By Brian Samuel
On Tuesday, 19th February, Grenadians go to the polls to elect a new government – or re-elect an old one. Regardless of which political party emerges triumphant on morning of the 20th, its first priority will be to take steps to immediately stimulate the flagging Grenadian economy.
Unemployment, high prices and economic stagnation have consistently topped the issues of concern to Grenadians – along with the associated crime that goes with persistent poverty.
For 20 years I worked with the World Bank in Washington DC, the Caribbean and Africa, doing what Grenada and most other emerging economies have as a major policy objective: attracting foreign investment.
In 20 years I participated in just about every type of financing scheme imaginable: commercial bank lending, equity investments, privatizations, concessions and Public-Private Partnerships (PPPs).
Being a Grenadian, my all-time favourite project was arranging the initial financing for La Source hotel back in 1992-3. Having mobilised over US$240 million in investment proceeds of one sort or another, I can say with some degree of confidence that I know what it takes to attract and retain foreign investors.
If I had to put the lessons of my 20-year World Bank experience into a nutshell; that would be: Simply put: it is not easy to convince foreign investors to invest millions of dollars into small, fragile economies like Grenada – especially “good” investors.
In the increasingly globalised economy, Grenada faces competition from virtually every other emerging economy for scarce international investment dollars. The simple truth is that, contrary to local legend; Grenada is NOT unique.
There are many, many other equally beautiful, friendly, crime-free niche destinations as Grenada – “we are not alone”. When international investors such as Sandals and Clear Harbour are considering new investments outside their home base, they perform exhaustive country surveys of the available investment destinations and take informed, calculated decisions.
Very few investors “must” invest in Grenada – we are up against the entire world as competition.
It is not a political statement to say that the Grenadian economy has been in a virtually continuous state of crisis since the current National Democratic Congress (NDC) administration took over – their timing could not have been worse!
Much of this is not Grenada’s fault; we are but one tiny microcosm in the global economy, which has been enduring one of the most serious global recessions since the Great Depression of the 1930s.
In today’s highly interconnected economic systems, it is no surprise that Grenada has seen drastic falls in the level of its Foreign Direct Investment (FDI) – when the world catches a cold; we get pneumonia.
Foreign Direct Investment (FDI) is a measure of how much international capital a country is attracting. FDI is direct investment into a business in one country by a company domiciled in another country, either by buying the company, or by expanding operations of an existing business.
In the Grenadian context, FDI is the gasoline that runs our economic engine. Let us face facts: Grenada does not possess the amount of investment funds needed to quickly and materially stimulate the economy.
Grenada’s largest companies are ranked as “Small to Medium-Sized Enterprises” according to international benchmarks; nor is Grenada blessed with an abundance of high net worth individuals who could invest the millions needed to start any new business of significant size in Grenada.
Foreign investment into Grenada rose steadily until 2007, when it reached a high of US$157 million; before falling precipitously in the subsequent years, reaching a low of US$40 million in 2011 before “recovering” to an estimated US$66 million in 2012.
This is nothing new; virtually any Grenadian can attest to the simple truism that over the past four or five years: “money scarce”.
In the four years from 2004 to 2007, Grenada’s average rate of economic growth was 3.64% per annum. Over the next four years, from 2008 to 2011, the average rate of economic growth declined to negative 1.16% per annum. So we can see a clear linkage: less foreign investment equals lower economic growth. Period.
It is pertinent to look at how Grenada has fared in relation to our competitors: our sister Organisation of Eastern Caribbean States (OECS) countries. Geographically, culturally, politically and economically, these are the countries that Grenada can realistically benchmark itself against; given that we are, almost literally, “all in the same boat”.
In the FDI stakes, Antigua has been the clear leader over the past ten years, attracting US$1.64 billion in net FDI inflows, compared to second-placed St. Lucia with US$1.3 billion and St. Kitts/Nevis with US$1.1 billion.
Grenada has fared badly, ranking fifth out of six with US$0.9 million, and Dominica in last place with only US$0.3 million in net FDI inflows.
These results are not particularly surprising; for many years Antigua was riding a wave of inward investment, largely fuelled by the “Stanford factor” – plus all the murky money that followed suit. St. Lucia enjoyed a prolonged hotel building boom, which has only recently abated.
So much for recent history, how is Grenada performing now? Given that all OECS economies are broadly similar in size and structure, and all have been negatively impacted by the global recession, we need to look at how much foreign investment Grenada is currently attracting, compared to our neighbours.
Compared to the longer-term trend, we can see that there have been changes at the top of the FDI rankings but sadly, no changes at the bottom. St. Vincent & the Grenadines has replaced Antigua at the top of the list, followed by St. Lucia then St. Kitts/Nevis.
Again this is backed up by anecdotal evidence: St. Vincent has been experiencing investments in tourism projects in the Grenadines, plus the construction of an international airport. The same “Stanford factor” that attracted so much money to Antigua over the past decade turned negative, and resulted in a capital flight after the bubble burst over Stanford’s illegal activities.
