Burchall: How “Nanci” Grew In The Ten Years

[Opinion column written by Larry Burchall] Many people say that Bermuda’s business model and the global business model have changed and that simply increasing Bermuda’s ResPop is not the only answer to Bermuda’s existing economic problem.

But what, exactly, did change? What will a solution look like?

From Tourist Playground to Business Park

From 1921 to 1993, Bermuda’s national economy and national labour force was based on Tourism and Bermuda was a Tourist Playground. At peak employment in the Tourist Industry in 1987, Bermuda had 6,741 people employed in the Tourism Industry – hotels, restaurants, bars, and cafes.

In 1994, Bermuda’s economy shifted. Bermuda’s national labour force was now based on IB and related services. Bermuda had become a Business Park. At peak employment in 2008, Bermuda had 12,619 people employed in International Business and related financial and business Services; thus employing 87% more people than Tourism had ever employed.

Bermuda’s national economic model had changed.

Between 1987 and 1997, in a distinct shift, Bermuda and Bermudians switched from selling low value human services to Tourists who visited Bermuda and stayed on-Island for five or six days; to selling high value intellectual and technical services to Business Residents who resided in Bermuda for 365 days.

Reflecting and underpinning this manpower and business model shift, capital investment in Tourist Playground Bermuda dried up. Starting with the 1988 closure of the Club Med operation, hotels and other tourist establishments began closing down. At the same time, capital investment in Business Park Bermuda and its supporting infrastructure poured in and new insurance, accounting, legal, and infrastructure support businesses opened up.

From “Bermuda’s Delicate Balance” [Pub 1981: p. 48.]: “In 1978, Tourists spent an estimated $195.3 million in Bermuda. This was about two-fifths [40%] of the $505 million Gross Domestic Product for that year and about two-thirds of Bermuda’s foreign exchange earnings.”

Although data collecting and economic measuring processes changed between 1978 and 2013, broad general comparisons are still possible.

Three comparisons.

ONE – In 2013, Tourism was 4.8% of a GDP of $5,573 million. So GDP had grown 1,100% or eleven times while Tourism’s share had regressed – plummeted – eight times or 800%.

TWO – In 2013, Tourists spent about $391 million in Bermuda which meant that in the thirty-five years between 1978 and 2013 the dollar volume of Tourist spending had doubled with year-on-year Tourist dollar volume increasing about 2% a year. However, the VALUE or buying power of that dollar declined to where the 2013 Tourist dollar could only buy about two dimes worth of goods.

THREE – By 2013, foreign exchange earnings by Tourism had fallen from $0.67 in every dollar to about $0.15 of every dollar earned. In 2013, IB was bringing in $0.85 out of every dollar.

That was business model change. Massive change. Bermuda had changed from a Tourist Playground to a Business Park.

In 2010, Nanci appeared.

In 2010, a new and semi-permanent numeric fact – a poisonous spider – formed inside Bermuda’s composite economic, social, and political model. That was the fact of “Nanci” or Non Negotiable Costs. These are the priority costs of Interest plus Sinking Fund Contributions that have to be paid or met to priority service Bermuda’s National Debt. Nanci was created by Bermuda’s brand-new situation as a new ‘Debtor nation’.

In 2004, Nanci was $11.4 million and 1.5% of Revenue. In 2010, the year of financial change, Nanci was $84.1 million and 8.5% of Revenue. From 2014 – 2017, Nanci will average $170 million and will be at least 18% of Revenue. [See the graphic attached… and link to my presentation of 21st August.]

Sometime next year, the costs for the new KEMH thing will kick in. Nanci will then climb above that $170 million average.

I have not conjured up any of those numbers. All those numbers are etched, deeply etched, in Bermuda’s un-rewriteable economic history.

In the hard cold uncaring language of numbers, all that I have described is change. Massive change. Those uncaring numbers confirm and demonstrate massive change in Bermuda’s national business model. That model change was absolute. It is not reversible without causing severe social stress.

Then, on top of all that, there was global model change.

In order for Bermuda to keep feeding Nanci so that Nanci does not turn and feed on us, Bermuda needs a GDP that is large enough to:

[a] Priority feed Nanci at Nanci’s current minimum of $170 million a year;

[b] Cover Government’s Personnel Costs [In 2012/13 Government’s audited Personnel Costs were $600.95 million. Government accounts for 2013/14 have not yet been released.];

[c] Pay for essential Operations and Services and unavoidable or desired Capital costs [In 2012/13 Government’s audited spending on these was $505.73 million. Government accounts for 2013/14 have not yet been released.].

Do the arithmetic. That’s about $1,107 million going out on Personnel + Operations/Services and $170 on Nanci. That adds up to $1,277 million needed in Revenue if Government is achieve a ‘break-even’ or ‘balanced’ Budget; and get away from the lending trough.

What does Government actually get in Revenue? In 2012/13 Government’s audited Revenue was $866.6 million. In 2013/14, Government thinks it took in $892.6 million. For this year, 2014/15, Government hopes for Revenue of $901.7m. Between 2015 and 2017, Government sees Revenue going no higher than $957 million. So Revenue has been, still is, and is projected to be, way below $1,277m.

Do the arithmetic. From 2013/14 and going forward [2013/14 – 2016/17], an average $920 million Revenue coming in with an average anticipated outgo [2013/14 – 2016/17] around $1,145 million. That’s an average annual $225 million cash shortage. That absolute money shortage is camouflaged by surrounding it with jargon like “current account deficit”.

Again, I have not conjured up those Revenue and Spending numbers. Those numbers are inscribed in the audited reports and Budget Statements of Bermuda’s current administration and Administration-in-waiting.

Bermuda’s new national creed is ‘First! Feed Nanci!’

In 2010/11, at $84.1 million a year, feeding Nanci became Bermuda’s NEW financial priority. In 2014 and going forward, Nanci will average $170 million a year.

Now and into the future, the absolute and unbreakable new rule – new since 2010 – is: “First! Feed Nanci!” From Financial Assistance to Civil Service pay, everything else is now in second place – or lower.

Bermuda’s new creed is: “First! Feed Nanci!” This leads to the question, how?

Next week…… The answer.

- Larry Burchall

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