Territorial update July 5, 2013

VIRGIN ISLANDS TERRITORIAL UPDATE BY PREMIER OF THE VIRGIN ISLANDS AND MINISTER OF FINANCE DR. THE HONOURABLE D. ORLANDO SMITH, OBE Theme: THE CHALLENGES WE FACE TODAY AND WHAT WE ARE DOING TO OVERCOME THEM July 5, 2013 Ladies and gentlemen, as the person to whom you have entrusted the leadership of this Territory, it is important that I report to you on the state of the Territory as it relates to our financial health and the challenges we continue to face in the economy. You have demonstrated confidence in my colleagues and me by returning us to Government, for which we thank you.

In being entrusted with this great responsibility we undertook to, first of all, tell you the truth about the state of the economy as we found it, and secondly, to do all that we can to increase revenues to the Treasury by attracting investments while we continue to build the infrastructure and protect our primary markets.

The Virgin Islands, not unlike the rest of the world, is facing a number of challenges.

These challenges are not new but bear their origins well before this Government took office. What I can assure you is that your choice was a good one; for you have a Government that takes its responsibility and accountability to you its people very seriously. This is serious business and it demands the efforts of serious and committed servants of the people. We are willing to confront the issues beyond the surface and implement thoughtful and sound strategies to overcome the challenges this Territory now faces. We hear your concerns and take your advice.

We are listening carefully to them and use them to formulate and implement solutions while we work selflessly and tirelessly on your behalf. I would therefore like to thank you for the patience and understanding you have exercised thus far.

Beyond the preoccupation we have had in recent months in respect to the financial services industry then, it is now time that I make a follow up statement to the one I made a few weeks ago.

Given the continuing world recession and the demands on the public purse understanding the TRUE fiscal position of the Government of the Virgin Islands has been a priority for this Government. When we assumed office in 2011, we undertook a preliminary review of our finances. We had preliminary indications that our finances were deteriorated. You see as a physician, I know the critical importance of the right diagnosis, however dire.

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I therefore did an extensive investigation in 2012 which indicated that the fundamentals of sound Financial Management and accountability were not in place, largely due to the discontinuation of reform of the processes during the prior four years.

To compound the situation, there was very little inward investment during the past four years and, some of the investment initiatives that my government solicited during 2003 to 2006 which would have done much to buffer the impact of the global economic downturn by providing work for our people and increasing revenues to the Treasury were discontinued Ladies and Gentlemen, the BVI is a small Territory with a population of about 30, 000 but with all the infrastructural needs of populations many times bigger than we are. So whether we have 1000 students or 10,000 students, we need to ensure a world class primary, secondary and tertiary education for them because that guarantees our present and future as a country.

Whether we have 500 patients or 50,000 patients, we need to ensure that a system of public health is in place, that a hospital exists to handle the health care needs and demands of our people.

Whether we have 8000 households or 80,000 households, we have to put in place a sewerage system to dispose of our waste.

And being in the Tourism business, we obviously have to get our tourists to our shores and create activities for them while they are here. We have done quite a bit of work in this sector in the last two years and soon I will report to you on the things that have been happening here and our outlook for the future of this sector in the BVI. The point I am making, my people, is that we have costly demands on shrinking resources and so, we have to look carefully at where we are financially and what decisions must be made if we are to continue to provide the services that are incumbent on government and expected by the populace.

The reality is that the BVI is facing tough times not unlike what have been felt in much of the global economy. How we fare ultimately will depend on our ability to make the tough but necessary decisions and stay the course which, my Government believes, will lead to a brighter future for all the people of the Territory.

Just under two (2) weeks ago I spoke on the environment in which we currently operate with respect to the financial services industry, and the many things that we are currently doing in this sector to ensure that we remain competitive and maintain our market share. Be assured that there is a certain level of diplomacy and political savvy that is required, to be heard, respected, and trusted in this global industry. I personally am continuing these efforts on your behalf. Today I therefore speak in more general terms about our economy.

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The main problems relate to a slow down or dip in revenue growth and an increase in infrastructural demands. Gross Domestic Product fell slightly from an estimated nine hundred and fifteen million dollars (US $915M) to an estimated nine hundred and nine million, dollars (US $909M) a reduction of a mere zero point seven percent (0.7%) from 2011 to 2012.

However, while certain sectors of the economy like the job markets are showing some slow down, other primary indicators of the Territory’s Gross Domestic Product, such as Tourism and Financial Services, illustrate that we are holding our own quite well despite the challenges before us.

With shrinking revenue , and without increasing our liability and breaching the borrowing guidelines, my government has to find a way to inject the level of funding into the economy that will ensure that infrastructural needs and social infrastructure projects continue to be funded. To do otherwise would further, negatively impact the economy.

We believe we have found a solution.

