1. 2. 3. 4. 5.

Banking

Banking

Banking Sector Overview based on 2003 data

1. 2. 3. 4. 5.

The Isle of Man banking sector can be divided into five distinct sub-sectors: o Clearing o Private o Off-Island Retail o Savings o Trust Over the past 15 years the sector has grown by between 3% and 9% pa but has been in decline since 2002 and faces a further sharp reduction (see below). Banking facilities on the Island range from basic current and deposit account facilities to complex wealth management structures. However, there are no genuinely unique Isle of Man banking products. In a global context, the Isle of Man banking sector offers a mainly retail, mass-affluent proposition targeting UK expatriates. Its chief revenue stream is derived from international personal client business referred from UK and International Group offices. At 294m the Banking sector directly contributes just over 37% of the Islands Primary Sector GDP of 781m at present and 20% of total Island GDP. The sector is the largest employer on the Island outside Government, employing 3,200 people, and paying an average salary of 20,000. The sector pays just over 46m in taxes each year, circa 38% of the Primary Sector total, by far the largest contribution of any Primary Sector industry, and is responsible for nearly 12% of all taxable income. The Banking sector supports approximately 6400 secondary sector jobs. In aggregate Banking is responsible, directly and indirectly, for some 23% of the Islands total working population.

3,200
Jobs

294m
GDP

20k
Av. Earnings

46m
Total Tax

Issues facing the sector The sector has a severely weakened retail-focused proposition which is under threat from the European Savings Tax Directive (ESD). In addition access to foreign markets and business development opportunities are limited by the rigidity of the legislative environment, and ineffective marketing of the sector. This means that other jurisdictions are winning business which the Island should be getting.

Banking Sector SWOT Analysis

1. 2. 3. 4. 5.

The balance of strengths and weaknesses identified within the Banking sector have shifted to a more negative positioning in recent years, but there are different outlooks within the sector as a whole. While the Trust and the Private banks are optimistic, the Clearing and Savings banks are more negative, with the off-Island Retail banks displaying mixed views. However, the size and importance of the Savings and Clearing banks in terms of total assets and staff employed is resulting in an overall more gloomy outlook for the sector. In relation to the issues covered by the SWOT analysis below, it is the size of the gap between the best estimate and pessimistic outcomes for the sector that is most noteworthy. This is largely due to the severity of the threat posed by ESD to large aspects of the Banking sector proposition and compounded by the market access issue. As these critical factors are largely outside the Islands control and banking is the largest sector of the economy, the prognosis is doubly worrying. Strengths Valuable contributor to GDP over a period of 15 years and of pivotal importance to the Islands economy. High standard regulatory environment. Flexible work permit system and good quality staff offering personal client service. Weaknesses Weak retail and mass affluent customer proposition. General perception of Isle of Man as vanilla jurisdiction that is is not attractive to the up-scale clients required. Lack of legitimate access to markets, especially the EU. Lack of competitive differential with other offshore centres. Rigid legislation that inhibits business development.

Opportunities Unified trade body to lead finance sector programme change. Active and aggressive targeting of corporate & private clients, and institutions that attract such clients, to shift focus from mass affluent to HNW business. Morphing of Banking and CSP propositions to create a bigger market share for all. Co-ordinating business relationships across the IoM finance sector to increase revenue, thus investing in the ecosystem.

Threats ESD significantly impacts business levels, affecting the Savings Banks in particular. Anti-offshore regulations in foreign target markets restricting the development of products and new markets. Downsizing and reduction in banking operations in favour of rival jurisdictions. Outsourcing to cheaper jurisdictions Subsequent impact on rest of finance sector ecosystem.

Banking the Turbulent Years 2004-2008

IoM banking AUM 2004-2014 Dip-Plateau-Recovery
50 48 46 44 42 40 38 36 34 32 30

1. 2. 3. 4. 5.

49.4bn

36.0bn 34.8bn
07 13 04 08 03 05 09 11 06 10 12 20 20 20 20 20 20 20 20 20 20 20 14

The anticipated impact of negative Savings Bank growth 2004-2008 on total IoM Banking AUM 2004-2014
8 6 4 2

Total Banking % Growth Rate

+5.8% +4.8%

0 +0.4% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -2 -4 -6 -8 -10

-8.5%

Savings Banks % Growth Rate

The European Savings Tax Directive (ESD) is expected to hit the deposit business of the Islands banking sector hard over the next 3 years in the lead up to its implementation and the immediate aftermath. Although a dip is expected over the period 2004-06, the decline is predicted to plateau over 2007-8 and recover steadily from 2009 onwards as the market adjusts to the change. Deposits represent approximately 95% of Savings Bank business but they also account for between 50-70% of the business of other categories of banks on the Island. The impact of ESD will therefore be felt very widely and the current IoM banking industry is likely to experience some Turbulent Years in 2004-08 but will hopefully then recover. The impact of ESD is also more acute for the IoM compared to other jurisdictions due to the retail nature of the sector and the importance of deposits to total IoM banking assets. This is further compounded by the typical people of European origin profile to the client base. If these individuals are not caught by ESD now they may come within its net at a later point when they return to Europe. The increase in EU states from 15 to 25 in May 2004 has also had the effect of reducing the number of active target markets. However, the Trust and Private banks are less affected by the impact of ESD as their leading client proposition is based more on fiduciary structures rather than retail relationships. Legitimate access to foreign markets is another major constraint on banking growth prospects be it in the form of legislative restrictions or the enforcement of action against previously tolerated practices. The EU Distance Marketing Directive is one such example of this. Anti-offshore regulations in foreign markets impinging on the structure of products is also limiting the development of business in markets such as Canada and Australia. There are therefore a variety of short-term issues that will make the next few years very difficult, so the banking sector will require support over this period. This support may involve conservation of the existing business and encouragement of other forms of banking both organically among the current players and new players from outside the Island.

20

Banking Sector 2014 - Best Estimate View

The forecast best estimate average growth rate across for the Banking sector to 2014 is 2.9% pa. However, this average masks the Dip-Plateau-Recovery pattern described above. In order for the sector to succeed it must address the immediate weaknesses and threats it faces (see above). The key factor to enable success will be developing new, competitive corporate and private banking services. The Banking sector in 2014 may therefore look quite different to the 2003 model, with upscale Private and Trust Banks offering the best growth potential, and revenue from deposit-takers playing a less prominent role.

1. 2. 3. 4. 5.

3,600
+11.5%
Jobs

404m
+37%
GDP

24k
+18%
Av. Earnings

63m
+35%
Total Tax

The refocus of the sectors proposition will see an increase of small upscale private banks locating on the Island. Existing licence holders will increasingly focus on these higher value customers and associated activities. Despite the re-focus and a healthy 37% real increase in overall activity, the contribution of Banking to total Primary sector GDP at 404m will decline in real terms to the Manx economy, representing only 29% of Primary sector GDP in 2014 compared to 37% in 2003. This reflects the relative growth of other sectors rather than an absolute decline in banking despite the Turbulent Years However, although only minimal staff increases are forecast for the sector, Banking remains a major employer in the Manx economy in 2014 with overall numbers rising by 11.5% over the 11-year period. Salary levels are forecast to see a slight increase in real terms in conjunction with the more specialised nature of the sector. The sectors contribution to Government tax take is also forecast to rise to 63m, representing just over a quarter of the total 219m collected from the Primary Sectors.

Actions required to achieve this: Realignment of proposition from Retail / mass affluent to High Net Worth clients by embracing a corporate access route through CSP products. Aggressive targeting of up-scale clients and those who introduce them, with a focus on London. Staff skills shortages overcome by intensive training programme. Ongoing pro-active development of the finance sector assisted by the Government. Focused on aligning factors such as tax, regulation and legislation, intellectual property, technology and people to help facilitate finance sector growth in general.

Banking Sector 2014 - Pessimistic View

1. 2. 3. 4. 5.

The pessimistic view of Banking in 2014 is based on an analysis of official 2003 GDP, tax take, employment and salary figures and illustrates what might happen should the sector not take action in overcoming the challenges it faces. As the largest financial services sector business, the prospect of a significant drop in banking revenue will have broader impact on the economy as a whole than a downturn in any of the other Primary sectors.

In the worst case scenario, Primary sector GDP levels in 2014 are forecast to be reduced to below 2003 totals in real terms and stand at 700m. However, the Banking sectors contribution to total Primary sector GDP will reduce by over 45% to 161m. Staff numbers are also forecast to fall as more operations downsize and close their doors. The total is expected to reduce from 3,236 to 2,120 in 11 years. Salary levels are forecast to remain static and stay at their 2003 levels in real terms. Taxes paid to the Government will diminish dramatically in line with the reduced levels of economic activity reflected in the lower GDP contributions and staffing levels. From a 2003 total of 46m, the 2014 tax paid is expected to fall to 27.4m. This pessimistic scenario would, in all probability, hole & sink the proposed zero corporate tax strategy due for implementation in 2006 that has taxation of banking activities at its core.

2,120
-34%
Jobs

161m

-45%
GDP

20k
0%
Av. Earnings

27m -41%
Total Tax

Events that could trigger this pessimistic case: EU Savings Directive could have a bigger and longer impact on Manx banks, causing loss of revenue, then confidence, then key staff and ultimately driving international banks to invest in other international centres. A resurgent Channel Islands competing more aggressively for Manx business to ensure their own survival. Failure by Manx banks to develop strong corporate and private banking offerings OR failure to market them internationally, so that IoM fails to attract business against competition in better-known financial centres.

