Chamber of Commerce St. Eustatius and Saba: Vision on Economic Development

The following  text depicts the vision of the Chamber of Commerce St. Eustatius and Saba about the economic development, mostly concerning St. Eustatius, but also meant for Saba. It was made available to the executive council for the CN week in The Hague. It was also presented (in Dutch) to the ministries of Economic affairs, Internal affairs, Social affairs and also to the 2nd Chamber commission of Kingdom relations in both the First and Second chamber.

Better results through efficient policy

By: Koos Sneek
Chamber of Commerce
St. Eustatius and Saba June 2014

Introduction

On St. Eustatius, there is growing dissatisfaction with the political structure and the negative impact it has on the population. The complaint is heard that a large amount of new and complicated laws and regulations are introduced on the island. There is also a reduction of the purchasing power, a stagnation of the economy and a rise of unemployment. And the obstinate attitude of the Netherlands and the apparent lack of willingness to cooperate toward solutions and also the lack of willingness to provide information doesn’t make things easier.

The Netherlands did help the islands write their development plans, which content is the foundation for policies to strengthen the economy and to improve the level of prosperity of the population. Unfortunately, the Netherlands shows a lack of commitment to help accomplish the goals set in these development plans. There is also a lack of commitment with regards to the implementatioins of the social plans.

Consequence of this attitude is that the arrears that are assessed can not be taken away. These arrears form a major impediment to the economic growth of the island. Economic growth is the road to a financially more independent island.

It has almost been 4 years since the start of our current political structure. The question we may ask ourselves now, is: “What have we achieved?” Everyone would agree that in the field of education and public health, major improvements have been made. But upto now, far too little is accomplished in fighting poverty, improving infrastructure and in strengthening the economy. It is not enough to help the islands make development plans, it is time to offer help achieving the goals set up in these plans.

The key question is: “What exactly does the Netherlands want with these islands?” Starting point should be to help the islands stand on its own feet as soon as possible. For example, one of the basic conditions for St. Eustatius (and Saba) is to establish an affordable and attractive air connection to and from these islands.

At least 35% or more of the population of St. Eustatius is living on minimum wage (which is 42% of the minimum wage in the European Netherlands). In the Netherlands 15% of the workforce lives on minimum wage rate. The NIBUD research conducted on Bonaire shows that the minimum wage there is well below the minimum required for a household.

The economic impulse that can be generated by for example the development of the harbor and infrastructure (as described in the development plans) could turn the tide. Tariffs of electricity, water, telephone and internet, mortgage, insurance, transportation and other costs are often higher, or even a multitude of the tariffs in the European Netherlands.

To take away this ever spreading criticism of the current situation, it is of utmost importance for the Netherlands to invest in the economy of the islands and to help strengthening the purchase power of the populations. It is crucial that we have to take into account the agreements that have been made with respect to achieving a level of provisions that is acceptable for Dutch standards (“een voor Nederland aanvaardbaar voorzieningenniveau”) The Netherlands can not be taken seriously as long as there are no steps taken by the Hague to determine what the acceptable level is in various sectors. If we knew what that level has to be, it can serve as a reference point for addressing the arrears. It is clear that we have a long way to go, in particular regarding the purchasing power of the population and social provisions. In addition, an important cause of Statia’s economic stagnation is the infrastructure wich is behind the times. An insufficient infrastructure makes it difficult to attract investors.

A lack of proper information sometimes causes completely wrong conceptions which contribute to a feeling of dissatisfaction.
This document is intended to describe the improvements that can be made different areas. Often, simple interventions can lead to a healthier economy and a higher level of welfare of the population. Some of these areas will also be covered in the evaluation that is about to take place. We don’t have to wait for the evaluation to start making improvements.

Purchasing Power

Over the past years, a number of reports have been published that explain the feeling of discontent among the population. NIBUD. The NIBUD survey, conducted in Bonaire, is one of them. In it a calculation is made of the minimal budget needed for different kind of households. For single households the minimum wage is 58% of the required minimum budget. The AOV allowance for a single household is only 40% of the minimum budget requirement. The “onderstand” construction can not be related to the minimum budget requirement at all.

It should be noted that the study was conducted on Bonaire. Since the costs of living are higher on St. Eustatius then on Bonaire and since the inflation is also higher, the outcome of a similar study on St. Eustatius would probably prove that the low incomes have even less to spend as on Bonaire.
Symptoms of poverty.

