The Bahamian Business Structure: A New Look at our Economy

First Published: 2003-07-12

Any capsule summary of the Bahamian economy always describes it as composed of just two elements: tourism and banking.

This is a halftruth at best, and distorts any real understanding of our nation’s wealth. It is true that these two industries, particularly tourism, do provide the mainspring to our growth. The Kerzner complex of Atlantis and Ocean Club alone, even before adding 1,200 rooms in the Phase III expansion, has a direct labor force of over 5,700 people, plus the vast number of separate service organizations that devote most of their personnel to providing supplies and maintenance for the complex. Our 189 active licensed banks and trust companies are reported to provide another 4,000 of employment, usually at the higher end of the wage scale. Thus these two industries do finance a substantial base of personal income to fuel the local demand for goods and services.

However, I wish to look at our economy from another point of view. How have Bahamians themselves become wealthy? How has our capitalist class developed?

How have a substantial group of Bahamians risen above the level of serving as salaried employees, even senior executives, to become owners of businesses, with all the rewards, risks and responsibilities that derive from that status? For the last 50 years, and at a faster pace during the last 20, we have seen more and more Bahamians exercise the entrepreneurial spirit. For well-educated young people, the traditional appeal of a safe and well-rewarded position as a lawyer, accountant, or bank manager has lost ground to the fascination of starting one’s own business – sometimes succeeding, sometimes failing, as can be the fate of any entrepreneur. And in general these entrepreneurs have not chosen either tourism or banking as the foundation of their wealth.

The great edifices of our tourist industry – the giant hotels that line Cable Beach and dominate Paradise Island and parts of Freeport – are not Bahamian creations, but almost exclusively the offspring of international hotel chains backed by foreign capital.

The Bahamian capitalist class has often been criticized for not making a contribution to the hotel boom. Why have they not adopted the adventurous spirit of the Jamaicans who started small in their home country: the late Abe Issa and his nephew John, who have spread a network of SuperClubs, Breezes and similar all-inclusive hotels throughout the Caribbean, and Butch Stewart, who has done the same with his Sandals trademark? Even Sol Kerzner started locally in his native South Africa, opening a small resort hotel outside Durban in the 1960’s, and using that as the springboard for his later grandiose successes. Surely Bahamians, it is said, could have put together the combination of expertise and capital to do the same.

I take a contrary view: perhaps our local capitalists should be congratulated as shrewd investors who have avoided what is notoriously a risky business of huge funding demands and dramatic ups and downs. Over the last 30 years every hotel on the Cable Beach strip has been through the wringer of losses, changes of ownership, or Government take-over. The impressive renovation of the traditional British Colonial has virtually bankrupted the Canadian owners. An international chain for years could not make the Freeport Tower and Country Club complex successful, and even the spectacular new “Our Lucaya” has had to survive a change in ownership and management, with its highly touted casino still not open. It is sometimes forgotten that before the special genius of Sol Kerzner revived Paradise Island, the main hotel operation there had at least three owners who faded from the picture, even the American TV millionaire Merv Griffin could not make a go of it.

Equally, Bahamians have, with few exceptions, taken little interest in banking, particularly the type of private banking for which The Bahamas have become famous as an international financial center; and this is one field where it can be argued that they have missed the boat. Long before World War II, the Royal Bank of Canada became well established in Nassau, soon followed by the post-war arrivals of Barclays, Scotia, CIBC, Chase and Citibank, all serving both domestic and international customers, and then a wave of over 80 active banks and trust companies mainly from Switzerland, but also from other European countries, Latin America, the USA and the Far East, all devoted exclusively to an international clientele. Obviously, it was Government policy to welcome all these foreign banks with unrestricted licenses, and influential Bahamian politicians and businessmen did not appear to object. The largest local banking operation here is now First Caribbean, resulting from a merger of CIBC and Barclays, with net income of $54 million in 2002.

Meanwhile, it was not until the 1980s that we began to see the creation of Bahamian controlled banks, but by now only three are operating, and strictly for the local market. Only one of them can truly be said to be an invention of our capitalist class: Commonwealth Bank, initiated by the Symonette family and later joined by other local businessmen as substantial shareholders. Commonwealth by any standards has been successful, growing to achieve earnings of $16.5 million and market capitalization of about $175 million. However, strangely it has chosen not to build on its domestic success to offer trust services or investment accounts for international private clients, fields in which it takes no interest whatever. The other two banks follow the same policy of ignoring the international market: the successful and growing Government-controlled Bank of the Bahamas, and the smaller British American Bank, an odd combination of local and foreign ownership that is probably a target for consolidation with a competitor.