1. 2. 3. 4. 5.

Life Insurance

Life

10

Life Sector Overview based on 2003 data

1. 2. 3. 4. 5.

Since the late 1970s the Isle of Man has been at the focal point for the global offshore Life industry and was successful in attracting many major international companies which have established operations here. The sector provides mainly investment-linked insurance products aimed at mass-affluent and high net worth clients, with a strong focus on the UK (c. 40%) and expatriates of different nationalities in a range of foreign markets. Local nationals now form a larger proportion of total clients reflecting how the business has gone native in some markets. A high proportion of their business is sold via independent financial intermediaries. In the four years prior to 2001, the sector had enjoyed compound new business growth of 14% pa and had seen assets under management grow to 14.4bn. However, 2002-3 proved to be a testing time. During this period profits and margins were thinner as a result of falling stock markets generally and the retail consumers desertion of the with-profit bond specifically. 2004 has seen something of a recovery for the major players as they have begun to source business from a broader range of distributors at thinner margins.

The Life sector on the Island currently contributes 13% of Primary sector GDP, the third largest source after the Banking and Fiduciary sectors. It is also one of the largest employers, accounting for almost 2000 or 16% of primary sector jobs alone. The average salary of a life sector worker is 20k per annum, similar to the banks. The sector contributes 10% to the total primary sector tax take, although it pays no corporate tax Finally, the Life sector supports a further 4000 secondary sector jobs on the Island, or some 14% of the total workforce. It is also a vital part of the financial services sector sourcing almost all of its business off-Island. It is estimated to be responsible for over 30% of the Islands Asset Management business.

1,970
Jobs

104m
GDP

20k
Av. Earnings

12m
Total Tax

Issues facing the sector: Competition from other jurisdictions, regulatory arbitrage, the demise of with-profits, legacy of a three-year bear market, increased market uncertainty, consolidation or change of parent companies. Limited growth in new markets owing to strengthening of international law, national legislation and the enforcement of actions against previously tolerated practices. Continually rising cost of staffing, administration and compliance.

11

Life Sector SWOT Analysis

1. 2. 3. 4. 5.

This is a weaker sector compared to that in the boom years prior to 2001. The Life sector has suffered from falling profits but while a number of players are showing the strain, other providers have weathered the storm and are now seeing profits recover. However, further growth within the sector can only be achieved, by a sector-wide recognition of the shift to higher premiums at lower margins and focusing on distributor channels that are aligned with such business. The gap between best estimate and pessimistic figures is significant; reflecting the difference between a sector that is prospering and one that is stagnating. However, a smaller leaner more efficient life sector focused on higher value/lower margin business is already beginning to emerge.

Strengths IoM has longevity as a respected Life jurisdiction and still accounts for a high proportion of all offshore life business. Reputable companies with dominant market shares. Strong IFA distribution channel, especially in regulated markets. Respected regulator and regulatory framework. Policyholder Protection Scheme.

Opportunities Court new high value/low margin distribution channels, moving from retail IFAs to bancanssurance and professional advisers as evident in companies now providing tax wraps for institutional investors. Shift the focus of the business from retail to corporate & wholesale clients. Encourage cohesion between market players to achieve common objective of stability and growth.

Weaknesses Lack of retail market access, especially EU. Limited knowledge of alternative distribution channels. Limited product portfolio. Quality and availability of staff, including management. Key decision makers located off-Island, some business opportunities going to subsidiaries in other locations. Interpretation of regulations proving to be a deterrent for some clients and IFAs. No real cohesion within the sector. General suspicion of rival companies and ineffective trade bodies. Confusion re. role of Ombudsman and the rulings emerging.

Threats Regulatory lock-out in an increasing number of foreign markets. Erosion of tax wrapper advantages for UK market. Stricter internal group risk and cost control strategies restricting market development opportunities. Domestic players in traditional overseas markets substituting offshore proposition. Competition from Dublin and Luxembourg. Competition from US/Australian-style Wrap Accounts.

12

Life Sector 2014 - Best Estimate View

The best estimate view for the Life sector in 2014 sees a steady rate of 5% pa growth for a sector which has reached a stage of relative maturity but one that needs to continue its shift to higher value/lower margin business in order to remain competitive and thrive.

1. 2. 3. 4. 5.

1,500

-24%
Jobs

143m +38%
GDP

24k
+18%
Av. Earnings

11m -10%
Total Tax

A refocus of the Life sector proposition to concentrate on the more high premium/lower margin business including corporate sources, is forecast to increase sector GDP contribution to 143m, the fourth highest contributor within the Primary sector. However, jobs are expected to decrease to 1500, as many of the lower-end administration jobs will be automated away. In the future the sector will predominantly employ skilled technical staff. The hierarchical shape will shift from that of a pyramid to a diamond. Salary rates will increase in line with this repositioning and the average rate for the sector is expected to rise to 24k per annum in real terms over the 10 year period. The overall tax take from the industry is forecast to be lower than the total collected in 2004, largely due to the lower number of staff employed and the consequent lower personal and indirect tax revenues generated from them.

Actions required to achieve this: Actively develop a new model for the Life business on the Island focused on higher premium/lower margin business by building upon the steps already taken by some of the key players in expanding their product proposition to cater for wholesale and corporate business, including bancassurance. Attract more small, niche market players with this same focus. The sector must move away from its reliance on the old style retail IFA-focused distribution model and seek more client-focused professional adviser distribution. Finally, it must ensure that it can offer the high standards of service required to cater for such a specialist market. Education and training on a wide scale is required to bring staff up to standard. Work with the rest of the finance sector to develop financial solutions for the international investor and internationally mobile workforce.

13

Life Sector 2014 - Pessimistic View

1. 2. 3. 4. 5.

The 2014 pessimistic assumptions for the Life sector provide an insight into how it might look if it fails to address the key issues facing the industry or does not build on the more recent improvements. It is based on an analysis of official 2003 figures relating to GDP, employment numbers, salary levels and tax contribution. As one of the largest finance sector businesses, and one in particular that generates almost all its income from off-Island sources, the effect of a further slowdown in the sector would have a significant impact on the financial services sector as a whole.

In 2014, pessimistically the sectors GDP contribution is expected to remain at broadly the same level in real terms as in 2003, but this is largely generated from administering the run-off of several closed businesses rather than that of active players. As more parent companies withdraw backing from their international operations and close to new business, employment figures are expected to fall sharply, from 1,970 in 2003 to 800 in 2014. This is the most striking aspect of this scenario and, if it occurred, would undermine up to a further 2,300 secondary sector jobs in the process. Salary levels are forecast to stay the same, but fewer than half the people will be working in the sector than did ten years ago. Total tax contribution is also forecast to fall sharply to now represent only 5% of total Primary sector tax take.

800

104m
0%
GDP

-59%
Jobs

20k
0%
Av. Earnings

5m
-59%
Total Tax

Events that could trigger this pessimistic case: Another prolonged bear market The introduction of gross investment roll-up for life products in the domestic UK market Changes to the tax treatment generally of offshore life products in a range of foreign markets. Continued consolidation of UK financial services market (life companies in particular) A significant IoM player relocates low value activities off-Island.

14

1. 2. 3. 4. 5.

Fiduciary

Fiduciary

15

Fiduciary Sector Overview based on 2003 data

1. 2. 3. 4. 5.

The Fiduciary sector specialises in the establishment and administration of company and trust structures for private and corporate clients worldwide. It is not subject to the same market access issues faced by the retail operations of the banking and life insurance industries, but new fiduciary incorporations on the Island have fallen in recent years owing to an increasing lack of competitiveness of the corporate product and troubled international markets. The Islands main competitors are the BVI, Cayman and the Channel Islands. The sector is a vital part of the finance sector as it is a valuable generator of off-Island income for the Manx economy. While employment numbers within the Fiduciary sector are relatively low, compared to Banking and Life, at 10% of total Primary Sector jobs, the sectors economic contribution is substantial, at 12% of total Primary Sector GDP. The true contribution of this sector has only become fully evident since it was regulated in 2000. Average earnings within the sector are high at 25k per annum reflecting the highend, specialised nature of the business and the customers they serve. Total tax contribution is one of the lower amounts amongst the finance sector, but still represents 9% of the Primary sector total. The Fiduciary companies have benefited quite significantly from the Islands low corporate tax charge and keenly await the implementation of the zero rate policy. The sector is estimated to support a further 2,600 secondary sector jobs and is a vital part of the financial service sector, sourcing almost all of its income off-Island.

1280
Jobs

96m
GDP

25k
Av. Earnings

10.7m
Total Tax

Issues facing the sector: The biggest threat facing the sector is competition from other jurisdictions. There are a wide range of fiduciary structures for professional advisers to place their clients into and the IoM currently has no obvious competitive differential. Its standard corporate product is based on outdated company law which requires urgent updating to create a lower cost/easier to administer structure. The Island suffers from a lack of marketing and promotion with the key professional advisers, and must do more to establish itself and its products as a focus of excellence within the industry to ensure continual growth.

