Pillar Design

| 15/09/2011

Diversifying the economy of the Cayman Islands is a good idea. Encouraging high tech companies to locate in Cayman is a good idea. The draft “special economic zone” legislation recently released is very badly flawed. So how did two good ideas come to be associated with such daft implementation?

The draft legislation proposed last week shows all the signs of being another episode in the MOU-of-the-week “Fire, Ready, Aim” soap opera … or worse. There are so many things wrong with it that it would not be possible to identify all of them in 8000 words let alone the 500 – 800 words that CNS recommends for a single Viewpoint. This Viewpoint will point out only two of the many defects, one specific and one general.

The specific problem is that while the hype surrounding the “special economic zones” suggests that they will bring in new high tech companies, the draft legislation does not even mention "high tech" nor does it limit in any meaningful way the types of businesses allowed to escape normal regulation within the “special economic zone”.  The principal limitations are set out in s.18 of the Bill, but these are so vague that much of our current financial services sector would be permitted to relocate. By way of example, our principal law firms, fund managers, etc. exist mainly to service offshore clients and most of what they do in Cayman is incidental to the services they provide to offshore clients. They would therefore be permitted to relocate some or all of their activities to the proposed “special economic zones”.

Perhaps it is the government’s intention to ensure that one of the existing pillars of our economy is placed outside the rules that apply to the rest of the economy. Perhaps, as it appears, this draft legislation was designed by the ones intending to benefit from it, with nobody in government understanding the effects. Perhaps it is the case that those who proposed the legislation in the LA don’t really care what the legislation does to our country.  Perhaps there is another explanation.

Whatever the explanation, a simple solution to this specific problem is to add provisions that clearly delineate which businesses are not intended to be in the new “zones”. By way of example, the legislation could specify that no person engaged in a profession regulated in the Cayman Islands (including law firms and accounting firms), and no business regulated and/or licensed by the Cayman Islands Monetary Authority, and no person doing business with any of our official registers such as the Companies Registry or the Trade Mark Registry, is permitted to operate in the “enterprise zone”. That addition would not hinder real “high tech” companies, but would limit the damage to an existing economic pillar.

The general problem is that the Premier and his Cabinet propose that they should be the ones who decide on whether a particular entity is able to set up a zone in Cayman. That is a very, very bad idea.

Consider that perhaps there are very good reasons why politicians are no longer permitted to decide which applicants get banking licenses. The reasoning in relation to banking, which is applied across the planet, seems to be that most politicians have no relevant experience or formal education on which to base appropriate licensing decisions and, just perhaps, there is a need to minimise political corruption producing decisions that are bad for ordinary people. Whether either of those criteria is relevant in Cayman is left to the reader.
 
The simple solution to this general problem is to set out proper policy guidelines in the legislation and to leave decisions on the number and location of “special economic zones” to the “Special Economic Zone Authority” that the legislation already proposes. This is already done with other statutory authorities. Provided that the proposed Authority is staffed with appropriate expertise and is not tampered with politically (that is a big “if” admittedly), it would be able to make decisions that are good for the entire country, rather than decisions that may be based on other considerations.

There are a number of specialist developers around the planet which have developed very successful “high tech” parks in the US, Canada, the UK, and elsewhere. These developers have proven track records filling real high tech parks with real high tech companies that provide real high tech jobs. If “high tech” is to be a real pillar for our economy rather than smoke and mirrors camouflage for a get rich quick scheme, then we should be encouraging many proven high tech park developers to come to Cayman.

Ignore the hype. Read the proposed legislation, look at the relevant track records, see the flaws, and then ask yourself, “who is this intended to benefit”. Then raise hell!

Related article: Mac brings techy park law 

Category: Viewpoint

Comments (31)

Trackback URL | Comments RSS Feed

  1. Anonymous says:

    HELP! HELP!

     

    Can someone explain why a business, tech or otherwise would set up shop here? The price of food, fuel and electricity alone would be reason enough to find a cheaper location somewhere else. There is no tax advantage anymore since US citizens cannot avoid US taxes by moving out of the country. This holds true for many other countries as well.

     

    I assume they will not be charged work permit fees for bringing in outside employees. They will not have Camanian Status or any voting rights. There will be no incentive for them to purchase a home or build one. The whole idea of such a zone is baffling to me.

     

    • Anonymous says:

      There are many reasons.

      First is the savings on corporate taxation. Cayman is an excellent tax neutral jurisdiction in which to base and from which to conduct international business.

      Second is that non US citizens working in Cayman face no income tax obligations whatsoever

      Third is that contrary to your suggestion, US citizens are entitled to an exemption on taxation of their first (approximately) 90k of income.

      Fourth we are conveniently located in terms of both geography and time zone

      Fifth, we are happy to grant all required work permits to staff, and to do so quickly and efficiently (the US has imposed strict visa quotas on Indian and Chinese software engineers who we will welcome.

      Sixth, despite our challenges we rmain one of the best places on earth to live, conduct business, and raise a family.