Consider the contrasting situation in Bermuda. Many years ago, two groups of the local business and legal fraternity established two banks to serve the domestic economy, Bank of Bermuda and Bank of Butterfield, and convinced the authorities that no other banks were necessary or should be permitted. In post-war years when Bermuda became attractive as an international financial center, these two banks steadily added to their staff, their range of skills, their scope of services, their international connections and overseas offices, so that they became truly “global banks” that continued to serve the Bermuda community as a minor side-line to their main business. With an international network of 13 foreign offices, Bank of Bermuda has reached total assets of $11 billion and market capitalization of $105 billion, trading both on the Bermuda Stock Exchange and on NASDAQ. Bank of Butterfield is slightly smaller but even more profitable; both of them provide sophisticated expertise in private client services, trusts, international portfolio management, securities trading, and mutual and pension fund administration. The combined earnings of these two banks in 2002 was about $160 million, compared to barely $40 million for the three Bahamian controlled banks. A few other banks and trust companies have been granted Bermudian licenses, but the “two B’s” remain dominant. Naturally, competitors from elsewhere accuse Bermuda of permitting a banking duopoly that limits competition and maintains a high level of costs for all financial services. Whatever the truth of these accusations, the reputation of Bermuda as a financial center seems not to have suffered, even in these days of attack on the offshore world generated by the OECD, FATF and the grotesquely named U.S. “Patriot Act”. Above all, the Bermuda model has kept the entire banking system within local ownership and control, so that, unlike the Bahamas, Bermuda has not had to close down banks that proved to be undesirable and is not subject to the sudden and arbitrary decisions of foreign banks to terminate their offices, events which here have damaged both employment and our image as a stable financial center.

Thus we may conclude that our Bahamian capitalist class has been astute in avoiding investment in the expensive and volatile hotel industry, but has missed a great opportunity by failing to be aggressive and imaginative in the banking sector, passively leaving to foreign banks all the international services that could have been provided under local ownership. It may not be too late for Bahamian capital to make a mark in newer types of financial services: securities and derivatives trading, mutual fund creation and administration, annuity programs, and captive insurance. But it will be a game of catch-up, as we are far behind Bermuda and Cayman, where governments have been quicker to create the required legal regimes and to permit painless immigration of the foreign “hired-gun” specialists who know this business.

Instead of the two industries of tourism and banking, Bahamian entrepreneurs have found many other opportunities. A review of the 19 so-called “public” companies trading on our stock exchange or the over-the-counter market gives a very limited picture of the diversity of investment choices. The list includes five banks (three locally controlled), two life insurance companies and one general insurance agency, a cable-TV and internet operator, an electric utility, a supermarket chain and a wholesale-retail conglomerate, a hospital group, a concrete producer, a waste collection firm, a cinema exhibitor, a petroleum products distributor, a closed-end investment company, and a real-estate mutual fund. Based on the quoted share price of these companies – which in many cases is hypothetical at best – their total market capitalization is about $1.7 billion. However, in terms of true Bahamian ownership this figure is meaningless, since nearly 50% is provided by one company, First Caribbean Bank, which happens to be 95% owned by Canada’s CIBC. Several other public companies also have substantial foreign ownership, so that the true market share attributable to Bahamian investors is probably no more than $500 million, representing possibly $100 million in shareholder net worth.

This figure reflects only a tiny fraction, probably less than 2%, of the total value of Bahamian business enterprises. Since our stock exchange does not yet provide an effective trading platform and is often regarded with suspicion by successful corporate leaders, the vast majority of our wealth continues to be held in private hands, often passed down from father to son. The most traditional path to wealth, and still one of the most lucrative, has been the field of wholesaling, or more precisely the role of “commission agent”, acting as the local representative for all the multifarious brands of imported commodities that Bahamian consumers demand – from lumber and lawn-mowers down to corn flakes, chocolate bars, toothpaste and detergents. The father of this essential industry was the late Sir Asa Pritchard, who even before World War II founded Asa H. Pritchard Ltd. which continues its success under his family descendants, acting as exclusive distributors for Procter & Gamble’s vast range of household products, H.J. Heinz, Libby’s, Chivers, and Folgers. Pritchard was soon followed by d’Albenas Agency, Thompson Trading, Lightbourn Trading, and Milo Butler & Sons, all family-owned firms (and many smaller ones) who aggressively fight for and guard their connections with suppliers, well aware that unless they demonstrate active promotion of their assigned products, they could easily lose the business to a competitor.