We are critically examining our various loan commitments with a view to consolidation and refinancing. With interest rates at the lowest they have been in decades, a consolidated loan would actually result in a lower combined payment and more room within the guidelines for additional borrowing. This would allow us to pay for some of these critical infrastructural projects without increasing Government’s overall liability.

We expect to have access to at least one hundred million dollars (US $100M) as a result of this exercise. I will continue to update you on my progress with this initiative and I am asking you to continue to put your confidence and trust in me as your leader to get us safely across this difficult path. I promise you, I will do so, but I need time, your patience and your understanding.

It is true that the Government of the Virgin Islands is today less able to let as large a number of contracts as was the custom in the past two decades or so. Unfortunately except during the previous four years of my administration, very little was done to encourage investment and small business development, which forms the backbone of any economic growth.

But I assure you, my people, my Government is working hard to fix this. This Government will continue to fund its commitments including the Civil Service, its largest single expenditure. All around us, governments are reducing their civil service and also cutting their salaries. We have been able to avoid both of these things thus far out of a strong and deep commitment to our people.

We recognise that our greatest resource and most important assets are our people and they can rest assured that the Territory’s budget woes will not be settled on their backs.

Yet we cannot do this alone, but require our civil servants to recognise the sacrifices that are being made to protect them. I therefore expect them to be determined to work hard, selflessly and efficiently to serve the people of this Territory.

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Some insensitive souls, purely to gain political mileage would have you believe that we are being misers, growing the proverbial grass while the horse is starving; this my people, is simply not true. On the contrary, it is totally irresponsible for any Government to proceed without setting resources aside for a rainy day. That is the bad formula that got us here in the first place. In the times of plenty when it would have been easy to set reserves aside, we did not do so.

It was my Government’s vision and leadership that established a dedicated Reserve Fund to meet the requirements of the Borrowing Guidelines that predated the Protocols for Financial Management. The former Borrowing Guidelines and the current Protocols for Effective Financial Management require that these reserves be at a level that allows us to meet three months of operational expenditure; this is good financial management practice.

The first contribution of one point one million dollars (US $1.1M) was made by my Government in 2004. However, previous spending without savings means that the level of reserves needed to meet this requirement falls short. As a result any loans that we need to take out to develop this Territory must be approved by the United Kingdom.

This is where we are now and while there is enough blame to share around, I am actively seeking SOLUTIONS. I am pleased to say that by building these levels in excess of the minimum requirement, we will be able to borrow without having to seek external approval, thereby returning a higher level of decision making authority to you the people. I know that this is a level of independence that we all desire.

Today my Government is indeed left with this difficult task of putting this economy back on track. But we are up to it! As difficult as things may be in the BVI now, I can assure you that without careful management they could get a lot worse.

My people, I have already explained my commitment to the Civil Service but please understand that the cost to run the civil service is very high. This year we will spend in excess of 40 percent of our budget on wages and salaries alone, and another 40 percent on the other aspects of running the civil service and having it meet its mandate to you the people of this Territory, which leaves precious little to engage in capital projects. This is nothing new. It has been our reality for some time. We therefore need greater efficiency and productivity and yes, transparency and accountability, to curtail this trend.

The significant changes that have been occurring within my administration in respect to its financial reporting standards, has illustrated that there is much work to be done regarding our financial management practices. While others may have delayed or ignored these needed changes, I consider that it would be a breach of trust and mismanagement of your affairs for me to do so. As you know, we commissioned Pricewaterhouse Coopers to conduct a forensic audit in the Treasury. The results are serious and telling.

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Suffice it to say that certain adjustments in our Treasury’s operational policies highlight that the financial reporting practices were not satisfactory and hence could not reflect accurately the true fiscal position of the BVIG which was on preliminary examination not good. The true picture will soon be determined.

The development and subsequent signing of the Protocols for Effective Financial Management, was a significant step. Its application has played a prominent role in the progress we have made in financial management and in accountability to the people of the British Virgin Islands. To relax our position now such as is being called for by colleagues on the other side of the aisle would be irresponsible.

Many of you have complained to me about the high prices we all face in the super markets and stores. Some of you have indicated that this is your reason for buying outside the BVI. As you may know, once spent, those monies are no longer available to circulate in our economy. So we hold a double edged sword.

However, while I agree with you that some prices in the BVI are high, at the same time we should also understand that if we continue to spend as we have been doing outside of our economy, we cannot affect those prices, but we will affect jobs and job creation as well as the further development of our own economy.

I also hear the cry of the local merchants: 'high shipping costs, high fuel prices, increasing cost of goods.' Still, I believe there is room for dialogue to understand what can be and needs to be done to bring BVI’s hard earned dollars back to the BVI market place. In this we all have a responsibility.