Another report that was published recently is a report on domestic violence in the Caribbean Netherlands. This reports concludes that the main cause of many cases of domestic violence is the widespread poverty prevalent on the islands. The recommendations given in the report relate to the elimination of the symptoms, but a recommendation to address the problem of poverty is missing.

Beside domestic violence, health problems are also symptoms directly related to poverty, with diabetes and obesity as a result of the poor and unbalanced diet that is common on St. Eustatius

Price control

Some Second Chamber members are of the opinion that it would be good to get the islands to introduce maximum prices (price control). This is possible by law. The question one may ask is whether such price control will indeed have a substantial effect on the purchasing power. One must also consider the possible side effects. It is also important to determine how prices are structured and what the external and internal factors are that affect them. To establish how prices are build up is a good first step, but the realization and implementation of price control has many pitfalls.

St. Eustatius and the other islands are almost entirely dependent on imports. This means that the foreign manufacturers and traders determine the height of the prices in the supermarkets. The island is also dependent on transport from outside the Caribbean Netherlands. Because of the high energy prices, the transportation costs also make the prices rise. Included in the price is also the insurance for transportation. The import tax (ABB) of 6% has to be added to this price also.

The CBS (Central Bureau of Statistics) includes eleven categories to determine the height of the inflation. The costs of the most basic needs is only one category. We can’t predict if having a maximum price on these products will help lower the inflation, nor can we predict what it will do to the purchasing power.

Considering the above, it is questionable whether price control on basic necessities will help strengthening the purchase power. Also, some suppliers might stop offering certain products, because it will be no longer profitable to sell them at that maximum price. The local provider has no influence on the major part of the costs of the items in his or her shop.

Other issues affecting the purchasing power:

Utility and telecom rates

A large part of the household budget is spent on other things than food. We have to pay the electricity and water bills, the cost of telephone and internet, the cost of house rent or mortgage, insurance and travel expenses.

Electricity

Electricity costs USD 0.34 per Kwh. The monthly electricity bill for a one-or two-bedroom home is about 150.00 USD. This is almost 17% of the minimum income. The Ministry of Social Affairs should give some form of provision for these low income households.

Water

Since about a year, there is a water supply system on St. Eustatius. Before this system, the water was delivered by truck if needed. The traditional cisterns or water cellars, where rainwater is collected, are still widely used. Only when it does not rain for a while, people use the water supply system.
The low income families are the firsts to have to use the water supply system. This part of the population lives in relatively small homes with larger families often consisting of several generations. The small houses have small cisterns, which after a few dry weeks are empty and one is therefore dependent on the watersupply system or the water truck. This water costs USD 10 per M3, which is 4 to 5 times more expensive than in the Netherlands. An average water consumption of 90 liters per person and a family size of six persons provides a monthly water bill of USD 160.00. This is almost 19% of the income of the minimum income. This amount does not include the cost of bottled water, which is bought at the supermarket. This remains a necessary cost because the water of the watersupply system is mixed with the cisternwater and therefore not suitable for consumption.

Telephone and internet

The cheapest internet package that is available costs USD 83.00. Calling with a mobile phone is many times more expensive than in the Netherlands. For both the internet and telephony, the quality lags far behind from what is acceptable in the European Netherlands. Cable TV is provided by a separate service provider. The costs are USD 45 for 51 channels that are often passed illegally and of poor quality. Except BVN, no Dutch channels are offered. The small size of the market is the main reason for the high prices and poor quality of services offered.
One would wonder if the open market that is currently maintained, is the right choice for a market with no more then 2000 potential customers. For telecommunication there is an open market. For water and electricity only one concession is issued. It could be taken into consideration to do the same for telecommunication.

Housing

Mortgage interest

In the Caribbean Netherlands the mortgage interest is not established by the free market. Mortgages are kept artificially high by the banks. The interest rate is currently somewhere between 6 and 8%. For comparison, in the Netherlands this rate is between 2:25 and 3:55%.
St. Eustatius has two branches with head offices elsewhere as banks (delete) (one of the two closes in July 2014). Dutch banks don’t do business in the Caribbean Netherlands and the limited scale and existing legislation are not a stimulus for the establishment of Dutch banks.

Insurance

Because St. Eustatius is situated in the hurricane belt, the insurance for a house has to include hurricane damage. The premiums for home insurances are therefore between 12 and 14 per thousand. For a property with a value of $ 150,000, this means an annual premium between USD 1800 and USD 2100 has to be paid. These premiums are much higher than in the European Netherlands. As with the banks, only branches of insurance companies are located on the island.

