* Undercut by rivals avoiding tax and regulation

* More than half of medium firms hit by same trends

* Just 0.5% of Bahamas firms using 'advanced tech'

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Some 75 percent of small Bahamian businesses face a persistent competitive disadvantage because they are up against rivals in an "informal economy" that generates up to 30 percent of Bahamian GDP.

An Inter-American Development Bank (IDB) report, accompanying its recent $200m loan to the Government, drew on International Monetary Fund (IMF) research to reveal that more than of this nation's legitimate medium-sized firms face similar challenges from unregulated competitors able to undercut them on price due to tax evasion and other factors.

Describing the so-called 'underground' or informal economy as one of the key "structural factors affecting the competitiveness of small-scale private businesses", the IDB document said this unregulated, untaxed sector was likely to account for "about 20-30 percent of GDP" or economic output in The Bahamas.

"The costs and consequences of informality are well known: Unfair competition due to avoidance of social and fiscal obligations, lack of access to credit markets or to public financing, low productivity firms with limited capacities to grow and innovate," the IDB said. "High business registration costs can generate perverse incentives towards maintaining informality, especially among micro-enterprises.

"Currently, the percentage of firms competing against unregistered or informal firms is 74.6 percent in the small firms’ segment, and 52.6 percent among medium firms. To reduce the level of informality, changes in start-up regulation should also include specific mechanisms to incentivise formalisation through simplified registration."

As for business capacity, the IDB report added: "Bahamian firms face challenges derived from their low use of technology and low capacity for innovation. Bahamian firms experience low complexity - existing industries are not closely connected and face challenges in upgrading products or moving into more complex parts of the supply chain."

It said there was "insufficient innovative activity", as only 22 percent of Bahamian companies are involved in innovation that "is more prevalent in the manufacturing sector", while there is "practically non-existent use of high technology". The report said just 0.5 percent of Bahamian companies "have adopted advanced technology" such as licensed technologies.

"In addition, Bahamian micro, small and medium-sized businesses (MSMEs) lag in the adoption of digital technology, and therefore miss out on the potential benefits in productivity and competitiveness," the IDB added.

"As businesses around the world are becoming digital at an accelerated pace, companies that do not strengthen their digital capabilities are at risk of being disrupted and sent out of business by other companies that do acquire advanced digital capabilities."

This, the multilateral lender said, was occurring at a global as well as national and regional level as digitisation gave access to goods and services across borders. Failure to keep up with the pace of digital evolution, it added, will make it difficult for Bahamian companies to add value and integrate into supply chains, leaving them vulnerable to "stagnation" and losing opportunities provided by the shared economy and cloud-based services.

Acknowledging the Government's efforts to reform via the introduction of the provisional Business Licence for "low risk" businesses, and the launch of its e-business portal, the IDB nevertheless said present indicators suggested obtaining a licence still cost the equivalent of 13.8 percent of per capita income.

"Changes to business regulation affect the number and size of firms in the market. The number of days and procedures taken to register firms that are ready to begin operations equates to standstill capital and forgone profits. In addition, entry of new firms results in higher productivity because of the reallocation of resources from inefficient firms to new entrants," the IDB report said.

Adding that minority investor protections "are still not enough" despite recent reforms to the Companies Act, Securities Industry Act and accompanying regulations, it added: "Minority shareholder protection has long been seen as a point to strengthen in Bahamian capital markets’ regulation, especially when it comes to takeovers of publicly-traded companies.

"It has been challenging for minority investors to obtain influence on the Boards of publicly-traded companies via independent directors and achieve more even-handed consideration when controlling/majority investors were bought out.

"In order to promote the growth of capital markets, investments will have to be more attractive and provide sources of finance to small, rapidly growing firms, and the current legal and regulatory framework will need to provide a stronger framework on disclosure of conflict of interest, shareholder governance and rules regarding takeover of companies."