A relative newcomer to this elite group is Bahamas Food Services, which evolved from Bahamian ownership to be controlled by an American business group who only three years ago completed a $20 million state-of-the-art refrigerated warehouse from which it distributes a wide variety of meats, fish and fresh produce. As wholesale suppliers to our supermarkets, small food stores, and direct to hotels, all these firms remain tightly centralized and avoid the problems inherent in retail operations. Their enormous role in our economy can be seen from the Department of Statistics figures for 2001: 47 wholesale firms with revenues of $887 million and operating profits of $69 million. We can estimate that the largest ones must enjoy sales of at least $50 million, with a profit margin of about 7%. And all this with a total of only about 2,500 employees! Clearly our merchant class has benefited from the growth of tourist hotels, not by investing in them, but by selling to them.

The retail sector has by no means been neglected. One branch of the Pritchard family diversified into John Bull Ltd., Bay Street’s leading purveyor of watches, jewelry and luxury goods. Our two supermarket chains are probably the largest single businesses in the private sector. Bahamas Supermarkets, with ten stores in Nassau and two in Freeport, evolved out of the original Bahamian City Meat Market and is now 60% owned by the American Winn-Dixie chain. Trading on our over-the-counter market, its published figures show sales in 2002 of $122 million, earnings of $7 million, and net worth of $14 million. Its vigorous competitor is Supervalue Stores, founded in 1967 by Bahamian Rupert Roberts Jr. and wholly-owned by his family. Limiting its business mainly to ten Nassau outlets, its sales of $80-$90 million approximate the Nassau sales of Bahamas Supermarkets. Mr. Roberts estimates that the two supermarket chains together account for only about one-third of total food sales in The Bahamas, evidence of the wealth retained in the hundreds of smaller chains and “mom-and-pop” stores.

Other dominant participants in the retail market include the family-owned Kelly’s Home Centre, Nassau’s leading department store – and indeed the Marathon shopping mall where it is located, a joint venture of several local investors with over 50 commercial tenants, giving it a valuation of over $50 million. Beyond this, the list stretches ad infinitum, to the successful auto-parts chain Automotive and Industrial Distributors, Mike’s Shoe Stores, Lorene’s group of lady’s apparel shops, Nassau Paper Company, Destination Travel Agency, Burns House Wine & Spirits, Hill-York Air Conditioning, and the innumerable small enterprises marketing virtually all the goods and services that are expected in a modern economy. One special category is auto dealerships: every Bahamian must drive a car, preferably a hefty SUV, and the market is dominated by three highly profitable importers of the most popular foreign brands, backed up by several successful niche players.

Almost every Bahamian who has accumulated any surplus wealth has, in effect, entered the real-estate business, as can be expected in an economy with few stock-market opportunities, a limited supply of land, a growing population and a steady stream of home-buyers from abroad. For many citizens, this has meant simply the occasional buying and selling of properties for a profit; for others, it has meant becoming licensed real-estate brokers, appraisers and building managers; and for still others it has meant committing capital to the active development and ownership of commercial buildings, shopping centers, condominium complexes, and residential housing tracts. Probably a greater percentage of the country’s private wealth is invested in real property than in any other type of asset.

Closely related to the real-estate business is the construction industry. With demand for high-quality housing from a wealthier local population and from foreign second-home owners, together with improved Government facilities and periodic large new hotel and office projects, contractors have enjoyed a long-term but by no means steady history of growth, marked by periods of boom and bust. At least five major contracting firms created by Bahamians are always kept busy, although their levels of employment may expand and shrink radically. Naturally, a whole sub-industry of building-supply firms exists to serve the major contractors.

As an island nation, we can only survive with imports, virtually all of which arrive by sea from Florida ports. Although most of the vessels are foreign-owned, a substantial Bahamian owned industry has developed to provide container handling, stevedoring, customs brokerage and local delivery. Even more significant is our inter-island marine transport, restricted exclusively to Bahamian ship-owners. With communities scattered over a range of 700 miles of seascape, it is not surprising that local marine transport represents a substantial capital investment, although fragmented among many participants. For many years, all freight and a few uncomfortable passengers were carried under separate “mail-boat” contracts, with each ship-owner assigned a specific island route to serve with a slow-moving cargo vessel under fairly rigid Government rules. More recently, a modern group of Bahamian entrepreneurs are altering this pattern with high-speed catamaran ferries, some taking passengers only, others carrying vehicles and cargo. While these services are presently limited to ports within easy range of Nassau, further capital investment will gradually extend carriage to the more distant communities. In the air transport industry, Bahamian capital has built an impressive Fixed Base Operation for private aircraft, under franchise from the U.S. Million-Air group, the first of its kind in the Caribbean..