      There are other reasons too…

      • Anonymous says:

        The U.S. is well aware of the fleeing of corporations to foreign jurisdictions offering lower corporate tax rates. They is pending legislation that will undermine these companies efforts. If their production facilities are within the U.S. and their corporate address is outside the U.S. they will be taxed. If they operate overseas but do business within the U.S. they will be taxed. Although income is tax free up to 90k, the cost of living here depletes the income at a greater rate than current income tax rates within the U.S.

         

        Bill Gates of Microsoft relocated one of his software design facilities across the border to Canada because of immigration restrictions on his Indian and Chinese engineers who he needed to keep as employees. The question remains, will the profits produced by moving to Cayman and keeping key these key employees be high enough to offset the tremendous costs of living here.

         

        I will leave you with the words of Mr. Ryan of the Ritz here in Cayman. He stated in a printed interview that his electricity costs average $150.00 per room per day. That is just electricity, it does not include insurance, employee payroll, water, garbage fees, maintenance, legal and professional fees or paying of debt and interest on the debt. It's hard to imaging how it could ever be profitable. An economic free zone will suffer the same costs which will make it unaffordable.

         

  2. tim ridley says:

    The draft SEZ legislation predictably shows every sign of being the product of horse-trading, committee drafting and trying to thread the needle. The result is a camel (with any number of humps) that, in its current form, will move slowly if at all and that has the potential to cause problems .

    Moving on from the mixed metaphors, the need for a SEZ and special legislation to carve out parts of the Islands for particular "offshore" businesses seems to strike at the very heart of what Cayman should be all about    i.e., an open market economy welcoming high quality exporting and revenue generating businesses and talent without borders. 

    If we have to create a SEZ to attract these new businesses, we clearly have problems with the current Cayman model. Unproductive red tape, unnecessary regulations and onerous bureaucracy that in turn encourage "cutting corners" and worse will, unless fixed and soon, start pushing Cayman back to the "Islands that time forgot". But we should address these fundamental issues headon and find solutions for the Cayman Islands as a whole and not by creating a SEZ that appears to float in the ether and that only certain businesses can enjoy.

     

    Tim Ridley

    • Anonymous says:

      Very good points.

      It may rarely be the case that certain businesses currently do not locate in Cayman because we don't have a "free port" where they could temporarily import materials to develop high tech products outside of the existing customs regime. In such instances a special zone might be a good idea.

      When it was initially presented in the media I understood that this was the SEZ model Cayman was looking at. Having looked at the draft legislation, this is clearly not the case. If a camel metaphor is appropriate, we need to consider the camel as rabid and dangerous.

    • Anonymous says:

      Didn't you mean to say, "The Islands that forgot time"?

       

  3. Anonymous says:

    The park is there to attract new types of business, full stop. To do that it requires concessions or those businesses will not come. Its as simple as that and we have a history of lost opportunities to prove it.

    We need to encourage this effort and whilst good criticism is welcome the problem with this form of communication is the ability to remain anonymous and say whatever you like whether it be true, fabricated, guesswork etc. We will never know your true identity and you may wish to hide it for good reason. On a small island such as ours there will always be disgruntled parties and there will always be those who have their own secret motives, some commecrial and some malicious, who make outrageous statements that go largely unchecked.

    I know a bit about this park and the law and the only valid question Iwould have after reading the above is: Mr. Developer, can a business in the financial community be a tenant in your park and receive the concessions?

    If the answer is yes we have a problem. If the answer is no I suggest the nay sayers shut the hell up and let the countries leaders and entrepreneurs try make a difference that benfits everyone on this island.   

    • Anonymous says:

      If you believe that what is being proposed has to do with benefitting everyone on the island I can set you up with some submerged toxic waste swamp land in Florida for only $2 million per acre. We should talk.

  4. Anonymous says:

    As the Premier has pointed out, "Ignoring regulations and policy is not the same as breaking a law". Based on this I would suggest that laws are passed that define exacly which entitlies are allowed to operate  in the zone. It should be made ILLEGAL for any politician to make exceptions or bypass the law in any way. Without legal regulation the zone will be used as a political tool.

  5. Anonymous says:

    well done!…great view point…..cayman is getting scammed…….

    cayman enterprise city is the ultimate oxymoron

  6. Lachlan MacTavish says:

    IMHO you cannot create a solid economy for The Cayman Islands through knee jerk MOU actions and capital projects. The county must be based on sound good governance with short and long term planning, balanced budgets and accounts and solid income streams . Why is this so hard to grasp. Apologies.  Once again IMHO the country shifted to a premier driven electorate at the worst time. The leader was the wrong person. The USA and then the World economies struggled to find direction. Our present premier is struggling for a direction to lead The Cayman Islands out of this situation. The shotgun approach to recovering from this is not the answer. Voters, Mr. Bush is shooting from the hip every day and we need firm, solid, calculated direction or you will continue to pay the price . There is no money in teh bank and you will have to borrow it or ?

