally sound and sustainable manner; provides for the maximum level

of employment; guarantees an acceptable level of economic security and

generally fosters the economic growth and development of The Bahamas.

. The government outlines its role, commitment and

facilitation of investment in the National Investment Policy which

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• Strategic location – just off the coast of Florida, USA

The policy encourages partnerships between foreign and Bahamian investors and

outlines sectors which the government specifically seeks to have foreign investment but

as well distinguishes those sectors which are reserved exclusively for Bahamians.

These are shown in table 1. Four sectors for investment are emphasised in promoting

The Bahamas as a country for investment: hotel, second home ownership, financial

services and ship registry. The features of The Bahamas which are usually advertised

to potential investors are:

• Political stability – a British parliamentary democracy dating from 1729

3 The BIA was incorporated into the Ministry of Financial Services and Investment under the previous administration. 4 http://www.thebahamas.com/islandsc/p12.htm#import, this policy published in 2002

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• Legal environment - English Common Law and the highest court being the Privy

Council (of England)

• Economy - prudent fiscal policy, a stable exchange rate, flexible exchange

control rules

• Tax haven – no taxes on capital gains, inheritance, profit or profit remittance,

royalties, sales, personal income, dividends, payroll and interest

• Infrastructure - adequate police constabulary, health and education facilities,

utilities, roads, and ports

Table 1: Sectors for Investment - Foreign and Bahamian

Sectors where foreign investment encouraged Sectors reserved for Bahamians

• Touristic Resorts • Upscale Condominium, Time share and

Second Home Development • International Business Centre • Marinas • Information and Data Processing Services • Assembly Industries • High-Tech Services • Ship Repair and other services • Light Manufacturing for export • Agro-Industries • Food Processing • Mariculture • Banking and other Financial Services • Captive Insurance • Aircraft Services • Pharmaceutical manufacture • Off-shore Medical Centres

• Wholesale and Retail Operations; • Commission agencies engaged in the

import / export trade; • Real estate and domestic property

management agencies; • Domestic newspapers and magazine

publications; • Domestic advertising and public relations

firms; • Nightclubs and restaurants, except

specialty, gourmet and ethnic restaurants, restaurants operating in a hotel, resort complex or tourist attraction;

• Security services; • Domestic distribution of building supplies; • Construction companies, except for special

structures for which international expertise is required;

• Personal cosmetic / beauty establishments;

• Shallow water scale-fish, crustacea, mollusks and sponge-fishing operations;

• Auto and appliance service operations; and

• Public transportation. International investors may engage in the wholesale distribution of any product they produce locally.

Source: Bahamas National Investment Policy

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The BIA comprises about eleven professionals and oversees the administration of

legislation relative to foreign investment, among other things. It receives applications for

foreign investment and prepares briefs for the National Economic Council (NEC, the

cabinet). Applicants are advised to engage the services of a local attorney and to

incorporate in The Bahamas prior to submission of applications. Principals and

companies are vetted to ensure their legitimacy and financial viability. The NEC grants

approvals for projects based primarily on employment possibilities, time to completion of

project, the size of the investment in relation to relevant communities and given

negative experiences and trends, environmental factors. Economic impact assessments

are not required.5

Heads of Agreements (HOAs)/Description of Projects

The government of The Bahamas contracts with foreign investors using HOAs. In this

section an overview of eight agreements is presented. With some two-thirds of the

population residing on the capital Island, New Providence (Nassau), the focus of the

government has been to provide employment opportunities in the other islands (the

Family Islands). The brief descriptions of the islands are provided in table 2 and signify

sparsely populated communities.