House Rental

The local housing foundation has great difficulty to manage and maintain the social housing they provide. The necessary funds should come from the rental income supplemented by a modest grant from the Public Body. The rents are kept artificially low in order to ensure that the residents can pay.
Housing allowance (huursubsidie) such as in the Netherlands does not exist. Proposals to provide for housing allowances are not considered by the Ministry of Finance, arguing that a housing allowance does not fit in the present tax system. The result is that there are insufficient funds for maintenance of homes and no reserves set for replacement. The latter in turn leads to a chronic shortage of social housing in particular.
Rents in the private sector are high, due to high construction costs (all materials must be imported), high mortgage rates and high insurance premiums. 750 to 800 dollars for a simple two-or three-room apartment is a customary rent and almost equal to the minimum wage.

Home ownership

It will be clear that the extremely high mortgage rates and the expensive insurance discourages home ownership. Adding to this is the recently introduced law Wfm BES and Wwft BES, which makes it almost impossible to get the approval for a loan. Besides this, there is no guarantee for mortgage (hypotheekgarantie) on the islands, like in Holland, which also discourages home ownership.

Traveling expenses

St. Maarten has 93% of the shares of Winair, the airline that flies Statia and Saba. The remaining 7% of the shares belong to the State since 2010. The islands of St. Eustatius and Saba have no influence on the policy of the company. In the past, they each had a respresentative in the board.
A return ticket St. Eustatius – St. Maarten now costs USD 209. For someone who recieves a minimum wage, this is almost a quarter of his salary.
The annual losses of Winair have turned into a profit which amounted to 2 million in 2012 USD since 2010. The CEO of this small company recieves a fee of $ 280,000.
The airlift from St. Eustatius to St. Maarten is just as important as for example the boat connection from Terschelling to the mainland in the Netherlands. The latter is, however, seen as a form of public transport and subsidized by the State. A return ticket Terschelling thus only costs USD 35.
Shortly after he took office, Minister Plasterk seemed in favor of the idea to consider the route St. Eustatius – Saba and St. Maarten – St. Martin as public transport. However, this has not led to any result.

Minimum wage and level of social provisions

Obviously, the purchasing power is primarily determined by the level of income. The level of the minimum wage and the level of the social provisions play a decisive role, particularly in the Dutch Caribbean, where the percentage of the population that falls into this category is estimated at around 50%.
Uncontrolled raising of the minimum wage will have a negative effect on the economy of the islands. It is therefore important that a thorough investigation will take place among local companies to see if they have the financial leeway to adjust the minimum wage.

Furthermore, measures will have to be taken to strengthen the economy and attract investment. This will strengthen the business sector, will create job growth and it will provide the opportunity to raise the wages.

Shipping inspectorate

The shipping inspection is a subject that does not directly affect the purchasing power, but has a direct effect on the economy of St. Eustatius. Tradionally, the surrounding islands are lenient when it comes to the international regulations for inspection. Since 2011 the CN islands are an exeption in the region. The inspectorate applies the rules strictly, all ships have to meet these strict regulations. The result is that ships especially the ships that carry construction materials like cement, sand and concrete blocks, avoid St. Eustatius for fear of reprisals and controls by our shipping inspection. Given the small size of our market, this is not a major problem for these companies. For the economy of St. Eustatius however, this has major consequences. Contractors have problems getting their supply in time, causing severe construction delays and jobs at risk.

It is understandable that there are international rules and these should be respected. However, the islands suffer significant damage because throughout the region ships that are not upto par with the regulations are tolerated.

Taxes

You often hear people complain about the high taxes that have to be paid since 10-10-10. There seems no ground for these complaints when you compare the old tax system under the Antilles to the new tax system under the Netherlands. Why do people still complain?
The introduction of ABB

ABB is a new tax, which replaced the former turnover tax. The turnover tax was a tax that was paid monthly on the turnover achieved in that month.
The tax was invisible to the consumer and was not reflected in the account.

ABB is paid on imports on the amount in the account, plus transportation and insurance. ABB is visible to everyone. On the other hand unlike in the Netherlands, everybody imports. Not only all the companies import, also all the inhabitants of St. Eustatius import products from St. Maarten, Puerto Rico, the U.S. and even from the Netherlands. In contrast to the turnover taks, the ABB therefore is visible to all and is actually paid by everyone. A consumer tax that was invisible became visible with the introduction of the ABB and creates the perception that one has to pay more than before. Proper information and instructions could take this perception away.