16

Fiduciary Sector SWOT Analysis

1. 2. 3. 4. 5.

The Fiduciary industry on the Island has suffered declining growth in recent years due to the popularity of structures in other jurisdictions. However, the industry is hopeful that, with some adjustments or additions to Isle of Man company law, the introduction of the zero-rate tax regime and effective marketing of the Islands proposition, this decline can be reversed. Bridging the gap between best estimate and pessimistic projections for the Fiduciary industry is dependent on the sector galvanising itself to respond to new company legislation but the challenge is broadly within the sectors control if these issues can be addressed.

Strengths Island-based management and decision making. Well regulated, comparatively low-cost jurisdiction. Mature, well-trained specialist workforce. Catalyst for other sectors essential part of the financial services sector.

Weaknesses Lack of competitiveness of current corporate product compared to other jurisdictions. Higher cost base than previously owing to cost of regulation and downturn in world economy. Some view the sector as over-regulated compared to competitor jurisdictions Struggle with historic reputation issues

Opportunities Introduction of new legislation to create a lower cost/easier to administer structure that will end the decline in company formations & promote growth. New products not only company products but also pension and fund administration products. Zero-rate tax regime to support IoM company formation. Appoint industry representative to market and develop the IoM proposition. IoM to offer top quality customer service as differential to competitor jurisdictions.

Threats Competitor jurisdictions improving their product offerings. Regulatory inflexibility in IoM is met with regulatory flexibility elsewhere. Failure to obtain a level playing field with competitors. External threats from supra-national bodies such as OECD/FATF and their influence on legislation.

17

Fiduciary Sector 2014 - Best Estimate View

The sector is optimistic about its future over the next ten years and there is a general belief that, provided company legislation can be improved and the Isle of Mans proposition is marketed more effectively, the sector will enjoy healthy growth. However, this is dependent on action being taken now in order to adjust the Islands positioning within the global fiduciary market.

1. 2. 3. 4. 5.

1,490
+16%
Jobs

147m

+52%
GDP

28k +12%
Av. Earnings

25.8m
+140%
Total Tax

GDP contribution is forecast to rise to 147m in real terms or 11% of the total Primary Sector contribution compared to 12% in 2003 reflecting the planned growth in the ICT/eBusiness rather than a decline in the Fiduciary sector. Staff numbers are predicted to rise and salary levels will increase 12% from 2003 levels in real terms. This will be achieved due to advances in technology that will reduce much of the manual work undertaken in the past. In addition new company legislation will mean that fiduciary structures and companies will be easier to administer, and in 2014 staff will be highly skilled in both their technical abilities and in providing excellent customer service. Although the zero-rate tax strategy will reduce elements of the current tax-take from this sector, fees generated via the incorporation of new companies and their annual renewal under the revised IoM Company Law are expected to see a significant increase of 140% in real terms by 2014.

Actions necessary to achieve this: A change in company legislation required to facilitate this a create the lower cost/easier to administer structure required to compete with other jurisdictions and attract new business. The Isle of Man sector lacks an effective marketing and development unit. This must be addressed to raise the Islands profile and attract new business. An industry wide representative body must be established to coordinate such issues with Government. Take steps to improve labour market efficiency by making the Island attractive to high quality technical staff, by encouraging greater regulatory flexibility and by implement training schemes to ensure a ready supply of high quality staff to meet the increased demand.

18

Fiduciary Sector 2014 - Pessimistic View

1. 2. 3. 4. 5.

The pessimistic view of the Fiduciary sector in 2014 is based on an analysis of official 2003 GDP, tax take, employment and salary figures and illustrates what might happen should the sector not take action in overcoming the challenges it faces in 2004. While the Fiduciary sector is not the largest in terms of staff employed or GDP contribution, the sector is a valuable originator of business to the Island and has a number of important relationships with other financial services sector businesses. Failure to act would have a direct impact on other areas of the economy. Its GDP-impact on the Islands economy is estimated to be over 35% more than its actual GDP.

Rather strangely, the pessimistic view of the Fiduciary sector in 2014 predicts that the sectors GDP contribution will actually rise from 12% to 17% of Primary sector GDP. This in part reflects overall financial services sector shrinkage in the pessimistic scenario and relatively stable performance of the Fiduciary sector across both the Best Estimate and Pessimistic situations. Jobs levels are forecast to fall as, in the pessimistic scenario, there is no new fiduciary formation activity warranting extra staffing but the upward shift in the level of work undertaken is likely to continue regardless leading to a smaller number of higher paid staff. Pay rises in real terms are not expected to suffer greatly as profitability within the sector falls, however, they are expected to increase less than could be assumed if the sector was in a state of real growth. Total tax contribution is expected to reduce by over a quarter in real terms from 2003 levels, owing not only to the zero tax policy but the loss of new company formation and renewal licence fee income.

1020
-20%
Jobs

119m
+23%
GDP

27.5k
+10%
Av. Earnings

7.7m
-28%
Tax-take

Events that could trigger this pessimistic case: Isle of Man company law based fiduciary structures are ostracised by the significant numbers of professional advisers. An incident occurs causing major reputation damage to the IoM as a jurisdiction. Anti-fiduciary legislation in key markets, including any decision by the EU to regulate fiduciary activities that would take IoM business outside Protocol 3.

19

1. 2. 3. 4. 5.

Asset Management

Asset Mgt.

20

Asset Management Sector Overview

1. 2. 3. 4. 5.

The Isle of Man asset management sector comprises two key segments, fund management and fund administration, with fund management including stockbroker and private portfolio investment management services. Internationally, both sectors have experienced considerable growth over the past several years, reflecting demographic trends and an increased propensity to save amongst the baby boom generation. The Isle of Man has lagged somewhat behind the levels of international growth achieved, particularly in competitor offshore centres such as the Channel Islands and Dublin. There are two factors behind this. So far as concerns the fund management industry, the Island has lacked critical mass which has been difficult to build up due to an increasing trend towards the consolidation of investment management activities within the major onshore centres of London and New York. Third party fund administration has begun to experience more satisfactory growth rates following the major legal, regulatory and fiscal changes introduced during 2003 and reflecting flexibility of the Experienced Investor Fund product which had been introduced prior to that. Increasingly, the Island has become a provider of third party fund administration services to specialist offshore hedge funds, where the major existing third party administrator are building up considerable expertise and are able to provide a tailored and cost effective solution. It is in this area that future growth is expected.

With the industry contributing 3.6% of Primary sector GDP and making up 3.5% of employees, the Funds business is one of the smaller finance sector industries. However, it has a number of key interdependencies with other finance sector business and is itself the most dependent on them, sourcing nearly two-thirds of its business from other Island financial services sector businesses. Average earnings in the sector at 22.9k are higher than those for Banking and Life due to the high skills requirement in the industry and the more technical nature of the business. Total tax contribution makes up 11.3% of the Primary sector contribution, which reflects the relatively high salaries and corporate profits generated. This again reflects the importance of the industry to the economy and the financial services sector despite of its relatively small size.

440
Jobs

28m
GDP

23k

14m

Av. Earnings Total Tax Issues facing the sector: Sector lacks critical mass. A global fund administrator would attract other fund business to the Island. Complicated and convoluted companies legislation makes it easier for clients to do business elsewhere. Regulator has indicated they are carrying out an ongoing review of the experience with EIFs and the regulatory monitoring of third party fund administrators consultation regarding any proposals will be important. A key competitive differential for the Island in the future will be the availability of skilled staff who understand offshore specialist and hedge fund structures training and work permit flexibility will be critical. 21

Asset Management Sector Swot Analysis

1. 2. 3. 4. 5.

The balance of strengths and weaknesses in the Funds sector is positive in the main, as the growth in alternative investments offers good prospects for expansion of the sector in the future. While the sector is coming from a small base, the right combination of aggressive promotion with legislative streamlining and protection of the Islands low cost and relatively simplistic fund approval regime could seal its success over the coming ten years. In addition, the factors which make the difference between the sectors best estimate and pessimistic figures are within its control to a certain extent, so steps can be actively be taken to promote opportunities or prevent threats.

Strengths Expertise in administering specialist funds: hedge funds, experienced investor and professional funds. User friendly fund structures. Comparatively low cost jurisdiction. Symbiotic relationships with other sectors.

Weaknesses Lack of critical mass and sector share of total funds market. Lack of codified funds legislation. Lack of EU market access restricts geographical diversification. Dependency on IoM financial sector business, need to generate more income from off-Island sources. Labour supply.

Opportunities Potential growth market in alternative investments and specialist funds, with an opportunity to attract suppliers and product providers to the Island. New products such as WRAP Accounts and international pensions. Ability to create market impact, concentrating on key markets such as London and Switzerland.

Threats Narrowing of IoM cost advantages in relation to other jurisdictions. Strategic decisions made off-Island, leading to funds or administrators leaving. Changes to legislation and regulations making the IoM less attractive as a jurisdiction. Erosion of the advantages of offshore e.g. UCITS III.

22

Asset Management 2014 - Best Estimate View

In the light of the increasing consolidation of investment management activities towards the major onshore centres, in the period to 2014 it is anticipated that the Island stockbrokers and private portfolio managers will continue to provide bespoke services largely to group clients, leading to steady growth in the sector at an average of just 5% pa. The achievement of growth in respect of third party fund administration will depend on a number of key factors. Firstly, the maintenance of a regulatory environment which is conducive to the retention of existing businesses and the attraction to the Island of a number of new global fund administration businesses. Secondly, encouraging new funds to incorporate on the Isle of Man utilising substantially amended and specifically tailored fund company legislation.

