“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. Most Bermudians are hurting and are looking for some guidance and relief. The following information is an honest look at Bermuda’s economy and it is designed to educate you, the public, in making informed decisions about where we are, how we got here and what we need to do in order to make Bermuda the viable economy it used to be.What is happening…lBusinesses are closing or laying off peoplelRapid decline in jobslIncrease in homes for sale and empty rental propertieslA growing number of people cannot pay mortgages and other billslCharitable donations are on the declinel Rapid decrease in money for travel, school fees, medication, etc.l Rapid decrease in money for public infrastructure improvementsl Dividends & profits from businesses have declined considerablyl Civil servant pension funds are underfunded by 65.8 percentlCrime is on the increaselMoney for maintenance of public services buses, ferries, etc. has decreasedl Money for renovation of commercial properties has decreasedlHome foreclosures are increasinglTourism income is decliningl International Business is relocating to other jurisdictionslRisk of downgrading of the countryWhy is this happening?Two Pillar Economy: Bermuda has two pillars to its economy:lInternational BusinesslTourismThese sectors are what earn us our foreign currency exchange which is the US dollars that are earned by Bermuda and is 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 percent of our economy, generating foreign exchange earnings of over $1.9b in 2010.Tourism represents 4 percent of our GDP and generated only $384m in 2010.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 WorkforceThere are approximately 64,186 residents in Bermuda of whom approximately 50,533 are Bermudian.As a result of past experience, in order to maintain a viable national economy, the national workforce (NWF) count must be a minimum of 40,000.At 40,000 NWF count, Bermudians comprise approximately 27,000 and non-Bermudians approximately 13,000.In 2011 the NWF is dropping below 37,000 and we are unsure of the figure for 2012. Therefore, we have already dropped below a number that maintains the basic viability of our economy.The population of 50,533 Bermudians includes:- Men- Women- Children- Retired Seniors- Physically challenged- Mentally challengedOur birthrate has been steadily decreasing with only 572 Bermudian babies being born in 2006. Our ageing population has been increasing.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. In 2009 and 2010, guest worker manpower declined by an average of 4.5 percent each year and it continues to decline in 2011.What we need to do is to increase the employment level to 40,000 from its current and decreasing level of about 37,000. Since there is a limited 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 standard of living that Bermudians now see in jeopardy.Government’s financial positionAssuming that Government can collect all funds due to it, 71 percent of Government’s current revenue goes to service payroll, personnel costs and debt. This compares to 48 percent in 2002/03 and before.Revenue: $977.2mDebt service andPersonnel costs: $692.8m (71% of revenue)Left for all other services: $284.4m(These figures are extracted from 2009/10 Financial Statements of the Consolidated Fund and from the Budget Statement of 2011. The figures do not include the servicing of the $200 million Loan Facility taken up in June of this year.)The residual of $284.4m is what is left to use for maintenance of all public services, consultancy services, shortfalls in other revenue generating areas and planned capital expenditures.With the increase in civil servants, debt borrowing, decrease in revenue, and Government’s current budgeted debt commitment of $262,000 per day, according to the Auditor General, this residual will not be enough for Government to meet its commitments.In February 2011, $95,800,000 was budgeted for interest payments plus Sinking Fund contribution for fiscal year 2011/12. When the $200m is fully taken up, this will add about $16m to this year’s budgeted debt service costs which will then increase to about $111.8m per year or $306,000 a day.National Financial PositionGovernment’s accumulated debt including obligations to underfunded pension funds and other Government controlled entities is $4.6 billion.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.If we take all of the financial commitments that are owed both by the private and public sectors:4 Each Bermudian (every man, woman and child population 50,533) has approximately $193,900 worth of commitments owing to Bermuda’s economy(Government debt is payable by taxes collected from the general public therefore it has to be considered as owing by each Bermudian.)The graph (below) shows the Government’s revenue, spending, national debt and the national debt service cost.Between 2000/01 to 2009/10:n Government revenue rose 47% (from $623m to $917m)n Government spending rose 93% ($582m to $1.12b)sn National debt rose over 700% (from $138m to $969m)n Annual debt service costs rose over 230% (from $15m to $35m*). It is expected to rise 745% by mid-2012*Full debt service cost is made up of interest payments + 2.5% Sinking Fund contribution. The figure of $1.7m (found on the graph) for this period from Government is an anomaly and does not give an accurate assessment due to Government delaying the contribution to the Sinking Fund (sum set apart periodically from the income of a government or a business and allowed to accumulate in order ultimately to pay off a debt) as well as interest on long-term debt being paid from the Sinking Fund for that period.In order to get a balanced view of the debt service cost, the Auditor General’s figure was used.The preceding was prepared to provide you with general information. In organising this report, we have used figures provided by Ministry of Finance, Auditor General’s reports and Department of Statistics.Recommendations on 