Bahamas Needs A Great Moderniser

by Larry Smith

Listening to political leaders and financial experts these days can give you the creeps. That's because they all give the impression that we are in for a serious economic crunch - when the chips will be down and the chickens will finally come home to roost.

Inter-American Development Bank Chief Luis Alberto Moreno says regional economies have under-invested in infrastructure for years, curbing economic growth in the process. To catch up, we will have to more than double our spending on capital works, and keep spending at that level for a long, long time.

"(Caribbean states) need to spend between 4 and 7 per cent of GDP per year for the next two decades in order to have high-quality infrastructure that can become the backbone of development," Moreno said, in his economic outlook for 2008. That translates into hundreds of millions a year for us.

Of course, the IDB is in the business of financing infrastructure - they loaned out almost $10 billion to regional governments and businesses last year - so maybe we should expect Moreno to be saying that. But he is not alone.

With the Bahamas likely unable to withstand a major economic downturn, Colina Financial Advisors says our leaders must take some bold and difficult steps in terms of governance, education reform, economic restructuring and infrastructural improvement.

And at a recent conference, KPMG managing partner Simon Townend echoed the call for structural reform, saying we must invest at least $2 billion in transport, health, education and other sectors to remain competitive. Both Colina and KPMG argued that the Bahamas should develop a national strategic plan with an agreed vision and aggressive targets.

Infrastructure plays a critical role in every aspect of development. It dictates how we move the people and goods that help keep an economy alive. And most would agree that we need to invest much more than the $225 million the government has allocated this year on capital projects.

The big ticket items waiting in the wings include $500 million for airports; $200 million for roads; $200 million for ports; $500 million for schools and hospitals; and multiple millions more for new power plants, fresh water supply and renewing Nassau's sewerage system.

But without a strategic plan there is a danger that we may invest in the infrastructure we have instead of the infrastructure we will need. And at the end of the day that means we may not get the anticipated payoff.

In the Bahamas, public funding of infrastructure has been severely constrained by the fact that the country has few taxes and a huge national debt, running at 38 per cent of Gross Domestic Product in 2006. Our total GDP today is about $6 billion - that's the market value of everything we produce in a year.

Just to reach the per capita income enjoyed by the Cayman Islands right now ($40,000), we need to grow our economy by 10 per cent annually for the next eight years - as Cuba is doing. But this is surely an impossible task unless we modernise the way the country operates and invest heavily in strategic imperatives.

It is a vicious circle. Tourism accounts for two thirds of our economy, and it is weakening as we speak. Growth rates for tourist arrivals over the last five years show the Bahamas at the bottom of a list that includes Florida, the Dominican Republic, Cuba, Barbados and Jamaica. We had 13,000 hotel rooms in 1983, and we have only 15,000 today - a quarter century later. One reason for this relative decline is not enough investment in infrastructure

In his mid-term budget, Prime Minister Hubert Ingraham said he was working to eliminate the recurrent deficit - the government's operating expenses - in order to bring the national debt down a couple of notches to under 35 per cent of GDP.

"We recognize this as an essential requirement in preserving the competitiveness and economic viability of our country," the prime minister said. "A country with a high level of government debt has very little room to manoeuvre if the economic environment deteriorates and revenues fall. This is because the government has either to reduce expenditure on vital services or raise additional taxation because borrowing is not available."

Ingraham shuffled some money around to beef up spending on tourism, housing, medical supplies, schools, the police and public corporations. Almost half of this extra spending will go towards shoring up "deficit-generating public sector entities...(meaning) that many priority projects may be denied resources because additional funds must be advanced to the loss-making entities. This is an unsustainable situation which must be addressed."

He added that cash-guzzling state companies like the Broadcasting Corporation, Bahamasair and Water & Sewerage would have to cut back because no more money would be allocated for recurrent expenditure - only for necessary capital works.

“"At least 20 per cent of the monies borrowed by the government under the disguise of capital expenditure will continue to be transferred and pumped into these entities to pay operational expenses, such as salaries, office supplies, gasoline, and whatever. And then we burden the taxpayers of the Bahamas for 20-30 years to pay that money back."

And that is the nub of this whole issue. The country has a serious infrastructure deficit - large backlogs of needed work on existing systems, together with new demands that go unmet. Meanwhile, scarce public funds are being poured into dysfunctional state corporations that provide very little public value.

There are really only three options here. Business as usual - continuing to waste our tax dollars on non-essential goods. Drastic cutbacks in services and manpower to realistic spending levels. Or gaining value by selling off non-performing state assets. This is something that has been talked about at length but rarely achieved in the Bahamas.

Worldwide, the results of privatisation have not always been good. In Russia, for example, the collapse of the Soviet Union led to a scramble for wealth and power. The greed of the so-called oligarchs discredited the free market and paved the way for the ex-KGB agent Validimir Putin, who restored statism and curbed the push towards political freedom.

But where it has been handled properly, privatisation has worked well. In the United States, state and local governments have cut spending by up to 40 per cent, often with big improvements in efficiency. The most common approach is to contract out public services to private firms. Another way is commercialisation - where the government simply decides to stop providing a service - like garbage collection. Citizens themselves then contract private providers.

State assets can also be privatised by a sale to a private entity or through a public stock offering. Or vouchers can be issued for redemption in the marketplace, giving recipients choices where they had none before.

Perhaps the best-known privateer was former British prime minister Margaret Thatcher, who overturned decades of state control, selling off major airports, more than a million public houses (the live-in kind), and all the large utilities - and in the process taking Britain from 19th to second in the OECD economic rankings.