1. 2. 3. 4. 5.

500
+12%
Jobs

48m
+71%
GDP

27k
+18%
Av. Earnings

21m
+51%
Total Tax

In 2014, while the Funds sector is expected to enjoy steady growth and make a greater contribution to GDP and tax in monetary terms than its own economic activity, it remains one of the finance sectors smaller businesses. In percentage terms, forecasts show the Asset Management sector continues to make a roughly similar contribution to the Islands economy. Employee numbers are expected to increase, but while the number of companies within the sector is hoped will grow, advances in technology will mean that fewer numbers of staff are required to cope with increasing levels of business. Average earnings will also increase significantly in line with this in real terms.

Actions required to achieve this: Attracting to the Island at least one or possibly two global third party fund administration businesses and thereby increasing the number of administration mandates held on the Island and the Islands share of international fund administration business. Implementation of training programmes designed to ensure that growing third party administration businesses have an ongoing supply of new recruits, either directly from second level education or from the third level sector. Maintenance of regulatory environment conducive to third party fund administration, whether the underlying funds are formed in the Isle of Man or overseas.

23

Asset Management 2014 - Pessimistic View

1. 2. 3. 4. 5.

The pessimistic view of the Isle of Man Funds sector is that having largely re-invented the proposition to achieve a level playing field with its competitor jurisdictions, it fails to attract the new fund managers and administrators to give the sector critical mass. In this scenario the sector plods along and ultimately stagnates.

440
In the worst case scenario, the Asset Management sector in 2014 is forecast to remain broadly at 2003 levels in real terms although taxtake will take a 7% hit, largely due to the introduction of zero rated corporate tax. Salary levels and job numbers are expected to remain largely static, with sector decline offering little in the way of hope for technological advances or a highly-skilled workforce. Due to its high dependence on other Island-based finance sector businesses for its introductions, the Funds sector represents a barometer of the overall finance sector, for better or worse.

28m
0%
GDP

0%
Jobs

23k
0%
Av. Earnings

13m
-7%
Total Tax

Events that could trigger this pessimistic case: Failure to predict the growth in future alternative investments and an inability or unwillingness to react to them. Failure to address the current lack of visibility in the market of the Island as a fund administration centre. Failure to attract more providers to the Island by not being seen as an attractive jurisdiction to do business with. A major regulatory incident causing a loss of confidence in the Isle of Man as a jurisdiction.

24

1. 2. 3. 4. 5.

Captive Insurance

Captives

25

Captive Insurance Sector Overview based on 2003 data

1. 2. 3. 4. 5.

Captive Insurance Management is primarily involved in the running of general insurance risk companies for large corporate entities. Business is generally introduced to the offshore captive managers from risk management brokers within their own group of companies based in key centres like London. The Isle of Man has been a domicile for the management of captive insurance companies for 25 years and is viewed as one of the most successful locations, attracting business from all over the world, but primarily from UK blue chip companies. 179 captive companies are currently authorised here which ranks the Island ninth in the world. There are 20 captive managers, 3 of whom manage approximately 60% of the total number of captive companies.

At present, the Captive sectors direct impact on the Islands economy is relatively small contributing 2% of total Primary Sector GDP, 100% of which is generated from off-Island sources. Staff numbers are relatively small with the sector employing only 150 people and an estimated further 25 ancillary support staff, or 1% of the Primary Sector total. Salaries in this specialised sector are relatively high at an average of 25k per year. This reflects the technical and specialist nature of the business and its clients. The overall tax contribution is also small, with only 1% of the total Primary Sector contribution in personal tax and National Insurance payments. Captive companies and managers pay no corporate tax.

150
Jobs

17m
GDP

25k
Av. Earnings

1.6m
Total Tax

Issues facing the sector: Prospect of decline in traditional blue-chip captive company numbers owing to merger & acquisition activity Little formalised marketing of the Island as a captive domicile means that new business may locate in alternative jurisdictions. Difficulty in recruiting appropriately qualified staff. Lack of direct writing access to the EU, a key growth market.

26

Captive Insurance Sector SWOT Analysis

1. 2. 3. 4. 5.

The Captive sector is currently in a state of flux; the Island offers a favourable environment for sector development and a flexible regulatory attitude to business development. However, the gap between the best estimate and pessimistic assumptions is considerable reflecting some of the current uncertainties. With M&A activity on the increase, the sector will continually shrink unless it promotes itself heavily to the right people, i.e. global risk managers in London, and takes advantage of the opportunities offered by new legislation on the Island to broaden the use of captive structures.

Strengths Simple and easy to understand insurance legislation and a pragmatic regulator. Realistic captive capital and solvency requirements compared to other jurisdictions makes the IoM very competitive. Good professional support services infrastructure. Competitive pricing.

Weaknesses Little consolidated or formalised marketing effort to promote IoM in the Captive arena. Historic perception that IoM is reactive and not proactive, e.g. Protected Cell Company legislation. Difficult to persuade senior executives and their families to locate in the IoM. Market access issues with the EU.

Opportunities Specific targeting by Government and industry of the key decision makers in the London global risks markets Protected Cell Legislation taking the effective entry point for a captive structure down to include SME businesses and family firms. The development of captive reinsurance business. Cross-fertilisation of the captive proposition with life industry

Threats Mergers and acquisitions activity likely to reduce overall blue-chip captive company numbers Impact of anti-captive legislation in UK or other jurisdictions Increasing costs making other jurisdictions more favourable. EU: If a business/client moves to a jurisdiction where direct writing is permitted

27

Captive Insurance 2014 - Best Estimate View

Best estimate growth in the Captive sector is expected to be slow but steady, with the effect of minor legislative changes continuing to make the Island a more attractive place to conduct captive business. The sector remains an important part of the financial services sector as 100% of its business comes from off-Island sources.

1. 2. 3. 4. 5.

174
+16%
Jobs

29m
+69%
GDP

29k +18%
Av. Earnings

2.2m
+36%
Total Tax

The sector is expected to continue to play a small but vital part in the finance sector ecosystem and will see GDP contribution grow by nearly 70% to 29m in real terms. Increasing workloads will not impact greatly on the number of staff required and employment figures will not increase significantly. However, average salaries will increase in real terms by roughly 18% over the next ten years. Total tax take is expected to rise slightly, up to 2.2m, an increase of 36% on 2003 in real terms.

Actions required to achieve this: Lobby Government to undertake joint initiative with industry to promote the Islands considerable benefits as a location for captive insurance to the right risk management decision makers. Encourage innovation in product creation, taking advantage of the new markets for captives in the SME and company partnership markets. To continue pro-active developments e.g. re-domiciliation and Limited Partnerships legislation .

28

Captive Insurance 2014 - Pessimistic View

1. 2. 3. 4. 5.

The pessimistic view of business in 2014 sees the Captive sector in a state of stagnation, having not moved forward from its position in 2004. As a business which relies heavily on referrals from inter-group companies, the Captive sector has to actively target new business from the right sources i.e. global risk managers based in London, in order to ensure its development and future growth.

In 2014, the Pessimistic scenario see the Captive sector pretty much as it was in 2004. While it remains an important part of the financial services sector, its significance as an originator of income will diminish with its size. GDP and tax take levels are forecast to be similar to those in 2003, and the same number of people will be employed by the sector on broadly the same salary levels in real terms.

150
0%
Jobs

17m
0%
GDP

25k 0%
Av. Earnings

1.6m
0%
Total Tax

Events that could trigger this pessimistic case: UK Revenue attack the tax sheltering activities of the underlying UK Blue-chip company Captive clients. A significant lowering of the current global Terror Alert reducing the cost of insurance and making captive arrangements less attractive. The decision of any of the Big 3 (Aon, Marsh & Willis) to route their UK-centric captive business via Guernsey, Dublin or another centre). EU action to enforce direct dealing by EU-based Captives dealing with EU risks.

29

6. 7. 8. 9. 10 11

Shipping

Shipping

30

Shipping Sector Overview based on 2003 data

Mainstream Ship Management Shipping Related Support Services Indirect Services

6. 7. 8. 9. 10 11

The Isle of Man shipping sector can be sub divided into three distinct areas:

It has always been difficult to estimate the total effect in economic terms of the shipping sector for two reasons; firstly the fact that the mainstream ship managers have operated as exempt companies and hence little data is available and secondly the fact that the indirect services are not recorded as shipping in any data collection reporting. The sector has grown steadily since the creation of the Shipping Register in 1985 The best estimates available suggest that in early 2003 the shipping sector was contributing at around 1.4% of GDP. The sector employs a high proportion of qualified technical staff and the ratio of professional staff to administrative staff is about 50%. The shipping sector in its three divisions employs approximately 400 to 600 people including those in indirect occupations in banking, legal services, trust services and others. These employees are also counted in other statistics for banking, insurance, legal etc. The largest threat to the islands shipping sector over the next 10 years is likely to arise from one of two sources: A general shift to the Far East by ship management in search of cost savings. While freight rates are currently very high and new building orders are at record levels it is thought that the current levels cannot be sustained indefinitely which threatens to leave the market over tonnage and in decline at some point in the medium term future. The European Fence. A political move in Europe to bring European Shipping into line with EU views on manning and operations. European Wide tonnage tax rules and manning requirements could mean that flagging outside Europe and operating from bases outside Europe is problematical for any owner or manager attempting to trade in or around Europe. A number of current EU moves seem designed to close Europe to all but EU entities and flags.