Another option could be a return to the old turnover tax, as St. Eustatius and Saba suggested some time ago. The Ministry of Finance did not react to this proposal.

Overdue taxes from before 2011

The enforcement of the tax regime by the former Dutch Antillean tax department left much to be desired, to put it mildy. This resulted in a culture in which many entrepreneurs paid no tax at all. At the end of 2009 the new tax department started to catch up and collected the backlog from 5 years back. Today there are many small businesses on Statia, that are still paying off these old taks debts, on top of the current taxes.
Again, this creates the perception that the tax rate is higher than before. People blame the new system and are not aware that they still pay for the mismanagement in the old system.

Another negative effect of the collection of these old taxes is that the entrepeneur has to increase his prices to keep his head above the water. This also contributes to the very high inflation since 2010.

The proceeds of this tax arrears, which actually were supposed to contribute to the island government (that is the taxes from before 2011) now disappear into the coffers of the central government and do not contribute at all to the development of the island.
In light of the described above, it is time to consider to cancel these outstanding tax arrears.

Current tax revenues

The objectives of the tax system chosen for the Caribbean Netherlands were the following:
– Revenues equal to the revenues before 2011;
– Stimulating the economy of the islands;
– Easy for tax authorities and taxpayers.
There is no evidence that the introduction of the current tax system has stimulated the economy of the islands. The evaluation will determine whether the goal of a simple system is reached.

As for the revenues; we only know how much is collected for the three islands together. Many times, the islands have asked for the specific data for each island separately. Unfortunately these requests are systematically ignored by the ministry of finance. An argument that is used here is that Rotterdam or Amsterdam don’t get this information either. This is a false argument. In the first place, we can not compare a municipality to a public entity. The choice was made to make the island public entities because they can not be treated as municipalities! Secondly, the islands, as opposed to, say, Amsterdam and Rotterdam have the right of self-determination. If the islands want to decide upon their political status, it is a prerequisite to be aware of the costs and benefits of each separate island.

Providing information about tax income and costs will eventually remove the distrust of the population that now believes that information is held back in order to hide how much is actually collected. For people on St. Eustatius it now appears as if the central government collects more money then what the costs are.

Financing the Caribbean Netherlands

How is the CN budget spent?

Two evaluation reports have been published on the functioning of the RCN (Rijksdienst Caribisch Nederland or the central government office in the Caribbean) and the Kingdom Representative office. The researchers note that these two bodies need improvement especially when it comes to the coordination of policies. The latter undoubtedly means that money is spent ineffectively and the result is that the parliament in the Netherlands is wondering why it all costs so much while at the same time the living conditions of the island populations do not improve.
The national budget for the Caribbean Netherlands is 350 million dollars in 2014. How this amount is spent is the sole responsibility of the various ministries. The islands have no influence on it. Just 8% of this amount is spent on the economy and infrastructure, with only a small portion that directly attributes to improving the economy and infrastructure. As an indication, in 2014 a mere $ 139,000 is set aside for the promotion of entrepreneurship on the islands.

The free allowance for the three islands totaled only $ 44 million (St. Eustatius 11.5 million) and is not included in the amount of $ 350 million. The islands therefore receive only 11% of the total amount that the Netherlands spends on the Caribbean Netherlands.
Financial constraints of the Public Body.

The free allowance of the Public Body is established based on the results of the reference survey (referentiekader onderzoek). The authors of this reference survey stated that overdue maintenance was not taken into account when establishing the proposed amounts. In determining the height of the free allowance this message of the authors was not taken into account. For the island government there are no resources to initiate improvements in public buildings and infrastructure. An infrastructure that is inadequate has a negative impact on economic development, which in turn leads to stagnation or loss of employment and income per capita of the population and therefore in its purchasing power.

In collaboration with the Ministries of Home Affairs, Economy and Infrastructure & Environment, the islands have drawn up development plans. Unfortunately, the resources to take these plans into action are scarce.

It should be noted that a number of infrastructure projects are executed, or about to be executed. The improvement of the airport, although there are no funds for the replacement of the outdated terminal building, alternative energy and the schoolbuildings are being done. However, the roads are in very poor condition and the harbor needs improvement. Although the importance of good roads for the economic development of the island certainly should not be underestimated, the seaport in particular is a huge potential source of income for the island.

