Diversifying the Cayman economy

The Chamber of Commerce has, in a meeting with the government, made clear that it opposes any additional revenue measures without a definitive plan to cut costs and reduce debt. The Chamber also rejected any additional corporate or other form of tax on income, interbank transactions, payroll or property.

Seeking revenue – potential new sources for government finances
Many ideas have been floated about how the Cayman Island Government should widen its revenue base to deal with the budget deficit. In addition to property or payroll taxes as suggested by the UK Foreign Office and the increase of already existing fees and charges, several so far untested potential sources of government income and ideas for developing new business are now being contemplated.

For Cayman’s large infrastructure projects, such as schools, cargo docks or marinas, the government proposed private financing initiatives. These would not increase revenue but reduce borrowing requirements and free up liquidity.  Other proposals, such as the introduction of legalised gambling or the liberalisation of trading hours, would have to overcome some adversity, but may have become more acceptable in light of the financial crisis.

Privatisation
The Chamber of Commerce has, in a meeting with the government, made clear that it opposes any additional revenue measures without a definitive plan to cut costs and reduce debt. The Chamber also rejected any additional corporate or other form of tax on income, interbank transactions, payroll or property.

In order to reduce government debt, the Chamber recommended the identification of assets that can either be sold outright or offered for investment through privatisation or the issuance of an initial public offering. By using this approach, residents and businesses could become direct shareholders of important national assets and government would reduce its direct operational costs.

The government controls and, if necessary, funds several entities that are not part of its core activity, including the Turtle Farm, the Water Authority and Cayman Airways. The Turtle Farm and Cayman Airways in particular have made significantly losses in recent years and relied on government funding. The government also explicitly guarantees a portion of the debt issued by these entities.

In addition to controlling costs and reducing the national debt, the Chamber urged the government to raise revenue from areas that would have minimal impact on business development and residents.

Private financing initiatives
One of the ways suggested by the government to deal with the financial strain is to seek private financing initiatives.

PFIs are the most frequent form of public private partnership. They tend to involve specific infrastructure projects within the domain of public services, for example the construction and maintenance of schools. They could also be applied to the construction of cruise ship or cargo docks or sewerage systems, which are currently under discussion in the Cayman Islands.

There are many different ways of structuring a PFI, but almost all involve the phases of design, financing, building and operating the project. In a public finance initiative the government or public services authority makes an annual payment for the use of the asset to a private company, which in return provides construction and maintenance services.  Typically PFI projects will be owned by a company that is specifically created to run the scheme and combines the interests of the financial, construction and management firms involved. Depending on the structure of the PFI, the government will own the asset (eg the school) at the end of the agreement.

Costs
A PFI is only worthwhile, if it compares favourably to the alternative of the project being financed and managed entirely by the government, which, in the case of a school project, would simply procure a private company to build the school.

PFI contracts generally last for a long time of 25 to 35 years. Ultimately, the government will pay for the entire project, including construction and management costs, even in a PFI. The main difference compared to traditional financing is that in a private financing initiative the private company will raise the necessary funds from bank loans and shareholders and repay the funds with interest from management fees paid by the public authority over the life of the contract.

In privately-financed school schemes in the UK it was found that PFIs were more expensive in the construction and in terms of the running costs compared to public projects.

PFIs are often more expensive than public service projects for several reasons:

Generally governments will be able to borrow money at cheaper rates than private companies and public service authorities also do not require a profit, which in turn would be incorporated into the PFI management fee.

PFI set-up costs are also higher as the services of lawyers and consultants are required to negotiate and draft the public private partnership agreement.
Another risk is that, like in conventional construction projects, project costs of PFIs may overrun. If a PFI becomes underfunded or runs into other difficulties, the government may have little choice but to jump in and take over the project to be able to provide the needed services, such as education.
There is also a danger that the service provided may not be as effective, as the private operator will always seek to optimise profits, at times, at the cost of the service.

Finally, the electorate has no means of influencing the project over the long life of the contract.

Reduces debt burden
However, on the benefits side PFIs transfer construction risks related to the project, which can be a major factor in a region affected by hurricanes.
They are also a suitable instrument to ensure the provision of services that are not a core part of government activity. In these cases the private management of a project is often more efficient than the public management. This potentially outweighs the higher PFI set-up and funding costs.
Another important reason for the use of PFIs is that it frees up public funds and reduces the volume of public debt. The fact that a government may be restricted in the amount it can borrow, could mean that large infrastructure projects can only be achieved through PFIs or not at all.
Whether it is possible to transform already commenced construction projects, such as John Gray High School, Clifton Hunter High School or the new government building, into PFIs is doubtful, as it would depend on the willingness and ability of the contractors to bring in partners and secure financing.

National lottery
During this year’s election campaign several candidates raised the issue of introducing a national lottery. From a revenue portfolio perspective, lottery revenues are useful because they are generally uncorrelated with other revenue sources.

Former legislator Gilbert McLean said a national lottery would not only bring in additional revenue for education and public health services, but it would also curb the illegal numbers game practised on the Island. Candidate Walling Whittaker also proposed a lottery as an additional revenue source, giving US states as an example for the successful introduction of lotteries to finance education and other capital–intensive initiatives.