Table 2: Descriptions of Relevant Islands in the Heads of Agreements

Project Name of Island or Island Chain Geography

Population and Population per Square

Mile (2000 Census)

G The Exumas Central Bahamas; Comprises more than 360 cays, 112 square miles

Total pop = 1, 696, Pop. per sq mile = 32

H The Berry Islands Northern Bahamas;12 square miles

Total pop = 709 Pop. per sq mile = 31

D Cat Island Central Bahamas; Approximately 48 miles long, 150 square miles

Total pop = 1,647 Pop. per sq mile = 11

B Crooked Island Southern Bahamas; 93 square miles

Total pop = 350 Pop. per sq mile = 4

A, C, E, F Eleuthera Central Bahamas; East of New Providence stretching some 110 miles long, 187 square miles

Total pop = 7,999, Pop. per sq mile = 43

Source: Report of the 2000 Census of Population and Housing, Department of Statistics, Ministry of Economic Development, Nassau, Bahamas. (April, 2002)

5 Interview with Tyrone Wood, Bahamas Investment Authority, 21 April, 2009.

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• Project A was signed in March 2004 to develop a luxury resort and marina in

Governor’s Harbour, Eleuthera to include an up to 200 condo/hotel suites/rooms, up

to 40 room oceanview or oceanfront hotel with between two and three bedrooms

each, along with a marina with up to75 slips. The total investment is to be $40

million and the project is to be completed within three years.

• Project B was signed in April 2005. This project is to take place on Crooked Island

with a value of $35 million and includes 50 residential homes three 6-unit townhouse

buildings, rehabilitation of an existing 13 room hotel, a swimming pool with

recreational amenities, and an 8 acre 40 slip marina. This project is to be completed

within four years.

• Project C was signed May 2005 for the settlement of Deep Creek on island of

Eleuthera. The value of $34 million to include a 60 bedroom hotel, 30 townhome

units, for private multifamily townhome units, 15 single-family estate home, 12 Beach

villas and a 20 slip marina. This project is to be completed within four years.

• Project D was signed in January 2006 for Cat Island, just north of the town of Port

Howe. The project entails a five-star hotel consisting of 250 bedrooms, a casino,

beach clubs, restaurants, bars, and spa. Also included is a high-end residential

subdivision consisting of a minimum of 100 estate homes. The total value of this

project is $30 million. This project is to be completed within 3 1/2 years.

• Project E was signed in April 2006 for the Island of Eleuthera just outside the capital,

Governor’s Harbour. It is to include 41 resort homes, private pools and 3 bungalows.

Also included is a clubhouse with the usual amenities. This project is valued at $50

million and is to be completed within three years.

• Project F was signed in December 2006 for 3 islands off the north coast of

Eleuthera. The project is to include 300 hotel rooms, up to 220 residential units, spa,

golf course, helipad, tennis courts and a marina to facilitate 200 vessels. The total

value of the project is $700 million and is to be completed within 11 years.

• Project G was signed in April 2007 for three of the islands in the Exuma chain. The

project is to include six guesthouses, 18-hole golf course, sea plane landing dock, a

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helicopter pad, a yacht dock, a church, tennis courts and a 20 slip marina. The total

value of this project is $100 million.

• Project H was signed May 2007. This project involves three islands within the Berry

Island chain. The project includes the development of 135 residential lots, a luxury

boutique hotel of up to 50 rooms, 65 club villas, a club, two swimming pools, two

tennis courts, a 100 slip marina, bone-fishing club, 72 large luxury residential units,

art gallery, and a sports centre. This project is to be completed within nine years.

The estimated value of this project is $485 million.

These projects are all touristic in nature. They include hotels, residential units which are

upscale or luxury and marinas. One includes a casino and one includes and golf course.

These projects total $1,439 million which is a little under one fifth of the country's gross

domestic product.

The Effects of FDI on the Bahamas

The HOAs are evaluated sing four criteria: Incentives, Environmental and Heritage

Protection, Spillovers and Linkages, and Cost /Benefit.

Incentives

Some of the provisions incorporated in the HOAs conform to the OECD(2003) definition

of incentives, “Measures designed to influence the size, location or industry of a FDI

investment project by affecting its relative cost or by altering the risks attached to it

through inducements that are not available to comparable domestic investors” (p.12)

Although general legislation provides legal basis for incentives, the government includes

in the HOAs measures and inducements to influence or encourage FDI generally and

specifically. Common in the HOAs are statements of the government’s desire to

increase employment opportunities for Bahamians. However, each includes provisions

to facilitate foreign workers where Bahamians are not available or do not have requisite

skills. There are also statements exhorting investors to utilise locally grown products

and local suppliers. Again the government agrees to allow imports of goods and

materials as needed when they cannot be procured at ‘reasonable’ prices. It is

important to re-iterate that The Bahamas is not, nor has it ever been an industrial

economy and no policy pronouncements over the last two decades provide any

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indication that this will change. The main focus of FDI in The Bahamas is therefore to

expand and deepen existing industries – tourism and financial services. Further, unlike

many developing countries that attempted industrialisation by way of import substitution,

The Bahamas has always been export (tourism) oriented. So the government is not

really giving up anything in allowing for these incentives.

