INVESTMENT CLIMATE STATEMENT FOR THE BAHAMAS 2006

UNCLAS SECTION 01 OF 08 NASSAU 000367

SIPDIS

STATE FOR EB/IFD/OIA, WHA/CAR, E/CBA/WALKER, TREASURY, USDOC
AND USTR
SANTO DOMINGO FOR USFCS
USDOC FOR ITA/TD/OETCA/BUSBY,3134/USFCS/IO/WH/MANN, AND
4322/ITA/IEP/WH/OMCB/MBROOKS

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV KTDB BF ECON
SUBJECT: INVESTMENT CLIMATE STATEMENT FOR THE BAHAMAS 2006

REF: SECSTATE 202943


1. THE FOLLOWING IS PROVIDED IN RESPONSE TO REFTEL.

INVESTMENT CLIMATE

A.1. Openness to Foreign Investment

The Bahamian Government generally encourages and offers
incentives for foreign investment in all sectors of the
economy except those the Government reserves exclusively to
Bahamian citizens. Reserved businesses include: wholesale
and retail operations; commission agencies engaged in the
import/export trade; real estate and domestic property
management agencies; domestic newspaper and magazine
publication; domestic advertising and public relations
firms; nightclubs and restaurants (except specialty, gourmet
and ethnic restaurants and restaurants operating in a hotel,
resort complex or tourist attraction); security services;
domestic distribution and building supplies; construction
companies (except for special structures for which
international expertise is required); personal
cosmetics/beauty establishments; shallow water scalefish;
crustacean, mollusk and sponge fishing operations; auto and
appliance service operations; and public transportation.

Officially, the Government has targeted the following
categories of businesses for foreign investors: tourist
resorts; upscale condominiums; time share and second home
development; international business centers; marinas;
information and data processing services; assembly
industries; high-tech service; ship registration, repair and
other services; light manufacturing for export; agro-
industries; food processing; mariculture; banking and other
financial services; captive insurance companies; aircraft
services; pharmaceutical manufacture; and offshore medical
centers.

Benefits of investing in The Bahamas include: a stable,
democratic government; relief from corporate and personal
income taxes; timely repatriation of profits of approved
investments; proximity to the United States; extensive air
links through nearby Miami, Ft. Lauderdale and Orlando; well-
developed telecommunications links; a good pool of skilled
professionals; excellent tourism and conference facilities;
and tariff concessions under the Caribbean Basin Economic
Recovery Act, Canada's CARIBCAN Program, and the European
Union's LOME IV Agreement. The Bahamian dollar is fixed on
par with the United States dollar and the Government is
firmly committed to maintaining this exchange rate.

In practice, the vast majority of successful foreign
investments in The Bahamas have been in the traditional areas
of tourism and banking. The decision-making process within
the Government of The Bahamas is highly centralized and major
investments are subject to review and approval at the cabinet
level. The Government is most interested in investments that
will generate local employment, particularly in white-collar
or skilled jobs. Large-scale projects in areas such as
agriculture may be difficult to staff since low-wage and low-
skill jobs do not appeal to most Bahamians, and because the
Government is reluctant to permit importation of foreign
laborers to staff these jobs, even on a temporary-permit
basis. When new foreign ventures are perceived as
competitors to existing Bahamian businesses or too dependent
on foreign labor, the Government has responded to local
concerns and withdrawn or refused the license of the foreign
business.

In 1993, the Government established The Bahamas Investment
Authority (BIA). It is located in the Ministry of Financial
Services and Investments. BIA is intended to provide a "one-
stop-shop" to assist foreign investors with initial
governmental approval of their investment applications and to
cut through further red tape for approved investments. BIA
is the Government's central point of contact for foreign
investment questions. Potential investors may contact the
BIA at:

Bahamas Investment Authority
P.O. Box N-7770
Nassau, Bahamas
Tel: 1-242-356-5956, Fax: 1-242-327-5907
www.opm.gob.bs