As an old socialist, I have a genuine appreciation for what Thatcher did in Britain. And it led the old socialist British Labour Party to abandon its religious commitment to public ownership - a commitment that the political elites of former British colonies like the Bahamas still share.

Recently, economist Larry Reed, president of the Mackinaw Centre for Public Policy in Michigan gave a lecture hosted by the Nassau institute. He pointed out that before Thatcher began her revolution, "the bitter harvest of statism was everywhere apparent: in bloated bureaucracies, in crushing tax burdens, and in frightening burdens of debts and deficits."

We haven't got to the point of crushing taxation yet, but if you read between the lines of the prime minister's mid-term budget address we may soon have to face some hard decisions. Electricity and water rate increases are on the way, and there have been calls for an income tax as well as more payroll taxes.

In the meantime, government planners are still happily investing in infrastructure that was designed a century ago. For example, more conventional oil-fired power plants are on the way for Nassau, Abaco and Eleuthera at great cost. Yet such systems were designed for a world without climate change or resource scarcity. These plants are out-dated and out of touch with the realities of our century. And the likelihood is that in 10 to 20 years we won't be able to afford the oil to run them.

Unlike Marxism. which proved to be unworkable time and again in the 20th century, the free market is grounded in profound truths about the nature of human beings. The evidence is right before our eyes in the Bahamas. As Larry reed said, "Tie up the performance of a task with red tape, bureaucracy and politics, within a system that is guaranteed to exist regardless of outcomes, and the result is usually mediocrity at great expense."

So here's a quick test for you. Name one state enterprise in the Bahamas that operates at a level similar to private enterprise. And then consider that those same state entities consume over a billion dollars a year.

Changing the way we think and behave in these matters requires strong leadership and political conviction. And our most fundamental long-term challenge is not a broken economy, but a broken society. - arguably the consequence of years of failed state planning and the denial of social responsibility. It has led to falling school standards, a high rate of family breakdown, and an endemic crime problem.

What the Bahamas needs today is a great moderniser determined to overturn the conventional wisdom which holds that our decline is irreversible.

Comments

[Rick]

Excellent commentary Larry.
Privatisation inititives are long overdue for The Bahamas.
One point to take issue with and that is the growth rate in Cuba.
These numbers are not verified by any international authority so I don't think we can really use them as a benchmark.
I do understand your point that economic growth is important however.
Keep up the good work.

[drew Roberts]

May be relevant / interesting:

http://data.un.org/

UN Makes Its Statistical Data Free and Searchable

all the best,

drew

http://zotzbro.blogspot.com/
Wild Idea - Opt In Income Tax For The Bahamas?

[Rick]

Thanks Drew:
But are they audited.
Cuba reports their GDP numbers but no authority checks them as the IMF does with us for example.
I stand to be corrected.

[Geoff Treco]

I read your column regularly and find it very informative. However, I must say that this one is very good.

Will we find the political will to rid ourselves of the loss-making public enterprises? I hope we do. Maybe Mr.Ingraham is laying the groundwork for this by exposing the losses in his mid-year budget--it gives the public an opportunity to see the effect on the nation's budget and finances, particularly as we borrow to pay operational expenses.

Personally I see no ill effect to disbanding Bahamasair. Certainly workers can receive adequate severance, and that will be a one-time expense as opposed to the perpetual and ever increasing losses.

A proper licensing regime put in place before this happens will allow private companies to take up the slack.

With regards to existing infrastruture and its sad state, I fear that the government may undertake too much in an effort to catch up. That is, take on too much debt.

I am worried that the politicians like to talk about large projects and how these projects will "save" us. We should have a list of priorities (I am sure it exists somewhere) underpinned by a national development plan that would point the way to public investment in a controlled and orderly manner with due consideration to the current state of the public finances.

In this same vein, I support a move to Arawak cay for the shipping companies as opposed to the construction of a new port in SW New Providence - a cost of $250M plus as opposed to a significantly smaller sum.

We can digest the former rather easily. A privately funded project at Arawak Cay as opposed to the public one at SW Point.

Government's thinking going forward should be "how can we involve the private sector to help plan and finance the projects we believe are necessary".

The answer to this question may mean that where there is no support from the private sector,the planned project is not feasible and should not be undertaken.

[drew Roberts]

Hey Rick,

My post was of a general nature and not in response to yours in any way.

all the best,

drew
http://zotzbro.blogspot.com/

[Willie]

Excellent article!
The timing is perfect for real 'Privatization". A slowing economic environment and growing pressure to make major changes. Just sell them off totally. Don't try to take a 'golden share' approach for political purposes. Don't handcuff buyers. Don't worry about employees. If they're good, they will remain employed and probably promoted. Try to outsource/sell/privatize all government services.
Concentrate expenditures on education, police and health.
By the way, get rid of all government cars for MP's, judges, etc. The PM should get a car and driver and that's it. It's a bloody waste of the people's money for a show of status. They can take a jitney or walk and rub shoulders with real people. They live in a fantasy world that we can't afford.

[EB Christen]

@Larry
Great article. I couldn't agree with you more. I liked that you cited Cuba's growth as well. It is important that we open our eyes to the very real problem that Cuba presents to our tourism industry. They are currently doing things better on the tourism front and are reaping the rewards. We could learn a lot from them on this front. Bahamians have some hard choices to make over the next few years and we don't seem to have the political will to make them.