ARTICLE

Investing in Economic Expansion

April 26, 2017 – Justin Moorhead

Expanding our economy requires both a willingness and ability to invest and participate in that expansion.

Identifying opportunities to expand economic growth is not easy. We have a narrower path for development and growth than do larger communities.

In general, economic expansion occurs as a result of tradable natural resources, skilled or cheap manpower, competitive cost for energy and water, and robust transportation systems that offer ready access to large markets.  Limited economic opportunities for small communities are highly correlated to absence of these elements.

In our effort to grow and make meaningful ownership and employment opportunity available our focus has to be on exploiting our competitive advantage, which at the moment is tourism.   Simultaneously, we cannot loose sight of the importance of diversifying our tourism product and where possible our economy itself.

Attracting small high technology companies owned by young entrepreneurs and staffed by millennials who place considerable value on quality of life and access to the outdoors, can be a growth opportunity. Boise, Idaho, once known simply as the gateway to remote mining camps, has seen explosive growth as a high technology hub for small companies.

This requires an ability to invest in expanding the economy.  And, that investment must come from both the public and private sector. The public sector lays the groundwork, in effect building the foundation and the framework.  The private sector completes the build-out by offering goods and services that satisfy market and consumer demand.

Economic expansion is, therefore, a community wide effort that assesses

• Where can the economy be expanded?
• What is the required investment to achieve that expansion, and
• How best are the investments made to have the greatest likelihood of success?

Public sector investments are invariably made in infrastructure and in developing the human resource capacity to support economic expansion.

A challenge for many small economies is when to limit or to even stop investing in legacy industries once it becomes apparent that structural shifts are reducing that industry’s ability to support economic growth.

For years Caribbean communities focused on agricultural production even when it was apparent that declining worldwide commodity prices and global competition reduced agriculture’s contribution.

How then do we pursue economic expansion with reasonable assuredness that our investment will produce some sustainable benefits? We do so thoughtfully and after giving appropriate attention to cost and benefits, risks and returns.

Tourism

There are niche opportunities within the tourism sector– historical, heritage, convention and conference services, sports, game fishing, boating– that can be further developed to expand their economic contribution. Doing so requires the focused investment and analysis discussed above.

Our modern tourist product dates to the closing of Cuba and unrest in the Dominican Republic.
In 1954, 60,000 individuals visited the Virgin Islands.  By 1959, visitor arrivals had increased to 200,000. However, the real growth has occurred in cruise tourism.

In 1990 total visitor arrivals were 1.8 million of which 61% were cruise passengers.  By 2015, visitor arrivals had increased by 832,000; 76% of that increase was attributable to cruise tourism.

This disproportionate emphasis on cruise tourism is reflected in the limited growth of hotels and related accommodations for visitors.  Between 1990 and 2015, the number of hotels in the Virgin Islands declined by 18 properties.  Hotel rooms did increase but on average by only 22 units per year.

Cruise tourism today raises questions on how much more can it or will it continue to contribute to economic growth.

The competition from privately owned cruise terminals such as Labadee in Haiti and the various Cays in the Bahamas, larger ships with extensive offerings, and the promotion of the ship as the destination significantly erodes the economics of the independent port of call.
Building new infrastructure to service additional vessels might be considered a viable approach to maintaining market share.  However there are realities to consider when evaluating that proposition.

First is the reality of the cruise route.  A destination’s position is a function of geography and cruise routes for the most part track geography.  If a port is part of the Eastern Caribbean it remains in competition with other ports on that route, regardless of what it might offer the cruise visitor. There are exceptions to this pattern and repositioning or world cruises have greater flexibility to choose among destinations to visit.

The other is the business dynamic which focuses on what the ship offers to maximize per passenger return to the cruise line.  This accentuates the competition between maximizing cruise line profitability and the destination port’s economics. Lloyd Gardner with the Foundation for Development Planning commented on this dynamic in a recent posting on St. Thomas Source.

Non-cruise tourism requires facilities that support and offer opportunities for engagement and entertainment for more than a day’s visit. For these visitors the destination is the end product and the quality of the experience must be differentiable, compelling and competitive. If the effort is to attract conference and convention visitors, there must be services that support event planning and execution as well as addresses the logistics of moving, housing, feeding and entertaining large groups.  All of this requires investment to ensure the appropriate availability of facilities, experienced management and trained personnel.

Historical and heritage tourism requires investing in the rehabilitation and the revitalizing of our historical areas and sites and the making of the touring experience pleasurable and informative. Signage, safety, accessibility and the training of knowledgeable tour professionals are needed investments. Sports tourism also requires investment in facilities, sponsorship and promotional spending.

The pleasure boating sector with its subsectors of sailing, yachting and game fishing offer significant growth opportunity through both direct and indirect spending.