400
Jobs

19.3m
GDP

26k
Av. Earnings

3.7m
Total Tax 31

Shipping Sector SWOT Analysis

6. 7. 8. 9. 10 11

The shipping sector is a well developed industry which is well established in the Island. Shipping still accounts for well over 90% of world trade and this is likely to remain the position for a long time. It must now be regarded as a mature sector in the Island although the recent expansion into commercial yachts will maintain growth it is likely that future growth will not be as high as in the past. The very success of the Isle of Man Register and the shipping sector associated with it brings threats from those who would not wish to see it succeed. This plus an increasing political drive in Europe to bring shipping back into the member states means that future growth will not be as rapid as in the past. Strengths Low costs, favourable tax regime. Quality reputation high on Port State Control White Lists. Efficient, practical service 24/7. Approachable Marine Administration High level of respect and reputation in the maritime community. High professional standards and capabilities. Inside EU for operations but outside for problematical EU legislation. Communications, time zone. Supportive Government Weaknesses Not an independent State and hence dependent too much on the UK and UK policy. Not an EC flag Too close geographically to the EU to avoid the effects of some EU policies. High cost of living in particular housing and travel. Low availability of qualified local staff. Indifferent transport links and high cost of communications. National Insurance rules prevent true crew management operations from the Island. Low levels of investment. Threats External pressures such as barriers and restrictions imposed by the UK, the EU, the OECD. Tax competition from other jurisdictions or a long term decline in the US$ value. Over enthusiasm for Security in the UK could drive owners to neutral flags. A real security threat to British interests could drive ships to neutral flags. Insufficient Resources; unless the Marine Administration stays ahead of the competition others will be able to offer the same service and price. 32 Restrictions on international air travel.

Opportunities EU expansion allows the Island to offer a home to organisations that want to operate in Europe but outside the EU. International uncertainty makes a stable jurisdiction like the Isle of Man attractive. Strong skills base generated within the shipping sector allows opportunities for extended specialist services training, consultancy, technical support etc. Commercial yachts and their management. The Isle of Man remains an ideal brand to provide bespoke services to this sector.

Shipping 2014 - Best Estimate View

6. 7. 8. 9. 10 11

In 2004 there are signs of the development of other support businesses such as consultancy and specialist services, which are the natural results of a mature centre of excellence in shipping. Some threats to the Isle of Man sector can be countered by the development of expertise in highly specialised areas as well as the Islands reputation and standing in shipping which provides access to the US and other areas where security paranoia exists. The Manx fleet and the Isle of Man industry are well positioned at the high end of the markets to sustain quality business here. Assuming the major threats do not materialise or can be countered, an optimistic 2014 position is The sector overall has continued to grow steadily and another major ship manager has moved to the Isle of Man The number of consultancies and specialist technical services providers has expanded and these companies are trading internationally and contributing high value export services. The mainstream management companies have further developed their own specialist expertise and have established a market leading position internationally in a number of areas. At least one of the embryonic yacht management companies has sourced sufficient investment and has found enough drive to develop a real yacht management function challenging the established businesses for market share in the large yacht management business. Employment in the sector overall has increased by 5% annually with the majority of jobs being in the professional/technical specialities.

680
+71%
Jobs

39m
+104%
GDP

40k +54%
Av. Earnings

9.6m
+161%
Total Tax

Actions required to achieve this: Strengthen the Marine Administration resources enough to allow it to maintain fleet growth and thus its clout internationally as well as its Cat. 1 status and fend off FOC challenges. It must also be strong enough to fight against the worst excesses promoted by the UK on the security front making it possible to operate an Isle of Man ship profitably while strengthening its capabilities to provide an enhanced service to owners/managers and others as a source of technical expertise and advice and knowledge dissemination. Promote the island aggressively in an international context as a location for mainstream businesses other than finance businesses. Maintain a close watch on the main transport providers on and off the Island to ensure that transport links are effective for business and in particular, effective at providing connections and links to Europe and worldwide not just quick hops to outlying UK airports with no practical onward links. The Marine Administration should develop and strengthen current links with the USCG in particular but also with other authorities in key trading areas. The Isle of Man needs as many friends internationally as possible and can earn such friends by 33 demonstrating its commitment to quality, to proper regulation and high standards, and to showing a lead in key areas.

Shipping 2014 - Pessimistic View

6. 7. 8. 9. 10 11

The pessimistic position is based on the assumption that the critical external threats cannot be countered affectively and that they impact seriously on the Islands shipping sector. It is assumed that freight rates have declined significantly and that most sectors are over tonnage with fierce competition. However it is also assumed that the requirements of security have had an impact and that there are key market routes where quality companies are still able to compete at a premium as a result of their reputation and record, despite crippling competition elsewhere and the high costs associated with operating a British ship.

Assuming the major threats do materialise or cannot be fully countered, a pessimistic 2014 position is The sector overall has failed to grow significantly since 2004. The overall shift of many ship management operations to Eastern Europe and the Far East in pursuit of cost savings has also developed a significant consultancy and technical support industry in these areas competing strongly with the Manx businesses with the result that there has been almost no growth in these areas in the Isle of Man. A number of major high quality companies remain committed to a British connection but others have found that operating profitably under the restrictive and expensive UK required security systems is commercially impossible. They have firstly re-flagged to neutral flags and then removed their other business operations from the Isle of Man. There has been negative growth in the Manx register with the result that its voice internationally and the position of the Isle of Man internationally has declined so that the Manx Administration is too weak to effectively prevent the full weight of UK requirements falling on Manx ships. The existing management companied have retained their expertise in specific technical areas but the demand for innovative and high quality solutions is declining in the current climate and replacement of their in house experts is now unlikely. None of the CSPs that, in 2004, set out to become yacht managers have managed to source sufficient drive, expertise and finance to break into the mainstream yacht management market. The yacht management business in the Isle of Man remains a very minor interest mostly associated with CSP business and accountancy. Employment in the sector overall has remained flat since 2004 with most of the losses occurring amongst professional and technical staff. Shippings overall contribution to GDP remains roughly what it was in 2004.

400
0%
Jobs

19.3m
0%
GDP

31k
+18%
Av. Earnings

4.3m
+16.6%
Total Tax

34

6. 7. 8. 9. 10 11

eBusiness

e-Business

35

ICT & eBusiness Sector Overview based on 2003 data

6. 7. 8. 9. 10 11

The emergence of the IOM as a leading finance centre has stimulated the corresponding development of a strong ICT (Information and Communications Technology) sector, due to the business need for high quality reliable global communications, and the increasing utilisation of high technology systems to improve business productivity. The ICT sector consists of a number of local firms whose primary purpose is to provide high quality ICT solutions and support for the local business community (e.g. Manx Telecom, XKO, Skanco, Domicilium and DPN Software). In addition the Island has a cluster of successful IT companies who are expert in discrete niches and who generate the majority of their revenue off island (e.g. AFD Software, PDMS, B Solutions, Central Software and Marlborough Sterling) Five years ago the Isle of Man Government announced its commitment to developing and supporting an e-business strategy. There has been a close collaboration between the public and private sector to implement the strategy, and exploit the islands four key strengths (tax structure, flexible legislation and regulation, high quality telecoms infrastructure and high quality of life), which has been successful in attracting new inward investment. The ICT sector on the island currently contributes 3.4% of total GDP. It is a large employer, directly accounting for over 1,000 jobs. In addition to the direct employment in the ICT sector, there are a large number of ICT professionals in other sectors, principally in the financial services sector. It is estimated that circa 10% of the finance sector headcount (650 people) have a direct involvement in Jobs GDP ICT. The e-business strategy has been gaining momentum and the Island has recorded some notable successes over the last few years. Key new e-businesses locating on the Island include Dimension Data (logistics), Microgaming (e-gaming systems), PaddyPower and Boyle Sports (sports betting), CallKey (international communications), Tyntec (pan European messaging), Inca Gold (computer gaming software) and NeTeller (e-payment solutions). Av. Earnings Total Tax Issues facing the sector: The main issues facing the local ICT companies, who provide support service for the local market, is the small size of the IoM market and corresponding difficulty in attracting and retaining the right level of skilled staff in a full employment economy. The software sector, which generates a large proportion of revenue off Island, is facing strong competition from low cost centres in India and Eastern Europe, and there is a limited pool of top quality ICT professionals available. The main issue impacting on the Islands success in attracting inward investment is the high level of competition with a large number of islands/countries pursuing a similar strategy. Given this strong competition, only the nimblest and most innovative jurisdictions will succeed. 36

1,040

48m

30k

5.2m

ICT & eBusiness Sector SWOT Analysis

6. 7. 8. 9. 10 11

The development and growth of a successful ICT sector is a key strategic priority for many nations. It is a key area of focus in the EU, where a wide range of projects are underway with the dual goal of improving the quality of life of the citizens and improving the overall international competitiveness of the economy. Typically in Western Europe ICT represents between 3.8% (Spain) to 6.3% (UK) of national GDP. The IOM is at the lower end of this spectrum, with 3.4% of the GDP represented by ICT, so there is clearly scope for future growth. In 2005 the ICT market in Western Europe is expected to grow by 4% to a turnover of 636Bn. The Island only needs to capture a very small percentage of this growth to make a real difference to its future economic prosperity. Strengths
High level of Government commitment to ICT and e-business. Zero corporation tax attractive to existing businesses and new inward investors. Favourable legislation (e.g. e-Transaction Act). High quality, resilient telecoms infrastructure with effectively infinite capacity available. High quality, high profile new inward investors providing good case studies and a catalyst for niche clusters. E-business ambassador and e-gaming niche expert, actively promoting IoM PLC.