All developing/emerging countries are in competition for FDI and The Bahamas uses

‘regime competition’. The country has deliberately held on to its ‘tax haven’ status of not

imposing taxes on capital gains, inheritance, withholding, profit remittance, corporate,

royalties, sales, personal income, dividends, payroll and interest as a key approach in

attracting FDI. The National Investment Policy outlines other ‘environmental’ aspects of

The Bahamas which are deemed attractions for FDI. These include: parliamentary

democracy; a legal environment which has the Privy Council of England at its apex;

stable exchange rates and free trade. It is expected that investors would have

confidence in an English style democracy and legal framework to provide political

stability and safeguarding of investments. These ‘regime’ incentives are externally

motivated and reflect under-development vis-à-vis inward oriented systems that better

serve local needs6

Environmental and Heritage Protection

.

The Bahamas is renowned for its natural beauty. Aspects of the Bahamian natural

environment that are seldom, if ever advertised yet are important as the environment

and its protection have attained global importance and attention. For example, The

Bahamas has the third and fourth largest barrier (coral) reefs in the world; some of the

purest limestone in the world, over 98% calcium carbonate; the largest saltwater flats in

the world; and the largest concentration of aquatic nursery system in the world. Further,

85% of The Bahamas is water or the marine environment and 80% of the country is

within five feet of mean sea-level. Availability of fresh water into the capital island is

6 For example: the efficacy of a parliamentary system of government where so much power lies in the prime minister in a low populated archipelagic country is questioned daily; the rulings of the Privy Council have been criticised because they do not reflect the culture of the country; and the exchange rate parity with the United States dollar distorts local pricing, leads to balance of payments pressures and discourages local investment.

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through tapping into fresh water lenses, reverse osmosis, or by barge from nearby

Andros Island. Certain types of developments especially golf courses and marinas are

watched closely by environmental groups as they both are potentially harmful to the

environment and in particular to fresh water preservation.

All of the agreements contain sections for environmental protection and include

provisions for an environmental impact assessment (EIA) which investors are to

conduct at their own expense and to be approved by the government's Bahamas

Environment Science and Technology (BEST) commission. The EIA is complemented

by an Environment Monitoring or Management Plan (EMP) for all projects except project

A. Generally, the investors commit to working along with relevant government agencies

in avoiding and minimising negative impacts on the environment.

The BEST commission7

Historically, the country’s heritage has not been the most prominent feature of

Bahamian tourism. Heritage became a political issue when about ten years ago there

were public protests against plans to place a luxury tourist resort on the sight of a

former slave plantation. Four of the agreements, C, F, G, and H include provisions for

investors to preserve, conserve and restore antiquities and historical sites on the

was established in 1994 to among other things, to coordinate

the national effort

To protect, conserve and responsibly manage the environmental resources of The Bahamas; To develop national environmental strategies and related action plans; To identify suitable scientific and technological advances that can contribute to the development of The Bahamas; To propose legislation to enforce the provisions of the national environmental plans and policies;

It is an advisory body to the government with no regulatory functions. It coordinates “the

review of commercial, industrial, and residential development projects to be considered

by the Government of The Bahamas.” This puts into question the value of guidelines or

strategies for environmental protection when there are no enforcement powers.

7 See, http://www.best.bs/index.html

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properties being developed. This involves development of a training manual, creation of

easements and buffer zones, complying with guidelines set by the Antiquities,

Monuments and Museums Corporation (AMMC). The AMMC differs from the BEST

commission in that it is a statutory body with authority from the Antiquities, Monuments

and Museum Act, 1998 with a mandate which includes the establishment and operation

of museums in the country. The Act requires that discovery of antiquities is to be

reported and makes it illegal to spoil any designated monument. The AMMC does have

enforcement power.