While The Bahamas has not yet enacted environmental
legislation as extensively as that in the United States, the
BIA still requires a full accounting of the environmental
impact of any industrial or agricultural schemes.
A.2. Conversion and Transfer Policies
Persons and corporations resident in The Bahamas are subject
to exchange controls administered by the Central Bank.
Certain commercial banks are authorized to deal in foreign
currency and have authority delegated by the Central Bank to
approve exchanges for certain current account transactions.
Non-resident investors wishing to initiate operations in The
Bahamas must register their operations with the Central Bank.
If their projects are financed substantially by foreign
currency transferred into The Bahamas, they will be given
"approved status," meaning that profits and capital gains can
be converted into foreign currency and repatriated with
minimal formalities. Capital investment into The Bahamas
remains subject to exchange controls, but as a practical
matter these controls have not been known to inhibit
repatriation of approved investment capital. Many Bahamians
argue that exchange controls should be eliminated, but the
Central Bank and the Government are not prepared to do so at
this time, citing the need to retain sufficient foreign
reserves to mount a strong defense of the currency's one-to-
one parity with the U.S. dollar.

A.3. Expropriation and Compensation

Article 27 of the Bahamian Constitution prohibits deprivation
of property except upon the making of prompt and adequate
compensation in the circumstances. There is no evidence that
the Government has ever expropriated a business, and both
major political parties have stated that nationalization will
not be an instrument of Government policy.

A.4. Dispute Settlement

There is no history of major investment disputes in The
Bahamas, although smaller contractual and other disputes
between Bahamians and foreign investors or exporters are not
uncommon. The Bahamian legal system is based on English
common law. The judiciary, appointed by the Governor
General, is independent and there is no evidence of
Governmental interference with the system. The highest court
of appeal is the Privy Council in London.

Tentative consideration is being given to the creation of a
Caribbean Final Court of Appeals to replace the Privy
Council. Despite recent efforts to reduce backlogs of
criminal and civil cases, resolution of court cases can be
slow, sometimes taking years. The Embassy has received some
reports of encounters with biased judges and malfeasance by
attorneys. The Embassy has also received reports of local
defendants evading payment of Bahamian civil judgments or
deliberately dragging out court disputes, especially in cases
involving non-resident plaintiffs.

Judgments of British courts, and of selected commonwealth
countries, can be registered and enforced. Other countries'
judgments, including those of the United States, must be sued
upon in court as debt, subject to all jurisdictional
requirements. Judgments of Bahamian courts are payable in
Bahamian dollars unless otherwise specified by agreement of
the parties.

Personal bankruptcy laws are antiquated and rarely used.
Companies can be and are frequently liquidated according to
law. Creditors of bankrupt debtors and liquidated companies
participate in the distribution of the bankrupt debtor's or
liquidated company's estate according to statute. The law
relating to sales of goods and some other commercial subjects
are codified in The Bahamas' statutes.

The Bahamas has been a member of the International Center for
the Settlement of Investment Disputes (ICSID) since 1995. It
is also a member of the Multilateral Investment Guarantee
Agency, which insures investors against currency transfer
restrictions, expropriation, war and civil disturbances, and
breach of contract by member countries.

A.5. Performance Requirements/Incentives

The Bahamas lacks any form of taxation on income, sales,
estates or inheritances. The only direct tax is a real
property tax. Casinos are specially taxed, and there is a
$15 departure tax levied at the airports and harbors. The
principal incentives for foreign investments are concessions
on import duties and property tax abatement. Tariffs in
general are high but do not generally discriminate by country
of origin. Incentives are offered under the following
legislation:

-- Industries Encouragement Act: Under this law, the
Government may exempt from duties the machinery, tools,
equipment, and raw materials imported to construct new
factories. A list of duty-exempt items is negotiated
separately with each new venture.

-- Hotels Encouragement Act: Under this law, new hotels
and resorts can be exempted from real property taxes for ten
years from the date the new facility opens, and for
significant tax reduction for up to ten additional years. An
amendment to the Act currently before Parliament would allow
the Government to grant tax relief for an additional ten
years, raising the maximum length of tax abatement to thirty
years. In addition, the Act allows the duty-free importation
of materials used for the construction of new facilities or
the substantial renovation of existing facilities acquired by
new owners for a set period of time. The list of duty-free
items for each project and the duration of some duty-free
windows are negotiated separately for each venture.