Weaknesses
High cost jurisdiction for employment, housing and travel. Limited availability of high end skills. Over-regulated/difficult to do business with in some areas. Low profile / weak marketing / lack of resources devoted to attracting new business. Lack of high quality further education in ICT skills.

Opportunities
Address current weaknesses in gaming proposition to re-establish IoM as a key hub for e-gaming. Identify new niches where IOM can establish a differentiated proposition (e.g. Intellectual Property management, gaming software etc). Increase resource focussed on attracting new business to IoM. Focus marketing on nearby territories (Ireland and UK) to attract niche business to IoM. Introduce e-money legislation, to attract quality providers to the IoM. Establish attractive tax framework for professional Venture Capital funds to finance IOM based start-up businesses. Leverage the International Business School (IBS) as start-ups often cluster near successful business schools, due to availability of highly skilled and motivated resource.

Threats
Speed of decision making / quality of execution is vital. E-Gaming showed Government finds this difficult when several Departments and/or regulators need to work together. Historic lack of political appetite for taking risks has hindered growth. Success must be judged on sector as a whole, not by individual anecdote. Many jurisdictions implementing similar e-business strategies. IOM is not just competing with offshore jurisdictions , but also with Ireland and UK Regional Development Agencies (RDAs). ICT sector heavily dependent on revenues from the finance sector. Businesses tend to cluster around market leaders, hence critical mass f business is crucial compared to other jurisdictions. Cost disadvantage for the finance sector compared to Channel Islands due to VAT on computers/ servers.

37

ICT & eBusiness 2014 - Best Estimate View

The best estimate view for the ICT and e-business sector sees the Island successfully building on the momentum gained in the last 12 months, to the point where ICT and internet based business represents the second largest component of GDP, or c. 11% of the total GDP. Much of this growth will be based on attracting a limited number of niche e-businesses with high value add per employee, attracted by the zero tax, flexible legislation and high quality of life.

6. 7. 8. 9. 10 11

1,600
+54%
Jobs

265m
+451%
GDP

35.5k
+18%
Av. Earnings

44m
+741%
Total Tax

There will be a number of different segments contributing to the increased GDP: ICT services, which should grow in line with general local economic growth. Off-island software exports, which could grow by c. 15% pa in their specific niches. Seven e-Gaming companies could set up over the following three years, generating high profits per employee, if the Island accepts US bets for poker and casinos. The Island could establish a cluster of e-money companies (like NeTeller) which are forecast to deliver strong performance by expert analysts. Additionally, one successful new e-business niche start-up per year is forecast. Overall increased inward investment in e-business could create over 550 new jobs. These jobs are expected to be relatively highly paid, with pay in some segments increasing ahead of inflation, reflecting both the highly skilled nature of new jobs and anticipated productivity increases in existing businesses. This will require attracting more highly skilled staff to the Island and increasing the level of technical training on the Island.

Actions required to achieve this: E-Gaming: - Following major policy changes to accept US bets for casinos and poker, plus the appointment of a new Gambling Control Commission, IOM should implement an aggressive PR campaign to win business in 2006/06 as many key businesses are looking to relocate and float in that window of opportunity. Introduce new e-money legislation, with goal of establishing IoM as a leading location for reputable e-money providers. Complete detailed review of new opportunity areas, and develop clear propositions for different niche segments. Invest in additional specialist business development resources with segment expertise with specific responsibility for bringing new investment to island (suggestion of 2 individuals initially at total cost of 150k). Leverage the IBS by providing support to existing Manx businesses and increase number of overseas students. This will help to address long term skills gap, attract entrepreneurs to IoM, and increase international pool of IoM PLC advocates.

38

ICT & eBusiness 2014 - Pessimistic View

6. 7. 8. 9. 10 11

The pessimistic view is based on how the sector might look if we fail to grasp the opportunities in a timely manner, in which case the new inward investment will migrate to those jurisdictions who are proactive in promoting themselves and who provide a flexible and responsive business friendly environment. This pessimistic scenario also reflects a knock-on decline in the ICT service and support segment, due to the overall decline in the IoM economy. Although partially offset by modest growth from a small number of local companies who export software off-island, the overall picture for the ICT and e-business sector is one of gradual decline. In 2014 ICT and e-business GDP might only grow by 3.2% overall compared to the 2003 baseline, at a time when this sector will be one of the highest growth sectors in the UK, European and global economies. For the majority of existing ICT businesses, a weak local economy will impact negatively on their investment and their profitability, leading directly to reduced employment levels. This downside could be partially offset bu the continued growth of a limited number of local niche software exporters (eg AFD software) provided they can be retained on the island. The net effect on existing ICT businesses is an estimated loss of at least 50 jobs. It should be noted that job losses could be significantly worse if the local support companies become uncompetitive compared to their UK peers, which could lead to increasing spend with companies based off-island and a gradual downward spiral in the local ICT support sector. In this pessimistic scenario it is also assumed that the IOM is unsuccessful in attracting new inward investment. In particular the e-Gaming companies and the e-money companies will be attracted to other more competitive island jurisdictions. As a result IoM ICT employment could be just 95% of todays levels, with the opportunity to create over 500 new high value add/well paid new jobs missed. It is likely that salaries will remain flat in real terms despite the local decline in the sector. However in real terms ICT salaries will be growing in the UK so there is a risk that we could see a brain drain of our top skilled people, which would further reduce the competitiveness of IOM. Furthermore the loss of the e-Gaming sector means that Treasury would forego multi-m annual income from gaming taxes compared to the best estimate case.

990
-5%
Jobs

49.5m
+3.2%
GDP

30.0k +0%
Av. Earnings

4.5m
-14%
Total Tax

Events that could trigger this pessimistic case: Lack of ICT/entrepreneurial skills Inflexibility/over-regulation in e-gaming/e-money Lack of business development/marketing resources High inflation/house prices Unable to retain new start ups

39

6. 7. 8. 9. 10 11

Tourism

Tourism

42

Tourism Sector Overview based on 2003 data

6. 7. 8. 9. 10 11

Tourism is one of the important economic drivers for the Isle of Man economy, and most of its services and facilities benefit also local residents as well as visitors to the Island. These facilities contribute significantly to the diversity of the local economy and the high quality of life here. In 2003 69% of visitors were ABC1, and this market is better educated, better informed, better off and more widely travelled than any other. The Island must meet the challenge in the continually rising standards of product expectations and the demand for better value for money; for example with the growth of low cost budget airlines from UK regional airports the Island is increasingly seen as expensive and difficult to reach. The continued decline in bed stock is also stifling growth within certain markets, but for the most part this is countered by the market seasonality of much of our product. The TT is still recognised throughout the world as being associated strongly with the Isle of Man and has the capability of becoming an even stronger international brand.

The Tourism industry generates GDP of 74m. The accommodation sector contributes 10.9m of GDP and employs a workforce in excess of 600 However the visitor economy in total is valued at 102.5m in 2003 (source Economic Affairs Division, Treasury) and underpins a much larger proportion of jobs Average earnings at 13.7k are lower than other sectors particularly financial services due to many of the jobs being lower paid and of a part time nature. However without these positions much of the quality of Island life would decline.

630
Jobs

74.2m
GDP

Issues facing the sector: Continued reduction of bed spaces Increasingly competitive market Uncertainty in the UK economy and no European gateways to stimulate growth. Lack of access to volume low cost air travel Lack of consistent service provision Tourism markets are getting older and more demanding

13.7k
Av. Earnings

9.1m
Total Tax 43

Tourism Sector SWOT Analysis

6. 7. 8. 9. 10 11

The Tourism or visitor economy has recovered from the severe downturn in business suffered as a result of the 2001 UK foot and mouth crisis. Total revenue for the visitor economy was 102.5m in 2003, well ahead of the targets set within 3 year recovery plan ending in 2004. The Tourism industry has seen many changes since its peak of the 1960s and 1970s, chiefly as a result of the collapse of the traditional UK target market, together with increasingly low cost holiday offers abroad and the growth of budget airlines. The Isle of Man has, therefore, re-invented itself as a short break destination based on relaxing, regenerative experiences. Available evidence indicates the long process of market attraction may be over as volume and revenue increase. This continued growth is not guaranteed and continued investment in marketing and the product is needed.

Strengths The Isle of Mans natural environment and wildlife based on its landscape, coast and character. The rich nature of the Manx culture and heritage. Well established events and activities. International Mecca for motor sport. A safe environment based on a quiet and peaceful way of life.