The HOAs have slightly different provisions. Each requires the developer to cooperate

with AMMC in the preservation of antiquities. For project C, the developer is requested

to observe and perform requirements of AMMC and provide access to its personnel. For

projects F and G, the developers are to pay for the preparation of a training manual for

construction workers in the event antiquities are found on the property. The developers

of project F are also to pay the cost of an archaeologist if necessary. Protective

covenants are to be placed in property deeds in project H and the developer will review

site plans to ensure compliance.

The Act already sets out the obligations and responsibilities of the government and

others. Although repeating some of these conditions in the agreements cannot hurt,

differing wording of clauses tends to suggest different obligations and responsibilities for

different investors. It should be expected that in the preservation of historical sites there

would be consistent and common rules and guidelines for all persons, local or foreign

investor, resident or visitor.

Linkages and Spillovers

In the agreements the government seeks to encourage investors to utilise Bahamian

suppliers and products. For example, in project G the investor is, “to use its best efforts

to utilize Bahamian materials and services” (p.7); project B to “purchase marine,

agricultural and other products from Bahamians where available, subject to competitive

terms, price, delivery, efficiency and quality.” (p.8); and project C, “to the maximum

extent possible make the utilization of Bahamian farm products and marine products a

stylistic and theme-based feature of the development.” (p. 12).

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The National Investment Policy is referenced as a reminder in each agreement (except

project G) in relation to the operation of certain businesses on the development’s

premises. Project C states, “ensure that all retail stores and facilities, scuba diving,

fishing and other water sports and related recreational and entertainment within the

Development are operated by Bahamians.” (P.12) Developers are required to use local

transportation operated by Bahamians. On the same line, the investor in project H is “to

designate to the extent possible and area on the Island to be used for the purposes of a

Bahamian Craft and Straw Market.” (p. 22) The other projects (except A) use language

such as in projects B and E, “endeavour to use” or in projects C, D, F, and G “acquire

and utilize as far as possible Bahamian artwork in decorating” the resort of

development. The benefits sought extend further.

It can be expected that much of the benefits from FDI projects are ‘spillovers’ which are

crucial for enhancing the development process. For the government of a small island

developing/emerging state, the desired spillovers are in the line of transmission of

technology and know-how, human capital formation, linkages with local businesses and

therefore local business development, and increases in international trade. For the

projects reviewed in this paper, an increase in international trade refers to increases in

visitor arrivals and expenditure. Lall and Narula (2004, p.450) suggest that, “the quality

of FDI spillovers depends on the scope and competence of the subsidiary” which must

“build on the advantages that already exist in the host economy – local capabilities

matter.” The requests for collaborations with local institutions and for education and

training programmes suggest inadequate local capabilities. The motives for investment

matter as well. The projects reviewed fall under the category of asset-exploiting

particularly resource-seeking of the beauty and of the natural environment of The

Bahamas. The spillover benefits of these types of investments are low compared to

market seeking FDI. (Lall and Narula, p.451)

A country’s capacity to absorb spillovers is an essential consideration for “development

because it allows domestic actors to capture knowledge that exists elsewhere”. (Lall

and Narula, p.454) It might be correct to say that The Bahamas has a comparative

advantage in tourism, but persistent current account deficits indicate insufficient FDI

linkages to local businesses. Clearly industrial policy has not kept pace with policies to

18

facilitate FDI. As the mainstay of the economy for well more than half a century, tourism

has not led to parallel growth in local business development in the areas of

manufacturing, agriculture, fisheries and other areas for possible linkages to tourism. In

this regard, The Bahamas has been a champion for neo-liberal policies even before

they were in vogue. Market forces however, have not led to meaningful (in the sense of

development) strengthening of linkages or expansions of local entrepreneurship.

Further, and drawing on history and present day conditions as indicators, it is unlikely

that these HOAs will cause increases in domestic absorptive capacity and business

capacity building specifically. The evidence lies in the very low level of Bahamian

ownership in the hotel and tourism resort sector.