-- Agricultural Manufacturers Act: This law allows any
materials necessary for the construction, alteration, or
repair of an agricultural factory, as well as any machinery
or supplies used in establishing such a factory, to be
imported duty free. An agricultural factory refers to any
factory established for the purpose of manufacturing or
preparing agricultural or horticultural produce of The
Bahamas for sale or export.

-- Spirits and Beer Manufacturers Act: This law provides
for the duty-free importation of materials used in the
construction, alteration or repair of approved liquor
distilleries or beer breweries and the duty-free importation
of raw materials and equipment for liquor or beer production.

-- Recent amendments to the Tariff Act provide duty
exemptions for construction and development on certain outer
"Family Islands."

Prospective investors should discuss the terms and conditions
under which these benefits will be made available in any
specific case with The Bahamas Investment Authority.
Although work permits for key foreign employees are readily
granted in connection with the investment approval process,
Government policy favors employment of Bahamians. Fees for
work permits can run up to several thousand dollars each, and
permits for less senior employees can be difficult to obtain.

A.6. Right to Private Ownership and Establishment

Subject to the reservation of certain areas of economic
activity to Bahamian citizens only, and the necessary
approvals and licenses, private entities may engage in
nearly all forms of remunerative activity. They may freely
establish, acquire, and dispose of interests in business
enterprises. One significant exception is the Government's
monopoly on all forms of telecommunications (except Internet
services, wireless services, paging, and radio) exercised by
The Bahamas Telecommunications Company (BTC). Government
corporations compete on a basis of rough equality with
private corporations in similar businesses.

A.7. Protection of Property Rights

Subject to long legal delays, secured interest in property,
both chattel and real, is recognized and enforced. Mortgages
in real property and security interests in personal property
can be recorded with the Registrar General.

The Bahamas is a member of the World Intellectual Property
Organization (WIPO),but not of the World Trade Organization
(WTO). There is little industrial production that might
generate possible infringements of patent rights. However,
existing copyright laws are widely ignored, resulting in
widespread piracy of video and music recordings and
broadcasts, most of which remain in The Bahamas.
A.8. Transparency of the Regulatory System
Official Government policy commits The Bahamas to building an
economic environment where the Government assumes its proper
role as regulator and facilitator of economic development,
and where ideals of transparency, fair play and equality of
treatment are protected. Still, the discretionary issuance
of business licenses can result in a lack of transparency in
decisions to authorize or to renew the authority of a
business. Large foreign investors may be held to higher
labor, health and safety standards than are local
entrepreneurs. Obtaining required permits, especially
immigration permits, can take an inordinate length of time.
The Bahamas Investment Authority exists to assist foreign
investors in dealing with the permitting process.

A.9. Efficient Capital Markets and Portfolio Investment

The Bahamas International Securities Exchange (BISX) offers
shares on the domestic market. BISX has been plagued with a
shortage of funds and low trading volume since its inception
in 2000. However, the improvement in the economy in 2004
contributed to an increase in investor confidence and
activity in the domestic capital markets. The volume of
securities traded on BISX nearly doubled to 8 million shares
during 2004, with the value significantly higher at $24.3
million from $7.5 million in 2003. The BISX All Share Price
Index appreciated by 19.7% to 1,039.4 points, a marked
rebound from the narrowed decline of 2.0% in 2003.
Similarly, valuations represented in the broader Fidelity
Capital Market Index (Findex),which captures over-the-
counter trading, recovered by 14.9% to 423 points, from a
loss of 0.6% in the previous year. Total market
capitalization on BISX rose by 17.2% to $1.9 billion, and was
inclusive of the Kerzner International Bahamian Dollar
Depository Receipts (BDRS) sold to the public during July

2004.

A number of important initiatives are being considered to
accelerate the development of the local capital markets. One
of these is the eventual inclusion of Government debt
securities among instruments issued and openly traded in the
capital markets, provided that this does not increase the
cost of Government debt financing, and this would establish a
benchmark for the pricing and issuance of private debt
securities. Consideration is also being given to measures to
ensure the self-sustaining operating viability of BISX.
Finally, consideration is being given to the further gradual
liberalization of Exchange Controls, including those on
certain portfolio investments. On January 16, 2006 the
Minister of Finance, James Smith, announced "the relaxation
of certain capital account restriction," that now makes it
easier for Bahamians to invest money abroad.