  7. Anonymous says:

    The proposed Law takes Cayman into the 21st century! AT LAST! Its so sad to read comments from those that are poorly informed. Have any of these people been to the developers presentations? Thank God for this project and God bless those that had the forsight and vision to bring it to Cayman

  8. Anonymous says:

    the author has picked an appropriate nom de guerre since they obviously want us to return to the heyday of pedro st james and have us all thatch rope and catch turtles.

     

  9. 101 says:

    If the zone does not exclude core existing business. I.e. if it does not attract truly NEW types of business then it is simply a major real estate play by the developer. That means they have an area which, by law, has been granted with tons of concessions and they become the most popular landlord in town because they will have great incentives to attract business there. and that also means they can charge high rents to capture the fact that they will be giving certain benefits (breaks on immigration process, low duties etc). The obvious question is therefore; why is this benefit being granted to one particular developer?

    The solution to that problem is simple: designate the area as a general/government owned area so that it provides no favouritisim to a single developer to reap high rents. The rationale for doing this is to designate an area in Cayman that the government would like to encourage development and economic growth.

    OR 

    Maintain this "special landlord" concept and at least make the legislation clear that existing businesses are basically not allowed to simply relocate to this "zone" and that it has a true purpose to establish some NEW types of businesses here. I agree that the "high tech" focus is not wide enough so we should broaden the scope of the types of businesses (that are not here already and that we wish to encourage)

  10. Anonymous says:

    I don't think the author understands the difference between a "tech park" and a special economic zone.  first you must pass legislation to establish zones, then you pass legislation to delineate those zones (e.g. offer more legislation that incentivizes specific industries such as the tech industry).

    further there are no special economic zones in the U.S., so I'm not sure who the author is referring to as an expert in developing these in the U.S.  Hi tech parks yes, but not special econmic zones.

    Just because the media keep referring to this developent as a "techie park" doesn't mean that's all it is.

    first and foremost, as I understand it (and okay I have no real inside knowledge so maybe my undersanding is limited) this is a special econmoc zone which happens to tout tech industries.

    • Anonymous says:

      I agree that what is proposed is an economoc zone, only it is spelled "econo-mock zone"

  11. Anonymous says:

    I found it very strange that the Schedules to the law mentions a specific developer. I wonder who drafted those Schedules and what went on to justify that special treatment?

  12. Anonymous says:

    hmmmm how about it only benefits the few….the few involved in this deal!

    • Anonymous says:

      Woyoyoyo what is a draft law it means it is not final,perhaps we should submit our comments to be includednin the draft shouldn’t we then if not included then we can complain. Les contribute together we stand divided we fall

  13. Anonymous says:

    Great Viewpoint. I have looked at the Bill that was published last week. It is a bad joke.

  14. Eck O'Nominist says:

    Dream on.  Other than scuba diving there is nothing to attract hi tech workers to Cayman.  On the other hand we have a real opportunity to expand our intellectual property work in Cayman and maximise significant regulatory arbitrage opportunities.  Your proposal would prevent that in one line of statute.  Cayman should focus on and expand what it is good at.

    • Anonymous says:

      I agree with this Viewpoint. Developing intellectual property is appropriate for a high tech park. Lawyers and other agents registering it and taking advantage of other arbitrage points can continue to work outside the zone. That is the way it should be. 

    • Anonymous says:

      don't hi-tech workers want the tax benefits that right now financial services workers get?  I would say that's something to add to scuba diving.

      don't they also want intellectual property protection?

      so that's three things to attarct them!

  15. Anonymous says:

    Excellent points.  The park is a good idea but it needs to be done properly.  Reading the bill it is clear that this has not been thought out completely and it needs to not be rushed through.  My suggestion is "Mac, do this right not in way that will hurt Cayman but rather work with experts (not just the developer and make sure the laws are good for the people  of Cayman.  Not just the developer and the politicians."

    • Anonymous says:

      Hasn't been thought through and is being rushed?  

      Really?  

      Seems like this has been in the works for almost a year now. Besides, people out here need work now!  No one whose unemployed or whose business is suffering thinks these economic rescues are being rushed I asure you!

      • Anonymous says:

        Except for the fact that the way it is currently written it could be built entirely by imported labour and imported goods and materials. The whole idea seems to be to have a zone outside the normal rules that require employing Caymanians.

  16. Anonymous says:

    It is intended only to benefit the ones involved in creating the zone. No one else.

    • Anonymous says:

      I'm not a lawyer, nor an economic expert, but please explain to me how it can possibly only benefit the ones involved in creating the zone?

      Seems to me that the only way it can beneft the developers is if they attract loads of hi-tech tenants.  If they do that then it benefits everyone in Cayman because it expands the economy.

      If they don't do that then no one benefits, including the developer.

      • Anonymous says:

        The way it is currently drafted it looks like it will mainly attract tenants out of existing locations in Cayman not bring in new business to the island. It will also likely mean that government will have less revenue.