However, the proposal has in the past met resistance from opponents citing moral and ethical objections. When the Leader of Government Business McKeeva Bush, during his previous term in office in 2003, announced he would press Cabinet for a national lottery, the Cayman Ministers’ Association outcry over the issue caused him to reverse his stance just six weeks later.

Another criticism levelled against a national lottery is that it would not produce the expected levels of funding for government projects.

In the US, lotteries are considered to be one of the largest services produced by state governments. US state lotteries on average generated proceeds of US$65.5 million per capita according to the last available US census data from 2005. 

Applied to Cayman’s population of 55,000 this would result in just under CI$3 million additional revenue.  It is therefore clear that even if a lottery would prove more popular in Cayman than in the US, the income generated from it would be relatively small.

In addition the administrative costs for a national lottery may well be higher in the Cayman Islands as economies of scale are lower.

Gambling
The administrative costs could be minimised if a national lottery was part of a wider liberalisation of gambling in Cayman. Gambling is illegal in the Cayman Islands and a change to the law would be required to introduce gambling as a potential source of government revenue. Gambling and gaming revenues could be generated either on island through casinos and casino licences or derived from the licensing of remote online gambling firms.

The Bahamas has supported legalised developments of tourism resort-based casinos to enhance its overall tourism product. Casinos in the Bahamas pay up to $200,000 in basic taxes and up to 25 per cent on their gross winnings in taxes. Over the years direct government revenue from casinos ranged between US$18 million and US$23 million.

Gibraltar and Malta are two examples of islands that have successfully attracted gaming companies to their shores. Gibraltar started to offer licences to online gaming sites in 1998 and licenses online casinos and betting exchanges. Gibraltar only licenses operators with a proven track record and demands rigorous software testing as part of the licensing process. The country generates revenue through an annual licence fee of £2,000 and a tax of 1 per cent on fixed-odds, betting exchange operations and Internet casinos. The maximum payable amount under the gaming tax is capped at £425,000 per year, with a minimum payable annual tax of £85,000. Gibraltar has 20 licensed operators.

Malta began licensing online gambling sites in 2000 and raises gaming revenue through licence fees and a gaming tax of 0.5 per cent of turnover. The industry generates an income of over 10 million euros for the country each year.

It must be remembered, however, that the licensing of gambling would have to come with a robust regulatory, supervisory and compliance framework that will cost significant sums to set up and to maintain.

Cruise ship gambling
As gambling is illegal in the Cayman Islands, cruise ships must also close their casinos while in Cayman waters. Cruise operators and the Cayman Islands Tourism Association have requested a change to the practice, arguing that cruise ships would stay longer, if they were allowed to open their onboard services including gambling.

“The primary purpose of this is to enable ships to stay longer and for them to be able to offer ‘over night’ ports of call,” said Stephen Broadbelt, president of the private sector tourism organisation.  This would translate into more money spent in Cayman, while cruise ships are in town.

Bush agreed that he would like to see the ships stay in port longer, but stated that allowing gambling on cruise ships in George Town Harbour is a decision that has to be based on the consensus of the people in Cayman, not just him alone.

A change to the law to allow cruise ship gambling for cruise ship passengers only might face less resistance than the outright introduction of legalised gambling in Cayman.

Sunday trading  
Similarly to the national lottery and gambling ideas, proposals to change the Sunday Trading Law have been met with resistance from Christian ministers and church groups in the past. The application of the Sunday Trading Law is far from being consistent, with gas stations and restaurants allowed to open, whereas grocery stores and shops have to remain shut. Most tourism–related businesses in downtown George Town are closed on Sundays, except on the rare occasions when cruise ships arrive on a Sunday.

Sunday trading would potentially allow the increase of spending by tourists and provide greater convenience for visitors and residents. The results of a Chamber of Commerce web survey on Sunday trading showed that a large majority of Cayman residents want businesses to have the option of opening on Sundays. However, the commercial benefits would not apply to all businesses and some resistance remains from merchants. In the same survey only 44 per cent of the merchants stated they would not open on Sunday, even if they were allowed to.

Another effort to extend opportunities for both tourists and locals to spend more money in the local economy has been raised with regard to daylight savings time. The Cayman Islands does not observe daylight savings hours. Some business owners say they would benefit from introducing a change; specifically business owners in George Town believe that a switch to daylight savings time would provide tourists with an extra hour to shop or eat out, if cruise ships were to stay longer as result. 

It is evident that no single measure by itself will significantly improve government finances, but that, short of introducing direct taxation, many novel approaches to new business development must be considered. The Chamber supports government plans for the development of cruise berthing and a mega yacht facility and the relocation of the cargo facilities. In order to generate future business the Chamber has also suggested the development of medical tourism and convention facilities, a waterfront redevelopment in George Town as well as attracting the reinsurance sector and additional private trust business. A fee on individual money transfers out of the country and a charge on retail bank accounts that have been dormant for five years or more should also be investigated.

 

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