By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas may have to release the government’s stranglehold over the foreign investment approvals process in return for higher tariffs that protect domestic producers under WTO.

Authors of the Oxford Economics study on how full World Trade Organisation (WTO) membership will likely impact the Bahamian economy, which was released yesterday, told Tribune Business that the current regime was “not going to fly” with other countries in a rules-based, liberalised trading environment.

But Ramesh Chaitoo, one of the co-authors, said such a tariff “trade-off” could ultimately boost the Bahamian economy by removing an “opaque” approvals process that likely deters some investors due to the lack of transparency.

Describing The Bahamas’ foreign investment approvals process as “unlike any country in the Western Hemisphere”, the trade policy specialist nevertheless indicated that reducing government control could be a relatively easy concession to make in WTO negotiations if it was required to protect local manufacturers and farmers.

“As you well know, it is not really clear what the terms of engagement are in The Bahamas in any sector,” Mr Chaitoo said, apart from those industries currently reserved for Bahamian ownership only under the National Investment Policy.

While foreign investors always expected to encounter “upfront costs” when entering any overseas market, he said those coming to The Bahamas could never be sure whether their projects will ultimately be approved by the National Economic Council (NEC) or Investments Board because the “rules of the game” are not clearly defined.

“It’s unlike any country in the Western Hemisphere that the government decides what investment will be here,” Mr Chaitoo told Tribune Business. “Market forces do that.

“Here the initial [WTO] offer of The Bahamas seeks to meet the economic needs test. That’s not going to fly. The US and most other countries will not accept that. It’s not part of what a market economy is.”

The Bahamas’ current offer maintains the investment approvals status quo, where the government must approve all foreign direct investment (FDI) proposals worth $500,000 or more.

Mr Chaitoo, and the Oxford Economics report, yesterday recommended that this nation restrict such an “economic needs test” to specific sectors rather than “across the board”. These would be the resorts, real estate and financial services investments that The Bahamas typically attracts, as well as industries such as telecommunications that are important on national security grounds.

“The second part is it’s not codified, not clear and not spelled out; the terms of engagement are opaque,” he told Tribune Business. “You may have to trade that off to keep tariffs that are reasonably high.”

The Oxford Economics report said the government’s near “total control” of the foreign investment approvals process was more akin to a centrally-planned economy that is typically found in communist states as opposed to one governed by market forces.

It said: “Bahamian negotiators may have to trade off concessions on the investment front in order to keep tariffs higher to protect employment in domestic manufacturing and agricultural sectors.

“While it is common for governments to approve investment projects, it is unlikely that The Bahamas will be allowed to join the WTO with a horizontal economic needs test (ENT) for all investment and a requirement that all foreign investment proposals must be over $500,000.

“Furthermore, these requirements are not codified in any law, and there are no objective, published criteria for them... In fact, the almost total control over investment in The Bahamas is more in line with a centrally planned than market economy,” the Oxford Economics report continued.

“Normal market signals interpreted by investors such as return on capital, market assessments, etc., seem to be overridden by the Government. And it is not clear how its complex process for assessing an investment project is conducted. It is fair to say that there is inadequate transparency or predictability in the Bahamian investment regime.”

The study added that no other country, whether it be a small island developing state (SIDS), vulnerable economy or recently-acceded WTO member maintained such a rigid, government-controlled process for all investments.

“It is recommended that the Bahamas consider limiting the economic needs test (ENT) to specific services sectors or activities that are considered important for political economy and other reasons, and schedule it in sector-specific commitments,” the Oxford Economics consultants added.

“The obvious areas would be hotels and restaurants; real estate development; telecommunications; and perhaps insurance and financial services. The vast majority of large investment proposals approved by the Bahamian government over the past five years are in hotel development or real estate anyway.

“But the country is an inward-seeking investment location that has had persistent unemployment in the range of 10 percent of the workforce for several years. A more flexible investment regime might result in greater investment in more diverse economic activities.”

The Oxford Economics report added that the 15 services industries reserved for Bahamian ownership were a “defensible” position in the WTO negotiations, since they were mainly “small scale”, “sensitive” when it came to Bahamian employment, and unlikely to be of much interest to WTO members. These industries include the likes of retail and wholesale; real estate; and media.

Elsewhere, the Oxford Economics report recommended that the Government’s existing Heads of Agreement with major investors be placed among this nation’s list of Most Favoured Nation (MFN) exemptions to ensure they were not “challenged” by future developers and other WTO members.

“The Heads of Agreement (HOA) for existing projects should be included in The Bahamas’ List of MFN exemptions to safeguard them from challenge,” the study said.

“This is because some of the provisions in the Heads of Agreement grant preferential treatment to investors and investments, and some agreements stipulate that any treatment that is offered to another investor that is better than an incumbent should be extended to it.”

The Oxford Economics report also reveals that the US is demanding The Bahamas make a wide-ranging commitment to open up audio visual services under WTO, which would include films, TV and live theatre productions.

“The US has requested a comprehensive offer here and indicated that it is ‘critical to accepting the Bahamian services offer’,” the report reveals.

“However, under the EPA (Economic Partnership Agreement with the European Union), The Bahamas, like all other Caribbean countries had to exclude audio-visual from their commitments so it is not feasible for The Bahamas to liberalise audio-visual services in the WTO. This needs to be made clear to the US.”