Thus far, I have given a brief survey of the traditional industries where Bahamians have sunk their capital and often achieved wealth. Basically we are merchants, not producers. Our agriculture sector is negligible. Our manufacturing sector is represented mainly by the rum distillery operated by the foreign owned Bacardi company and the brewery initiated by Heineken jointly with a Bahamian group, supplemented by quasi-manufactures such as mattresses, windows, and paper products. But what can be said about technology, the industry that in its many manifestations is changing the face of the United States and the developed world economies? Bahamian investment is really just at the take-off point in this field. The first local private-sector company that could be said to rely on modern technology is actually in the telecommunications sector: Cable Bahamas, the sole licensee for cable-TV transmission and the most successful of our three licensed Internet service providers. Although conceived and founded by a Canadian group, 50% of its equity was offered locally and quickly snapped up by the more imaginative investors at a price of $10 million, now enjoying a market value of over $50 million. No other local company in a related field approaches the size or profitability of Cable Bahamas. The closest comparison is Systems Resource Group, a 13-year-old Bahamian-controlled firm that has made its mark in computerized data integration and network technology. Having recently been granted a license to provide wireless voice and data telecommunications services, it is now more than doubling its size to raise $12 million capital needed to construct the network. We also have a software consulting firm that has created specialized accounting programs for banks and trust companies serving private clients, which have been marketed successfully both here and abroad. A growing number of local entrepreneurs are using the latest computerized technology to design corporate websites for use on the Internet.

It is too much to expect that The Bahamas will ever become a Caribbean version of Silicon Valley where the cutting edge of new hardware and software is invented, financed and brought into production. Any such center needs vast numbers of specially educated technicians and links with nearby universities and research facilities. Because of our limited labor pool and its high-wage structure, we will not even match Costa Rica, China or the Philippines in the routine business of assembling components for cell-phones, routers, servers, main frames and mother-boards.

But we certainly can benefit from the growing use of technology that is developed elsewhere. First, with increasing wealth and more intensive efforts to introduce computers in our schools, most Bahamian homes can eventually become equipped with a PC or lap-top linked to the Internet. Educational and cultural programs can then be extended directly into the family. The medical profession can exchange computerized patients’ records and prescriptions. All our major companies can develop and market their products on-line. Our banks can create direct payment systems linked to public utilities and most major merchants. Investors can have direct access to up-to-date corporate information about public companies and can trade securities using direct connections to broker-dealers. All these initiatives will require a growing work-force of computer-literate Bahamians often trained as programmers – a field in which our young men and women already show tremendous enthusiasm and aptitude.

I have given this overview of existing Bahamian businesses to demonstrate one point: in this country we already have a long history of entrepreneurship and capital formation. Certainly, foreign investment in the hotel industry has been welcome, but Bahamian capitalists have been ingenious in developing highly profitable ways to serve not only the tourist industry, but also the thousands of Bahamian consumers who depend in part on tourism. The structure of our business economy has been created by local energy and imagination, not primarily by foreign ingenuity. There is no reason why this local energy should not continue into the future and bring further prosperity. However, we must face, and not hide under the rug of complacency, one serious problem that infects our culture and inhibits growth: a widespread lack of morality in the work-place. It is most depressing that, side by side with hard-working, totally ethical Bahamians, we have an underclass of employees who see it as their natural right to steal from their employers, either goods themselves or time which should be devoted to work. Rupert Roberts of SuperValue, employing over 500 people, estimates that his company suffers a 5% product loss to pilferage, and of this about 80% is theft committed by his own employees! And he is by no means alone among business-owners. In a God-fearing nation, where new churches spring up like fast-growing weeds, this is a shocking indictment of the failure of the Christian message to filter down to the lowest levels.

Let us be optimistic and hope that this failing among some Bahamians will gradually wither away as the ever-stressed need to become competitive takes hold.

We are constantly told that if we join the Free Trade Agreement of the Americas, all our businesses will face intensive competition from foreign concerns. I am by no means convinced that joining FTAA will bring us substantial benefits, but I am convinced that even without FTAA foreign competition will grow in strength. What measures can our successful capitalists, our business leaders, use in meeting this competition?

Of course, each one of them will continue to concentrate on his own enterprise to increase its efficiency and profitability. In addition to the resources of our capitalists, we should not overlook the ever-growing funds locked up in the National Insurance Board and our many pension funds. Primarily invested passively in Government debt, bank deposits and residential mortgages, these institutional investors may in future find more ways to diversify. With the N.I.B. holding funds in excess of $1 billion, and the various pension funds probably $600-700 million, and each enjoying a monthly inward cash flow, surely some reasonable percentage of these assets could be devoted to more productive investments, without risking the welfare of their beneficiaries.