Even where the government urges investors to engage local professionals, the past

does not provide confidence that this is an area where Bahamians involvement in FDI

projects to the extent one would expect assuming a developmental intent. Davis,

Rahming, Diggiss and Manoo-Rahming (2008)8

...foreign investors, when seeking Governmental approvals, come with design

schemes prepared extra-territorial which leaves little opportunity for Bahamian

professionals of the Built Environment, such as Engineers, Architects, Quantity

Surveyors and Environmental Consultants; participating in the design process

[and] sadly, there has been little consultation between the Government and the

professional bodies representing the Built Environment. ... To further exacerbate

this situation, the Bahamian work force is unprepared for project implementation

address this issue.

The authors relate a scenario of $5 and $6 billion worth of foreign investment

construction start-ups emanating from approvals of foreign investments exceeding $20

billion over a five year period. This compares to the $300 million of local investments.

The foreign investments were targeted to touristic and second home sectors which led

to a very robust construction. However,

8Davis, D., Rahming, H., Diggiss, M. and Manoo-Rahming, L. (2008) CIB W107 Construction in Developing Countries International Symposium, “Construction in Developing Countries: Procurement, Ethics and Technology”, 18-20 January 2008, Trinidad and Tobago, W.I. These authors include an architect, engineers and a senior public officer.

19

due to lack of skills and the lack of foresight of the Government in preparing the

workforce through technical and vocational training. (p.2)

The authors also speak to the government’s lack of support for training programmes.

Also, the authors suggest failings on the part of the government in enacting legislation

to regulate the professions. “to legally ensure that there is participation by the Bahamian

Professionals of the Built Environment, especially in the large scale projects.” (p.5)

This explains the non-specificity of language in the agreements as regards use of

professionals etc. This lack of thrust towards creating, supporting and sustaining

training initiatives is not reflective of a government serious about capturing spillovers

and forging business linkages with FDI.

Costs and Benefits

The OECD cautions against “wasteful strategies” (ibid, p.14). These are strategies that

are either ineffective or where benefits derived from the project do not outweigh costs of

incentives. This can only be measured where economic impact assessments or cost-

benefit analyses are conducted. These are not done in The Bahamas in assessing the

merits of investment projects.

The direct costs to the government are the concessions it grants to the investors. Each

of the agreements rewards the investor with concessions under the Hotels

Encouragement Act which includes exemption from stamp, import and export taxes on

equipment, machinery and materials used in the construction or refurbishment for the

project. Also included in the Act is exemption from Real Property tax for up to 20 years.

Exemptions under The Family Islands Economic Enterprise Zones Act, 2003 is provided

for in project B as well as exemption from import duties on petroleum products. Project

H includes exemptions under the Economic Development Act 2007. Benefits to the

government are in having the investors provide facilities for public use. The operators of

project B are also given permission to establish and maintain a port, in accordance with

the Customs Management Act. For the building the community centre and other public

areas and amenities, relevant materials and equipment are exempt from import duties

under the Customs Act as they represent gifts to the government. As regards, projects

D and E, the government agrees to build an airport in the settlements. For project D the

20

agreement obligates the government to repair and upgrade roads leading to the airport

while the government commits to having electricity available to the property.

Government’s assistance in marketing and promoting the developments are also part of

the agreements for projects A and E.

Additionally, appointment of a senior government official to oversee the project is

included only in project F. This will mean either hiring a new officer specifically for this

project or adding these duties to an already overwhelmed public officer. Also exclusive

to project F is the issuance of annual cruising permits for vessels docking in Bahamian

arenas. Normally, cruising permits are required each time a vessel enters Bahamian

waters. 50 year leases of government owned land is granted to projects G and H.

Project G’s lease involves islands and rocks that are to be left in their natural state.

Project H’s lease involves Salt Ponds which are to be dredged and Sea Beds for

construction. The payment for these leases is nominal.

It is estimated that customs and stamp duties on imports for construction materials and

furnishings would total around 50%. Foregone taxes can possibly exceed $700 million.