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 constraint 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.The following recommendations 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 GDP, reduce our necessity for borrowing and provide jobs, rent and dividends in the private sector.Airport►Increase air traffic flow through our airport to retain US Pre-Customs clearance►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► Improve the private jet facilities and proceduresCity of Hamiltonl Development of the Waterfront to include:►Convention/Entertainment Centre►Casino►Restaurants►Retail shopslAllow high end retail shops managed, financed and owned by non-BermudianslExtend the city limits to allow for the development of high rise condos by International Business for “key” employees. This would be the only area this would occur which would help keep congestion out of the rest of the IslandEconomic ZoneslLook at making the following economic zones►Dockyard including Ireland Island►SouthsideEnvironmentl Give tax incentives to people who import and utilise environmentally friendly products/servicesFinancial Servicesl Initiate legislative reform to encourage trust companies, non-retail banking and fund management to establish hereHigh Net Worth Individualsl Provide permanent residency and/or domicile statuslAllow private possessions and assets to be imported without dutyl Reduce property purchase tax to ½ its current assessmentl Allow for approval in principle to bring “key” employees, both professional and domestic, with themInfrastructure ProjectslInfrastructure projects such as Waterfront, Airport and any other revenue generating project could be allowed to be privatised (majority ownership by non-Bermudians) which must be listed on the Bermuda Stock Exchange (BSX) or should be private/public structureslProjects 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 AirportInternational BusinesslMake it easier, more efficient and welcoming to do business in Bermuda. Bermuda has to realise the competitive environment is different and cannot do business on its own terms we have to adjust to our customer’s needs and wantslRemove the 60/40 rulel Any public utilities or broad service organisations that impact the general Bermuda public which are exempt from 60/40 should be listed on the BSXProperty OwnershiplRelax ownership restrictions on married couples where only one is the Bermudian. Purchase of the 1st property would not require government approvall Lift ownership restrictions on PRC holders to allow for the purchase of one propertyl Liberalise immigration policy to allow for Bermudians to sell to non-Bermudians where property is above a set ARVl Change condo ownership policy to allow Bermudians to sell to non-Bermudians where property is above a set ARVl Restrict land ownership of companies after 60/40 removal to:l Major Infrastructural Projects: 100% foreign ownership of the facility with long term leasehold on the land. Company must be listed on the BSXl 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 BSXl Commercial/Retail Business: Foreign management with Bermudians retaining real estateStatus/Residencyl Grant Bermudian status to a limited number who:nhave lived in Bermuda for a minimum of 10 years andn demonstrate that their continued presence would enhance the employment opportunities and skills of Bermudiansn Open residency rights to a wider qualifying groupTourismlReintroduce local entertainment into the hotelslWe also need to market Bermuda as a:►Diving destination►Fishing destination►Historical destinationl A tax holiday should be given to any investors/developers who have approval for a project to begin in the next two years or a project with existing approval and a determined completion datel To encourage the development of new properties, a pre-established incentive package should be drawn up so that developers know exactly what they are getting and avoid frustration during the negotiation phase. Some of the incentives could include:►Free payroll tax►Import duty relief►Free licensing feeslEstablish a fund for the purpose of promoting tourist establishments that wish to participate. The fund would be supplied by equal contributions from the Hotel Occupancy Tax, the Tourism budget and matched in total by the individual establishment. Government would have oversight over the expenditure of the fund.TaxeslDecrease taxes on sale of fractional unitsl End senior benefits such as free land tax above a set ARVlEnd senior benefits of free car licencel End senior benefits of free car registration above a set vehicle classl 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 annumlOffer a two year payroll tax holiday for:►new international or local business which hires Bermudian employees► new Bermudian employees hired by existing businessesl Remove tax on boats and increase mooring fees to enable Bermuda to become an international boating centreTelecommunicationsBermuda should free up the telecommunications market to maximise new opportunities in technology and minimise cost as a result of competitionWork Permitsl 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 periodl If someone is “key” and is moving to Bermuda, consider granting their corporate and/or domestic employee a permit in concert with the “key” employeelRemove term limits on work permitsAre 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.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[AT]challengerbanks.bm or visit us on Regeneration of Bermuda’s Economy.Many thanks to the several members of the local and international Bermuda business community who made submissions in response to the question, “What can the Private Sector do to kick start the economy with Government only being called upon to change policy and legislation and not make any expenditure?” The majority of their views in response to the question are expressed in this document. Special thanks to Larry Burchall who provided the financial statistics included here.