Local bank credit, including loans from The Bahamas
Development Bank, is available to resident enterprises for
capital investment in The Bahamas in proportion to their
local ownership.

The prime rate at the end of November 2005 declined from
6.00% to 5.50%. The majority of outstanding commercial bank
credit is personal loans (mortgages) for consumer purchases.
According to data from the Central Bank, the number of U.S.
bank and trust companies has declined from 41 in 2003 to 15
in September 2005. At the end of June 2005, the total
external assets and total external liabilities of these banks
amounted to approximately $229,082 million and $227,327
million respectively. The gross economic contribution of the
banking sector for 2004 to the Bahamian economy was $463.1
million. Since the passage of the new financial legislation,
the total number of banks and trust companies declined from
415 in 1999 to 253 as of September 2005 -- most of these
banks were "brass plate" banks (organizations that were
registered in The Bahamas but did not have a physical
presence in this jurisdiction). In addition, the number of
International Business Companies (IBCs) has rebounded after
falling-off to around 80,000 in 2003, after implementation of
new bank regulation in 2000, to 135,595 at the end of 2004.
Assuming continued growth and steady or declining
unemployment, there is at this time no reason to doubt the
soundness of the banking system in general.
Projects in The Bahamas are also eligible, in some instances,
for financing from the U.S. Export-Import Bank, the Overseas
Private Investment Corporation (OPIC),or from multilateral
institutions such as the Inter-American Development Bank
(IDB). Major Bahamian banking institutions, which can
provide financing for certain projects in The Bahamas
include:

Bahamas Development Bank
P.O. Box N-3034
Nassau, Bahamas
Tel: (242) 352-5780

Bank of The Bahamas, Ltd.
P.O. Box N-7118
Nassau Bahamas
Tel: (242) 326-2560

First Caribbean International Bank (merger between Barclays
Bank and the Canadian Imperial Bank of Commerce (CIBC)
Charlotte House
P.O. Box N-3221
Nassau, Bahamas
Tel: (242) 325-7384

British-American Bank
P.O. Box N-7502
Nassau, Bahamas
Tel: (242) 327-5170

Commonwealth Bank
P.O. Box SS-6263
Nassau, Bahamas
Tel.: (242) 328-1854

Royal Bank of Canada
P.O. Box N-7537
Nassau, Bahamas
Tel: (242) 322-8700

Bank of Nova Scotia
P.O. Box N-7518
Nassau, Bahamas
Tel: (242) 356-1400

Finance Corp. Of The Bahamas
P.O. Box N-3038
Nassau, Bahamas
Tel: (242) 322-4822

A.10. Political Violence

The Bahamas has no history of political violence. The
Government publicly and strongly supports a modern open
approach to foreign investment, although many Bahamians,
including some prominent politicians, remain suspicious of
expatriate investors and employees. Foreign investors are
sometimes the targets of criticism in the news media and
Parliament.

A.11.A Corruption

Giving a bribe to -- or accepting bribes from -- a Government
official is a criminal act in The Bahamas. The current PLP
Government, cognizant of scandals in the 1980s that helped
bring down the previous PLP government in 1992, has
emphasized anti-corruption measures and has recently
introduced code of conduct guidelines for members of
parliament. Since 1992, credible reports of heavy corruption
have become rare, although allegations of improper conduct on
the part of Government officials surface regularly, and were
a prominent feature of the 2002 election.


B. Bilateral Investment Agreements

There is no Bilateral Investment Treaty between The Bahamas
and the United States. The Bahamas was designated a
beneficiary of the Caribbean Basin Initiative (CBI) in 1985.
As a result, with certain restrictions, products manufactured
in The Bahamas qualify for duty-free entry into the United
States. High wage rates, combined with the small size of the
country's manufacturing and agricultural sectors, have
hindered The Bahamas' ability to exploit these benefits. On
January 25, 2002 the former FNM Government signed a Tax
Information Exchange Agreement (TIEA). A key side benefit of
this agreement for The Bahamas is that, effective January
1,2006, it permits U.S. tax deductions for expenses of
business conventions held in The Bahamas.