The relevant Real Property tax rate for projects reviewed in this paper is 2% with the

possibly of near $29 million tax revenue lost annually. It can be argued that without the

tax exemptions and derogations, the projects might not materialise but the opposite

argument can also be tested.

Initial infusions of foreign currency derived from FDI is of utmost importance along with

the foreign currency earnings during operations. With respect to the projects reviewed,

foreign currency is earned from tourist spending. The rationale must be then that once

the projects become operational, the short term lost tax revenues will be made up in the

long term by way of a stimulated economy and more tax revenue opportunities. It is not

possible to assess (quantify) in this paper how effective these agreements are from a

cost-benefit perspective. The Bahamas has used this model of attracting FDI for more

than three decades and over this period the country has run persistent budgetary and

concurrent account deficits. (Saunders, 2009) There is no reason to believe this will

change for these projects. Without the business linkages goods and services will

continue to be sourced mostly from abroad. This fact makes it quite uncertain how much

21

of the FDI results in actual capital inflows and even where goods are sourced locally,

because there is a dearth of industry, these locally sourced goods are likely to have

been imported! The pressure on the balance of payments is great and because of

import leakages, the investment multiplier is small. Another cost that might be

overlooked is the repatriation of profits that face no local taxes and are not re-invested

in the local economy.

Whether the incentives/concessions offered are efficient (maximising benefits and/or

minimising costs) or not is also difficult to measure for the purpose of this paper. As

regards the private construction of public places, the initial cost to the government is

zero. However, the cost of maintenance over the long term rests with the government

which will require additional tax revenues for this purpose. Further, by not using the

equivalence of tax revenues foregone in attracting FDI, perhaps the highest costs are

the opportunity costs of the government not investing to develop local industries and in

human capital development.

Employment

The benefits of the FDI in these agreements are associated principally with

employment, but other benefits include infrastructure upgrading and social

contributions. It is clear from the projects that the government seeks to extract as many

benefits as it can directly from the investor. This can be viewed as a substitute for

income and profit taxes. As regards employment table 3 shows that these projects are

expected to employ 3, 381 persons. The government agrees to provide approvals for

work permits for non-Bahamian staff where Bahamians do not hold the expertise or are

not available. Assuming an average wage of $3369

9 Occupations and Wages in the Hotel Industry, The Department of Statistics, Ministry of Finance, Nassau, Bahamas, 2003

per week, employment benefits to

the country have the potential to exceed $59 million annually.

22

Table 3: Value of Projects and Projected Employment

Project Value of Project $(millions)

Projected Employment

A 40 150 B 35 81 C 34 200 D 30 250 E 15 60 F 700 2,000 G 100 215 H 485 425

Total 1,439 3,381

Further, each of the agreements except A and E exhorts the engagement of Bahamian

professionals - musicians, entertainers, architects, engineers, etc. Project B refers to

musicians and entertainers and requires the use of Bahamians in minor marine repair

and maintenance. Included in project E is a reminder for the need to “involve a

Bahamian real estate agent” (p.6) in accordance with the Real Estate (Brokers and

Salesmen) Act. As discussed above, there is not much confidence that these urgings

bring about suitable employment levels. Leading entertainers continually complain

about the under-utilization of Bahamian entertainers in tourist resorts.10

Infrastructure

Additional benefits are in the form of construction of modern infrastructure. The

government has sought to ensure adequate infrastructure is built and maintained in the

developments, although no such provisions are included in agreement A. These clearly

have environmental implications as well. Incorporated into each agreement are

stipulations for:

• Sewerage system (projects B, C, D, F, G, H,)

10 See, The Bahama Journal, May 19th 2006, Kendea Jones reporting http://www.jonesbahamas.com/news/156/ARTICLE/8858/2006-05-19.html

23

• Desalination plant /reverse osmosis (projects B, C, D, F, G, H)

• Garbage disposal system (projects B, D, F, G)

• Standby generators (projects D, F, H)

• Laying of utility cables and pipe lines (C, E, F, G, H)

• Solid waste incinerator (projects G, H)

• Solid waste disposal and sewerage pump for marina (B, G)

