San José, Costa Rica, since 1956

Debate over Tourism Bond Law Suspended

MANAGUA After another year of intense legislative lobbying, anxious pacing and perhaps a bit of praying, boosters of the Tourism Investment Bond (BIT) Law will most likely be waking up to empty stockings on Christmas morning.

The bond bill, which promises to open Nicaragua to major tourism investment the likes of which the country has never seen, was again buried near the bottom half of the lawmakers to-do list before breaking for year-end recess today.

Despite several moments this year when it looked like BIT was going to pass through National Assembly on the coattails of another tourism-incentive law, it appears that the bond bill will again be left behind to celebrate another birthday in legislative limbo.

The BIT Law was first approved in general vote in December 2004, but never made it to the second, line-item vote to become passed into law. Now the future of the bond bill looks increasingly uncertain.

Promoters say they are frustrated, but not defeated.

We are still in the fight for the BITs, however not until the next legislature, said Lucy Valenti, president of the National Tourism Chamber (CANATUR). We have to wait for the government to change and then we will continue to lobby for the law.

Valenti said that CANATUR is already planning to host a forum on the benefits of the bill for the new lawmakers next January.

Lucía Salazar, former president of the Nicaraguan Tourism Institute (INTUR) and an equally enthusiastic booster of the bill, laments that the BIT issue has become so politicized over the past year. But she too sees a reason to keep her spirits high about the incoming government of Sandinista leader Daniel Ortega.

This will be an excellent opportunity for him (Ortega) to show that he really wants to attract more foreign investment, Salazar told The Nica Times this week.

Though Ortega has not declared his party in favor or against the BIT Law, Sandinista Front founder Tómas Borge, who heads the legislative tourism commission, supports the measure. But Borge might not be speaking on behalf of his party (see separate story).

Vice-President-elect Jaime Morales Carazo, who has been tapped to head Ortega s economic transition team, has come out against the bill, arguing that it would lead to abuses. Several other Sandinista lawmakers have made similar comments.

Opponents argue that the investment bonds would be a government subsidy for rich developers, namely the Marriott Hotel chain.

One critic of the bill went so far as to argue that the government would become a stupid partner in potentially risky investments.

Renowned fiscal expert Julio Francisco Báez, Central Bank president Mario Arana and rival tourism organization, the Smalland Medium-Sized Tourism Chamber (CANTUR), which claims to represent 98% of the small- and medium-sized tourism businesses in the country, have all questioned the merits of BIT and called for a larger, national debate on the issue.

While Arana agrees with BIT supporters that Nicaragua needs to do something to create tourism infrastructure to support the economy s new engine, he isn t convinced the bond law is the best way to do it.

I am not in agreement with exonerations for just whatever (type of investment), which is what we are doing now, he said.

Boosters of BIT, however, claim most of the criticism is misleading and intended to confuse people about the law. Proponents say they welcome a larger national debate and are convinced people would understand the value of the law if they would just take the time to look at it carefully.

A BIT of Background

The BIT Law originally was drafted three years ago to replace two other tourism investment incentives that were eliminated by the Law of Fiscal Equality of 2003.

As a consequence of termination of the old incentives laws, Nicaragua s tourism investment plummeted 84% in one year, from $3.8 million during the first half of 2003 to $700,000 during the first half of 2004 (NT, Nov. 12, 2004).

It hasn t made a full recovery since.

To fill the legislative void left by the old investment incentives, INTUR, with the help of other government institutions and financial consultants, answered with the proposed BIT Law, which would allow some projects that qualify for incentives under Law 306 (The Tourism Incentives Law) to finance up to 70% of development projects through the sale of private bonds with a 20-year term.

The bonds would be repaid with income tax generated by the new tourism business.

In effect, the government would offer qualifying companies a partial tax exoneration for up to two decades with the stipulation that the money generated would go to repaying investors at a market-set interest rate of around 10-12% (NT, Aug. 12; Oct. 7; Dec. 23, 2005).

A five-star hotel would receive $38-41 million income-tax exoneration over 20 years, but would have a net-positive effect on the economy by generating jobs and injecting capital into the economy through other taxes and expenses, according to a study prepared earlier this year by investment-promotion group ProNicaragua.

Tourism mega-projects, such as the $55 million Gran Pacifica beach and golf resort an aspiring five-star Marriott Hotel claim BIT or a similar investment mechanism is necessary to generate the capital needed for the project to move forward as planned.

Though there is still disagreement over whether the government would be assuming any risk on the venture, proponents claim BIT is 100% risk-free because the state would not contribute a dime and would be exonerating income taxes that currently don t exist.

Moral Obligation

The BIT model is based on an urban-renewal incentive that was first implemented in Chicago in the 1970s.

BIT carries a seven-year sunset clause. Salazar claims the government owes it to big investors like Gran Pacifica to pass the BIT Law.

Gran Pacifica came here lured, in part, by the old investment-incentive laws that were still on the books at that time.

Once committed to Nicaragua, Gran Pacifica had the rug pulled out from beneath it when the incentives were reversed.

The development project has since been awaiting ratification of the new BIT Law to move forward on financing construction of the hotel, which Marriott has already agreed to put its name on if Gran Pacifica can get it built.

Morally, the government has to look for a solution to this problem because it changed the rules of the game for investors, Salazar argued.

Mike Cobb, president of Gran Pacifica, says he is saddened that the BIT Law has been derailed by a few opponents who haven t offered any alternatives.

He also claims it s unfortunate that BIT has become known as The Marriott Law.

Cobb insists that the scope of the investment bonds is much greater than just his project. The economic reality here is that Nicaragua is perceived as a risky place to invest, which may not be the reality, but investors deal with perception, Cobb told The Nica Times. So there needs to be a financial mechanism to offset the risk, or investors will go to Mexico, or Belize or 100 other places where there is less risk with similar returns.

Ironically, the Sandinista government may be more aware of Nicaragua s dangerous image than anyone else.

Now, tourism investors hope the Sandinistas will be willing to do what is necessary to fix the problem.

The new government seems very serious about tourism and we are hopeful that they will pass BIT to help put some muscle behind Law 306, Cobb said.


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