Of course, the feebleness of our one official stock exchange, BISX, discourages enthusiasm on the part of both pension funds and individuals to invest in publicly traded corporate securities. This failing represents a serious drag on our business growth, as many companies are reaching the size where they cannot be financed only from internal cash or bank loans, or their family owners may wish to sell out to provide liquidity for future generations. However, with an inefficient trading mechanism, share offerings are rare indeed. The problem is by no means insoluble. There is no need for Government to strain its budget by investing in BISX, but Government can and must adopt a whole series of new financial policies that could invigorate securities trading, including relaxation of exchange controls. I will not detail these policies here; they have often been spelled out by our investment banking firms and are well-known to Government. All that is needed is the political will to stop studying the changes and start enacting them

I believe there is one massive long-range project that is essential for The Bahamas’ continued growth – a project beyond the scope of any single entrepreneur that will demand the joint imaginative efforts of many businessmen together with Government, foreign expertise, and our pension funds. This is nothing less than the redevelopment of down-town Nassau, more particularly the eastern section of Bay Street. This stretch of our famous thoroughfare is now a scene of decay, showing a series of dilapidated paint-peeling buildings, empty store fronts, fly-blown restaurants, and a few lingering business establishments offering inhospitable blank walls to the passerby. The small stores that once dominated the area will never return, as their native customers now choose to shop in Palmdale. In this entire stretch, one can find nothing whatever to interest either the tourist or the Bahamian. Worse, the potential beauty of the adjacent waterfront, only a few yards north, is totally destroyed by commercial shipping wharves, cargo cranes, and unsightly stacks of containers waiting delivery.

No other competitive Caribbean tourist destination – Bermuda, Grand Cayman, St. Thomas, Curacao – has allowed its downtown center, its tourist hub, to deteriorate into a virtual slum and dockland. By now, only a massive reconstruction can save the area. The task is difficult but not impossible. First, Government should decree that all international cargo vessels must be docked at Arawak Cay, which of course would draw with it all the cargo-handling facilities and container parks. This is only logical. The physical growth on New Providence will be mainly to the west and southwest of central Nassau. The constant stream of heavy trucks and container trailers, which can only be expected to increase with predictable new construction, instead of tying up the narrow streets of downtown Nassau, will more sensibly flow from its western edge. Second, a development master-plan must be created, involving the razing of many buildings and the creation of a sea-front promenade, open pedestrian plazas and shops, restaurants, night-clubs, even small hotels, covering the entire area between Bay Street and the harbor. Very likely an international firm will have to be retained to lead this effort, some group with the experience of the Rouse Company, that redeveloped downtown Boston and the Baltimore waterfront and created the South Street Seaport in Manhattan and Bayside in Miami, all depressed, rundown zones that now thrive with both tourist and local participation. Finally, since no project of this kind is undertaken for altruism, local business owners will have to create new ventures that can profitably appeal to both tourists and Bahamians, and convince pension fund trustees to join with them in investing. All in all, it will be a challenging and fascinating exercise in tough Government decision-making (that will no doubt be criticized by many local nay-sayers), ingenious town-planning and design, entrepreneurial initiative, and imaginative financial engineering.

Perhaps we should take a leaf from the special experience of Freeport, dominated by the Grand Bahama Port Authority, a quasi-Government body that influences all economic activity. In joint ventures with foreign investors, particularly the Hutchison-Whampoa group from China, it is transforming the harbor area and adjacent airport, having already created a multi-acre container port, cruise-ship terminal and repair facility with floating dry-docks, to be followed by a duty-free limited-access warehouse and transshipment zone. This same type of decisive action can be applied to the Nassau waterfront, although the relocations will certainly be more complex.

Pessimists may say that such a grandiose project is beyond Bahamian capabilities.

To which I retort: look at the photos of down-town Nassau, or of Palmdale, of 50 years ago. Only a few visionaries at that time predicted the extraordinary physical growth that has taken place. This growth resulted from the energy and imagination of our capitalist, risk-taking class of entrepreneurs. Initially a small group of individuals, we now have a much larger group of wealth creators, with greater expertise at assessing the risks and rewards of new ventures. I have no doubt these people will have the vision to see that their long-range welfare depends on the rebuilding of Nassau and will have the ability to carry it through to completion.

Mr. Coulson has had a long career in law, investment banking and private banking in New York, London, and Nassau, and now serves as director of several financial concerns and as a corporate financial consultant. He has recently released his autobiography, A Corkscrew Life: Adventures of a Travelling Financier.

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