• Construction and maintenance of roads (C, D, G, H)

In some cases developers are obliged to construct additional facilities to house

government offices and for example for project G the developer is to, “meet the initial

and ongoing cost of office accommodation, housing, salary, transportation and any

other expenses whatsoever associated with Government officials ... and the provision of

such additional education, health, environment, environmental health, police and

community related facilities as may reasonably be required.” (p.6) Similar requirements

are included in agreement B. A requirement in projects B and H is the construction of a

police station, fire station, and customs and immigration facility. Project F provides for

the investor constructing public dock facilities including dredging of the harbour, land

reclamation, public parking lot, a welcome centre, and restrooms (the reclaimed land

will be leased from the government “on nominal terms.”),

It would appear that the government is ensuring that investors bear the costs for some

of the public goods they receive. And where the newly built infrastructures connect with

communities, the benefits are enhanced.

Social Contributions

Recognising limitations for housing in relevant communities, in some cases, the

government has required the developer to construct housing for construction workers

(project H). Further, projects C, F, and H contain provisions for the developer to make

social contributions as shown in table 4.

24

Table 4: Description of Social Projects

Project C: construction of a community centre, a park/playground, a basketball park, a softball field, a 400 metre track, beach facilities and covered pavilion, public facilities and picnic area on an outlying cay.

Project F: make golf course available to the Bahamas Golf Federation and Bahamas Junior Golf Federation for scheduled events.

Project H: the developer contracts to “cause to be established” a day care, an Institute of Hospitality, an Artists Residence, Music and Video Production Centre, an Institute of Caribbean Music, Amphitheatre and Institute for Sustainable Living. Additionally, the developer is to follow a ‘proposed Marina Policy’ (not yet completed); join the Bahamas Hotel Association, and the Bahama Out Island Promotion Board; provide infrastructure for the subdivision, a public park, a clinic to be operated by the Ministry of Health; and public dock facilities.

Undoubtedly these are valuable benefits which in some cases, are supplemented by

requirements for the developer to contribute to education and training.

The agreements except B and G require the investor “to implement during the

operational phase of the project multi-disciplinary on-the-job technical skills-training and

apprenticeship programs designed to equip Bahamian employees with the level of

technical proficiency necessary.” This is to be done by liaising or in collaboration with

the Ministry responsible for education and training, local national education and training

institutions and programmes. For project C, “provide training for its Bahamian

employees at similar projects and developments of the Developer or affiliated/subsidiary

companies”. (p.11) For project F, “render assistance towards the capital and curriculum

development of the School of Hospitality at The College of The Bahamas and/or the

Bahamas Technical and Vocational Institute”. (p.12) Project D also has a provision to

render assistance to the development of the School of Hospitality. For project E, the

investor agrees to cooperate and “provide reasonable assistance to encourage the

development of highly skilled personnel and other vocational and technical training

required to the hospitality industry”. (p.6)

The value of these benefits, in some instances cannot be quantified, but as is

suggested by the OECD ex post and ex ante evaluations are possible to review

completion of these direct benefit activities, quality and usage in order to have some

25

valuation of the benefits to the communities. No such evaluations are incorporated in

the agreements. Where measurement is possible, there is no stipulation in these

agreements as to specific amounts to be spent or percent of budgets to be allocated for

example, to fulfil for example, educational and training obligations. The number of

employed Bahamians are projected and not specified even as to a minimum number.

Implications for Development

Development can have varied meanings but underlying all must be building a country’s

internal capacity to better (sustainably) exploit physical and human resources for the

benefit of its citizens. The requirement for investors to assist in social developmental

(education and training) activities infers a low level of government capacity to deliver the

education and training needed for workers to benefit from the FDI. This is particularly so

in the Family Island communities. This derives in part from a narrow tax base which is

narrowed even further with tax exemption and tax derogation incentives! It is a

questionable policy that relies on outside investors to perform social and public good

functions especially as in these agreements where no specifics are given.

Clearly there is no development plan or agenda which the government is following.