Investment in the quality and capacity of the harbor facilities is important, but most important is the seperation of the commercial harbor and the recreative harbor. The proceeds of the nautical business will improve and tourism can develop. Investments in the harbor will pay off in a relatively short time. A better equipped harbor will also result in an increase of income of the public entity in the form of port and anchorage fees. This will able the island to take care of infrastructure and other task under its responsibility.

Conclusions and recommendations

Purchasing power

First the answer to the question: “What is the acceptable level of provisions for the Netherlands” has to be established. Also research has to be done into the feasibility of bringing the minimum wage and social benefits at that acceptable level. To improve the purchasing power a number of issues should be taken into consideration.
Before considering solutions to the problem of the purchasing power, a consideration should be made about price control. Do we choose price control on basic necessities as the solution to the problem of the purchasing power, or do we tackle the other expenses that weigh so heavy on the household budget?
With regard to the rates of electricity and water, a solution can be found by socializing these rates. To cite one example, on Terschelling consumers pay the same rate as on the mainland. This model can be extended to the Caribbean Netherlands. The result will be almost immeasurable in European Netherlands, but it will have a significant positive effect on the rates on the islands.
The current plan with a reducing subsidy structure for the local electricity companies as included in the draft regulatory legislation is not the solution. In the long run, it will bring the suppliers of electricity into major financial problems.
As for telephone and internet, it should be seriously taken into consideration to let go of the open market policy and to establish the same situation as with the water and electricity, where there is only one provider. In the latter, the size of the market has shaped the policy. It is clear that this also should apply for telecommunications. An optimal share in the market will help reduce the costs for the provider, which will be reflected in lower prices for consumers.
To keep rents affordable and to also enable the housing foundation to manage and maintain its housing stock in a responsible manner, a rent allowance (huursubsidie) should be established, just like in the European part of the Netherlands. The fact that this would not fit in our tax system should not be an obstacle.
To make home ownership affordable and to encourage home ownership, the cause of the high mortgage interest of the local banks should be investigated. It is also important to establish incentives for Dutch banks to become active in the Caribbean Netherlands. Mortgage guarantee (hypotheekgarantie) must be made available for the Caribbean Netherlands. The negative consequences of the strict regulations of the Law Wfm BES and BES Wwft that the AFM and DNB which now apply for the islands have to be made clear. Then there should be policies drawn up for consumer protection without disrupting the market, and taking due account of the specific situation on the islands.
pg. 10
The airfares on the route St. Eustatius – Saba – St. Maarten should be reduced substantially. To achieve this goal, the air transport should be regarded as public transportation along these routes and just like the ferry connections to the Wadden Islands should be subsidized.
Shipping Inspectorate
To prevent the economy of St. Eustatius and possibly the other islands of the CN from unnecessary harm, the shipping inspection should use a more flexible policy, so that ships won’t avoid Statia out of fear of the shipping inspection. At the same time a dialogue should be started with the surrounding islands with the aim to establish mutual compliance with international regulations in the field of shipping.
Taxes
The possibilities and effects should be explored to replace the current ABB with the old turnovertax, while the proceeds stay the same. Also in the study, a comparison of the costs for the collection of these taxes should be included. The latter may show that the net yield of ABB would be lower than that of turnover tax.
It should be considered to grand general amnesty for the outstanding tax arrears from 2011. Such a measure will have a direct positive impact on the financial position for especially small local businesses and is stimulating the economy.
The expenditures of the central government for the Caribbean Netherlands have to be made clear for each island seperately. At the same time the tax revenues have to be specified per island. The population of the public entity has the right of access to this information. The islands differ in this respect from a Dutch municipality. In addition, the three islands are not one public entity, but three public entities with each individual island having a right to self-determination.
Financing Caribbean Netherlands
The recent evaluation studies carried out indicate that the Caribbean Netherlands and the Kingdom Representative office operate inefficiently. Inefficient functioning is inherent to inefficient utilization of the available resources. It can therefore be assumed that by improving the efficiency and coordination of policies, resources will become available in other areas.
It can be considered to use these resources to support the local budgets of the islands with their infrastructural plans and economic development plans.
In summary it can be stated that in all probability, using little additional resources or perhaps even without the need of increasing the supply of money, but only by a more efficient use and redistribution of existing resources, a situation can be created, which leads to an improvement of the living conditions of the inhabitants of the Caribbean Netherlands.
Openness and providing clear information plays an important role throughout the entire process