Weaknesses Lack of quality bed spaces particularly in the serviced sector. Poor service levels due to the transient nature of staff and relatively low pay. Limited use of technology with few businesses offering on-line bookings. Uncared for appearance of some urban areas. No core visitor attraction or energised core. Costs of travel to the Island. Marked seasonality.

Opportunities Interactive traveller partnership Maximising the advantages of the Manx landscape. Established department for facilitating and marketing events. Motor sport heritage based on internationally acclaimed brand. Conference initiative.

Threats Increased worldwide competition with growth of destinations based on access through budget airlines. Continued decline of bed stock. Lack of forward marketing funding from 2005/6. Negative impact of increased regulation. Structure of travel industry. Lack of private sector marketing.

44

Tourism 2014 - Best Estimate View

The best estimates for the Tourism and tourist accommodation sectors is an annual growth rate of 3.6% in line with European estimates until 2009 and higher growth of around 5% thereafter. These rates are reliant on the continued refinement of the Isle of Man product to attract high spending markets. Development is to focus on core strengths such as marine activity, natural environment, and cultural experiences.

6. 7. 8. 9. 10 11

710
+12.5%
Jobs

114m
+54%
GDP
Employment levels rising marginally as new businesses come into the market offsetting losses elsewhere. Salary levels likely to rise by inflation due to competitive nature of the business but some above inflation rises possible from 2009 onwards as quality kicks in. This will feed through to the economic output for the Island in the form of increased GDP up by 54% over the period. Tax-take also picks up in line with GDP, rising to 14m in 2014, and increase of 47% in real terms.

13.7k
0%
Av. Earnings

14m
+47%
Total Tax

Actions required to achieve this: Ensure the Tourism Strategy Fit for the Future is endorsed by the Island and fully introduced. Deliver a new Tourist Act to take into account the new vision for the visitor economy. Attract high spending markets such as conference and quality short breaks. The industry must become self sufficient and not rely on Government. Introduction of the Manx Welcome programme uplifts quality across the hospitality sector. There is a clear focus on technology throughout the industry. The sector must overcome its reliance on out-dated methods, reduce seasonality and embrace change.

45

Tourism & Leisure 2014 - Pessimistic View

6. 7. 8. 9. 10 11

If the industry fails to grasp the opportunities now presenting themselves then sales volumes are likely to be virtually non-existent and could even decline. The effect would be to see a further reduction in bed spaces and corresponding loss of facilities thus impacting on the quality of life on the Island. There would also be a decline in the number of air and ferry services. This lack of growth could hit other industries as service levels and facilities are not up to the standards demanded.

520
In 2014, the Tourism sector GDP is positive but has averaged less than 1% annual growth over the period. Overall sales have fallen reflected in the lower numbers of staff employed and their average earnings which are estimated to decline by nearly 20% due to pressure on margins. However, due to the focus on higher value customers the tax-take from the sector is still marginally positive.

81.6m
+10%
GDP

-16.4%
Jobs

11.0k
Events that could trigger this pessimistic case: Lack of forward marketing funding Continued decline of bedstock Failure to develop new bedstock particularly 4 star and above Demise of TT and other motor sport events Uncompetitive pricing growth of low cost airlines E-enablement for the industry remains weak Failure to develop new and emerging markets Global economic downturn

9.8m
+6.3%
Total Tax

-19.9%
Av. Earnings

46

6. 7. 8. 9. 10 11

Manufacturing

Manufacturing

47

Manufacturing Sector Overview based on 2003 data

6. 7. 8. 9. 10 11

This is a diverse sector producing a wide range of products, with a wide range of jobs spread across the Island. Over the past 15 years the sector has grown in real terms by an average of 9.25% pa. The Manufacturing sector generates significant secondary income for the Islands economy through a requirement for a wide range of on Island services. This increases the sectors contribution to GDP from 6.9% to 10.7%. High volume low skilled labour intensive production on the Island has reduced in recent times due to lower cost competition from the Far East and remains under pressure, threatening a further 300+ jobs. To counterbalance this, it continues to be Governments policy to encourage high value manufacturing where such businesses have niche products, good intellectual property and are capital intensive so labour costs are not the dominant cost factor.

Sub-sector

Jobs No.

GDP (Ms)

Av. Earnings (Ks)

Tax& NICs (Ms)

Company Examples Swagelok Ronaldsway Aircraft BA CitiExpress IoM Creamery Breweries Robinsons Strix SLS Optics Prometic Biosciences

Engineering

1,050

28.7m

25.3k

4.9m

Food & Drink

1,220

22.9m

18k

2.9m

General Manufacturing

1,080

47.3m

20.6k

5.7m

Issues facing the sector: Most businesses in the sector compete in the global market place and are subject to a range of external factors beyond their control such as the impact of terrorism, a fluctuation in interest rates and the strength of the pound against other currencies etc. It is also increasingly difficult for these businesses to compete against businesses in low wage economies such as the Far East. To combat this businesses need to adopt a greater use of technology. 30m + has been invested by Government and 50m + by the private sector in the last 10 years in a bid to boost productivity and thus enable them to compete.

48

Manufacturing Sector SWOT Analysis

6. 7. 8. 9. 10 11

Several years ago, many observers forecast the death of manufacturing in Europe and the Island. Our analysis shows that many Manx manufacturers are quite positive about the future. There are some real opportunities for revenue growth and the range in growth rates from Pessimistic to Best Cases is less than 3% p.a. compared to over 8% for Banking, although the total number of jobs is likely to be static at best Engineering companies are positive about the future given improving conditions in the key sectors of aerospace and oil & gas. Food and Drink companies see growth prospects in UK, especially the Creamery for branded cheese. General Manufacturing is very mixed, with some small niche businesses forecasting growth, while some more traditional businesses with labour-intensive processes are under enormous pressure from the Far East. Strengths Many technology driven companies with a good capital base Highly skilled, loyal staff Access to Government for financial assistance and training Projected growth in key markets (aerospace & oil and gas). UK share of global aerospace market has risen from 9% to 13% in 9 years. Forecast growth of 2% pa for the next 10 years Low tax and discreet secure place to do business Food and Drink sector served by very high quality raw materials and good customer loyalty Weaknesses Small labour pool and high cost of housing is creating real recruitment difficulties at low/ medium levels for skilled labour Poor facilities: lack of quality manufacturing units at affordable rates available plus high land & build costs for new units High utilities and transport costs Finite domestic market for Food and Drink products

Opportunities Creation of aerospace technology hotspot with IOM development funding, design and long term manufacturing Far east represents a massive potential market Growth in oil & gas offers real opportunity NEW: IOM fulfilment business utilising Manx postal services Promotion of IOM as a manufacturing base for distribution into the EU while being outside the EU Good export potential in the UK for Manx Food & Drink products, e.g. IOM Creameries through Morrisons

Threats Key markets are influenced by external factors outwith IOM control. E.g. The impact of terrorism and SARS on aircraft demand, high interest rates and exchange rates: is strong v. Euro, $ and Far East Increasing pressure to reduce costs to compete globally particularly with Far East whose capability is growing fast High volume, low skilled labour intensive production will continue to be relocated to low wage economies Food and Drink sector is dependent on a few supermarkets who might source elsewhere Rising on-Island costs (energy, transport, wage inflation) a key concern

49

Manufacturing 2014 - Best Estimate View

Overall there are good prospects in manufacturing in the future. Committed projects on the back of strong forecast demand in aerospace and oil & gas are driving significant planned growth in GDP in the short term and coupled with anticipated new businesses will increase GDP over the entire period by 48%, with half of this from new businesses. The profile of the sector will change significantly over the 2003 model with a marked decline in high volume lower value business . Employment levels will broadly stay the same as 2003 however, the job mix will change as a significant number of lower skilled operative jobs will be lost over the period, being replaced by higher value ones from new businesses. Average earnings to increase in line with skill level, with higher earnings potential for many workers.

6. 7. 8. 9. 10 11

Jobs

GDP

Average Earnings

Tax/NI

Engine-ring

1,140
+9.2%

47.2
+64.4%

28.2k
+11.6%

5.7m
+16.8%

Food & Drink

1,220
-

28.5m
+24.3%

19k
+5.6%

2.8m
-5.3%

General Manu

970
-9.5%

94.9m
+100.6%

25.8k
+25%

6.0m
+6.2%

Engineering: This sub-sector is experiencing renewed optimism which translates into forecast growth in GDP in 2004 of 10% and thereafter at 4% pa for the next 10 years. A 9% increase in employment is anticipated in 2004 and 2005 to satisfy projects being implemented but thereafter employment levels likely to remain static as growth is achieved through productivity improvements. Average earnings could rise to 28.2k as skills levels rise. Good signs that leading businesses have been investing in capital for the long term future. Food and Drink: This sub-sector is likely to remain stable with growth in GDP of 2% pa planned and static employment levels. There is limited scope for average earnings to increase beyond 19k in this sub-sector. General Manufacturing: Even under the Best Estimate, existing businesses are forecast to halve jobs to 500, with most of the losses in the first 5 years. Growth in GDP is anticipated at 6.5% pa, driven mainly by new high value start up businesses including distributive business exporting into EU and international HQs attracted by low tax. New businesses will create GDP of 40m and over 400 jobs.