Such imprecise ‘requirements’ are likely to lead to imprecise results. Further, these

HOAs reveal a government that is not striving to develop its people for greater self-

reliance or a sustainable economy. It is in fact fostering greater and greater

dependence, as local professionals and businesses are crowded out. As the

government signs more of these foreign investment agreements in the absence of

attention to local human capital development it is in fact under-developing the local

economy. Saunders (2007) suggests a divide between the ‘foreign economy’ and the

‘Bahamian economy’ where the former is dominant and rising and the latter is

subordinate and shrinking.

One troubling aspect of the agreements relate to penalties for non-performance

particularly as regard implications for development. Projects B and G do not outline any

provisions for delays or non-performance. Where there are delays due to hold-ups in

granting of permits by the government, extensions for performance are provided for in

project A, C, D, and E. Extensions will also be given for project A for unavailability of

26

labour or economic recession. Where provisions are made for delays and where there is

non-performance, the government is to reduce concessions and further for projects C

and F termination of agreement. Project H only addresses the possibility of termination

by either party in the event of default by the other party. There is no effective penalty

therefore for non-performance even if concessions have been used or if the government

has fulfilled its obligations.

In describing foreign investment strategies of Trinidad and Tobago in the early 1970s,

Barclay (2004) speaks to the domination of foreign investment in the manufacturing

sector while “the government made little attempt to augment the modest managerial and

technology capabilities of domestic firms” (p.489). While this strategy shifted not much

was done in “formulating and implementing functional and selective intervention

policies”. This reflects the Bahamian condition. It is evident that local technological

capabilities and know-how have not advanced meaningfully over the years relative to

the high levels of FDI. Training and workforce development have been more in line with

specific needs of the investor as the government has taken a much too passive and

non-focussed role.

Conclusion

The views on FDI as discussed in the literature review are polarized: from advocates of

FDI who see it as a major development promoter, to those who demonstrate negative

effects of FDI on developing/emerging countries. This paper used the case study of The

Bahamas and eight FDI agreements to evaluate the impact on the country.

The Bahamas has a significant number of legislations designed to promote and regulate

FDI in the country. Legislation however, is necessary but not sufficient to guarantee

favourable FDI effects. The Bahamas as a small, open and developing/emerging

country has its door open for FDI. Its political stability, democratic system based on

English law, combined with stable currency, free trade, and tax free regime are

attractive inducements for the foreign investors. These incentives have been successful

in attracting foreign capital. However, effects of FDI on the local economy are not

necessarily positive. These policies have created a dual economy: “foreign economy”

27

and the “Bahamian economy”, where the former is dominant and rising and the latter is

subordinate and shrinking.

The “foreign economy” is operating under advantageous condition (none or reduced

taxes; limited obligation toward social, environment and national heritage protection). Its

effect on employment is under the potential level due to the fact that foreign investors

can always rationalise the use of foreign labour and the government’s willingness to

accommodate them. The government is not forceful enough in demanding more local

content in the sourcing of goods and services. Further, the government is not

convincingly providing purposeful education and training of the local people, nor

ensuring the maximum use of local professionals.

Possible benefits from ‘spillovers’ have been negligible. Although major FDI is in

tourism, this industry has not led to parallel growth in local business development in

manufacturing, agriculture, fisheries nor other areas related to tourism. Even though,

the Bahamas has a comparative advantage in tourism, the persistent current account

deficits indicated insufficient FDI links to local business. Tax free benefits for FDI

severely hampers government revenues. More positive effects were found in the area of

infrastructure and social contributions. Overall, role and effects of FDI on the Bahamas

and its economy are mixed. FDI is not helping development of the local business, nor

does it contribute significantly to the government’s budget. FDI has had a limiting effect

on local ownership in tourism and financial sector. Partially it does assist in training.

The role of the Bahamian government in stimulating FDI is positive. However, its role in

stimulating meaningful development is less favourable. Its policies have fostered a dual

economy. This is polarizing the society, and can in the long run jeopardize FDI. A

broad-based development agenda is recommended. This can lead to more serious and

directed role of government in education, training, and support of local professionals,

protection of environment and national heritage and enforcements of laws that

maximises the benefits of FDI.

28

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