C. OPIC and Other Investment Insurance Programs

Since 1992, the U.S. Overseas Private Investment Corporation
(OPIC) has approved two investment projects in The Bahamas.
It guaranteed up to $10.8 million in loans to Uniroyal
Chemical Company, Ltd. to assist in the purchase and
refurbishment of a plant in Freeport. The Uniroyal plant has
since closed. In addition, OPIC committed itself to a loan
of up to $1.6 million to Landquest, Ltd., for the development
of a cruise ship facility on the island of Eleuthera.

The Bahamas is also associated with the Multilateral
Investment Guarantee Agency of the World Bank, which, like
OPIC, insures investors against currency transfer
restrictions, expropriation, war, civil disturbances and
breach of contract by member countries.


D. Labor

In 2004 the labor force consisted of 178,705 workers. The
Government and the tourism industry are the country's largest
employers. According to the Department of Statistics, the
unemployment rate at the end of 2005 remained unchanged from
the 10.2% rate at the end of 2004, although the statistics
mask considerable under-employment. Unemployment is slightly
higher for women and highest among youth. Unemployment
outside Nassau and Freeport tends to be higher than in the
two major population centers. Wage rates, while lower than
in the United States, tend to be higher than elsewhere in the
Caribbean. Well-qualified accountants and secretaries, and
others with skills appropriate to the financial services
industry, command a premium wage.

The minimum wage is $4.45 per hour for public sector
employees. Minimum wage for private sector workers is $4 per
hour. The Fair Labor Standards Act requires at least one 24-
hour rest period per week, paid annual vacations, and
employer contributions to National Insurance (social
security). The Act also requires overtime pay (time and a
half) for hours in excess of 48 or on public holidays. A
1988 law provides for maternity leave and the right to re-
employment after childbirth. A Minimum Labor Standards Act
including the Employment Act, Health and Safety at Work Act,
Industrial Tribunal and Trade Disputes Act, and the Trade
Union and Labor Relations Act were passed in 2001 and early

2002.

The Bahamian Constitution specifically grants labor unions
the rights of free assembly and association. These rights
are exercised extensively, particularly in the hotel industry
- where 80 percent of the employees are unionized - and in
the state-owned industries. Unions operate without
restrictions or Government controls. The right to strike is
governed under the Industrial Relations Act, which requires a
simple majority of union members to vote in favor of a strike
before it can commence. The Ministry of Labor oversees
strike votes. Although prolonged strikes are still rare,
work slow-downs and rowdy protests occur occasionally. Labor
unions and others involved in disputes with foreign-owned
enterprises have not been above using the fact of foreign
ownership as a lever to gain popular support for their
demands.

The Immigration Act requires foreigners to obtain work
permits before they can be employed in The Bahamas. The
Government will permit foreign employees to work in a
technical, supervisory or managerial capacity to initiate and
operate industries, provided no similarly qualified Bahamians
are available for the job. Foreign business owners are
expected to train as many of their Bahamian employees as
possible to eventually fill technical and managerial
positions. Work permit fees have been increased from a range
of $250 to $7,500 per year to $350 to $10,000 per year.


E. Foreign Trade Zones/Free Ports

The 1955 Hawksbill Creek Agreement established Freeport,
Grand Bahama, the country's second-largest city, as a free
trade zone. Firms in Freeport are granted the right to
import equipment and materials duty-free, and enjoy other tax
advantages. In 1993, the Government extended the Hawksbill
Creek property tax exemptions through 2015 and duty
exemptions to 2054, but withdrew real property tax exemptions
for foreign individuals and corporations. The Hong Kong-
based conglomerate Hutchison Whampoa has invested millions of
dollars in a new deep-water container port, airport, cruise
ship dock, industrial park, and hotel properties in Freeport.