At the bottom of the list, Grenada still occupies fifth place in the FDI rankings, once again with Dominica in last place.
Within recent years, great store has been placed in the World Bank’s annual Doing Business Rankings – a quantitative assessment of how easy it is to, literally, do business in a particular country.
The World Bank invests millions of staff-hours in the production of this annual tome, and announces the results with much fanfare.
The Bank’s client governments also place great stock in the annual Doing Business Rankings – provided, of course, that their rankings are moving in the right (upward) direction.
In some areas, like dealing with construction permits, protecting investors and getting electricity (never mind the cost), Grenada ranks quite highly. But in others, like registering property and enforcing contracts, Grenada’s ranking is shockingly low.
These are the areas that bring down our overall Doing Business Ranking, and any incoming administration must urgently address these glaring shortcomings.
As regards the six main economies of the OECS, there is no clear correlation between FDI inflows and Doing Business Rankings. St. Vincent has almost the same Ranking as Grenada, yet attracts twice the amount of investment.
International perceptions on corruption are an important influence on the level of foreign investment into a country.
Regardless of national laws, regulations and institutions governing foreign investments into a country, the reality is that big projects are handled on a case-by-case basis, as happens all over the world.
Big boys get better treatment. Global investors play hardball to get the best package of fiscal incentives available. That is how business is done.
In November 2012, Finance Minister Nazim Burke announced that “something special” had been awarded to the Sandals Group on the La Source deal, including:
* 29-year waiver of corporate taxes
* 25-year waiver of property taxes
* 25-year waiver of customs duties on capital goods
* 25-year waiver of customs duty on consumables
* 15 year waiver of Value Added Tax
One may well ask: what else is there? In truth there is a lot; the large bulk of the economic benefit of deals like Sandals is derived after the deal is done – and continue for a long time thereafter (barring any disasters!).
Corporate and property taxes are tiny, in comparison to the total of the wages and salaries of 500 staff, the electricity consumed, NIS payments, food and supplies purchased and local services bought – this is the economic gold at the end of the rainbow, not the taxes foregone.
When La Source was originally built in 1993, it was given a package of incentives that some people at the time considered generous. However, La Source subsequently went on to become an extremely successful hotel and Grenada’s largest single hotel employer; this would not have been possible without its incentives package.
And let us remember: taxes on nothing equal nothing; when global investors threaten not to invest unless they are given seemingly over-generous fiscal incentives – they are not entirely bluffing. In these hard times, investors with deep pockets are becoming increasingly hard to find, and what one country won’t give, another would be glad to offer.
Grenada pays lip service to developing its Renewable Energy (RE) sources; it is now time to stop talking and do something about it. In November 2012, legislative changes were made to Grenada’s electricity sector that, although far from perfect, go a long way towards creating a conducive environment for Renewable Energy.
There are several potential Public-Private Partnership (PPP) projects for the exploitation of Grenada’s RE resources, all of which are languishing with one delay after another:
(1). Exploration of geothermal resources and construction of a geothermal power plant; studies suggest that Grenada’s total geothermal potential could equal 100% of installed capacity.
(2). Wind farm for Carriacou: Grenada will be launching a wind energy project in partnership with the European Union and GRENLEC.
(3). Petite Martinique offers similar wind potential on its uninhabited windy eastern shore.
(4). Solid waste to energy: The Grenada Solid Waste Management Authority (GSWMA) has started a tender for the construction of a waste to energy plant at Perseverance.
(5). Solar generation systems for car parks, hotels and office buildings.
In addition to these projects, there is a long list of delayed, dying or dead tourism projects that show few signs of revival. Yes, there has been a severe global recession, but must we continue to blame the recession for our own lack of performance?
In the past 20 years, how many world-class new hotels have been opened in Grenada, compared to St. Lucia? I can count them on one hand and still have fingers left.
In the past two years St. Kitts, St. Lucia and St. Vincent have each attracted more than double the amount of foreign investment that Grenada has – how did they do that? Maybe we should ask them.
In conclusion, any incoming political administration in Grenada must pay urgent attention to the immediate need for significant injections of foreign investment.
Action is needed on five fronts:
*Unblock the plethora of stalled tourism projects: urgently look at each project and perform economic triage to determine which are fixable, versus those that are fatally flawed.
*Resolve outstanding high-visibility disputes with investors and/or potential investors: why wait for the lawyers to have a field day? Appoint arbitrators if necessary.
*Re-engage with investors – old and new.
*Re-start with a clean sheet; accept that attracting foreign investment must be the country’s number one economic priority. And finally;
*Change the laws, regulations and practices that need changing, to correct deficiencies.
This requires a lot of resources, effort, thought and some painful decisions. Like I said at the outset, the road is not easy; but the long-term economic rewards are eminently worth the effort.