In 2000, the US VI Marine Resources and Fisheries Strategic and Comprehensive Conservation Plan indicated that boating and chartering ranked next to cruise tourism in producing revenue and employment in the Territory.  In 1978, 75% of registered boats in the VI were devoted to recreation. However, by 2001 that number had declined to 50%.  The decline was in part reversed by 2015 when recreational boats represented 67% of registered boats in the Territory.

The 1993 six passenger uninspected vessel rule decimated the charter industry in the Territory.  The good news is that the 2014 Coast Guard Reauthorization Act increases the number of paying passengers on an uninspected vessel to 12 placing the US Virgin Islands charter boat industry on a level playing field with the British Virgin Islands.

This rule change together with our geography allows expanding this sector’s contribution to the local economy and offers the opportunity for ownership and employment opportunity, assuming Virgin Islanders are trained to provide the services required by that industry. It can contribute to spurring additional business formation and expansion to provide marina, marine-electrical and refrigeration, catering, diesel maintenance, chartering, outfitting, and crew and vessel services.  All of these require investment in infrastructure, facilities and training.
The super and mega yacht sectors are a further subset of pleasure boating. Destinations with the highest prospect for growth offer history, heritage, status and privacy to yacht owners and their crews.

Super yachts exceed 78 ft. and are professionally crewed.  The mega yacht universe numbers some 5000 vessels worldwide.  Subscription grows annually through ownership and charter, and that growth is a function of individual and corporate wealth.

Estimates suggest that each super yacht over 55 meters or 180 feet in length, generate 9 jobs on board and spends in excess of $1 million annually for berthing, supplies, crew and passenger wages, repairs and fuel.  Taken together, the mooring, supplying, maintenance and chartering of these vessels is an economic force for the communities where they are moored.  Most spend at least 4 out of 12 months moored in a unique location and the industry moves consistently between the Mediterranean and the Caribbean depending on the season of the year.

The City of Barcelona estimates that the annual spend by a mega yacht of 180 feet is $3 million. Berthing and marina cost absorb 9% of that spend; supplies and fuel 12.5%; crew and passenger expenses, 61%; crew wages, medical and training expenses, 34%; and repairs 25%. All services can be provided locally and exert a positive impact on the economy of the host community.

Small High Technology Companies

Another productive area for pursuing economic expansion is by recruiting new high technology companies to incorporate in the Territory.  These firms are often built around new ideas in science, engineering and technology. Universities incubate these companies but all transition away from the university incubator to a community where they grow.  Locations that ease that transition can be a permanent home for these businesses.

These companies need to be actively courted with investments assistance and subsidies.  At the onset of their growth they have limited resources for facilities and training, choosing instead to spend on product development.

Our effort should be to create a hospitable environment for the growth of these companies.  Most know nothing of what the Virgin Islands can offer.  Our task then is to make the sale for incorporating in the Virgin Islands. There will be losses along the way but a few wins can be significant. We only require those few wins to materially and positively impact growth in community spending, employment and tax revenues. The decision of two companies to move to Boise, Idaho was the catalyst that spurred the exponential growth of the Boise Valley technology industry.

Attracting these companies at the early stage of formation is easier than pursuing more established companies to relocate management, staff and facilities later in the company’s development cycle.

Emerging entrepreneurs may not initially be drawn to the Virgin Islands in part because of its distance from larger markets that afford easier networking opportunity among peers. However, if we stay focused and build a hospitable environment we will grow a community of talented and high-energy entrepreneurs who will work with us to help build an even more supportive environment. It is in their self-interest.

Our islands are cosmopolitan and enjoy excellent transportation and information connectivity.  Further we offer to young entrepreneurs a little rivaled natural environment along with a quality of life considerably more attractive than is available in most mainland communities.  Western states have played to this advantage with considerable success.

More often than not these businesses do not have the same space, natural resources and logistics requirements as large manufacturing concerns. The finished products can often be transported digitally or by air as the value add to the consumer justifies premium pricing.  This sector is growing and hiring faster than larger companies.

To be successful these companies require highly educated and well-trained employees who are the product of government investment in research, education and training.

Our university can assist in this overall effort by providing research support, management training and skill development in science, technology, engineering and math as well as advanced training in hospitality and marine industry management.

Despite 65-years of having tourism and marine industries as mainstays of our economy, we have little institutionalized post-secondary training directed at professionalizing the skills and management expertise required by these industries.

Much of the above requires government investment.  As such all of government’s tax receipts cannot be internally consumed on personnel and service delivery cost. Long-term base-budget support is essential for investing in additional economic growth.

Acting on the above or variations of the above requires government investment. Long-term base-budget support must therefore be prioritized and available. That said economic expansion is a collaborative effort involving various community stakeholders– the public, private and education and training sectors.  All have roles to play to help drive the economic expansion that is vital to the future of our community.