Government’s responsibility includes carefully looking at the issues. I will appoint a working party to assist me in that regard and report back. In the past we have instituted relevant policies such as carefully examining tariffs and making appropriate changes as we have done for items such as computers. I now recognise that we have not gone far enough.

Merchants also have a responsibility to consider changing their marketing strategy perhaps in lowering the costs of high consumables and earn their mark up on volume or luxury goods and of course, thereby encouraging the consumer to shop in the BVI. We always get a reality check in this season of graduations when we have hundreds of young people coming into the market place with shrinking job opportunities. Couple this with the growing number of unemployed persons and it creates concerns. It is also the case that some individuals are waiting for a ‘specific’ job before they assent to join the work force. I cannot help in that scenario. However, if individuals want a job and jobs are not available, then that is of concern.

Our statistics indicate our employment rate has being in steady decline for some time now from 18,473 persons in 2010 to 18,238 persons in 2011 to the current 17,797 persons in 2012. This indicates a decrease in employment of one-point-three percent (1.3%) between 2010 and 2011 and a two-point-four percent (2.4%) decrease between 2011 and 2012. In many instances these persons were persons here on work permits.

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Nevertheless, I have asked my Minister of Labor to look again at his work permit policies to determine the jobs that can now be done by BVIslanders, Belongers and Residents rather than constantly increasing the burden on the infrastructure (education, health, road, etc) by new awards of work permits.

I can assure you, my people that the Government is working on all fronts day and night to get us back to the position of prosperity we once enjoyed.

Governmental Reform The path to recovery begins with putting our house in order.

We cannot expect to achieve a successful economy, without a properly functioning central government. We are underperforming when we are capable of doing much better. That has to change. We have started the process. We are making significant strides within to improve existing systems to produce and to provide us with information and tools commensurate with a modern civil service.

This is why we are requiring proper strategic planning, budgetary discipline, revenue forecasting, cash flow management, debt management and consolidation among other things.

The forensic audit within Treasury Department was another significant step. We are currently revamping the entire department, creating new operating procedures and higher standards of operation. Within the coming weeks I expect a BVIslander will be appointed as Accountant General with professional accounting qualifications and extensive experience.

We have created a Central Statistics Office which will focus singularly on managing and collating data, so that ministers and officials alike can have hard data by which to make better decisions.

We have created a Macro Fiscal unit within the Ministry of Finance to analyse the relationship between the fiscal realities in the Government and the economic behavior of the economy in order that my colleagues and I can make forward looking information based decisions to promote the success of this Territory.

The budget process is being improved in order that it was be more results based, transparent and meaningful to you the people and that your hard earned tax dollars will be utilized more effectively and efficiently.

We are developing a reporting structure, so that regular reports of the activities and financial position of the Government of the Virgin Islands will be published for all to see.

Stronger project management oversight and project analysis is currently being developed as well to ensure that projects before and during executions are subject to strict standards, promoting value for money for the people of this Territory.

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E-government is also being pursued vigorously, headed up by one of my colleagues, in order to allow you to use government services more easily.

We are moving into a new era of accountability, transparency and performance; we are moving in the right direction. In other words, I am making sure that when we speak about the economy in the future, we have the hard facts to support our conclusions because I am making sure that the systems are put in place.

Ladies and gentlemen, these are not academic exercises. This is prudent financial management and is critical to the long term viability of the Virgin Islands.

Beyond putting our house in order, there are other key initiatives that we have undertaken to build a better Virgin Islands.

We have re-established the National Business Bureau. This institution is meant to assist enterprising business people to strike out on their own. In this way our people will, with pride, be able to provide for themselves and their families.

The Bureau will continue to train our people in managing a business and in preparing business plans for banks. It will assist persons with raising seed money and gaining access to cheaper credit to start their business and invest in this economy.

Inward investment is also very important. We will support the right kind of investments and investors for our country. This is both necessary and vital to growing our economy.

It is a simple truth, as a Territory, we do not have the means to engage in projects to the level and frequency that we did in the past. Nor do we have adequate financial resources to get on with completing all the necessary infrastructural projects in healthcare, transportation, roads, water, and sewerage at once.

This is why my Government is carefully selecting and prioritising projects that will provide the maximum benefits to you. We will fund those we can with the cash available and utilise loan funding or alternative means such as public-private partnerships for larger scale projects.

Now, let me talk about the projects that are receiving focus from this government. They are listed, not necessarily in order of importance but as a way of dealing with each separately.

We are completing the hospital. ‘The health of a nation is the wealth of a nation.’ As it stands, we fund the Health Services Authority to the tune of 22 million dollars (US $22M) per year. In addition, Government is frequently called upon to assist families with costly healthcare treatment and special needs that we are not equipped to give locally. These arrangements are unsustainable in the long term and that is part of the reason why we have to conclude our discussions on a National Health Insurance programme. It is, I can assure you, short term pain for long term gain.