Actions required to achieve this: Businesses must regularly invest in the latest technologies and concentrate on developing long term strategic partnerships Continued access to Government for financial assistance, guidance and advice and training. Significant support will be required to up-skill the existing workforce and to re-skill new entrants to the sector to aid recruitment. This must start in schools, not just the workplace Government to encourage capital investment and R & D activity on IOM and Intellectual Property to be held here. DTI has not grant-aided R&D historically; this may be vital in the future, e.g. in aerospace where such costs can be large, but can secure jobs and profits Targeted promotion of the Island to attract new businesses working jointly with private sector expertise in specific sub-sectors Driving forward the IOM branding project to help jointly brand Manx produce, like New Zealand

50

Manufacturing 2014 - Pessimistic View

6. 7. 8. 9. 10 11

The pessimistic view of manufacturing in 2014 is influenced greatly by world events and how they impact on the competitiveness of Manx businesses and the sectors in which they operate for e.g.. aerospace, oil & gas and telecoms. The overall view is that GDP would show modest gains to around 118m but there could be significant job losses at the lower skill level with only a few higher value ones created from new businesses. There is confidence that some new businesses will still be attracted to the Island but the assumption is that these will be small in size. A distributive based sector will not establish but some HQ business will be lured by the low tax. Total tax take will fall to 10m as the zero rate of corporate tax for trading entities takes effect from 2006. Engineering: Confidence remains for strong growth in the short term on the strength of existing projects (GDP +10% in 2004, jobs 4% pa in 2004 and 2005). Thereafter, GDP is static and jobs fall by 3% pa (270 in total). The assumption is that some of the larger businesses will contract in size with some closures amongst smaller businesses. Av. earnings to remain static. Food and Drink: Businesses here serve mainly the Manx market and the main players remain confident that 2% growth in GDP pa can still be achieved on the back of the exploitation of higher value opportunities to meet customer (major supermarkets) and consumer demand. However, jobs will fall by 1% pa as will av. earnings which fail to keep pace with inflation and remain difficult jobs to fill. General Manufacturing: Is the least stable sub-sector: cost pressures mean existing businesses could close, jobs could halve and GDP from existing businesses falls by 2% p.a. While new business start-ups would be fewer than under the Best Case, they are still forecast to generate 270 new jobs and sustain sector GDP growth of 2%+ p.a.
Engine-ring

Jobs

GDP

Average Earnings

Tax/NI

860
-17.8%

31.6m
+10%

25.3k
-

3.8m
-21.2%

Food & Drink

1,090
-10.5%

28.5m
+24.3%

16.1k
-10.5%

2.1m
-28.1%

General Manu

760
-29.1%

58.4m
+23.7%

23.2k
+12.5%

4.2m
-26.5%

Events that could trigger this pessimistic case: The impact of terrorism plus SARS continues to de-stabilise the aerospace, oil and gas and telecoms markets Unusually high interest rates and/or strength of the versus the $ and Euro Insufficient attention is given by both Government and businesses to up-skilling the workforce in line with technological advancements. Government training programmes fail to meet the needs of businesses or the workforce (or parts thereof) are unable to meet the more exacting standards of the new businesses Government fails to undertake effective promotion to win new business

51

6. 7. 8. 9. 10 11

Civil Aviation

Civil Aviation

52

Civil Aviation Sector Overview

6. 7. 8. 9. 10 11

The emergence of the IOM as a leading international finance centre based on stable government, a common law system, low taxation, and business friendly policies has enabled the development of a wide range of specialist niche sectors, including civil aviation. A number of local firms have utilised expertise in asset holding, international corporate structures and lease financing to stimulate activity relating to aircraft ownership and management. The sector consists of a small number of businesses primarily engaged in civil aviation related business and a larger number of businesses that undertake aviation related work as a secondary element of their activities. For example, legal, accountancy, fiduciary and lease finance entities increasingly undertake elements of civil aviation business. In 2003 the Isle of Man Government gained agreement in principle to the establishment of an aircraft register in the Island and subject to the final agreement of HM Government it is expected that a register will be established in 2006. This is expected to act as a catalyst for growth in this sector, in the same way that the creation of the Manx ship register did for the shipping sector on the Island.

The civil aviation sector on the island is currently a small contributor to GDP but it is expected that this will rise once the opportunities provided by an aircraft register in the Island are fully exploited and the Island becomes recognised internationally as a centre for aviation business. Currently, it is estimated that around 10 jobs exist on the Island in businesses specifically concentrating on the ownership, leasing and financing of aircraft. It is not known how many jobs in the finance and professional sectors of the economy undertake some element of civil aviation work. Issues facing the sector: The key issue facing the sector currently relates to the establishment of an aircraft register in the Island. While HM Government has given consent in principle to a register further negotiations are necessary before a register can be established. The register would be a UK register established under Order in Council and subject to the overall supervision of the UK Department for Transport. Aircraft management is a truly international sector, so the Isle of Man faces considerable competition from a number of other jurisdictions (including British Overseas Territories) with existing aircraft registers and established legal and financial centres.

0
Jobs

0m
GDP

25k
Av. Earnings

0m
Total Tax 53

Civil Aviation Sector SWOT Analysis

6. 7. 8. 9. 10 11

The development and growth of a successful civil aviation sector is a key strategic priority for many nations. Air transport is estimated to produce (directly or through multiplier effects) up to 4.5% of world output [ICAO] and this is likely to grow with increasing demand for passenger and freight movements. The development of an aircraft register in the Island enables those (corporations and high net worth individuals) who already hold assets through Manx corporate vehicles to extend their assets that are owned, managed and financed through the Island to include aviation assets, thus extending the one stop shop provision for which the Isle of Man well known.

Strengths High level of Government commitment to establishing an aircraft register as a catalyst for encouraging growth in the Islands civil aviation sector. IOM has proven asset management capabilities (e.g. shipping, fiduciaries, banks). Aircraft management offers growth potential for existing businesses (e.g. fiduciaries, professional services), who support the expansion into this sector. 0% corporation tax attractive to existing businesses and new inward investors. Strong synergies with IOM economic and taxation policies. Aircraft registry regulations to be ICAO compliant in line with appropriate UK /European standards. Opportunities
Excellent opportunities to increase business activity by exploiting the potential offered by the establishment of an aircraft register, e.g. asset holding, corporate services, lease financing, legal services. Potential to build competitive advantage in aircraft registration through strong customer responsiveness and technical regulatory requirements. Opportunity to promote the Islands financial services to corporates and high net worth individuals who become aware of the Island through civil aviation business. Exploit synergies with asset holding of other types, e.g. high net worth individuals often own both super-yacht and private jet. Longer-term potential to develop the register to include the registration of commercial transport aircraft (i.e. airlines).

Weaknesses Risk of failure to gain final consent of HM Government to an aircraft register in the Island, which would limit potential severely. Limited availability of high end skills (e.g. legal). IOM is a high cost jurisdiction for employment, housing and travel compared to some competitors. Possibility that registry standards will not be attractive to owners and/or managers. The Islands current low profile in this sector worldwide means significant resources will be required to attract new business.

Threats
Over zealous regulation of the operation of an IOM Aircraft Register by HM Government. Inability to establish commercial advantage through definition of technical requirements for registration. Unresponsive registry approach to customers needs. Many jurisdictions already have aircraft registries and may have greater flexibility in rule making to improve their commercial advantage to the disadvantage of an IOM Registry. Changes in IOM asset holding and taxation legislation may remove advantages of the Island as a location for civil aviation business. Possible European civil aviation requirements may impact on the IOM aircraft register.

54

Civil Aviation 2014 - Best Estimate View

The best estimate view for civil aviation sector sees the Island successfully establishing an aircraft register and building on this catalyst to increase momentum in developing greater civil aviation business activity in and through the IOM. Much of this growth will be based on attracting corporates and high net worth individuals looking to protect their assets and to hold them through a reputable common law jurisdiction.

6. 7. 8. 9. 10 11

50
Jobs

3.5m
GDP

There will be a number of different segments contributing to the increased GDP: Aircraft registration, Aircraft ownership and management providing business for specialist management companies and CSPs Professional services business related to civil aviation including financing, banking, legal services etc. Civil aviation engineering potential to establish further JAA 147 engineering services business on the Island Employment agency / specialist staff procurement. Potential to attract further civil aviation staff procurement and management businesses to the island.

28.1k 0.4m +12.4%

Av. Earnings Total Tax

Actions required to achieve this: DTI appoint a Director of Civil Aviation and support staff during 2005 DTI establish a Manx Aircraft Register by 2006 Form a civil aviation marketing group (comprising private and public sector representatives) to promote the Island as a leading location for civil aviation related business during 2005, then market the Island in 2006

55

Civil Aviation 2014 - Pessimistic View

6. 7. 8. 9. 10 11

The pessimistic view is based on how the sector might look if we fail to establish an aircraft register and grasp the opportunities flowing form this in a timely manner. Failure to gain agreement from the UK to an aircraft register or failure to exploit the commercial potential of such a register is key.

Without the establishment of an aircraft register or other initiative delivering significant additional commercial activity in the civil aviation sector there will be no growth in real terms from civil aviation over the period.

6
Jobs

0.4m
GDP

27.5k 0.04m +10%

Av. Earnings Total Tax

56