Incentivising Investment

In the scramble to attract FDI, are Caribbean governments promising too much?

[dropcap]T[/dropcap]he economic lifeblood of the Caribbean or a grossly inequitable system where profits are funnelled offshore and the benefits rarely trickle down? Wherever you stand on Foreign Direct Investment (FDI), one thing is certain—courting overseas investors is a longstanding practice in the region and accounts for billions of US dollars flowing through the islands. each year

Whether these dollars are a force for good largely depends on investment strategies and whether they are carefully managed to ensure governments don’t fall into the trap of promising too much and receiving too little.

FLOWING IN

Although inflows have been volatile since the 2008 financial crisis, Latin America and the Caribbean still receive the lion’s share of the world’s FDI. While global flows fell by 16 per cent in 2017 to US$1.52 trillion, the region was one of the few economies which saw a slight rise, collecting around US$170bn.

In Saint Lucia, FDI inflows reached US$130.41m in 2016 but Prime Minister Chastanet is on a mission to increase this figure, recently promising that the country would attract US$1.5bn by 2019.

Most of the Caribbean’s FDI takes place in the tourism sector and it’s easy to see why this industry, in particular, attracts international interest. Last year the Caribbean welcomed over 30 million tourists—a US$37bn payday for the region. And the sector is steadily growing with a year-on-year increase of 1.7 per cent in 2017.

Foreign investors have long been a part of the tourism scene in Saint Lucia, which has one of the top-performing tourism industries in the Caribbean and saw an 11 per cent increase in visitor arrivals last year. One of the country’s largest FDI projects, the $2.6bn Pearl of the Caribbean, is being developed by Hong Kong-based Desert Star Holdings Limited and will include a racetrack, boutique resorts, marina, casino and retail facilities.

Calling the project “a game changer”, Prime Minister Chastanet said it would also include an expansion of Vieux Fort’s international airport. In addition, other FDI-backed tourism projects set to come onstream in the coming year are the 120-room luxury Fairmont hotel in Choiseul, the Marriott Courtyard at Pointe Seraphine and the Sandals LaSource resort on Pigeon Island Beach – the brand’s fourth property in Saint Lucia.

SWEETENERS

FDI on this scale can transform local economies. But at what cost? FDI has attracted criticism in the past from those who believe that Caribbean governments are offering too much to international investors, tempting them with citizenship, tax breaks and other alluring fiscal incentives.

While these perks deserve scrutiny, it’s important not to over-estimate the power of incentives. According to a 2013 study from Carib Export, international firms rarely make investment decisions based on incentives alone. Tax breaks and other sweeteners are seen as the icing on the cake, rather than the deciding factor, as companies carefully weigh up a myriad of issues when choosing where to invest.

Having said this, incentives are the norm in the Caribbean where competition for the foreign dollar is fierce. Investors can afford to shop around, increasing the pressure on small nations vying for their much-needed investment.

According to Carib Export, incentive programmes have become more popular throughout the region in recent years, with most targeted at the tourism sector. They are also overwhelmingly directed at encouraging FDI (two-thirds of all incentives are awarded to foreign investors and a third to domestic investors) and have largely been successful, increasing jobs, exports and capital expenditure.

Indirect benefits have also been felt. FDI projects frequently require specialised knowledge and skills, which requires training the local workforce. They may also utilise new technologies and encourage adoption of best practices in line with international standards, encouraging the host country to become more innovative and competitive.

On the flip side, large-scale projects require large-scale resources. In Caribbean countries, where land is often scarce, it’s sometimes controversial to sell this precious resource to the highest bidder. And alongside land come environmental concerns: will developers contribute to pollution and overcrowding? Are there sufficient safeguards in place to protect local wildlife and habitats? These questions often go unanswered in the rush to close the deal.

STRIKING A BALANCE

How can governments accrue the benefits of foreign investment without the pitfalls? By performing a thorough and thoughtful cost benefit analysis from the outset. Carib Export believes that investment incentives should be limited and precisely targeted, as well as clear, simple and certain. They should also be transparent and consistent so that no investors are allowed to flaunt the rules or participate in backroom deals.

A regional approach should also be adopted to prevent the ongoing bidding war among Caribbean states. Countries fighting to outbid each other creates an environment that favours investors rather than governments, and harmonising the incentive regime could end this race to the bottom. The 1974 Agreement on the Harmonisation of Fiscal Incentives to Industry (signed by Saint Lucia in November 1973) was intended to create a regional incentives policy but in thirty years the business climate has significantly shifted and the legislation has not kept pace with the times.

In a 2017 study, the Caribbean Development Bank (CDB) urged a review of regional policy on FDI. The Bank calls for greater cooperation between Caribbean nations through the Caribbean Association of Investment Promotion Agencies, a focus on removing tax competition and a regional working group to help countries decide on the types of incentives they should offer. The CDB also suggests that institutional, regulatory and policy reforms would reduce the need for tax breaks and other such schemes.

As concerns increase over lack of infrastructure, skills gaps and ease of doing business in the region, governments find themselves forced to become more and more generous to cover the shortfalls of the domestic business environment. Improving the problematic business climate not only benefits local entrepreneurs alongside foreign investors, it also gives governments more power at the negoiating table. Incentives are a short-term tactic that won’t secure long-term growth. If Caribbean states are to get the balance right, and reap the full rewards of FDI, they need to look inward and address systemic, longstanding issues.