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A completed sewerage system in the East End Long Look area and in Road Town is a must. As we have known for years, the current situation in these areas is unacceptable, and inconsistent with the products and services we offer in our economy. The issue of sewage has been a talking point in political campaigns for the last 12-15 years and it is now beyond critical. We intend to bring closure to this debate.

We will build the senior citizens retirement home to allow our elderly citizens to live out their final years in comfort and dignity. And we intend to complete this project utilising available cash. When the world looks at the way we treat our young and our elderly, we want them to say that truly, this is a civilized Territory, a good place to live, to vacation and to invest.

The Cruise Pier - this is essential for the competitiveness of our cruise industry and growth of the BVI tourism industry as a whole. We will continue to look carefully at how we manage this sub sector but make no mistakes, we will ensure that our taxi men and vendors who rely on cruise tourism to support their families, remain integral to this sector.

Although we have not yet arrived at the stage at which we receive final approvals from the United Kingdom government in respect to this project, they have indicated their satisfaction with the processes thus far, have agreed to the need to implement this project and expressed their satisfaction to the basic terms of engagement now being finalized. I expect to report to you on the finalization of this process in the coming weeks but I am optimistic that construction on this project will likely begin in earnest this summer.

We will ensure that Prospect Reef hotel is upgraded or replaced to the standard of at least a four-star hotel. This will be done by attracting inward investment and affiliation with a global brand. This hotel will be used to complement the existing hotels we now have on the main island of Tortola. I am happy to report that we are now reviewing several groups who have expressed interest in its development and will be making a decision within the next two weeks to engage with one of them to get this project underway.

Finally, the upgrade of the Terrance B. Lettsome International Airport. I have indicated on previous occasions that this is the single most important infrastructural project in the BVI. Why do I believe this? Simply because tourism and tourism related activities earn the bread that is served on most of our dining tables in the BVI. If we cannot get our visitors to our shores, quickly, safely and enjoyably, we cannot earn that bread or maximize our visitor’s experience and spending.

Our market scans indicate quite clearly that the visitors to our shores are less likely to spend excessive quantities of time travelling to and from their vacation destination. We must facilitate easy and quick access to and from the BVI. The expansion of the T.B. Lettsome airport is key in this regard. Quick and easy access to and from the BVI is also a key factor for us as BVIslanders in addition to our business sector and plays a vital role in the use and success of our Commercial Court as well.

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Our transportation infrastructure is also hampered because our ferry services continue to perform below an acceptable level to serve the needs of the traveling public.

As a Government we have a responsibility to the public and have engaged the operators to determine how best to help them provide more efficient services. However, if significant improvement in this service is not seen within the very near future, Government intervention will be necessary to ensure that a service commensurate with what the people and visitors of the BVI deserve is in place.

Ladies and gentlemen, agriculture and fishing continue to be key matters for this Government. The Green House project was a significant investment and we are now reexamining how best to revitalise the project to reduce our dependence on agricultural imports and increase food security.

This will also provide an opportunity for our local enterprising farmers to utilise advanced methods to meet local demand on a commercial scale and build businesses.

We have already made strides in the fishing industry, developing capacity and outlet at the fisheries. We continue to engage the fishermen to assist them with building businesses and hopefully industries.

These initiatives and projects which are needed will also provide direct benefits once started in terms of employment opportunities, both in their development and subsequent management. They are also by no means exhaustive of the work your Government is engaged in on your behalf.

Building a better workforce through education, as well as immigration and labour reform are key dynamics in building a strong economy.

My people, I have tried to lay out with all frankness to you the state of our economy.

More importantly I have set out the path that we must follow which will restore our Territory to its former glory. The public sector projects combined with those ongoing in the private sector, together with our tourism and financial services activities is our blueprint To succeed every citizen must play his or her part. Elected representatives on both sides of the house must lead by demonstrating a commitment to work for the good of the people. We must understand and demonstrate that the BVI is bigger than any and all of us and that endless deadlock and political haranguing is counterproductive and is hurting the very people that we have pledged to serve.

Second, we all as citizens, residents and guest workers must keep productivity high throughout the entire spectrum of society, and take pride in doing our best. The BVI Government has its responsibilities to the people and to good governance and this often will translate in ‘teaching you to fish’ rather than ‘giving you the fish.’ .

Thirdly, I would like to leave you with the hope of better days ahead. Throughout history, societies have had to struggle through periods of daunting challenge. For the societies that adapted and met the challenges before them with resolve and commitment to their 9

fellow citizens, their rewards were great and they survived to be examples to be emulated by others. For those that did not adapt their societies did not endure.

I believe within our borders are a resourceful, resolute, proud and hardworking people who can meet and overcome the challenges that are now before us. I urge one and all to rise to meet the challenges.

May God continue to bless us all and these beautiful British Virgin Islands.

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