F. Foreign Direct Investment Statistics and Major Foreign
Investments

There is also a direct link between the level of imports
flowing into The Bahamas and foreign direct investments. At
the end of September 2005, net private direct investment was
$139.7 million, and net private direct equity investment was
72.6 million. Net Foreign Loan Financing on foreign
investments was ($5.2) million. Net foreign real estate
purchases for this period totaled $67.1 million. While
Government statistics do not list overall foreign investment
by nationality, the largest investors are American, Canadian,
Hong-Kong Chinese, and South African in origin.

Major foreign investments in The Bahamas include:

-- Atlantis, a hotel, resort, and casino complex on Paradise
Island near Nassau owned by Sol Kerzner of the South African
firm Sun Hotels International;

-- Baha Mar Resorts Ltd, owned by an Armenian, Sarkis
Izmirlian, recently purchased the Wyndham Nassau Resort &
Crystal Palace Casino, the Radisson Hotel, and the Nassau
Beach Hotel; and plans a large resort development on Cable
Beach;

-- Superclub Breezes Resort, owned by a Jamaican company;

-- Sandals Royal Bahamian Resort, owned by a Jamaican
company;

-- The British Colonial (Hilton) Hotel and the Clarion
Resort owned by RHK Capital, Inc. of Canada;

-- Club Med Resorts on San Salvador owned by a European
group;

-- Comfort Suites on Paradise Island owned by a U.S.
company;

-- Island Outpost Resort at Compass Point, Nassau, Pink
Sands Resort, Harbour Island, and Kamalamae Resort, Andros
owned by a Jamaican company;

-- Cable Bahamas, Ltd., established by a Canadian group;

-- Sandyport Development Co. Ltd., a housing subdivision
owned by a British company;

-- Roberts Isle, a housing subdivision owned by a U.S.
company;

-- Treasure Cove, a housing subdivision, owned by a U.S.
company;

-- Commonwealth Brewery Ltd (Heineken),a Dutch-Bahamian
company;

-- Bacardi Company Ltd., a Bermuda-based company;

-- The Container Port facility, airport and three beachfront
hotels in Freeport were acquired in 1997 by Hong Kong-based
Hutchison Whampoa;

-- Freeport Power, an affiliate of Mirant, based in Atlanta;

-- The Caribbean Marine Research Center, operated by The
Perry Institute for Marine Science, an American firm;

-- Freeport/Lucaya marina village developed recently by
European investors;

-- Polymers International, Ltd., a subsidiary of Dart
Container, which produces styrofoam pellets at a plant in
Freeport, owned by a former U.S. citizen (formally renounced
his citizenship, probably stateless now);
-- Morton Bahamas Ltd. (Salt),owned by a U.S. company;
-- Gorda Cay, renamed Castaway Cay, purchased and developed
by Disney Corp. for its cruise ship operations;

-- Half Moon Cay, owned by U.S. company Holland America
Cruise Lines;

-- A tropical fish farm operated on Walker's Cay by
Aqualife, Ltd., a U.S. company;

-- Princess Cay, a cruise ship landing facility near
Eleuthera Island, owned by Landquest, a U.S. company;

-- Four Seasons Resort Development on Exuma, owned by a U.S.
Company;

-- Freeport Ship Care Facility, owned by the Lloyd Werft
Ship Repair Company of Germany;

-- Our Lucaya Resort, a subsidiary of Hutchison Whampoa
Group and Centex Rooney;

-- RIU Resort, Paradise Island, owned by a Spanish Company;

-- Winding Bay Resort, Abaco, owned by a British company;

-- AES American Oil Company, which owns Ocean Cay a mining
facility to produce liquefied natural gas (upon Bahamian
government approval);

-- Baker's Bay located on Guana Cay, Abaco is owned by the
U.S. Discovery Land Company of San Francisco;

-- Bimini Bay Resort, owned by Floridian developer Geraldo
Capo;

-- The Ginn development projected located on the Western
end of Grand Bahama is owned by the Ginn Development Company
of Orlando, Florida;

-- The Bahamas Film Studio/Gold Rock Creek Enterprises
Ltd., located at East Grand Bahama is owned by Canadian Paul
Quigley.

HARDT